Crypto Long & Short: How Do You Value Crypto?

Weekly insights, news and analysis for the professional investor

By Marc Hochstein, Executive Editor

August 8, 2021

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Writing this newsletter after our former colleague, the mighty Noelle Acheson, and CoinDesk Research stalwarts Galen Moore, Christine Kim and George Kaloudis, I know how the Monkees must have felt when they went onstage after Jimi Hendrix.

A little bit about me: I’ve covered various corners of the financial world as a journalist for a quarter century, so I know a thing or two about what institutional investors care about. I started taking bitcoin seriously a decade ago, long before most people in polite society would give it the time of day, so I have a basic grasp of the asset class, as well.

Below, in this week’s Briefing, I discuss how hard it’s historically been to measure relative value in crypto, and how that’s starting to change. After that, you’ll find a roundup of this week’s most relevant reads – and listens, for all you podcast fans – for institutional investors in the digital asset market.

Feedback welcome – simply reply to this email. Enjoy the rest of your Sunday.

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THE BRIEFING

Pop quiz: If Bank of America stock is trading at $39, and Wells Fargo’s shares are changing hands at $47, which one is cheaper?

If you automatically answered “duh, B of A, it has a lower price,” without asking for more information, please do not start buying cryptocurrency. (Or stocks.)

As sophisticated investors – who make up the majority of this newsletter’s readers – know, determining the relative value of different assets isn’t as simple as comparing their prices. To suss out whether B of A is really a bargain compared with Wells, you would probably start by considering their prices in light of the companies’ profits.

According to Bloomberg data, at the Thursday closing levels quoted above, B of A had a price-to-earnings (P/E) ratio of 12.66, a tad higher than 12.48 for Wells, suggesting that the market values them roughly the same.

Another tried-and-true measure of relative value is how a company’s stock price compares to the sum of its assets minus its liabilities. By this measure, B of A has a price-to-book value ratio of 1.3, slightly above the 1.1 for Wells.

Again, the above is probably old hat for most “Crypto Long & Short” subscribers. But if you find it too abstract, consider this: Arnold Schwarzenegger in his prime weighed 230 pounds. That does not mean he was “fatter” than John Belushi at 222 pounds. For a more meaningful comparison, you would have to divide weight by height (body mass index), or ignore the scale altogether and measure the circumference of their forearms, wrists, hips and waists (body fat percentage). Or, you know, just look at the two of them side by side.

What I’m getting at is that numbers in a vacuum don’t tell you much without context.

A big challenge for investors in cryptocurrency is that the market has only started to develop anything like P/E for comparing the relative valuation of different digital assets. For most of this asset class’s history, market capitalization, a classic yardstick from the equity market awkwardly applied to a whole new type of instrument, was nearly all investors had to go on.

As CoinDesk Chief Content Officer Michael J. Casey has noted, market cap is subject to manipulation and, more distressingly, it implies that crypto – ostensibly an improvement over legacy money – is simply a means to get rich in dollars, encouraging shameless promotion over dutiful programming.

Click here to read the full column.

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CHAIN LINKS

GoldenTree Asset Management, a $45 billion asset manager, has added bitcoin to its balance sheet. TAKEAWAY: GoldenTree is leaning into crypto markets and considering hiring investment experts in digital assets. GoldenTree has traditionally been focused on credit and fixed income strategies, but may be opening its doors for more speculative investment strategies.

Arca launched an actively managed digital asset yield fund, targeting low double-digit returns. TAKEAWAY: Large funds and institutional investors are interested in earning high yields from decentralized finance (DeFi) tokens and applications. Active management is one way for investors to make the most of a highly speculative market with variable returns.

Bitwise, a $1 billion asset manager, launched crypto funds for decentralized finance tokens Aave (AAVE) and Uniswap (UNI). TAKEAWAY: The interest likely comes from crypto-focused hedge funds already in the market. Bitwise’s new AAVE fund already has around $100 million in commitments.

Ethereum successfully activated its 11th backward-incompatible upgrade, dubbed “London,” on Thursday. TAKEAWAY: It is fair to say that the London hard fork has received more media attention than previous upgrades. The growth of crypto markets this year has helped bring Ethereum to the forefront of the news, and investors are interested in the potential effect that the new code changes could have on the network as a whole.

Institutional demand for bitcoin continued to fall in July. TAKEAWAY: Regulated bitcoin futures markets are an indicator of institutional activity in crypto. Bitcoin futures volume on the Chicago Mercantile Exchange stayed high before the May price crash. In July, the monthly volume continued to drop, reaching its lowest level since December, according to data from Skew.

U.S. Securities and Exchange Commission Chairman Gary Gensler announced that he won’t take a hands-off approach to regulating the crypto markets, citing the need for investor protection. TAKEAWAY: Gensler was formerly a ‘Blockchain and Technology’ professor at the Massachusetts Institute of Technology. There were no near-term plans announced, but the SEC chairman could bring positive regulatory clarity to the industry.

– Teddy Oosterbaan

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A Paradigm Shift in Mining

The dynamic crypto mining industry has been even more active following China's crackdown. The global hashrate has largely shifted to North America, making the U.S. a key mining hub where institutions now take central stage.

In this sponsored webinar on Aug. 10, Foundry CEO Mike Coyler explains how this new demographic of miners have special requirements, which the company has been catering to through its rapidly growing Foundry USA Pool and other services.

Register for free.

Podcast episodes worth listening to:

What’s Really Behind SEC Chairman Gary Gensler’s Crypto Speech – Nathaniel Whittemore, “The Breakdown.”

Ria Bhutoria, Principal at Castle Island Ventures – Tristan Yver, “The FTX Podcast.”

What Is Latin America’s Love for Bitcoin? Feat. Sebastian Serrano – Ben Schiller, “Opinionated.”

A message from Coindesk

#CryptoState2021: Middle East

Even though many countries in the Middle East restrict or outright ban activities related to blockchain technology, the region is having its crypto moment. From Dubai’s first-of-its-kind Bitcoin Fund listing to the Bank of Israel’s trial of a digital shekel, interest is picking up in the region as crypto companies work closely with regulators in the Middle East and North Africa (MENA) to gain some clarity about oversight of digital currencies.

Join us as we jet-set through the Middle East on our #CryptoState2021 virtual tour and explore how different markets are thinking about crypto, their roadblocks and challenges, and crypto’s impact on the region. Register for the Crypto State: Middle East virtual tour on Aug. 11.

Crypto Long & Short

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