Bitcoin recently eclipsed $20,000 for the first time, rekindling excitement in retail investors again in a way it hasn’t since the cryptocurrency last peaked in 2017.
But while Bitcoin might have dropped off the radar for some, professional investors, billionaires and even publicly traded companies have maintained a keen interest in cryptocurrencies ever since. And this involvement in both Bitcoin, other cryptocurrencies and blockchain – the secure authentication technology behind Bitcoin – could help fuel gains in a number of companies as we head into 2021.
COVID-19 helped accelerate a number of digital reforms in companies large and small. “We’ve seen two years’ worth of digital transformation in two months,” Microsoft CEO Satya Nadella said back in April.
Cryptocurrencies and blockchain have been part of that transformation. The companies utilizing these technologies run the gamut, from traditional financial powerhouses looking to develop their own cryptocurrencies, to fintech firms looking to add Bitcoin functionality to their products, to other companies using blockchain to improve their operations.
Bitcoin might not be right for many investors. In addition to not being able to buy it directly through a brokerage account, it might simply be too volatile for some. “Cryptocurrency investing today is a bit like living in the early days of the 1850s gold rush, which involved more speculating than investing,” says John LaForge, Head of Real Asset Strategy at Wells Fargo Investment Institute.
Here are six cryptocurrency and blockchain stocks (and one fund) that can help traditional investors get at least a taste. They might not offer pure exposure to these technologies. But by embracing this growing space, these stocks look poised to deliver additional growth in 2021 and beyond.
Data is as of Dec. 15. Earnings growth rate, profit margin and return on equity provide by Yahoo! Finance.
PayPal Holdings
- Market value: $259.6 billion
- Earnings growth rate (year-over-year): 121%
- Profit margin: 15.5%
- Return on equity: 18.0%
PayPal Holdings (PYPL, $221.60) announced in October a service that would allow users to hold bitcoins. A November Mizuho Securities survey of 380 users showed that, within just one month, 17% had already used PayPal to buy or sell the cryptocurrency.
That same month, investment firm and hedge fund Pantera Capital wrote in a letter to shareholders that “PayPal and (Square’s Cash App) are already buying more than 100% of all newly-issued bitcoins.”
“Crypto functionality is now part of Top 5 finance apps,” say Piper Sandler analysts Christopher Donat and Crispin Love, who rate PYPL at Buy. “On Oct. 21, PYPL announced a new service to enable users of its Mobile Cash app to buy, hold and sell cryptocurrencies. PYPL plans to expand the offering to its Venmo app in (the first half of 2021).”
If that 17% figure actually translates across all 305 million users worldwide, that indicates that nearly 52 million users have started holding some amount of wealth in cryptocurrency. That’s a massive figure that only makes Bitcoin more useful as a digital store of wealth thanks to the “network effect” (a concept PayPal understands well from when it was part of former parent company eBay).
Allowing users to buy and sell Bitcoin on its platform naturally opens up a new source of revenue for the company. Their business model of collecting a small “toll” for every financial transaction processed should help the company expand its bottom line.
Wall Street analysts collectively believe PayPal will average 21%-plus earnings growth annually over the next three to five years. That’s reflected in a consensus Buy rating, according to S&P Global Market Intelligence.
Square
- Market value: $99.2 billion
- Earnings growth rate: 24.2%
- Profit margin: 4.1%
- Return on equity: 18.7%
Square (SQ, $219.99), another payments company that’s known for its card-reading hardware used by small businesses, also made an announcement regarding Bitcoin during the third quarter of 2020. Namely, it bought 4,709 bitcoins in early October for $50 million – an investment in the cryptocurrency that represented 1% of total assets as of the end of Q2 2020.
“We believe that Bitcoin has the potential to be a more ubiquitous currency in the future,” CFO Amrita Ahuja said in a release. “As it grows in adoption, we intend to learn and participate in a disciplined way. For a company that is building products based on a more inclusive future, this investment is a step on that journey.”
However, the company was already on the forefront of cryptocurrency, allowing people to use its Cash App to buy, store, withdraw and deposit bitcoins. In fact, the company recently added another crypto feature: Auto-Invest, which “allows for dollar-cost averaging from recurring daily or weekly purchases of bitcoin or stocks.”
Piper Sandler’s Donat and Love note that “we believe this (cryptocurrency) functionality might create a lead for SQ and PYPL that is difficult for other financial services firms to catch.”
