Money, Cryptocurrency, and the Value of Trust
This week Coinbase, a prominent cryptocurrency trading platform, debuted on the Nasdaq stock exchange via a direct listing. The timing coincides with a boom in cryptocurrency values this year and joins the surge in both IPOs and direct listings. The first day of trading valued Coinbase at $86 billion. For reference, that makes the cryptocurrency exchange more valuable than well-known companies such as General Motors or FedEx. This elicits disbelief and therefore some key questions: What is Coinbase? What is cryptocurrency? And, perhaps most importantly, how does it compare to traditional currency?
Transformation of Currency
Business has enjoyed many accelerants over the years — from the industrial revolution’s transformation of production capacity to the internet’s impact on scalability — but none were more important than the advent of money as a form of exchange. Money allowed the world to move beyond the inefficiencies of the barter system. It gave individuals and businesses a fungible medium of exchange, as well as a way to store and invest the value of their earnings over time. It made possible capitalism as we know it.
Money has historically been a physical object that represents an intangible agreement of value. The physical form is not important. The underlying contract is.
The first known usage of physical money was cowrie shells in China more than three thousand years ago. The natural supply of cowrie shells quickly lagged the demand for currency, and thus people began producing imitation cowries out of bone, shell, lead, bronze, gold, and silver. Gold and silver stuck around for millennia until paper money took over in recent centuries. The twentieth century saw the further transition from paper money to electronic payments and credit cards. The form of money has changed many times, and a digital evolution is in keeping with that pattern.
The physical aspect of money now matters less than the intangible agreement does. Parties involved in a transaction trust that the ‘currency’ they use will hold its value. The shift from gold, or the gold standard, to full adoption of fiat currency, further solidified the depth of this agreement, and trust in the value it represents. Fiat money is a piece of paper that has value only because a nation collectively agrees to ascribe a value to it. In short, money works because people believe that it will.
How Coinbase Fits In
Cryptocurrency, such as bitcoin, may be an evolution of money — but its acceptance as a mainstream currency will hinge on its ability to solidify trust in its functionality as a store of value and a medium of exchange. If it can become a substantive participant in the global currency market, it can make good on the hopes of many cryptocurrency enthusiasts. If, instead, government regulation aimed at curtailing money laundering or other illegitimate uses impedes the usage of cryptocurrencies, they could be worth substantially less than current valuations. That unresolved question has driven significant volatility in the price of bitcoin and other cryptocurrencies in recent years.
Coinbase is an app that lets you buy and sell various cryptocurrencies, like bitcoin, ethereum, and about 50 others. You can also use Coinbase to convert one cryptocurrency to another or use it as a digital wallet to send and receive cryptocurrency or make purchases at businesses. Effectively, the company simplifies the process of using this new form of currency and adds legitimacy and security to ownership. It lacks the advantage of federal deposit insurance and other elements of regulation that protect banking customers — at least at this stage.
Investors appreciate that as a trading platform Coinbase provides exposure to a diversified array of cryptocurrencies. At this early stage of a technology adoption cycle, there are bound to be companies (or currencies in this case) that fail. Those of a certain age will remember similar patterns — for example, Betamax disappearing when VHS became the video standard, and later evolving into streaming video without any physical disc.
Coinbase charges a percentage fee on each transaction, which translates into a substantial amount of revenue as trading volumes and prices have surged. In Q1, leading up to its trading debut, Coinbase reported $1.8 billion in revenue, which is 9x higher than Q1 last year. While they have the potential to be a long-term leader, the path ahead could mirror the volatility and risk of the new currencies themselves.
With any emerging technology, there are downsides. Parts of the bitcoin process rely on massive amounts of computing power, which in turn requires significant energy usage. Climate change advocates have raised alarm bells that the magnitude of bitcoin’s energy consumption surpasses that of entire countries including Sweden, Norway, or Ukraine. Further, the irony is not lost that a portion of legitimacy for a proudly decentralized cryptocurrency like bitcoin hinges on a centralized corporate clearinghouse like Coinbase. These hurdles and others will need to be addressed on the path to greater price stability.
When the market falls in love with a new technology and prices see periods of speculative excess, we keep client portfolios allocated to long-term targets. Our goal is to provide our clients with a sense of calm and an understanding that they are participating in many avenues of market growth, but not taking undue risks with their portfolios. Early cryptocurrencies and platforms may face similar challenges as the internet 1.0 boom in the 1990s and will continue to carry these significant price risks throughout the early adoption phase.
When it comes to cryptocurrencies, investors have a steep learning curve. As Barron’s summarized, “bitcoin is a technology, a currency, an inflation hedge, a non-correlated asset, an environmental threat, and the harbinger of a new crypto ecosystem that will probably change far more than we can imagine today.” While the growth potential is real, so is the risk.
Our work with clients is often an exercise in balancing risk. In client portfolios, we balance the risk of pursuing growth with the calm clarity of preserving financial value. In the financial planning arena, we balance goals of early retirement or philanthropic gifting with the risks of longevity and future health costs. In both areas, we support our clients as they Invest in Living, balancing uncertainties with living an impactful life.
This article does not represent advice or recommendation on any particular stock, company, or currency. The views expressed are a macro commentary on current economic conditions.
 The Booming IPO Market Shows No Signs of Slowing. Barron’s
 Cowrie Shells in Ancient China. The British Museum
 What Is Money? IMF
 Government regulation is a primary risk. Countries including China and Turkey have banned the usage of cryptocurrency, India introduced a similar bill early this year to outlaw cryptocurrency for all citizens. Concerns about speculative volatility and usage for money laundering and criminal enterprise drove these harsh policy responses. If western nations followed suit, it would be devastating to the price of cryptocurrencies.
 Cambridge Bitcoin Electricity Consumption Index. University of Cambridge
 Why Bitcoin Matters, and (Almost) Everything Investors Need to Know About Owning It. Barron’s
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