Digital currency is gaining a foothold globally. What will Pittsburgh’s role be in the crypto boom?
Pittsburgh Business Times
It’s especially fitting that Stronghold Digital Mining recently set up its Strip District office in the same building as Hot Haute Hot — and that its logo on the building’s side perches directly atop the retailer’s name.
Cryptocurrency is on fire nationwide, both as a hybrid industry sector and as an investment vehicle. It is increasingly accessible and everywhere you look, even on the names of sports centers: The Staples Center in Los Angeles, home of the NBA’s Lakers, is rebranding as Crypto.com Arena, heralding a new 20-year naming rights deal with a Singapore-based trading and service platform that exchanges digital currencies such as Bitcoin, Ethereum, Dogecoin and more.
And the value of crytocurrency is on the rise, albeit still volatile. Bitcoin, which is the world’s biggest and best-known cryptocurrency, hit a record high of $69,000 in early November — then dropped almost 21% over the past month. For a bit of perspective, the low end of its 52-week range was $16,526, and it was valued at $0.08 in July 2010.
While still a nascent industry with many hurdles to overcome, as cryptocurrency gains in accessibility and price, cottage industries are beginning to crop up around it, with a steady flow of young businesses becoming publicly traded companies.
Among them is Stronghold, a Bitcoin mining firm that raised $132.5 million in proceeds from its initial public offering in October. Based in Venango County, north of Pittsburgh, Stronghold’s facilities in Scrubgrass and Nesquehoning, in east-central Pennsylvania, generate power from coal refuse, a waste byproduct of legacy coal mining operations. This power is then used by computers to mine Bitcoin. It takes a lot of electricity to mine Bitcoin, which entails having computers compete to solve increasingly complex math problems, with the first that solves the problems being awarded newly created Bitcoin.
Tight-lipped about its Pittsburgh plans, Stronghold hired Kit Mueller last month as vice president of corporate development. A well-known player in the local innovation community as an investor/advisor/organizer and a founder of the grassroots initiative Rustbuilt that supports entrepreneurs and startups, Mueller was unavailable for comment. But he has posted on social media that Stronghold is hiring for several departments, including engineering, finance and operations.
The company sits at the intersection of technology and energy, both drivers of the regional economy, and it is symbolic of a role crypto may play in the local innovation sector, with startups or possibly businesses relocating or opening an office here given the region’s energy heritage, tech expertise, universities and specialized service providers.
“Pittsburgh has all the necessary components to build blockchain-based technology, including ones leveraging cryptocurrency,” said Zach Malone, co-founder of Magarac Venture Partners, a new early-stage fund. “I would imagine that, 10 years from now, blockchain will become as prominent a technology as cloud computing. It will be hard to get away from leveraging blockchain as time goes on — there’s so much value, and it’s becoming too hard to ignore.”
Malone is no novice to blockchain. He was a principal for more than a decade at Draper Triangle Ventures, which was a regional affiliate of giant Menlo Park, California-based global venture capital firm Draper Fisher Jurvetson. Tim Draper, whom CNBC recently dubbed a “Bitcoin bull,” is a billionaire who has invested in more than 50 cryptocurrency-related companies, including Coinbase Global Inc., operator of a cryptocurrency exchange platform that makes it easy to buy, sell and store virtual currencies.
“We’ve always had the benefit of Tim Draper’s position in the blockchain world, so we were always seeing deal flow, but there’s been a notable uptick in the past two or three years,” Malone said. “I’ve probably seen eight (blockchain startups) locally in the past three months.”
While it’s tough to pinpoint exactly how much venture capital is being pumped into cryptocurrency, KPMG’s twice-yearly “Pulse of Fintech” study said VC investment in blockchain and cryptocurrencies in the first half of 2021 more than doubled that of full-year 2020. And PitchBook, a Seattle-based producer of quarterly reports on VC activity, put 2021 investment at $15 billion for the nine months ended Sept. 30.
Crypto-related companies can obtain capital through private investors or high-net-worth individuals and private equity, as well as corporate or strategic investors. They can also go public, which is happening more frequently as the IPO market opened up over the past year for traditional IPOs and mergers with blank check or shell corporations, better known as special purpose acquisition companies or SPACs.
