Bitcoin is hitting record highs. Why it’s not too late to dig for digital gold

Bank of New York Mellon, founded in 1784 by Alexander Hamilton, announced last week it will help clients hold and transfer bitcoin and other cryptocurrencies. That followed an announcement from Tesla that the electric car maker purchased $1.5 billion worth of bitcoin. The combined excitement generated by two well-known companies likely played a role as the price of bitcoin hit $50,000 for the first time.

Many investors may justifiably feel that buying bitcoin or other tokens directly as a way to tap into this momentum is too speculative or volatile. But it may be time for even the crypto-agnostic to start thinking about getting exposure to the emerging ecosystem around bitcoin and other digital assets—not necessarily for the value of those assets themselves, but how finance and banking might evolve because of them.

After all, many longtime crypto proponents are already looking well past bitcoin as digital gold toward other developments, such as the use of crypto in commerce, lending and payments. The shape of this future is hazy: Bitcoin itself could be a major component, or it might be alternatives like so-called stablecoins pegged to dollars, or digital currencies issued directly by central banks. Mastercard said this month it plans to support some cryptocurrencies, particularly stablecoins, directly on its network.

For shares of big global institutions like Bank of New York or Mastercard, it could still be some time before crypto can move the needle more than macro factors like interest rates or consumer spending. So investors for now may be looking for more concentrated or direct exposures. There is a growing roster of listed companies that provide “pick and shovel" services across cryptocurrency and digital assets—though they aren’t cheap.

Some banks specialize in holding dollars attached to crypto businesses, like an exchange that facilitates buying and selling into and out of cryptocurrencies. Their shares have been soaring. Silvergate Capital, a La Jolla, Calif.-based bank that has for several years served crypto firms as a core part of its business, reported that its digital currency deposits grew 138% from the third quarter to year-end, to $5 billion. Its shares are up more than 100% so far in 2021, and roughly 10-fold over the past year. Silvergate operates a payment network linking these firms, which it believes is a moat as other banks come into the space, and it aims to grow other services such as crypto-collateralized lending.

Within the S&P 1500 banking industry group, the best performer over the past month is Signature Bank. The New York bank is a big player in commercial real estate but it also has a fast-growing digital-asset banking business. Those deposits grew by $8 billion last year to $10 billion. Its shares are up about 55% this year, triple the gain for the KBW Nasdaq Regional Banking index.

Then there are businesses that hold, exchange and transfer crypto on behalf of institutions or consumers. For consumers there is what is known as a “wallet," an account where they can buy, sell, move or pay with a digital asset. Most of these firms are still private, and some are highly specialized for crypto experts. But a couple of prominent firms are in the process of listing.

Coinbase Global has over 40 million users, and its business includes a consumer wallet, one of the largest crypto exchanges and custody and prime brokerage. It is rolling out a Visa rewards debit card linked to crypto accounts. The company said in January it plans to go public through a direct listing.

Bakkt was started by Intercontinental Exchange with bitcoin custody and futures trading, but has since expanded to consumer wallet and merchant products. In January it said it would go public via a merger with a special-purpose acquisition company. The SPAC’s shares are up more than 80% since the news, implying a roughly $5 billion market value for Bakkt.

Even if bitcoin itself isn’t a common way to pay, perhaps because people who hold it see it as a long-term asset, wallet providers bet that digital assets generally could become major payment methods. For example Bakkt aims to facilitate payments and transfers using all manner of digital stores of value, like videogame assets, airline miles or stocks.

Last year, PayPal Holdings introduced crypto buying and selling into its digital wallet, via a partnership with crypto-services provider Paxos. This year PayPal will begin allowing users to fund purchases via its payment buttons with crypto, as they might with a credit card. To the merchant, it would look like any other payment. PayPal argues this kind of flexibility can make it a central hub however digital money evolves. PayPal told investors last week it is looking at crypto services partly as a way to help it shape the role of cryptocurrencies in the future, including central bank digital currencies. PayPal shares are up more than 40% since it introduced its crypto service.

Beyond payments, crypto is often viewed as a gateway to digital finance. Payments and banking upstarts such as Square and Social Finance—which is going public via a SPAC—also offer crypto buying and selling. Likewise, Visa this month said that with digital-asset banking startup Anchorage it will begin offering a tool for traditional banks to offer crypto buying to their customers.

Analysts tend to look past the revenue from crypto buying-and-selling itself, which can be relatively small, and more at the potential this has to hook in younger users and earn their future loyalty in all things banking. “In digital banking, getting customers is the hard part. The real power of crypto may be getting people to download the app," said Lisa Ellis, analyst at MoffettNathanson. Notably, PayPal said that users who bought crypto subsequently opened their app, which has a bevy of features, twice as often.

As much as some investors in banking and finance might be skeptical of bitcoin’s rocket ride, they shouldn’t take their eyeballs off crypto.

This story has been published from a wire agency feed without modifications to the text.