The world's two most valuable cryptocurrencies by market cap, Bitcoin (BTC 0.06%) and Ethereum (ETH -0.45%), soared in value 61% and 409%, respectively, in 2021. Investors are beginning to view these coins as legitimate assets to allocate a small percentage of their portfolios to.
Even with continued innovation in the crypto space and the slow progress toward mainstream adoption, I'm considering exiting my investments in Bitcoin and Ethereum. Here's why.
1. I don't have the technical background
Probably the main reason I'm thinking about selling Bitcoin and Ethereum is simply because I don't have the technical knowledge to analyze and understand these blockchain protocols. Now to be clear, the number of people in the world that are knowledgeable about computer science, math, economics, politics, and law -- disciplines that seem to blend together in the cryptocurrency field -- is probably small.
I think at a high level, though, understanding how these protocols work, with all of the various incentives involved, is key. There are definitely a ton of resources out there for people to learn about the space and become more informed investors. But this would ultimately be a long and difficult process involving lots of study, something most people don't have the time for. If you run a more diversified portfolio, however, it could make sense to own individual cryptocurrencies that are small positions.
2. Bitcoin and Ethereum don't produce cash flows
I fully understand that unlike traditional businesses, Bitcoin and Ethereum don't produce revenues, net income, or cash flows. This is what a for-profit corporation is supposed to do. And investors use these financial figures to help with the valuation process.
In order to gauge if cryptocurrencies make worthwhile investments, more creative methods are required to assess their risk and reward profiles. For Bitcoin and Ethereum, looking at transaction volume, developer activity, institutional adoption, or any system updates might help. Nonetheless, trying to come up with a long-term price target seems like a daunting task. Owning these coins is like a venture-capital style bet. The reward might be high, but so is the risk and uncertainty.
3. A bet on the overall crypto market
I recently purchased shares of Coinbase (COIN 0.21%), the leading crypto brokerage and exchange in the U.S. Not only do I feel comfortable with this investment based on my ability to analyze the actual business, in contrast to what I discussed above about individual cryptocurrencies, but I believe there are three outstanding reasons to own the stock.
First, I view Coinbase as a bet on the growth of the entire crypto economy. While the company's results in any given quarter are unpredictable and based on crypto volatility and prices, the business tends to do well when interest in digital assets is strong. Coinbase's monthly active users grew from 1.5 million in the second quarter of 2020 to a peak of 8.8 million in the second quarter of 2021. During this time, the crypto market cap soared 445%.
Additionally, Coinbase possesses some superb financials. In Q3 2021, the business produced net income of $400 million on revenue of $1.2 billion, for a 33% margin. This remarkable figure demonstrates how profitable an enterprise Coinbase really is. Furthermore, the company executed a direct listing during its initial public offering, not needing to raise any fresh capital.
Lastly, there is a ton of optionality inherent in the business model that investors aren't pricing into the stock today. For example, Coinbase Cloud allows developers to use Coinbase's existing infrastructure to build and integrate new blockchain-based projects. Think of how Amazon Web Services is the backbone of many companies' online presence. Coinbase can be just that for the crypto economy, adding upside to the stock.
Even the two biggest cryptocurrencies, Bitcoin and Ethereum, are still nascent projects that have uncertain futures. As a result, Coinbase could be a safer bet on the whole cryptocurrency market without creating exposure to any single digital asset.
I'm still undecided
I haven't decided whether or not I will get rid of the Bitcoin and Ethereum I currently own. For what it's worth, they are the two biggest cryptocurrencies by value and have a longer history and larger developer infrastructure than most other blockchain projects out there. This alone makes me comfortable owning them.
However, going forward, I think Coinbase will be my primary exposure to the broader crypto industry.