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Cryptocurrency moves further mainstream; emerging markets could benefit most

  • Coinbase’s listing creates a regulated vehicle for investors to gain crypto access; the firm is delivering strong growth

  • In markets with weak fiscal/monetary discipline, crypto could become an established store of value/medium of exchange

  • Nigeria is the world’s third most active crypto market, despite central bank opposition. Technology is boosting access

Cryptocurrency moves further mainstream; emerging markets could benefit most
Rahul Shah
Rahul Shah

Head of Financials Equity Research

Rohit Kumar
Rohit Kumar

Global Financials/Thematics

Tellimer Research
16 April 2021
Published by

Coinbase’s recent Nasdaq listing and Tesla now holding cryptocurrency on its balance sheet signal that cryptocurrency’s inexorable shift to the mainstream is gathering momentum. The Covid pandemic has played a key role in accelerating this transition; government largesse to cushion economies crippled by lockdowns is putting pressure on the credibility of fiat currencies. Emerging market investors have long known about the risks of sovereign financial indiscipline – new technologies are now enabling cryptocurrency to complete with gold or hard currency, not just as a store of value but, increasingly, as a convenient medium of exchange.

Coinbase’s Nasdaq listing shows how crypto is becoming more mainstream

A fierce debate has been waging for many years as to whether cryptocurrency qualifies as an investment. In relation to Coinbase, there is no such ambiguity – the firm generates both cashflows and profits. There is also a strong growth angle to the story; Q1 21 revenues could be 40% higher than FY 20 revenues, which in turn were 140% higher than in 2019.

Coinbase's quarterly revenues

A key insight provided by the company is the growing weight of trading volume it processes from institutional (rather than retail) investors; almost two-thirds of business transacted on the platform is now institutional.

Coinbase: % of trading volume conducted by institutions

One of the main risks investors face in purchasing cryptocurrency assets is that a newer, shinier version could emerge on the horizon. For example, bitcoin cannot be used for transactions where speed of processing is important; and mining the currency consumes huge amounts of electricity, to the chagrin of ESG-focused investors. A cryptocurrency that could address some of bitcoin’s failings could potentially prompt a stampede for the exit. With new technologies, such as quantum computing, on the horizon, investors need to remain vigilant. Coinbase is potentially less exposed to such risks since it is a multi-currency platform.

However, based on its opening day of trading, one characteristic Coinbase seems to share with cryptocurrencies is high price volatility. The shares opened trading at US$381 and closed at US$328 (giving the firm a US$65bn market capitalisation), but the intra-day share price range was US$310 to US$430.

Bitcoin price has increased 10x in the past year

Emerging markets could prove key beneficiaries of cryptocurrency adoption

High inflation and capital controls are key barriers to investment in many emerging markets. By addressing some of these issues, cryptocurrencies could raise capital investment levels in those markets where it is most scarce, lifting long-term economic growth.

Nigeria is currently one of the leading emerging market cryptocurrency exponents; weak faith in government institutions, the naira’s unpredictable devaluation history and growing use cases have resulted in a burgeoning domestic cryptocurrency market. Chainanalysis’s 2020 Global Crypto Adoption Index provided ranked Nigeria 8th out of 154 countries, based on four different metrics (on-chain value received, on-chain retail value received, number of on-chain deposits and P2P exchange trade volume). Statista ranks Nigeria third globally, based on the value of Bitcoins purchased with domestic currencies through online platforms.

Online local currency bitcoin purchases

In terms of underlying blockchain capacity, we see China as being the most sophisticated emerging market. It also has a vibrant ecosystem of blockchain companies, some of which we have highlighted in our prior research. The country has also put in place a regulatory framework for blockchain; although this may offend purists (the anonymity of transactors is lost, for example), a stable structure does help companies to feel more comfortable investing in product development.

Weighting of blockchain fintechs by country

EM regulators are discouraging cryptocurrencies but with only limited success

Many emerging market regulators have been discouraging or banning the trading of cryptocurrencies recently. For example, Nigeria recently banned cryptocurrencies, Bangladesh’s central bank regards them as illegal and in violation of anti-money laundering legislation; Pakistan’s central bank says it does not recognise cryptocurrencies and has advised financial institutions to refrain from such transactions.

However, these regulatory hurdles have not deterred investors in these markets from taking cryptocurrency exposure. Often, they use the alternate route of P2P transactions, therefore bypassing the need for a registered financial intermediary. That said, any relaxation of regulatory hurdles (as regulators become more comfortable with cryptocurrencies) would likely allow emerging market trading volumes of such instruments to rise sharply.

Source: Techabal.com

Central bank digital currencies could be a potential threat to cryptocurrencies

Many central banks have indicated a willingness to introduce their own digital currency, and China became the first country to launch its digital currency, the digital yuan. Central bank-issued digital currencies could solve many of the issues with fiat money and could be viable alternatives to cryptocurrencies; our colleague Paul Domjan discusses this issue in more detail here.