During the most recent quarter, Cash App generated $1.63 billion in bitcoin revenue, which filtered down to $32 million in bitcoin gross profit. That’s not much, and that’s intentional, the company says, “because our role is to facilitate customers’ access to Bitcoin. When customers buy Bitcoin through Cash App, we only apply a small margin to the market cost of bitcoin, which tends to be volatile and outside our control.”
But the direct investment in bitcoins, as well as Ahjua’s comments, suggest that Bitcoin and perhaps other cryptocurrencies might play an even large role for Square, and its balance sheet, in the future.
JPMorgan Chase
- Market value: $366.8 billion
- Earnings growth rate: 4.0%
- Profit margin: 26.0%
- Return on equity: 9.5%
During Bitcoin’s massive run in 2017, JPMorgan Chase (JPM, $120.32) CEO Jamie Dimon called the asset class a “fraud,” calling it “worse than tulip bulbs,” referring to the Dutch tulip bubble burst in the 1600s.
He also said any JPM trader who traded the cryptocurrency would be fired.
Time has marched on, and Dimon still said earlier this year that Bitcoin is “not my cup of tea.” But he is supportive of blockchain technology, and in fact, the bank has created its own cryptocurrency: JPM Coin.
The bank is first looking at a blockchain-run system that can reduce the number of parties and time needed to verify global payments. Currently, some payments can take weeks; better verification technology could reduce that to hours.
Of course, this is one play that might take some time to pan out.
“Trying to find a blockchain investment that will outperform Bitcoin is not easy,” says Bryan Courchesne, founder of Digital Asset Investment Management. “Blockchain ventures are highly risky where less than one of a hundred will result in a positive return.”
Investors willing to wait can collect a 3% dividend yield on JPM shares, which the analyst community currently says are a Buy.
Nvidia
- Market value: $330.8 billion
- Earnings growth rate: 48.6%
- Profit margin: 25.9%
- Return on equity: 28.8%
Cryptocurrencies are generated from solving complex algorithms, rewarding those with the hardware to speedily get the job done. Much like gold miners panning for physical gold, with the right equipment, you can grab a bigger share with better tools.
That’s part of why Nvidia (NVDA, $534.42) enjoyed a surge along rocketing Bitcoin prices in 2017. As mining bitcoins became more lucrative, it created a rising demand for the company’s high-powered processors.
In 2020, while Bitcoin has surpassed 2017 prices, the mania is rising but isn’t quite the same … yet.
“While we have not encountered any signs that increased interest mining is creating additional demand for GPUs, the recent surge in crypto could yield another potential near-term demand driver for makers of graphics chips and is a situation we are monitoring,” says Wedbush analyst Brad Gastwirth.
Nonetheless, Nvidia is enjoying some pickup. RBC Capital Markets analyst Mitch Steves noted that chip sales to miners were $175 million during the third quarter, higher than the $150 million he expected.
The company’s latest RTX 3080 processor can generate an estimated profit of $3 per day – one of the highest levels in the industry – for miners of Ethereum, another popular cryptocurrency. That might not sound like much. But cryptocurrency mining is a major operation often involving thousands of such processors linked together.
Nvidia is hardly the purest of cryptocurrency stocks. But in any gold rush, it pays to be the guy selling picks and shovels. Sweeter fortunes for Bitcoin and other cryptocurrencies should help boost NVDA’s bottom line.
Advanced Micro Devices
- Market value: $116.9 billion
- Earnings growth rate: 225.0%
- Profit margin: 10.7%
- Return on equity: 29.1%
Another “picks and shovels” play in the digital gold rush, Advanced Micro Devices (AMD, $97.12) has roared ahead in 2020, more than doubling through mid-December. And while it seems unlikely to keep matching its current earnings growth rate, analysts’ projected long-term earnings growth rate of 33% is more than robust enough to drive more gains in the stock.
AMD, like Nvidia, develops high-performance processors used in a wide array of products, but primarily computers and servers. And like NVDA, Advanced Micro Devices also can benefit from any gains in cryptocurrency mining demand. The company’s latest GPU offering, the Navi 10, is well attuned to the needs of miners.
Advanced Micro Devices has plenty of other things going for it. Most recently, it announced in late October that it would acquire rival Xilinx. While shares initially fell on the news, a push since then to all-time highs reflects optimism that AMD will benefit from the M&A move.
While Baird analysts are on the sideline on AMD shares, they write that “for 2021, we model another strong growth performance with revenue up in the 20%s YoY, along with continued gross margin expansion.”
International Business Machines
- Market value: $1112.2 billion
- Earnings growth rate: 1.6%
- Profit margin: 10.5%
- Return on equity: 40.1%
International Business Machines (IBM, $125.93) has a storied history that includes decades atop the broader IT space. However, it has lost its powerhouse status as a mainframe computer player with the rise of desktop computers. The company has had to retool itself several times to stay relevant, and slow revenue declines have become the norm of late.
