To be clear I have not been directly trading Bitcoin and Ether coins because Bitcoin is not regulated as it is not considered to be electronic money according to the law. Financial institutions are not allowed by central bank to facilitate Bitcoin transactions. Some platforms like Coinbase may issue the IRS Form 1099-MISC while others may not leaving you to keep track your gains and report the income.
That said there are other ways to trade Crypto. I have been doing it by OTC market traded Grascale Bitcoin Trust GBTC and Ethereum Trust ETHE. Grayscale Bitcoin Trust is a traditional investment vehicle with shares titled in the investors name, providing a familiar structure for financial and tax advisors and easy transferability to beneficiaries under estate laws. I do not like to trade on OTC Markets as it could be thinly traded and you may end up paying premium for entry and exit points. The only way to avoid this is to us limit buy/sell orders and for that you need to monitor your entry and exit points using whatever platform you are using.
Now to the topic, one of the forum members mentioned Voyager Digital yesterday so I decided to look it up and do some research. If you’re interested in getting some crypto exposure without dipping your feet into the nebulous world of coins, perhaps Voyager is worth looking into.
Thanks to https://www.hotstocks.news/about he did a good DD on Voyager. Since he covered it last Wednesday, the stock has gone up close to +15%. Further information was summarized from this article published by Beth Kindig and Jessica Ablamsky on March 17, 2021.
TLDR
Voyager Digital Ltd. is basically a digital platform that focuses on enabling users to buy and sell digital assets such as cryptocurrencies. Voyager was created by one of the co-founders of Uber, together with executives of E*TRADE, TradeIt and Lightspeed Financial. The Voyager app enables its users to trade 55 cryptocurrencies in a fully secure environment. Users can earn interest on their deposits and trade 100% commission-free. Voyager doesn’t charge commissions on crypto traders, which is a big differentiator from competitors like Coinbase or Binance, for example. Actually, Coinbase can often charge ridiculous commissions (a $5k trade could cost you as much as $80 in commissions). So that gives a valuable edge to Voyager. The app supports Bitcoin, leading DeFi (decentralized finance) tokens, and stable coins, among a variety of other altcoins and allows you to trade many tokens that Coinbase or Kraken does not support. For example, Voyager offers Dogecoin, a meme coin pushed by Elon Musk. It also offers interest on Bitcoin, Ethereum, Polkadot, and Chainlink. The Voyager app is currently only available in the US, but there are plans this year to expand to Canada and Europe, as well as to launch a debit card. Voyager also comes with the added benefit of offering 9% interest on stable coins as the company is a consortium for stable coins, including USD Coin (USDC) and Tether’s USDT, which have surpassed $7 billion in circulation. As such, it provides exposure to decentralized coins like Bitcoin and stable coins based on the fiat system.
A direct competitor of theirs would be Coinbase Global, which is the largest U.S. cryptocurrency brokerage, and which announced, that it would go public through a direct-listing initial public offering that could value the company at more than $100 billion. In comparison, Voyager had as a market cap of $2b. That’s quite a big gap.
If Voyager were to reach even a 10th of Coinbase, the stock would 5x. Robinhood, on its end, is lacking in crypto offerings and it seems like Voyager has already come at them and eaten some of their crypto-oriented user base according to this article.
In terms of financials, take a look at the below, courtesy of Seeking Alpha.
Voyager Digital announced record Q2:21 revenue of $3.6 million. In February, the company experienced rapid growth surpassing $1.7 billion in AUM (assets under management) and $20 million in monthly revenues. Voyager grew from $5m in AUM in Dec 2019 to $1.7b in Feb 2021 (a 340x), and from 8.5k trades processed in Dec 2019 to 2m trades processed in Feb 2021. That’s some serious growth. VYGVF expects strong growth to continue, led by geographical expansion, new product launches, and platform enhancements. Some examples of new products include the development of debit and credit cards, margin products, desktop, and continued expansion of its interest program. In addition to adding new features and implementing platform enhancements, VYGVF is also focused on expanding internationally and bringing the Voyager App to investors in other countries.
Voyager is FDIC-insured. However, the crypto held with Voyager is not insured. Gemini, which operates as a trust, has private insurance. Crypto investors generally store their assets on a cold storage crypto wallet, which means it is not connected to the internet. In the event there is no insurance, the risk to cold storage wallets is minimal.
Voyager reported roughly 400% growth from December to January, and 132% growth sequentially from January to February for total monthly revenue growth of over 1000%in a two-month period. Basic users grew from 150,000 in December to 440,000 by early February. The company reported 605,000 verified users at the end of February.
The company closed a private placement of $46 million on January 21st, 2021.
Voyager has seen 75%+ sequential quarter growth with increasing operating margins in 2020. Per the Investors Presentation, Voyager had a previous goal of reaching $20 billion AUM based on $500 million AUM as of Q1 2021 (this was achieved at nearly 3X the company’s original goal with currently $1.7 billion AUM). The company believes it can achieve 90% CAGR on number of funded accounts and 35% CAGR on average account size.
