how stocks can diversify your exposure to the blockchain ecosystem

Diversify your crypto exposure with stocks

The crypto ecosystem is growing, with constant innovations and emerging companies in a variety of sectors. With the rise of blockchain technology and cryptocurrencies, this industry offers many investment opportunities for individuals. However, it can be difficult to know how to invest effectively in this ever-changing ecosystem.

In this article, we will show that investing directly in cryptocurrencies is not the only way to gain exposure to the growth of Web3, but that it is also possible to bet on the companies that participate in its development.

We will therefore explore the advantages of investing via stocks in the crypto ecosystem, as well as concrete ways for retail investors to do so.

With recent news and in particular the legal vagueness that reigns around the regulatory status of cryptos in the United States, shares, which have the clear status of “financial securities” are benefiting from renewed interest from investors. who wish to expose themselves to the Web3 ecosystem.

This article will allow those who are interested in this type of investment to better understand it and to find their way between the different options available to them.

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An increasingly rich ecosystem of companies

The ecosystem of companies in the crypto and blockchain universe brings together a large number of innovative companies, startups and well-established companies, active in different sectors.

This wealth creates a wide variety of investment opportunities. In addition, the ecosystem is constantly growing, with new companies and new projects emerging every year, which automatically creates interesting investment opportunities.

We will focus below on two strong characteristics of this ecosystem:

• The wide variety of sectors;
• The very significant weight of North American companies.

1 – A wide range of sectors represented

The crypto and blockchain ecosystem is made up of many companies that span a wide range of industries, such as crypto asset management, financial services, blockchain protocols, mining, and more. This diversity thus offers many investment options to investors interested in this ecosystem..

We will list the main sectors below and give some examples of companies whose shares are listed on regulated markets.

1. Cryptoasset management and trading companies : we can think of a company like Galaxy Digital which is listed on the Toronto Stock Exchange;
2. Banking or financial services companies around cryptocurrencies : for example the company Paysafe, listed on the New York Stock Exchange and which is an integrated payment platform which operates in B to B or B to C and which allows customers to pay using crypto-currencies and receive funds almost instantly. The payment solution it offers also makes it possible to accept debit cards linked to crypto-currencies;
3. Companies specializing in the extraction of cryptocurrencies (mining) and the supply of cryptocurrency mining equipment : Riot Blockchain and Marathon Digital Holdings both listed on the NASDAQ are among the most well-known companies in the sector;
4. Companies providing services around blockchain technology or using it : we can cite two examples 1) Opera Ltd, a Norwegian company listed on the NASDAQ, is the first major browser to integrate a native crypto-currency portfolio, in particular via its Opera Crypto Browser solution. The Ethereum-based wallet makes Opera capable of exploring Web 3.0 while allowing transactions with cryptocurrencies or managing its tokens. 2) Another example, in USA this time (listing on Euronext Paris), the company Crypto Blockchain Industries, which invests in services based on the blockchain in multiple sectors of activity around, among others, gaming and the metaverse;
5. Companies holding cryptocurrencies on their balance sheet : the best known company is MicroStrategy whose core business is not related to Web 3, but business intelligence and whose charismatic CEO Michael Saylor, who is a maximalist Bitcoiner, has decided to invest a very large part of the company’s cash in Bitcoins. Indeed, it has 140,000 Bitcoins or nearly 4 billion dollars at the time of writing these lines (June 2023).

2 – International representation, but with a clear advantage for North America

The crypto ecosystem is present in many countries around the world, but the majority of the latter’s companies are based or listed in North America, in particular the United States.

The few examples given above illustrate this characteristic. Even a company like Opera, which is Norwegian, is listed on NASDAQ.

Investors should therefore be aware of this geographical concentration of the ecosystem and its possible implications for investment opportunities. In particular, these values ​​will be likely to have a certain sensitivity to variations in the NASDAQ.

Statistically, if we look at the universe of companies listed in the Western world and specialized in the crypto ecosystem, companies listed in North America, whether in number or market capitalization, represent approximately 80% of the universe and more than 75% are listed in the United States.

Despite regulatory efforts in Europe towards the crypto ecosystem, the continent continues to fall behind compared to the United States or Canada in terms of the listing of companies belonging to this ecosystem.

How can this difficulty in attracting candidates for listing in Europe be explained?

