The Beginning of the Adoption Cycle and How It Impacts You
Every day there are headlines about Cryptocurrency, there are talking heads touting one coin or project over another and the value of these assets are at or near all-time highs.
When conservative retirees started asking me about how to buy Crypto and what I recommend, I knew it was time to pull together my analysts to create a report that would not only explain this new investment type, but would help people understand the risks and offer real investment opportunities that could take advantage of the incredible momentum the industry is experiencing.
I would like to start with a bit of a bird’s eye view of what a typical new technology adoption cycle looks like and use it to explain where we likely are today when it comes to this developing industry.
The Tech Adoption Cycle and Where the Money is Made
When new technologies develop, there is a relatively reliable cycle that happens.
The graphic below highlights the major stages of the adoption cycle. Innovators create the technology, they don’t typically make money at this stage.
The technology starts gaining attention and more people start using it. The innovators make a little money as early adopters come in.
Then there is a phase where the tech dies or thrives. If it takes hold, this is where the money starts coming in.
The bull market phase is when the early majority comes becomes aware of the tech and adopts it and invests in it. As the technology matures, some market saturation occurs and the newness ears off, the gains tend to moderate, volatility goes down and then the late majority and the laggards come in and adopt the tech or finally see its investment potential.
With new technology, products or investment vehicles you want to be on the right side of the adoption curve—not too early. And you certainly don’t want to be on the profitability downslope.
That said, being right in the middle of the curve can deliver outsized profits, but it can come with massive volatility. More on that later. Let’s now talk about cryptocurrency and where it is in this adoption cycle.
What Is Bitcoin?
When people think of crypto currency, they typically think of Bitcoin. It’s akin to the early days of copy machines. There were a number of machines that could copy paperwork, but everyone called it Xeroxing because Xerox was the biggest player in the space.
Currently, there are more than 13,000 different crypto tokens on the market today. But it is Bitcoin that has consistently been the big player in the space.
First released in 2009, Bitcoin is the most well-known and widely traded cryptocurrency. If you aren’t familiar, a cryptocurrency is a decentralized digital asset designed to be used as a means of exchange, primarily online. The technology typically uses an electronic ledger called a Blockchain to manage and track transfers. To help ensure that there is a reliable record of all transfers, which is distributed across all the computers on the network, making it virtually impossible to edit.
Bitcoins are created through a process called mining. Essentially, mining is the process that creates the Blockchain and records and verifies all transactions. Miners use specialized computers to assemble the transactions in to blocks and verify them cryptographically. When a miner finds a new block, they are rewarded with Bitcoins both for the mining and from transaction fees charges as part of the verified transactions.
Mining has become more difficult over time. This was an intentional part of the design which was intended to keep the production rate of coins consistent as more computing power is added to the network. In addition to the growth in users, the technology behind mining has advanced to such a degree that mining itself requires significant investment.
Mining and creating the Blockchain is not cheap. The investment in the technology as well as the incredible amount of energy it takes to assemble those blocks are highly cost prohibitive.
However, the increased security and versatile nature of crypto makes it a potentially very valuable asset.
Risks and Retrieval: The Crypto Rollercoaster
With the increased opportunity has come increased risk. While early miners were gambling very little, and only relying on the increased acceptance of Bitcoin as a method of exchange to create demand, attention by investors, particularly speculators, has both driven the price growth and created significant volatility. After peaking over $20,000, the price at the start of 2019 had fallen to less than $4,000. However, the price has surged in a big way, recently reaching a high of $64,083.
For many investors, this degree of volatility is impractical. Bitcoin is generally accepted to be 2-3 times as volatile as gold. The volatility also creates challenges for merchants trying to accept Bitcoin as the value relative to their local currency can swing significantly over the course of time necessary to complete a transaction.
Most transactions take place via online exchanges. Investors using an exchange must set up an account and fund it to complete purchases. Similarly, it is necessary to transfer the funds from the account to your bank to be able to use them. The mechanics of the transaction are not all that different from what would be done with most investment accounts, but the subtle differences may cause confusion.
The timing for completion can vary as it requires verification by miners, which can take 10 minutes or more. There is also generally minimal customer support available if there are problems. So, if you run into problems, it could be hard for it to get resolved.
There is also the question of how you will store your Bitcoin. There’s no physical asset for them, you can’t keep them under your mattress. One common method is what’s called a “Hot Wallet.” Many exchanges, and other service providers, will hold your Bitcoin similar to a bank account. While generally safe, there have been some well documented cases of hacking, or fraud, which have cost investors hundreds of millions.
If You Like The Coin, You’ll Love The Chain
Bitcoin may be the talk of Main Street lately, but Wall Street is all about “fintech,” the marriage of finance and technology. That’s Bitcoin and other crypto currencies that only exist inside computer screens, it’s true.