How does Voyager Make Money? Voyager’s revenue is not dependent on commissions or fees. The company plans to introduce a debit card, credit card, margin, loans, and advisory products over the next year or so. Right now, the business model creates revenue in two specific ways:
- Smart Order Routing: When you place an order to buy or sell a cryptocurrency, Voyager provides a listed price that you accept. It then connects your order to 12 exchanges. Unlike securities, which by law must have the same price across all domestic exchanges, cryptocurrencies are priced at variable levels. In other words, the same coin can be listed at two different prices at the exact same time. Voyager uses your order to capitalize on this inefficiency by performing an arbitrage across various exchanges. The profits from such a move would typically surpass any commission or fee, allowing Voyager to provide exceptional pricing. Voyager will thus share the profits from this arbitrage with you in an attempt to execute your order at a lower price than you agreed to.
- Voyager operates like a bank. However, Voyager is not considered a bank or a broker-dealer. In their terms and conditions, Voyager very clearly states “We will lend, sell, pledge, rehypothecate, assign, invest, use, commingle or otherwise dispose of funds and cryptocurrency assets to counterparties, and we will use our commercial best efforts to prevent losses.” If you receive a loan from a bank, the loan is used by the bank as collateral for other investments. This creates multiple derivatives on a single asset. This is similar to Robinhood in that the users take on counter party risk. Should Voyager become insolvent, you will need to stand in line behind other creditors to receive your money back. For taking on this risk, Voyager offers significant yield in a yield-starved economy. Like a bank, a minimal deposit must be kept to receive this interest payment, which can be as high as 9%. As part of this program, it may take up to 7 days for you to withdraw any crypto from your account. Voyager Digital is engaging in fractional lending practices, which banks have been doing for centuries.
Last March, Voyager acquired Circle Internet Financial’s trading app, which provided an additional 40,000 clients. The acquisition strengthens Voyager in offering the USDC stable coin that has $7 billion in circulation. Circle is backed by Goldman Sachs and is the founder of the consortium for USDC. The USDC coin allows global transfer of dollars at an instant and for a very low transaction cost. The stable coin is part of a consortium that is also sponsored by Baidu, IDG Capital and Bitmain with participation on trading apps, such as Voyager and Coinbase. The supply of USDC has grown by 41% since the start of 2020. A recently announced acquisition of France-based digital asset exchange LGOUY expands Voyager Digital’s reach into Europe.
RISKS
It would not be a proper analysis on a crypto exchange unless we discussed the risks involved. Hacks that result in a loss of assets are no longer as likely due to enhanced security measures and custodians. Yet it bears mentioning that Mt. Gox was hacked in 2014. At the time of the hack, Mt. Gox was the largest crypto exchange globally, handling around 70% of all transactions worldwide, totaling $3 billion. The hack resulted in a loss of about 6% of all bitcoins in existence at the time. The company went bankrupt, as all remaining assets were frozen. An investor who held their crypto at the Mt. Cox exchange lost most, if not all, of their investment. Voyager Digital was hacked as recently as December of 2020, but no customer data or assets were lost as the company shut down its systems when the vulnerability was detected. Cryptocurrencies do not come with FDIC or SPIC insurance. FDIC protects depositors from banks becoming insolvent, providing guaranteed insurance of up to $250,000. The SPIC protects investors from a broker-dealer going bankrupt, providing insurance up to $500,000 in the unlikely occurrence of a broker-dealer becoming insolvent.
Counterparty risk is a reality for any crypto investor holding their coins at an exchange/custodian. If a custodian does not segregate coins and provide unique private keys that the company cannot access, the risk remains that an investor could lose a portion of their coins in the event of insolvency.
This happened to BitGrail in 2019, an Italian exchange. The courts declared that because all crypto deposits were directed towards the primary address of the exchange, and were not segregated, it was impossible to determine the coins’ ownership. Thus, the remaining coins were used to pay off creditors, wiping out most of the individual investors using that exchange.
To be clear, we don’t think this will happen with Voyager but are providing a 360-degree view of the risks. We think the crypto landscape has become much more secure since Mt. Gox and BitGrail, and these old stigmas prevent many investors from participating in this sweeping trend.
Voyager Digital is a thinly traded over-the-counter (OTC) stock. The OTC markets come with higher risk as there are no central brokers compared to stocks traded on the Nasdaq. As a small cap OTC stock tied to crypto moves, Voyager promises to be a roller-coaster ride.
Conclusion
Voyager Digital’s growth is largely undetected by the market at this time and we think this is a boon to investors. With Goldman Sachs leading the IPO, Coinbase will be fully priced by the time it hits the market and we are not keen on direct listings as they did not perform well for retailers if we look at Spotify and Slack. At that price and under those terms, we will not be considering Coinbase as we feel our money is better spent on other stocks, crypto and blockchain companies that are less hyped. In our opinion, Voyager is a serious competitor to Coinbase – and most certainly to Robinhood. For our goals and desired gains in the I/O fund, we will take the 10 forward P/S on a company growing rapidly rather than an overpriced DPO at a much higher valuation.
If the above was not too long and anyone interested in reading the full article go here:
I am not a financial advisor so trade at your own risk!
