Long CFIG (CryptoFinancial) is Short MtGox and Btc-E. And to some extent long Alt-Crypto, short Bitcoin.
CryptoFinancial IPO concluded today, with about 80% sold. (UPDATE: all shares sold.)
This is a meh result in Bitcoin world, where IPO investors have been somewhat spoiled, with common expectations to double or triple their money in weeks. I think prospects are still good however, and the company is a buy, even more so if the price falls post IPO. Full disclosure: StandardCrypto is long the IPO, and plans to buy more if the price goes down after trading begins.
At any rate, CFIG is now one of the largest publicly traded bitcoin companies by market cap: currently 150k BTC, with 30k from the IPO and 120k privately held. Judging by the bitcointalk forum thread at
and the lukewarm uptake of IPO stock, there’s mostly pessimism about CFIG’s business model and prospects for success. And no surprise: this is a hard to value company, and the current valuation is extremely high.
I’ll give my own somewhat optimistic take, and I’ll try to keep it short.
CFIG is a Panamanian financial services startup that aims to offer full and convenient bitcoin/fiat conversion to individuals, and KYC/AML (Know Your Customer / Anti Money Laundering) regulatory compliance services to exchanges.
Though it is not a bank, CFIG will work closely with the banking industry to make it easy to spend bitcoin in a fiat dominated world. In particular, CFIG plans to offer a debit card where customers can spend from their bitcoin with conversion automatic, like Americans tourists spending Euros with their USD-funded ATM cards when vacationing in Europe. This idea isn’t exactly original — bitinstant was supposed to have implemented in 2012. But, bitinstant is busy editing their home page, the Winklevoss twins are working on an ETF, and so no one has acutally done the debit card thing yet. So, CFIG could be first.
The pitch to individuals could be something like: “The safety of Bitcoin, the convenience of Fiat.” With the American banking system in increasing disarray, the migration “offshore” of tens or hundreds of thousands of Americans is not outside the realm of possibility. Adding bitcoin to the mix sweetens the deal. Now, I wouldn’t expect CFIG to be the only player in the “offshore bitcoin/usd for middle class people” market, but they could have first mover advantage.
What I like about the CFIG business plan is that the customer piece and the exchange piece are linked in a way that makes a lot of sense for grabbing a big piece of market share from existing bitcoin exchanges and payment processors in the coming months and years.
CFIG is not a bank, and will not pay interest on deposits, or as some call it “Fractional Reserve Bitcoin.” But CFIG *will* provide regulatory compliance services that banks are good at, and exchanges have proved terrible at, particularly in the USA and painfully at mega-exchange MtGox. The idea is that CFIG will do compliance up to par with USA Fincen and OFAC requirements, and provide a consistent interface to the fiat world for bitcoin exchange startups hungry for market share and not thrilled about having to do compliance themselves — which is estimated to cost in the single digit millions *per exchange.* CFIG won’t be the only financial entity trying to smoothe the path for US bitcoin startups. Internet Archive Credit Union and Silicon Valley Bank come to mind as current players. But CFIG is an early entrant, and in some sense being US friendly but not physically in the US gives it a leg up. Pure focus on the regulatory and bitcoin/fiat interface pieces, while not getting distracted by everything else a bank provides, can be seen as a competitive advantage as well.
In some sense, the CFIG business plan is the opposite of Buttercoin, which plans to provide a trading engine and revenue share with existing money services businesses that already have compliance under control. But compliance is really the hard part, which is why CFIG’s plan makes more sense to me.
The optimistic scenario as I foresee it goes something like this. CFIG acquires a large number of individual “private bank-ish” customers through its debit care and painless bitcoin/fiat services. These customers are great for PR and brand building but don’t bring in that much revenue, because how much can you really charge for wire transfers and these aren’t interest deposits. Where CFIG wins is on exchang fees shared with its partner exchanges.