However, that’s only the tip of the fintech iceberg. Fintech is payment systems that render the credit card obsolete and cash mysterious to today’s kids. It’s new automated approaches to banking, insurance, lending and even investing. Stretch your definition and its new ways to buy and sell real estate and other assets without requiring a broker.
And if you weren’t around for the early meteoric days of Bitcoin, don’t worry. There’s innovation on the horizon that will make it look pitifully small. I’m talking about a $1 trillion opportunity, as big as the money all the FANG giants make together. It’s the foundation of an all-new Internet that’s safer, more efficient and scalable to accommodate billions of devices. I’m talking about Blockchain.
Blockchain boils down to a way to authenticate transactions within a cloud of networked computers. There’s so much processing power built into each link in the data “chain” that it’s practically impossible to break the code. Only the computers with legitimate access can authorize any activity whatsoever. Everyone else is locked out. And if anyone tries to tamper with the chain, the deception is obvious to all.
It’s a cybersecurity system that enforces itself. And that self-enforcing structure allows networks backed with Blockchain to replace the conventional Internet and, ultimately, raise serious questions about the future of money itself.
Everyone with an eye on financial markets knows about Bitcoin now as what was once worth $1 a decade ago occasionally trades for well over $10,000 now. But what they may not know is that the digital-only currency runs on Blockchain systems that verify custody of every microscopic fraction of digital money. Those same systems back up the entire currency in much the same way a central bank would, guaranteeing transactions with the full faith and credit of the network’s processing power while eliminating forgery and fraud.
Nobody who’s paying attention will ever buy a fake Bitcoin because they’ll always be able to confirm that the seller is telling the truth or lying. It’s that simple. Instead of all the special inks and secret printing tricks that authenticate modern currency, the numbers do all the work.
And while I think the crypto currency story is far from over, its mushrooming popularity means the easy gains will be played out by the time Wall Street unveils mutual funds and other vehicles designed to lower the obstacles that currently make it hard for retail investors to play.
Diving Into Crypto
As we dive into crypto, I’m going to start off by providing you with three picks that I really think will give you a good idea on how to begin looking at cryptocurrencies and the banks as well as companies that are beginning to associate with it.
Think of it as way of easing you in as an investor in terms of how crypto is being applied and how certain banks and companies are finding their niche in the crypto space. Let’s begin.
Crypto Pick #1: Silvergate Capital (SI)
Start with the basics. We aren’t going all in on pure crypto yet . . . we’re simply getting exposure to the intersection between the old dollar economy and the new digital currency universe. That intersection requires traditional banking infrastructure with a modern attitude. Silvergate is the only one. In a world where giants like JPMorgan Chase still refer to bitcoin as “worthless,” that’s a clear signal that you can swing the power of financial disruption in your favor. Other banks simply won’t touch crypto lending or crypto deposits.
This is a “blue ocean” scenario. Silvergate serves over 400 of the world’s largest currency exchanges, including Coinbase, Circle and Bitstamp. The money center banks avoid these accounts because they’re too small and too new . . . literally beneath their notice. But when you’re starting from zero, the growth rates can be enormous. As a result, you’ll profit from virtually every digital currency transaction on the planet. The best comparison I can make here is with Charles Schwab, which handed early investors over 17,000% gains since it went public. That company applied new logic (discount do-it-yourself stock trading) to a mature market and started a revolution for shareholders as well as everyone who now buys and sells in a zero-commission universe.
And right now, this is Silvergate’s world to build. The company isn’t investing in any crypto contract in isolation. This isn’t one of those “bitcoin ETFs” you’ve heard about. This is a business that generates cash flow on crypto transactions . . . in this case, providing the exchanges and other clients with the financial tools that dollar-driven companies have enjoyed for generations.
Silvergate can do that in the world of banking. Right now, it’s small. But it’s profitable. Net income for the third quarter of 2021 was $23 million or $0.88 per share, blowing past the second quarter numbers (up 10% sequentially) and leaving the year-ago $7 million completely in the dirt. This is the place where big economies of scale are generated. Margins get bigger as the breakeven point recedes in the rear view.
Book value has doubled in the past year. This is the boom time. I’m excited.
Of course, my IPO Edge subscribers were here at $12.50. But there’s still plenty of value here to capture as crypto hits the big time.
Crypto Pick #2: Riot Blockchain (RIOT)
Now this is what most people think of when they ask me about bitcoin stocks. RIOT doesn’t program the ledgers or create new tokens. It simply owns the computers that grind out fresh crypto assets night and day, 365 days a year. Think of a gold miner starting with raw dirt and pouring bars of bullion that didn’t exist previously. RIOT takes raw computing power and generates true crypto wealth.
That can be a challenging business as the cost of running massive data centers rises and the difficulty of “mining” bitcoin in particular increases. However, computing power still doubles roughly once every two years, so as long as RIOT keeps upgrading its servers, the calculations aren’t painful at all.