IBM began embracing blockchain technology in 2017 with IBM Blockchain, a service that allows businesses to start their own private blockchain ledger for a variety of purposes.
That has proven a bright spot for the firm:
“When you look at the direct attribution of the actual dollars spent on blockchain, we are seeing that for every dollar spent, $15 is spent on other cloud services,” Jerry Cuomo, Vice President of Blockchain Technologies, said earlier this year.
That cloud division is increasingly promising – so much so that IBM is planning on breaking out its legacy IT infrastructure services into a new company by the end of 2021, leaving the remaining IBM to focus on cloud, artificial intelligence and other higher-growth areas.
That has the potential to eventually turn IBM from an outdated dinosaur and into a hot tech play once again. But this is a “patience play” – most analysts that cover IBM are neutral on the stock. But IBM might be among cryptocurrency-adjacent stocks to watch in the future, perhaps as we get more visibility into the pending split.
Honeywell
- Market value: $150.3 billion
- Earnings growth rate: -53.3%
- Profit margin: 14.9%
- Return on equity: 27.7%
Honeywell (HON, $214.17), the industrial conglomerate best known for everything from small home appliances to aircraft engines, doesn’t exactly seem like a cryptocurrency stock. And at the moment, it’s not.
But it’s still worth paying attention to given what it’s doing in R&D.
Earlier in 2020, the company started using blockchain technology to track the sale of its aircraft parts. The technology helps ensure a chain of custody, preventing parts from going missing or being replaced with knockoffs.
“We’re a big company,” CEO Darius Adamczyk boasts. “But I really think we move like a small, agile technology company.”
It’s a great embrace of the technology – and one Honeywell isn’t alone on. Accenture research from 2019 showed that more than 85% of aerospace and defense companies planned on integrating blockchain technologies by 2021.
As far as HON stock itself is concerned, analysts are more bullish than not on the name, with a consensus Buy rating, though a number of pros are on the sidelines. That appears to mostly be a valuation concern, based on a consensus 12-month target price of $203 per share. Investors, then, might want to wait for Honeywell to cool off before jumping in.
Grayscale Bitcoin Trust
- Assets under management: $10.9 billion
- Expenses: 2.0%, or $200 for every $10,000 invested
“Bitcoin should be the core position of everyone’s digital asset/blockchain allocation,” says Digital Asset Investment Management’s Courchesne. “It’s the only truly decentralized fixed supply asset that is global and will only get more scarce.”
But the methods for investors who want to do so via a traditional brokerage account are extremely limited. In fact, there’s really only one way to get direct Bitcoin exposure. And it has its flaws.
The Grayscale Bitcoin Trust (GBTC, $23.25) might sound like an exchange-traded fund, but technically, it isn’t.
It works similarly to one. It’s modeled on trusts such as the SPDR Gold Trust (GLD), which represent real, physical holdings of the underlying commodity. You can go in your brokerage account and buy shares of GBTC just like you would GLD.
And Grayscale Bitcoin Trust allows you to track the price of the bitcoins it holds, but you can’t cash in your shares for actual bitcoins, similar to how most commodity ETFs operate.
GBTC doesn’t trade on a major exchange, however – it trades “over the counter,” where it’s not required to register with the SEC (though it does).
The biggest concern is found on the fund’s provider site itself: “There can be no assurance that the value of the shares will approximate the value of the Bitcoin held by the Trust and the shares may trade at a substantial premium over or discount to the value of the Trust’s Bitcoin.” We’ll explain.
ETFs typically trade very closely to their net asset value (NAV), meaning what you buy is what you get. However, GBTC can trade at a significant discount or premium, meaning that, depending on the time, you might be buying into Bitcoin for far less, or far more, than it’s actually worth.
When Bitcoin prices went parabolic in 2017, for instance, traders piled into GBTC, sending the NAV to a premium of more than 100%. Today, Grayscale Bitcoin Trust trades at a 26% premium, about in line with its historical average. And over the past five years, the fund has never traded for a discount.
That could change. When and if a Bitcoin ETF (which could theoretically track the cryptocurrency more accurately) is ever approved, demand for GBTC could plunge. If that happened, that premium would dry up – in other words, its price would fall even if Bitcoin prices remained elevated.
However, until that day, Grayscale Bitcoin Trust (and its pricey 2% expense ratio) remains the best option for investors who want to buy Bitcoin solely within their brokerage account.