This article was penned midday Wednesday, just moments after the much ballyhooed Coinbase (NASDAQ:COIN) initial public offering (IPO).
Shares of the crypto exchange operator opened at $381, more than 50% above the reference price of $250. That easily vaulted the company into the $100 billion market capitalization club. Putting that figure into context, a newly public company that makes it easier for investors to access an asset class many are still leery of is almost as big as 3M and Goldman Sachs and is bigger than Target, CVS and General Motors, among others.
To say Coinbase was one of the most highly anticipated IPOs in some time is an understatement. Market observers, crypto and otherwise, are viewing Coinbase as a Bitcoin proxy (the exchange offeers access to other digital coins), particularly because there still isn't a dedicated Bitcoin exchange traded fund in the U.S.
All of that is to say it's reasonable to expect that if they haven't already, advisors will soon be fielding questions from clients on the Coinbase IPO and how they can get in on the action.
Alternative to Direct Coinbase Exposure
Coinbase is like so many story stocks/unicorns before it in that it's a captivating growth company operating in compelling, growing segment. However, as history has proven time again, where there are pros with these types of companies, there are plenty of cons, too.
If market participants insist on making the stock a Bitcoin proxy, Coinbase will be vulnerable to downside in the largest cryptocurrency. Likewise, Coinbase has plenty of competition in the crypto brokerage space and any of those rivals can 1) Offer traders a larger menu of digital assets to trade or 2) Undercut Coinbase on pricing – the traditional brokerage model for stealing business from a competitor.
So it may be prudent for advisors to consider indirect exposure to Coinbase on behalf of clients. ETFs would be the way to go and while there are some logical destinations for the shares, it remains to be seen exactly where Coinbase ends up in ETF land.
A good guess could be the VanEck Vectors Digital Transformation ETF (NASDAQ:DAPP), which debuted on the same day Coinbase went public. I'll get into the timing aspect of new ETF launches another, but suffice to say, there were better days for DAPP to debut.
That said, the newest VanEck ETF has several points in its favor. First, it could easily become home to Coinbase stock in the future. Second, although DAPP doesn't hold that stock today, it's a credible alternative to direct exposure. Third, although it's new, DAPP is shaping as one of the more well constructed equity-based plays on crypto – a niche that thus far has left investors yearning for more.
The rookie ETF tracks the MVIS Global Digital Assets Equity Index, “which is intended to track the performance of companies that are participating in the digital assets economies,” according to VanEck.
Previous iterations of equity-based strategies purporting to have exposure to the crypto universe actually lack that exposure and, in some cases, are criticized for being higher fee, fancily named tech funds in disguise. Fortunately, those aren't issues with DAPP.
Clients may Dig DAPP
As is the case with many thematic ETFs, DAPP is likely to strike a growth chord with clients, particularly younger demographics, but it doesn't need to be a whopping percentage of anyone's portfolio. However, the VanEck offers some perks for risk-tolerant investors.
The mix of crypto miners, custodians exchange operators, hardware providers, companies holding crypto on balance sheets and more is attractive. So is the mandate that components derive 50% of revenue from digital assets, which gives DAPP a level of purity not found with legacy funds in this category.
“The opportunity set of publicly traded, pure-play digital transformation companies is still young, but has grown in both size and revenues over the last few years,” notes VanEck. “Despite underlying volatility in digital assets themselves, many publicly traded companies are investing heavily in new business lines to position themselves favorably as digital asset usage and adoption continues to accelerate.”
So when clients press about Coinbase, it might be wise to talk about DAPP as a way of reducing single stock risk while gaining equity-based leverage to digital asset growth.
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