Investment Thesis for Bitcoin and Fold
How would you invest $1 MM? Choose 1 crypto asset and 1 company.
- Crypto asset: $600,000 in Bitcoin.
- Company: $400,000 in Fold.
The Case for Bitcoin
Much has been written about the value proposition of Bitcoin in regards to its Stock-to-Flow ratio, its properties as digital gold, and its usefulness as a digital currency for the internet. However, there are three current trends that indicate Bitcoin is primed for significant growth within the next 5–10 years:
- Global economic conditions
- Bitcoin is an investment for Millennials
- The untapped half of the retail market
1. Global Economic Conditions
Over the past 6 months, the world has seen unprecedented economic policies implemented to solve the global economic crises facilitated by COVID19:
- Negative interest rates in Europe to encourage spending
- $2 trillion stimulus package funded through the issuance of new Treasury bonds in the U.S.
- The U.S. Federal Reserve’s fund rate targeting 0% to 0.25%
More than anything, these unprecedented policies have caused fear during uncertain times. This has been exacerbated by one of the biggest stock market crashes since 2008 and the overall economy doesn’t look to improve anytime in the near future with over 36 million unemployment claims as of May 14, 2020.
With growing concerns about the economic impacts of shutting down non-essential businesses for an undetermined amount of time, the search for stability through a non-correlated asset has never been greater. Two assets that fit this category are gold and Bitcoin. But as we will see later on in the article, Bitcoin is the investment that Millennials are buying into.
With a coefficient ranging between 0.2 and -0.15 over the past year, Bitcoin has a relatively low correlation to the S&P 500.
If there ever was an opportunity for Bitcoin’s 12 year narrative of digital gold to payout, the time is now.
With COVID19 initiating a historic shift in the global economy, the dominant narrative for the next decade will revolve around money and economic policies while everything else falls to the background. Therefore, Bitcoin as an uncorrelated, censorship-resistant, and neutral asset is primed to become the topic of national and cultural conversations as the world-wide search for sound money begins.
This same opportunity does not exist with other cryptocurrencies which can generally be bucketed into smart contracts, single-purpose coins, and privacy as none of them are designed to be as good of a store of value and money than Bitcoin.
2. Bitcoin is an Investment for Millennials
On Dec. 4, 2019, Charles Schwab released a report revealing the Grayscale Bitcoin Trust as one of the top five investments amongst millennials in self-directed 401(k)s.
Another factor to consider is that Coldwell Banker and Global Luxury estimate that $68 trillion will be passed down from one of the wealthiest generations in U.S. history as beneficiaries.
If the Millennial trend in favoring Bitcoin as an investment continues, then a significant portion of the expected trillions of inherited wealth will be allocated to Bitcoin.
P.S. shoutout to Phil Bonello for his great article on this topic. You can read more on his substack.
3. The Untapped Half of the Retail Market
Over the past few years, Bitcoin has been introduced to the world of traditional finance primarily through the form of GBTC. Bitcoin has also been offered through well-established and reputable financial firms such as Fidelity. However, the Bitcoin demand on the retail and brokerage side through neobank companies are outpacing them.
Let’s compare the volume of GBTC with the volume of a retail-focused neobank application such as CashApp.
In Q1 of 2020, GBTC’s daily volume over a 90 day period totaled $324.5 million according to yahoo finance. This was approximately three times the volume reported in Q1 of 2019 at $115.6 million. Now let’s compare these numbers with CashApp which targets people with little to no investment experience.
In the first 3 months of 2020 alone, more than 50% of CashApp’s revenue came from Bitcoin orders totaling $306 million. This volume is more than four and a half times the revenue Square reported in Q1 of 2019 at $65 million.
These numbers indicate that the demand for Bitcoin through retail-focused FinTech applications have increased more than the traditional stock market platforms. This is a strong signal that people will pay a significant premium for an easy Bitcoin buying experience. When we consider that 47% of the U.S. population has yet to make an investment of any kind, there is still ample opportunity for Bitcoin adoption in the retail market.
The Next 10 Years
In light of the three trends mentioned above, we see that Bitcoin’s role as a digital store of value is becoming legitimized through recent global economic policies. We see a trend that Bitcoin is a popular investment within the Millennial generation and that they are set to inherit a significant amount of wealth from their parents. Finally, we see a strong demand for Bitcoin in the retail market and it is significantly more profitable than running an exchange. So the question is: What company do we invest in to capitalize on this trend?
One answer would be to invest in a brokerage. However, this space is extremely competitive. Not only is there Coinbase, Gemini, and CashApp, other Bitcoin-only startups have launched within the past year such as River Financial and Swan Bitcoin.
So how do we penetrate the retail market in a different way? There must be another avenue to capitalize on their willingness to pay a premium for Bitcoin. The answer is Fold.
Fold
Fold is a Bitcoin rewards app that allows users to purchase gift cards and earn cashback in Bitcoin. The beauty of this system is that it completely removes the experience of going to an exchange like Coinbase in order to buy Bitcoin. Rather than forcing them to go down a journey that is completely foreign to them, they’ve integrated earning Bitcoin into a behavior that they’re familiar with.
In this world, there are no fee templates, no price spreads, and no price charts. This is perfect for someone who has never made an investment before. Also, the $100 they spend gives them $100 back plus some Bitcoin. This feeling of getting the full value of their purchase, as well as a reward, is very important in regards to the psychology of the consumer because it significantly reduces the barriers of purchase. Compare this experience to purchasing Bitcoin and paying up to $2.00 in fees for a $100 purchase.