“DeFi (deconstructed finance) is a small but growing part of the fintech sector,” said Peter Erin, senior investment associate at Innovation Works. “Currently, many projects and digital assets are highly speculative and have yet to progress past the concept phase. The highly speculative nature leaves most of these investments in Silicon Valley, but we’re beginning to see activity in the Pittsburgh region.”
Tommy Johnson, managing partner at government advocacy/business development firm Allegheny Strategy Partners LLC and a veteran energy lobbyist, believes crypto could easily “leverage strengths” already here.
“You have affordable energy; it’s probably an extension of that more than anything,” Johnson said. “Layer on the talent with Pitt and CMU. I think it’s deserving of a vertical, like fintech, robotics, AI, life sciences. But it’s not matured yet, it’s still in its infancy. We’ll need to see broader institutional adoption, then you’ll see if it’s parallel or in-reaction regulation, and then we’ll chart a course.”
Its connection to blockchain, a shared database of transactions that are confirmed and encrypted, may also play a role in cryptocurrency-related startups picking Pittsburgh.
“Blockchain technology extends far beyond cryptocurrency and more interestingly so,” said Sean Volk, an associate portfolio manager at CooksonPeirce. “For example, smart contracts may revolutionize the way businesses make and follow through with purchase and other agreements. Financial instruments that currently require administrators and clearinghouses may be moved to blockchain, via smart contracts. Health care is another potential beneficiary with the ability to securely transfer patient records. There are even potential implications for genome mapping using blockchain. Pittsburgh has tech talent and is a strong business, finance and health care environment. This confluence of factors may attract more companies based on blockchain innovation to the area.”
Still, it’s impossible to say how many companies operate in the space locally. Aside from Stronghold, Erin cited another local example: SakePerp, based in Moon, offers expanded trading services for crypto-contracts with lower funding rates.
“SakePerp’s business fits into the broader trend of decentralized applications that connect the user to diverse financial services including paying, lending, borrowing, trading and insuring,” Erin said.
He added SakePerp raised $3 million from CMS Holdings, Digital Renaissance Foundation, Future Fund Ventures, Genesis Block Ventures and Longling Capital in April. SakePerp did not return a call seeking comment.
Other larger firms are also starting to explore how cryptocurrency fits into their businesses.
Sheetz, based in Altoona, became the first convenience store chain in the country to enable digital currency payments at the pump and in store, starting over the summer at select locations. The company teamed with Flexa, a three-year-old digital payments network.
“Above all else, our mission at Sheetz is to continue providing our customers with the ultimate one-stop shop where they can refuel their car and refresh their body,” Linda Smith, Sheetz payments manager, said in a prepared statement. “As a result, we are constantly exploring new offerings to truly give our customers what they want, when they want it, 24/7/365. That includes accepting many forms of payment.”
Meanwhile, Pittsburgh’s two largest banks by deposit market share — PNC Financial Services Group Inc. and BNY Mellon — have taken steps to serve customers’ crypto cravings.
BNY Mellon, based in New York, confirmed in February it had formed a digital assets unit to accelerate development of a multi-asset digital custody and administration platform for traditional assets such as stocks and bonds — and digital assets including cryptocurrencies. And Bill Demchak, chairman, president and CEO of PNC Financial Services Group Inc., said at an investor conference that PNC has talked with Coinbase and is “pretty far down the path” as its customers are interested in crypto.
Richard Bove, chief financial strategist at Odeon Capital Group LLC, said banks have approached cryptocurrency in two fashions — creating their own for certain customer transactions but holding off from making moves in the outside world, and viewing crypto as an investment vehicle to be provided by their asset management division.
“Because of the amount of inflation, the amount of money printing globally that is, in my view, excessive … wealthy people want to have the ability to protect themselves by owning some crypto currencies,” Bove said. “They don’t know how to do that, so they expect their bank to create some sort of electronic fund to allow them to invest in these products.”
But given that crypto operates in an unregulated industry and bills are floating through the House and Senate and statements by the U.S. Securities and Exchange Commission and the Federal Reserve are under consideration, PNC hasn’t taken the leap.