In addition to the clear comparative advantage in terms of image that the NASDAQ represents for a technology company, European investors, but also local stock exchanges, still seem cautious and reluctant to bet on companies in the crypto ecosystem (the latest statistics show a lower adoption in Europe both on the side of retail investors, but also on the side of institutional investors). This is the famous debate about the difference between words and deeds.

Although Europe continues to play an important role in the development and regulation of blockchain technology and the crypto ecosystem, it is clear that more steps need to be taken to drive adoption and investment in this area.

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The advantages of investing directly in crypto companies

Investing directly in companies in the crypto ecosystem can offer several advantages compared to direct investments in the cryptocurrencies themselves:

1 – Diversify your portfolio

Investing directly in companies in the crypto ecosystem can provide investors with portfolio diversification.

Unlike direct investment in one or two cryptocurrencies, the investor has the opportunity to invest in companies that cover a broad spectrum of companiesvaried in terms of sectors (miners, financial services, etc.), level of maturity: the investor can choose to invest in established and profitable companies to reduce his risk or in startups with high growth potential to take more risk while trying to maximize their return.

The crypto theme is increasingly seen as a theme in its own right. Investing in stocks of companies in the crypto ecosystem allows investors to diversify their portfolio by adding stocks that are poorly correlated to other asset classes, such as traditional stocks, bonds, commodities and real estate.

Finally, shares, unlike live cryptocurrencies, can be accommodated within traditional envelopes, which will make it easier to monitor the impact of this diversification within the portfolio.

2 – Participate in the growth of the crypto ecosystem

Investing in companies in the crypto ecosystem can provide a unique opportunity to participate in the growth of this rapidly expanding ecosystem.

Direct investments can help companies grow and expand their business, which can contribute to the growth of the crypto ecosystem as a whole. For example, Block (formerly Square), a publicly traded electronic payments company whose CEO is the co-founder of Twitter, launched a Bitcoin trading service in 2018. Since then, the company has generated millions of dollars in revenue by making it easier to buy and sell Bitcoin for users of its payment platform.

Besides, direct investments can help companies in the crypto ecosystem to innovate and explore new application areas for blockchain technology. For example, the Canadian company Nuvei, soon after its listing on the stock exchange in 2020, launched a payments platform based on blockchain technology to allow companies to process international payments in a faster and more economical way.

3 – Iinvest in people, proactive management, business strategies

Investing directly in companies in the crypto ecosystem allows investors to bet on the leadership and management of these companies, as well as their innovative business strategies.

Michael Saylor, CEO of MicroStrategy, also showed bold leadership in his decision to buy Bitcoin to diversify his company’s assets. His decision was widely followed by other publicly traded companies, which helped increase the adoption of cryptocurrencies in the business world.

Elon Musk, CEO of Tesla, SpaceX and Twitter, is also a charismatic leader in the crypto ecosystem, with his public support for Bitcoin and other cryptocurrencies.

Jack Dorsey, ex-CEO of Twitter and CEO of Block, is another charismatic leader of the crypto ecosystem, with his support of Bitcoin and the creation of Square Crypto, a branch of his company dedicated to innovation in blockchain technology. .

In sum, investing in companies in the crypto ecosystem also means betting on charismatic leaders and innovative business strategies that can contribute to the growth of the company and the ecosystem as a whole

4 – Touching the latest technologies

Invest in companies in the crypto ecosystem, above all, it means investing in the very latest technologies. The crypto ecosystem is constantly evolving, with new technologies, new projects and new applications appearing regularly. By investing in companies in this ecosystem, investors can benefit from technological innovation and be at the heart of the digital revolution.

Companies in the crypto ecosystem are often at the forefront of technological innovation, developing new solutions to meet industry needs. These solutions can be software, platforms, protocols or financial services that are designed to solve specific problems in the ecosystem.

Companies in the crypto ecosystem tend to be more nimble and innovative than traditional businesses, as they constantly have to adapt to an ever-changing environment.

This provides investors with direct access to the latest technologies and innovations in blockchain, cryptocurrencies and decentralized finance. Here are some examples.

Block, the payments company run by Jack Dorsey, has launched the Cash App, which allows users to buy and sell Bitcoins and other cryptocurrencies. The app has also integrated Bitcoin payment functionality, allowing users to send and receive Bitcoin payments.

Applied Digital is a NASDAQ-listed (APLD) company that designs, develops and operates next-generation data centers across North America. Its main focus is to provide digital infrastructure solutions to the growing high performance computing (HPC) industry.

