Blockchain technology and cryptocurrencies based on it have received lots of attention in recent years. As assets with a finite supply, cryptocurrencies go through cycles, as price swings are subject to demand. Businesses that make use of blockchain technology and cryptocurrencies are also cyclical; however, since revenue-generating organizations are not the same as a raw asset, they have a different cycle from crypto assets like Bitcoin that are driven by supply-and-demand dynamics.
Here are some companies with a stake in blockchain tech, how their business models are cyclical, and the best time to buy them.
Image source: Getty Images.
How blockchain stocks are cyclical
We need an understanding of what makes a company go through cycles (versus what makes cryptocurrency prices go through cycles) before we can dive into the companies themselves. On one end of the spectrum are companies that rely on sales of physical products. This in and of itself can be a diverse landscape, like the tech hardware industry. Revenue for such companies may depend on consumer demand (like smartphones) or be tied to innovation that drives a hardware upgrade cycle among customers (like NVIDIA (NASDAQ:NVDA) and AMD (NASDAQ:AMD) — more on them in a minute).
Then there are those companies that go through longer cycles based on the health of the overall economy. Three examples are airlines, automakers, and oil and energy firms. When money is flowing through the economy at a healthy pace, demand for these services and basic goods is strong. But during times of recession, revenue can begin to contract. Retail sales are another example of this kind of cyclicality, and though it has a unique relationship to the retail landscape, we’ll discuss Square (NYSE:SQ) in this regard.
And on the opposite end of the spectrum are those companies tied to stable and predictable subscriptions, embodied by the software-as-a-service (SaaS) business model. These companies exhibit little to no risk tied to “cycles,” although the stocks of such companies can be very volatile and subject to rapid change based on the number of subscribers and the revenue generated. DocuSign (NASDAQ:DOCU) is a blockchain stock that falls in this camp.
Four cyclical blockchain stocks
Different cycles govern results for each crypto business. Here are how they work.
NVIDIA and AMD: The tech hardware cycle
During the Bitcoin boom in 2017, shares of NVIDIA and AMD were also off to the races. Both companies make graphics processing units (GPUs), a semiconductor type that has historically been associated with cutting-edge video game graphics. However, the GPU has recently found new use as a computing accelerator for complex tasks like cloud computing services, AI, and cryptocurrency mining.
NVIDIA and AMD experienced a surge in sales as many customers scooped up high-end GPUs to mine Bitcoin and other cryptocurrencies. By the end of 2017, though, the wave of purchasing had started to subside, sending both chipmakers into a cyclical sales slump. Since then, many new cryptocurrencies have moved away from mining (a process known as proof-of-work, whereby a computer needs to solve an equation to create a new “block” of crypto assets) to proof-of-stake (whereby a new crypto asset is created not through processing power, but based on how many units of the asset an owner has).
Thus NVIDIA and AMD’s next run higher isn’t being dictated by the resumption of demand for GPUs to create crypto assets. However, the crypto industry and other technologies in general require ever-greater computational power. Even during the 2020 recession, demand for GPUs is on the rise and may continue rising for another couple of years.
Square: The consumer spending cycle
Consumer spending is a basic measure of the health of the U.S. economy. After a decade of steady advances in low-to-mid-single-digit percentages, COVID-19 has been a disruptive force on this metric. Many segments of the retail landscape have been decimated by the pandemic and the economic lockdown to try to halt its spread (department stores, clothing and accessory chains, restaurants), while others have helped pick up the slack (grocery stores, online stores). Square’s performance is tied to the health of its merchants, but many of them have been transitioning online and have offset much of the pain Square would otherwise have felt.
As consumer spending normalizes again, Square’s growth in digital payments is likely to resume. Along the way it also generates income from allowing Bitcoin trading in its Cash App subsidiary. As income generated will be reliant on the price of Bitcoin, this is another cycle that could dictate Square’s fortunes. But as a digital payments specialist, this e-commerce outfit could incorporate blockchain and related tech into its operations in plenty of other areas and grow in importance in the overall retail industry.
DocuSign: The SaaS supercycle
Cloud computing was one of the best areas to invest in during the 2010s, and the trend is far from over in the 2020s. The world is going digital, and subscription-based access to services is helping businesses and consumers alike make the transition. Enter DocuSign, a platform that facilitates electronic signatures and agreement processes, which uses blockchain technology to help secure signer identity and contract evidence.
As subscription models go, SaaS firms like DocuSign are as cycle-free as they come. The businesses generate stable and predictable revenue, and many of them are disrupting the industry status quo and generating massive growth as a result. As they age, they could become more cyclical, depending on holding on to subscribers and staving off competition from similar services (like the mobile phone industry).
But for now, cyclicality for a crypto stock like DocuSign comes primarily from the stock itself. If growth exceeds investor anticipation, share prices can spike. If growth is lower than expected, the opposite often happens.
When to buy cyclical blockchain stocks
As with all types of market timing, consistently pinpointing a correct call is close to impossible. However, averaging a purchase over time — perhaps by accumulating shares of a company in smaller batches over the course of a few months or quarters — helps alleviate the need to get the timing right.
But at what point should an investor start accumulating a cyclical crypto stock? Assuming the long-term outlook for the company is positive, beginning to accumulate shares during a cyclical slump is far better than waiting for the boom time to begin. For example, after NVIDIA’s cyclical peak in 2018, the stock lost nearly half its value (going from nearly $300 to under $150) by the end of the year and remained down for much of 2019. Accumulating shares during this period, when investors had an overall negative view of the company, would have yielded a hefty return through the summer of 2020, when demand for the GPU soared again and NVIDIA’s stock rose well past $500.
Data by YCharts.
A similar story can be told of other business cycles. When parsing crypto and blockchain stocks, look to start accumulating shares in batches during the cyclical downturns, and scale back on purchases once the slump gives way to renewed demand.