“Client demand’s there, our ability to offer it in a clean, simple and easy form on mobile is built and ready,” Demchak said at the investor conference. “We’re just waiting for answers.”
For cypto to become more mainstream, buy-in by banks is important locally. It builds credibility, increases access and maybe even spawns startups. But everyone agrees regulation is crucial — and inevitable.
“You’ll have a wave of regulation that’s going to inform how this all works,” Johnson said.
Expect some direction next year. After months of study, the Federal Reserve System, Federal Deposit Insurance Corp. and the Office of the Comptroller of the Currency on Nov. 23 said they plan to provide greater clarity throughout 2022 on whether certain activities related to crypto assets conducted by banks are legally permissible, as well as expectations for safety and soundness, consumer protection and compliance and regulations.
This includes crypto asset safekeeping and traditional custody services, facilitation of customer purchases and sales of crypto assets, ancillary custody services, loans collateralized by crypto assets and activities involving the holding of crypto assets on balance sheets.
In the meantime, as clients are asking money managers about cryptocurrency, caution prevails.
Erica Snyder, president and CEO of Hunter Associates, believes it’s a “buyer beware” situation.
“The markets are very volatile with swings in excess of 10% to 15% in the matter of hours or days,” Snyder said. “The currencies are unregulated and most are not yet approved by the SEC, meaning investors do not have the traditional safeguards as they would with other types of investments such as mutual funds, stocks, bonds. We also expect the government regulators and tax authorities will be playing catch up in the year ahead, which may further increase volatility. Like many new hot areas, we often find focusing on companies that are beneficiaries of an emerging trend can be a less risky way to have some exposure.”
Investing in a publicly traded company in the crypto space may be less expensive and comparatively safer than buying Bitcoin. Still, those considering that approach have a lot to keep in mind.
“One of the most important issues to understand is how the company is investing in the cryptocurrency — do they own tokens or are they investing in options-based strategies designed to mimic the price of the underlying securities?” posed Carrie Coghill, president and CEO of Coghill Investment Strategies. “Due to the volatility and speculation with cryptocurrencies, the option-based strategy may cause the stock price to inaccurately track the price of the crypto.”
Volk believes the crypto trend parallels the internet boom.
“Attaching ‘blockchain’ or ‘crypto’ to something is like attaching ‘.com’ in the 90s,” Volk said. “It gets you instant attention and credibility, which is not always warranted. There were a lot of winners, and people made fortunes with the advent of the internet, but there were also many losers and bag holders when the dust settled. Look for the same to be true of the crypto-craze.”
Tech? Energy? Finance? Crypto touches or tips to each and to different degrees. It is difficult to define. Some consider it fintech or financial technology, others label it DeFi, or deconstructed finance, and many put it under the banner of blockchain.
In short, cryptocurrency is decentralized digital or virtual money, essentially a collection of binary data designed to work as a medium of exchange. You can’t hold it like a dollar bill. And it’s not backed or insured by, say, the Federal Reserve, which controls the supply of U.S. dollars. Essentially, cryptocurrencies use blockchain, a type of shared database where entries are confirmed and encrypted and which serves as a digital ledger recording transactions in code. These transactions are recorded in blocks that are linked together, making a chronological chain of previous cryptocurrency transactions.
Instead of being stored through a bank, cryptocurrency is stored online or on an external hard drive.
Its largest and best-known form is Bitcoin, which debuted in late 2008 as the Great Recession unfolded as a means to counter the financial crisis because it bypassed banks and provided an alternative investment opportunity. Of course, as high-net-worth individuals looked to add cryptocurrency to their portfolios, banks’ private wealth arms sought to provide it. People also can “mine” for cryptocurrency. But Bitcoin “mining” is far from physically chipping at coal underground, instead using powerful computers to solve sophisticated math problems. Basically, computers compete to solve increasingly complex equations, and the first that solves the problem is awarded newly created Bitcoin. The process then starts again. Powering the technology and maintaining the temperature in the areas where the computers are stored through industrial cooling systems consumes massive volumes of energy.
Digital currency is gaining a foothold globally. What will Pittsburgh’s role be in the crypto boom?