This is why Fold is primed for reaching the mass consumer market of people who have never made an investment while simultaneously offering them the opportunity to invest in Bitcoin.
The Market
The gift card market they are going after is sizable. In 2017, it was estimated at $315 billion globally and is expected to grow to $750 billion by 2026. One significant competitive advantage Fold has over other gift card retailers is their ability to mitigate fraud through irreversible Bitcoin purchases which prevents chargebacks. Approximately 1–4% of gift card purchases are fraudulent which resulted in $950 million lost in 2019 in the U.S. alone. This allows Fold to have a more efficient business and leverage more of their capital for growth.
One thing to note is that the $750 billion estimate was modeled prior to COVID19. However, preliminary data suggests that the gift card industry has actually grown in light of the pandemic.
The Company
The company is led by Will Reeves and Matt Luongo. Within a year, they have impressively acquired over 300,000 monthly sessions and are launching a Visa rewards card to earn Bitcoin back on every purchase. This will make earning Bitcoin even more of a seamless experience to their consumers. They have also raised a $2.5 million seed round from notable investors such as Craft Ventures, Slow, and CoinShares.
They currently serve the U.S. market but are able to offer select gift cards in other countries such as Mexico, Canada, and Ireland. Their goal is to expand into the UK and EU next.
Fold also has a great brand. It’s fun, bright, and extremely accessible to both Millenials and Gen Z. This gives them the creative freedom to attempt several viral and humorous marketing campaigns. It also allows them more opportunities to work with influencers as we’ve already seen with DJ Kam.
This is something that other exchanges or brokerages can’t do. Having a fun mass market appeal while offering financial services for investments are orthogonal to one another. But Fold has the ability to create an expressive brand akin to CashApp. Another example of this is the “Spin the Wheel” feature they recently added that incentivizes volume by offering extra satoshis with the purchase of a gift card.
The End Game
If Fold captures just 5% of the expected $750 billion gift card market by 2026, it will process over $3.75 billion transactions. That’s $187.5 million in revenue assuming a 5% margin. That in itself would make Fold a worthwhile investment. And within its first year, Fold is well on its way with having already processed millions in USD.
However, I also expect Fold to be so disruptive that they receive several M&A offers within the next 10 years from three potential sources: a gift card vendor, Visa, or a cryptocurrency exchange.
M&A Opportunities
Gift Card Businesses
Traditional gift card businesses could see their share of the market getting taken by Fold and have to make a decision on either to add Bitcoin functionality or acquire them. I believe the opportunity cost of not acquiring Fold will be too high. These include:
- 1–2 years of testing to implement successfully
- Continued loss of market share
- Risks of failure and inability to properly secure Bitcoin infrastructure
- Their current customers aren’t interested in Bitcoin
Visa
Another company that would be primed to acquire Fold is Visa for the ability to offer their B2B clients Bitcoin rewards, especially in light of the fact that Bitcoin payments help to mitigate fraud. In fact, the reason why Fold is able to offer a debit Visa card of their own is because they are piloting a program with them.
Cryptocurrency Exchange
But the acquisition that makes the most sense is with a cryptocurrency exchange. Here’s an example. Coinbase acquired earn.com for $100 MM. The rationale was to first acquire talent (Balaji) but also use it to launch an educational platform because the assumption was that cryptocurrency is hard to understand and therefore newcomers want to get educated before they invest. Their business model was to partner with foundations and cryptocurrency companies who would pay and fund this new initiative.
However, this was very short-sighted. There are only so many cryptocurrencies that Coinbase can list that have the capital to pay for their Earn program. It also is re-engaging the same demographic of investors instead of reaching a new population.
It makes much more sense for a cryptocurrency exchange to acquire Fold for their top of the funnel strategy:
- It generates revenue and therefore lowers CPA
- It penetrates the demographic of people who aren’t interested in investing
- It converts them into investors by exposing them to Bitcoin
The User Journey would look like the following:
- User hears about Fold to earn cashback in Bitcoin
- User already buys gift cards and figures they might as well try Fold to earn an extra reward
- User earns Bitcoin by purchasing a gift card
- User sees value of their satoshis fluctuate as Bitcoin’s price increases
- User clicks a knowledge base article to learn why
- User clicks CTA in the article that converts them into an investor and cryptocurrency exchange user
With earn.com setting the benchmark at $100 million, Fold is well positioned to get acquired at an even higher valuation for filling a similar role for an exchange such as Kraken, Gemini, or Bittrex.
FAQ
Why did you allocate $600,000 to Bitcoin and $400,000 to Fold?
I believe $400,000 would have been an appropriate investment in Fold in the seed round given the opportunities outlined in the “End Game” section. The rest is allocated to Bitcoin.
Is there a possibility of another cryptocurrency outperforming Bitcoin within the next decade?
Yes. There is always a possibility, but it is unlikely. As I previously discussed, cryptocurrencies can be generally bucketed into smart contracts, single-purpose coins, and privacy. All three of these are coming to Bitcoin through Liquid. But even without Liquid, there are significant challenges that these cryptocurrencies must overcome.
For example, smart contract blockchains will most likely cannibalize one another in an oversaturated market. Single purpose coins can be solved faster and quicker with permissioned blockchains or centralized database. Privacy coins have a lot of value however fight an enormous uphill battle when it comes to regulations which is only expected to get worse as governments take more emergency measures with COVID19.
Who is Fold’s primary competitor?
Fold’s primary competitor is Lolli. However, Fold distinguishes itself by offering a Visa debit card, an easily accessible phone app to make purchases on the go, as well as privacy. By purchasing gift cards, you do not reveal any financial data to the company you are purchasing from.