The problems are: how can CFIG justify its current valuation, let alone grow to justify the risk of invesing in a startup. And how does owning CFIG compare with just owning bitcoin?
For CFIG to fulfill its business plan projection it needs a lot of exchange volume. To put it plainly, it needs to be handling MtGox level volumes of trades through its partners. And to grow, in bitcoin valued terms, it probably needs to wind up a few times bigger than MtGox in the hand-wavy future. To skip to the good stuff, have a look at page 33 of https://www.havelockinvestments.com/reportdownload.php?id=21 (other docs at https://www.havelockinvestments.com/) and http://bitcoincharts.com/ for existing exchange volume. Gox currently handles 600k bitcoin monthly, bitstamp 300k, and there on page 33 CFIG projects 17280 BTC annual transaction fee revenue on monthly transactions of 400k bitcoin.
Exchange fees won’t be the only source of revenue for CFIG, but I think it’s fair to focus on them as the main measure of success as CFIG launches over the next few months and fights to wrangle a dividend. If CFIG can grow its volume to gox/bitinstant levels, projected annual revenue from transactions is 17280 BTC, with a 0.3% transaction fee. So (as a side note) with their partner exchanges tacking on a bit, expect to see 0.4-0.5% exchange fees from CFIG, but with a lot more convenience than current exchanges can offer.
Bottom line for an investor: can CFIG grow to MtGox level size and beyond? I think maybe it can. MtGox has a lot of people nervous right now, and btc-e isn’t exactly a model of customer service. Bitstamp seems to be executing well, but even on this well run exchange there’s no bitstamp debit card you can spend off of. There’s room for another big player, and the convenience factor of the debit card and related tightly coupled services could launch CFIG into the big leagues.
But even at Gox level transaction volumes, and revenues matching the projections in the business plan, we’re only at 9x earnings for the current valuation. Well, this is why I said for the IPO to make sense the end game has to have CFIG volume significantly larger than Gox. How much larger? I don’t know, but I have ten fingers, so I am going to say 10x — which allows for current investors to be rewarded at 10x if they’re in it for the long haul. Or to put it another way, consider every multiple of current gox size to be investor reward for courage — or punishment for hubris if it doesn’t materialize.
10x gox volume wasn’t in the business plan, and I’m going to treat this like a good thing. CFIG principals seem to be sober minded people. But that’s what investors should be looking for as a metric for whether they should invest, and the yardstick of performance that CFIG needs to be held to if they are to deliver value.
What about holding CFIG versus just holding bitcoin? Now that’s a really hard question.
If you think bitcoin is going to go 100x in a handful of years, as a reserve / tax evasion wealth sink, somewhat like digital gold but with actual transactions at the low end of the probability spectrum, you are probably better off just hoarding bitcoin. CFIG will do well compared to USD, but won’t be able to keep up with growth in BTC if “real world” transaction volume (like buying milk with fiat on a bitcoin backed debit card) lacks traction.
However, if you think crypto currencies “milk buying” transaction volumes will go up a lot, CFIG could take a real cut out of the fiat/crypto transaction flow, and the sky is really the limit, never mind what the business plan says. Well, the sky isn’t really the limit (I call sky the limit 100x), but CFIG could go up 10x and wind up as an asicminer sized bitcoin blue chip stock paying massive dividends to the early crowd. I’d be happy with 2x bitcoin, too. (I just don’t want 0x!)
Two more points, and sorry I didn’t keep this short like I thought I would.
1) I am pretty convinced that crypto currencies are going to dominate our future, but I am not totally sold that bitcoin is going to win this race. CFIG is well positioned to soak up crypto/fiat flows going into the future even if bitcoin turns out to be an also ran. I like these types of hedges.
2) Although they’re an elusive and pseudonymous bunch, I like the CFIG team from what they say publicly. I think we’ll see more transparency as the story develops. And, I have lived in panama, and I think it’s a great place to do this project.
To my readers, thanks for your time, and I look forward to hearing your thoughts.
Good luck investing.