The specificity of Applied Digital is to develop and operate an ultra-low cost digital infrastructure. To achieve this, the company seeks to bring data centers directly to the power point and encourages the use of renewable energy. The performance of the share since the beginning of the year (at the time of writing: June 2023) is +350%.

The mining company, Hut 8 Mining, has been installing next-generation Bitcoin mining equipment from MicroBT for a few years, which uses more advanced chip technology to increase the company’s hashing power. This allows Hut 8 Mining to increase its Bitcoin production while reducing its operating costs.

To conclude, iInvesting in companies in the crypto ecosystem is a way to be at the heart of technological innovation. Investors have the opportunity to touch the latest technologies and benefit from the potential growth of the ecosystem as a whole. Companies in the crypto ecosystem are working on exciting projects that have the potential to transform the industry and create value for investors.

5 — Better understand access, fees, taxation

Invest in companies in the crypto ecosystem rather than in cryptocurrencies directly offers the advantage of an investment journey that can be simpler.

First of all, investing in companies in the crypto ecosystem allows investors to benefit from what is considered to be easier and more convenient access to the ecosystem. While the purchase of cryptocurrencies can often be seen by some as complex, often requiring the use of specialized platforms, the purchase of shares of listed companies is more standardized and can be done for example via traditional online brokers. This allows all types of investors to expose themselves to the crypto ecosystem without having to worry about the cryptocurrency purchase journey which can be complex for some.

In addition, the fees associated with investing in companies in the crypto ecosystem are often more transparent and easier to understand than those associated with buying cryptocurrencies directly. While cryptocurrency exchanges often charge transaction, deposit and withdrawal fees, listed companies usually charge simpler and easier to understand brokerage fees. Investors can therefore better understand the costs associated with their investment.

Finally, investing in companies in the crypto ecosystem offers a clearer and more defined tax framework. Indeed, capital gains realized during the sale of cryptocurrencies are currently subject to ad hoc tax rules and likely to change over time, given the youth of the underlying.

Today cryptos are not eligible for any traditional investment envelope such as the securities account, the PEA, the Life Insurance or the Retirement Savings Plan, etc. Equities, equity ETFs or equity funds are eligible for this type of envelope and follow the classic tax rules that apply to them.

6 — Invest in a clearly regulated asset

Investing in a stock in the crypto ecosystem has a major regulatory advantage over investing directly in a cryptocurrency. In particular, an action is, without any possible doubt, a financial title, a “Security” in English. While cryptocurrency regulation is still under development and can vary widely from country to country or continent to continent, traditional companies are subject to strict and transparent regulations.

For example, when a company in the crypto ecosystem is listed on a stock exchange, it is bound by a specific set of rules and regulations. This includes compliance with securities laws, financial disclosure requirements and corporate governance.

Listed companies are regularly audited and must report to financial regulatory bodies, such as market authorities and securities commissions. This strict regulation aims to protect investors providing transparent information and ensuring compliance with established standards.

By investing in regulated stocks in the crypto ecosystem, investors benefit from greater confidence and better visibility on the company in which they are investing. They can access detailed financial reports, past performance information, and future forecasts, making it easier to assess the business and make informed decisions.

In addition, as shareholders, investors have legal rights and remedies in the event of non-compliance with the company’s obligations. They can participate in general meetings, vote on important decisions and express their opinion on the management of the company. These rights and remedies strengthen the position of investors and provide them with additional protection.

In summary, investing in stocks in the crypto ecosystem offers clear and transparent regulations, which means better protection and greater confidence for investors. This avoids regulatory uncertainty surrounding cryptocurrencies and benefits from a solid infrastructure that promotes transparency and accountability for listed companies.

Investors interested in the crypto ecosystem have several options for investing in companies in this ecosystem:

1 – Invest directly through listed shares

As we have seen, in recent years, many entities have emerged in the crypto ecosystem in particular mining and digital asset management companies as well as trading companies.

This direct investment in companies in the crypto ecosystem helps provide more targeted investment choices. By investing directly in specific cryptocurrency-related companies, investors have the opportunity to select companies with unique value propositions, strong management teams and promising growth prospects.

However, this approach may also carry higher risks, as individual businesses may be more exposed to market volatility, regulatory changes or other operational risks.

Investing in a single share is therefore a real challenge. : This investment option requires active management as well as extensive research before selecting companies that are suitable for the investor’s portfolio. The risk is also to have a concentrated exposure, because it is difficult for an investor to have a very diversified portfolio by choosing only a few stocks.

