Over the past one year till date, the price performance of Bitcoin ($Grayscale Bitcoin Mini Trust(BTC)$) has been staggering, with a nearly 127% increase since the 14th of December last year till early trends on the 16th of December. This increase in interest (and valuation) is reflected in the rise of Coinbase Inc ( $Coinbase Global, Inc.(COIN)$) - the premier exchange of choice for a rising number of large institutional investors for all products crypto-related - wherein its stock has risen 109% in the same period.
Bitcoin vis-à-vis Fiat Currencies (Mostly the Dollar)
Bitcoin has long been touted as a viable alternative - mostly the U.S. dollar in the face of U.S. government debt continuing to pile on. As it stands, BTC massively outperforms the U.S. Dollar Index or "Dixie" (DXY) which measures the value of the U.S. Dollar relative to a basket of currencies, principally the Euro (which comprises 57.6% of the basket).
BTC has seen bursts of high traded volumes throughout the year, with the biggest spikes happening since the end of the U.S. election which ensures the return of former U.S. President Trump to the Oval Office for a second term. Meanwhile, the "Dixie" has only risen by a little under 5% in the same period.
Note: The trading calendar for BTC and COIN as well as the tabulation of the "Dixie" follow differing session schedules. In all calculations, only common traded sessions are utilized to calculate comparative performance.
The principle behind the "basket of currencies" concept is that there is an "economic tug of war" between a country and its trading partners: if the "basket of currencies" is cheaper, e.g. the "Dixie" is high, economic activity would have a greater incentive to shift to the trading partners and vice versa. The "Dixie" is hobbled in that it doesn't account for major U.S. trading partners such as China, Mexico, South Korea and Brazil; instead it only considers the European Union, Japan, the United Kingdom, Canada, Sweden and Switzerland.
Institutions - both private and state - instead utilize Real Effective Exchange Rates (REERs) which is the nominal effective exchange rate (a measure of the value of a currency against a weighted average of several foreign currencies) divided by a price deflator or index of costs. The basket of currencies chosen are typically the country's largest trading partners to form a "narrow" REER or all major trading partners to form a "broad" REER.
In "broad" REER terms, the U.S. Dollar is steeply disadvantaged relative to their ostensible peers in the Western Hemisphere.
It bears noting that the REERs aren't one-shop explainers of all things economic: these are to be taken in context. For instance: while India might show nearly similar levels of REER appreciation as the U.S., India's biggest deficit-running trading partners are the Gulf Cooperation Council in the Middle East (who mostly supply oil), Russia (mostly oil, coal and gas) and ASEAN countries in Southeast Asia (mostly minerals and sundries). Given that China runs a deficit against India via the supply of goods such as electronics, et al, the rapidly-growing indigenous manufacturing sector - which never fully ceased to function despite cheap goods readily available next door - has been increasingly incentivized to produce goods locally to ameliorate this.
As the U.S. dollar grew increasingly disadvantaged in export competitiveness, its European and Asian counterparts grew stronger in their REERs relative to the U.S. Absent China and its pegged currency, the REER trajectory might be entirely different for both India and the U.S. But, unlike India, the American manufacturing sector is a shell of its former self. The high value of the U.S. dollar acts as an impediment to the restoration of its high status in a competitive and widely-distributed global marketplace.
While President Trump had proposed (or threatened) tariffs across the board for all its trading partners, the World Trade Organization - whose global rulebook was once acknowledged by the U.S. government itself as having helped established American manufacturing's dominance across the world - has already issued a caution that such plans are a "lose-lose" proposition for the United States and its economy. European thinktanks are already advising their governments to form economic coalitions that exclude the United States while mandating for continued commitment to the WTO rulebook.
Government spending has long lubricated select wheels/sectors of the U.S. economy. Regardless of the composition of the American legislature, successive administrations have relentlessly increased spending and it is somewhat unlikely that it would be any different in 2025. If President Trump were to follow his own recommendation made in 2023 and default on U.S. government debt obligations if spending cuts aren't made, the consequences for the U.S. dollar are going to be manifold and complex.
As uncertainty clouds the U.S. dollar, Bitcoin's valuation prospered. Its rising valuation and interest among investors - in turn - boosted Coinbase.
Coinbase: Trend Drilldown
As of Q3 of 2024 (nine months or "9M"), stablecoins that are tethered to the U.S. dollars have witnessed a fairly significant drawdown from the highs experienced in 2023. Meanwhile, transaction revenues mostly driven by crypto trading are showing early trends of resurgence in contribution to the bottom line.
Transactions have nearly bounced back to 2022 levels while blockchain rewards and custodial fees are witnessing explosive growth relative to the doldrums of 2022 and 2023. This implies a net pick-up in investor interest in cryptocurrencies.
The company's balance sheets also witnessed a boost in net incomes and EBITDA as technology development costs petered away and revenues soared with increasing crypto-centric transactions.
As volume trends indicated, Q4 witnessed a massive bump in traded volumes in BTC (as well as some other cryptocurrencies). Given lowered expenses, pass-through efficiencies from revenues to earnings can be expected to be even higher come Q4 results.
In Conclusion
While BTC has seen several speculative swings in its history, a number of those were ostensibly driven by longstanding concerns over the robustness of the U.S. economy and the outlook for fiat currencies (primarily the U.S. dollar). Whether BTC would be an effective substitute for the U.S. dollar in the global economy remains to be seen.
However, it also bears noting that blockchain networks and use cases for digital tokens continue to evolve and find steadily surer footing in the digital economy. Currency proxy or not, current market trajectories indicate that a sizeable portion of investors deem that BTC is likely here to stay, which imparts the likes of Coinbase and its stock's valuation a generally positive and reasonably strong tailwind.
Note: Professional investors in Europe can consider two instruments based on Coinbase that is bound to have interesting trajectories based on the forward outlook of the cryptocurrency market: $LS 3X LONG COINBASE ETP(CON3.UK)$ offers leveraged exposure on the potential upside of the stock’s trajectory while $LS -3X SHORT COINBASE ETP(CO3S.UK)$ offers leveraged inverse exposure to the potential downside.
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