After all, crypto assets can appreciate ahead of the effort it takes to produce them. Look at bitcoin: when the market value of your “bullion” jumps nearly 400% from $13,000 to $60,000 in a single year, there’s an incentive to swallow higher production costs in pursuit of much higher payouts.
RIOT generated $31 million worth of crypto in the second quarter and brought in close to $3 million more charging other companies rent on its data centers. A year ago, total revenue didn’t even crack $2 million. That’s the kind of exponential growth that the ability to create bitcoin out of thin air can support.
Management is still tinkering with the right operational balance but I suspect the current level of activity would break if bitcoin can clear $70,000 even for a brief period of time. As I write this, that’s only another 4% from the existing record price . . . and may already be old news by the time you read this.
Meanwhile, the company can always burn cash or sell its hoard of crypto assets on the open market to fund operations. There’s $147 million on the balance sheet, which is enough to keep the servers spinning through 2028 without any significant strain. And then there’s the $48 million worth of “intangible assets,” which translates into $48 million worth of crypto waiting to be sold on the open market and currently priced to reflect the current market environment.
That’s ultimately the prize here. RIOT is building a digital hoard as strategic as the old gold reserves in Fort Knox. It’s just intangible . . . perfect for a virtual world. Believe it or not, Wall Street is convinced this company will earn $1.68 per share next year, which means it’s actually cheaper than the S&P 500.
Crypto Pick #3: Akamai (AKAM)
Akamai (AKAM) provides internet infrastructure that enables ecommerce, social media, gaming and entertainment and other online applications.
The company does this through its Akamai Intelligent Edge Platform, which operates as an overlay on an enterprise’s existing network. The Intelligent Edge Platform enables valuable solutions for Akamai’s customers, including improved internal network and cloud security, speedier web and mobile performance, better delivery of gaming, movies and live events and specific solutions for network service providers. The robustness of these solutions is maintained through 250,000 servers employed in 1,500 networks globally.
The tech company has spent over $500 million in acquisitions the past three years, largely to improve its security offerings and is currently seeing strong customer demand. In one of its latest joint ventures, AKAM has enabled next-generation transaction security, scale and responsiveness by offering new blockchain-based online payment networks.
I like the fact that AKAM has a niche business that is “sticky” with customers and will therefore produce recurring revenues. The downside is limited on the stock and I consider it a buy at today’s prices.
There’s A New Reality Coming . . . But When?
We started off by talking about the adoption cycle of technology and that is what I would like to come back to before we close.
Cryptocurrency appears to be in the Early Majority phase given that it hasn’t matured past heavy volatility. Any investment in coins or projects will likely be a rollercoaster that only those with the firmest constitutions will be able to stomach.
That lesson is part of the delicate balancing act of investing with the goal of disruptive innovation in mind. The truly transformational plays are still speculative. They largely exist in the future, when they exist at all –somewhere between 75% and 90% of a typical early-stage venture capital portfolio will fizzle out on the way to the exit.
Now, let me share more about the other types of disruptive companies that truly get me excited as an investor.
Disruptive Innovation = Handsome Profits
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Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. The Financial Times describes Ms. Kramer as “A one-woman financial investment powerhouse” and The Economist distinguishes her as “one of the best-known investors in America.” Ms. Kramer is often quoted in publications such as the Wall Street Journal, New York Post, Bloomberg and Reuters. She is a frequent guest commentator on CNBC, CBS, Fox News and Bloomberg, providing investment insight and economic analysis. You can hear her weekly on the syndicated Millionaire Makers radio show.
Ms. Kramer was an analyst and investment banker at Morgan Stanley and Lehman Brothers. Ms. Kramer founded and ran a long-short hedge fund and has been chief investment officer overseeing debt and equity portfolios. Since 2010, Ms. Kramer’s financial publications have provided stock analysis and investment advice to her subscribers. Her products include GameChangers, Value Authority, High Octane Trader, Turbo Trader, 2-Day Trader, IPO Edge and Inner Circle.
Ms. Kramer, a Certified Fraud Examiner, has also testified as an expert in investment suitability, risk management, compliance, executive compensation and corporate governance.
Ms. Kramer received her MBA from the Wharton School at the University of Pennsylvania and her BA with honors from Wellesley College. Ms. Kramer has provided testimony regarding investment policy to the U.S. Senate and is a frequent speaker on the markets, portfolio management and securities fraud and compliance. Ms. Kramer is also the author of “Ahead of the Curve” (Simon & Schuster 2007), “The Little Book of Big Profits from Small Stocks” (Wiley 2012) and the recent Wall Street Journal best-seller “GameChanging Investing: How To Profit From Tomorrow’s Billion-Dollar Trends” (Regnery 2020).