In conclusion, it may require a higher level of expertise, time and effort compared to investing in ETFs, which are managed by professionals.

Here are 3 examples of listed companies from different sectors within the crypto ecosystem.

MicroStrategy $MSTR ($4.2 billion capitalization)

Listed on NASDAQ, MicroStrategy is the largest independent, publicly traded business intelligence company, with the first enterprise analytics platform. Its charismatic CEO Michael Saylor has the distinction of being a maximalist Bitcoiner. MicroStrategy is the company that holds the most Bitcoin in the world with a total of around 140,000 BTC or nearly $4 billion (June 2023).

Galaxy Digital $GLXY ($1.3 billion capitalization)

Listed on the Toronto Stock Exchange, Galaxy Digital a company that offers professionals (institutional investors, Web3 entrepreneurs, banks, traders, miners) several financial services around cryptos: 1) a trading platform 2) asset management (fund-type investment vehicles) 3 ) a strategy consulting branch to support companies in their understanding and use of the blockchain.

Marathon Digital $MARA ($1.7 billion capitalization)

American mining company listed on NASDAQ, Digital Marathon has the distinction of being one of the largest operators in North America with one of the lowest energy costs due to its focus on renewable energies (mainly wind and solar energy).

2 — Invest via ETFs (and thus indirectly via the shares that compose them)

By investing in an ETF, you expose yourself in one transaction to a basket of stocks from different companies in the crypto ecosystemwhich allows you, while diversifying your portfolio, to mitigate risk, by reducing volatility compared to an investment in an individual stock.

ETFs work in the same way as traditional funds, but while traditional funds are generally aimed at institutional investors, ETFs are specially designed for individual investors, making investing accessible to everyone.

The key characteristics of an equity ETF on the crypto ecosystem are as follows.

Diversification

By investing in such an ETF, investors gain access to a portfolio of many stocks from different companies in the crypto ecosystem.

Accessibility

Investing in this type of product may be more accessible for investors than investing directly in a crypto. Investors can buy shares of the ETF through their regular broker, without having to create a crypto wallet or worry about the security of their wallet.

Liquidity

Investors can easily buy and sell ETF shares.

The exhibition

Unlike buying a crypto or a stock belonging to the ecosystem, investing in such an ETF can give investors exposure to the entire crypto ecosystem, which can be beneficial for those who want invest in several companies in the sector.

Expertise and professional management

By investing in an ETF managed by industry professionals, investors can benefit from the expertise and experience of the management team.

Fewer regulatory risks and security issues

Investors may be reluctant to invest directly in cryptocurrencies due to associated risks such as regulatory risks, security issues.

By investing in an ETF based on shares of the crypto ecosystem, and moreover UCITS, investors can reduce these risks. Indeed, the European UCITS directive imposes solid risk management and investment limits, and the use of an independent custodian bank.

The transparency of the underlying assets

ETFs are subject to strict regulations that guarantee the transparency of the underlying assets and the composition of the portfolio. Investors can therefore have a better understanding of what they are investing in.

If we have to give some criteria for selecting an ETF, we can retain: the composition of the portfolio (sectors selected), the listing places, the availability of the ETF from the various platforms, the method of construction of the portfolio or the frequency of rebalancing.

The Melanion Capital ETF : the Melanion Bitcoin Equities UCITS ETF is a good example. It invests in shares of the crypto ecosystem with an original method of weighting based on the historical sensitivity of shares to Bitcoin.

Specifically, the ETF is interested in companies belonging to the following sectors: Financial services around cryptos, Mining, Blockchain Technology; but also to companies that hold cryptocurrencies on their balance sheet. The ETF invests in the 30 stocks whose variations are the most sensitive to variations in Bitcoin.

What is a Bitcoin (BTC) ETF?

Conclusion on Web3 Industry Stock Purchase

Investing in shares of the crypto ecosystem is a way to diversify your portfolio and participate in the growth of the ecosystem. This type of investment also has the advantage of presenting regulatory clarity, which tends to reassure today in the absence of a clear uniform regulatory framework.

Investors have several options for investing in this ever-changing ecosystem, but it is worth doing in-depth research and advised to consult a financial professional before making any investment decision.

This article was written by Cyril Sabbagh, Managing Director at Melanion Capital and designer of the Melanion Bitcoin Equities UCITS ETF