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Cryptocurrency is still kind of niche and a little confusing. The fact that it’s so beloved by eccentric tech billionaires doesn’t make it seem totally normal. But despite being developed as a decentralized alternative to government-created currencies, cryptocurrency is getting increasingly legit.
The cryptocurrency exchange Coinbase is going public Wednesday on the Nasdaq. PayPal is now allowing users to pay merchants with cryptocurrency. Visa will accept one type for payments. You can now use crypto to buy a Tesla or to send money on Signal. I spoke with Gil Luria, the director of research at D.A. Davidson. I asked him if we are in a moment with crypto. The following is an edited transcript of our conversation.
Gil Luria: The way I would define the moment is we’re in the convergence of finance of traditional finance, traditional business, with crypto. Crypto has really been on its own for a while, and there maybe hasn’t been a realization of how big a business it has become. And we are now witnessing the convergence of traditional finance and crypto. And it’s very symbolic that this week on Wednesday, Coinbase will list on the Nasdaq, and we will officially have a mega-cap company that all they do is crypto.
Molly Wood: Well, tell me more about how it’s become a really big business and traditional finance is finally feeling safer about it.
Luria: So the two big businesses around crypto are the ones that provide access to crypto on-ramps, like Coinbase. We refer to them as wallets or exchanges, but they’re really the on-ramps, the gateways between crypto and government currency. The other big businesses that are also out there are those transaction processors that in the crypto business are referred to as miners, but they’re really just independent transaction processes. They operate data centers that process transactions and crypto assets. Those businesses are quite large. We saw that Coinbase just reported $1.8 billion of revenue in one quarter with more than $1 billion of profits associated with it. There’s a few other companies at that scale, and there’s a few very large companies that are transaction processors that are miners as well. It’s very big business. Not to mention that crypto is a trillion-dollar asset class. There’s a lot of assets that are residing in crypto assets.
Wood: How much do you think crypto is poised to become part of the consumer experience? You have PayPal letting people pay merchants, you can use it on Signal, buy a Tesla. Is that the next frontier?
Luria: Maybe. I’d remind people that crypto assets, Bitcoin is an example, all it is is open- source software. Anybody can use it however they want to use it. And if somebody feels the need to buy their coffee with crypto assets, they can do that. It may not be the best and highest use of this technology, but it’s possible. It’s also possible to send money to relatives in other countries. It’s possible for companies to hold Bitcoin as a currency that they use to pay vendors in other countries. And it’s possible to just hold Bitcoin as an investment. And many people do that. It’s open-source software, anybody can use it how they want and some people use it to buy coffee, and that’s OK.
Wood: If more and more people use it to buy coffee, though, does that suggest that price volatility is becoming less of a concern?
Luria: Not necessarily, because the price volatility will continue as long as we don’t know what the outcome is going to be. The reason we have such price volatility in Bitcoin and other crypto assets, is that there’s a world where Bitcoin is all of money, where all companies, all governments, all people use Bitcoin as money. You can think that that likelihood is low, there are other people that think that it’s possible and unlikely. So as long as that’s possible, in which case, each Bitcoin would be worth $1 million, it’s also possible that Bitcoin becomes worthless — another crypto asset becomes more valuable, better for the purposes that people want to use it for and Bitcoin goes to zero. And when you have an asset that is either worth $0 or $1 million, price discovery is a process of volatility. It moves around a lot. That’s what we’ve seen in the last 11 years, and it’s likely what we’re going to see going forward as well. I don’t know that the volatility is going to go away. And people using it for transactions, it doesn’t in itself make it go away.
Wood: I mean, it’s interesting, I had a conversation this weekend with some friends. We’re still at the point where your friends who are not very online are asking you to explain Bitcoin. So I was having this conversation with a friend about this. And there is still this sense that “isn’t it all essentially imaginary?” But I wonder, if we’re at the point where this invented thing is a trillion-dollar asset class, it seems like nobody’s going to let it fail.
Luria: Yeah, that’s a great point. It’s a trillion-dollar asset class that has been building over 11 years. If it was going to fail as an entire system and go away, that would have happened by now. But evidently, the more people learn about it, the more they believe that there’s something there. The more they believe there’s utility in crypto assets, the more they believe that there’s something they can do, that there’s something other people will do. That’s how this is all building. When people ask me about, “Well, it’s all imaginary. It’s all just what you believe,” I remind them that you have to step back and think about what money is. Most money transacted today is transacted electronically as well, based on our belief that there is money in the bank. Crypto is not any different than any type of money in that regard.
Wood: And you seem to be saying that all companies will eventually be involved in crypto in some way.
Luria: I believe so, and that’s because if you were to design the internet today from scratch, if you were to design the financial system today from scratch, you would design a decentralized system, a system by which any person can exchange value with any other person without an intermediary. In a nutshell, that’s what crypto is. And therefore, it is likely that we migrate to a world where transactions are done without intermediaries because it’s more efficient, because it costs less, because it’s faster.
Wood: I mean, what’s so interesting, right, is that we’re at a point where Visa, PayPal, they have to be in this game, but it is an existential threat, right, on some level?
Luria: Absolutely. They are the middle person. And a lot of the fees they collect are because of their power as a middle person. And they’re going to have to adapt their business to the new reality. And that’s something that’s very hard for businesses to do. When your business is going really well, it’s very easy to just believe that that’ll continue forever and not adapt to a new technology. And most companies will fail, and that’s OK. But some companies will know how to adapt.
Wood: So despite the influence and impact that cryptocurrencies have already had, you seem to be describing many bigger earthquakes to come.
Luria: Absolutely. Up until now, crypto has really gone on a parallel path. We are in an era where that is beginning to look like the convergence is starting to happen. And if it does, it will transform many industries and many businesses. If you think about our overall [gross domestic product], I would say about 20% of our GDP comes from middle people that help transactions happen between people that don’t know each other. Once you have all decentralized systems, what those companies do has to be completely different than what they do today.
Related links: More insight from Molly Wood
Let’s talk more about Coinbase for a second, because its valuation is banana bonkers. Depending on its public outing, Coinbase is valued at anywhere from $50 billion to $100 billion. And remember, it’s an exchange for trading cryptocurrency assets. So it’s like the New York Stock Exchange or Nasdaq. One CNBC piece I read points out that Intercontinental Exchange, which operates NYSE, is valued at $65 billion, and Nasdaq at $25 billion. So as you might imagine, some analysts at MarketWatch are pointing out that the valuation is “ridiculous.” Not necessarily because crypto is in any trouble, but because it will be so successful that the market may get crowded with other exchanges. And then Coinbase will have to cut its trading fees to keep up with the competition and therefore reduce the profits it would need to be valued at $100 billion. But I can tell you one thing, this is going to be fun to watch.
And it’s likely to make a whole lot of unexpected characters a whole lot of money, like the rapper Nas — real name Nasir Jones. According to Yahoo Finance, Nas has an investment firm that got in real early on Coinbase. He now stands to make something like $100 million when the company goes public.
And just for fun, here’s a link to an article from 2013 that references the first note Gil Luria wrote on Bitcoin, which he believes is the first by any Wall Street analyst. He’s quoted as saying he thinks Bitcoin could be worth 10 to 100 times its current value, which the authors clearly, subtly believe to be insane. The trading price at that time was $998. It was, at the time I wrote this, trading at $59,000 — or pretty much in the middle of Luria’s range.
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