Bitcoin is all the rage again.
The cryptocurrency was given up for dead by many after surging three years ago to nearly $20,000 and then crashing to below $4,000.
But quietly, and now loudly, Bitcoin is back, this time with a lot of mainstream institutional converts.
Most long-term investors don’t have the stomach for Bitcoin’s volatility, let alone the inability to properly value it.
But there are some much safer ways to get exposure to the digital currency through some multi-billion dollar technology companies.
Here are two stocks from a list of seven from an article by analyst and financial writer Andrew Packer for Kiplinger:
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.
The following stocks 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.
PayPal Holdings (NASDAQ:PYPL)
- Market value: $259.6 billion
- Earnings growth rate (year-over-year): 121%
- Profit margin: 15.5%
- Return on equity: 18.0%
PayPal Holdings announced in October a service that would allow users to hold Bitcoin, as well as the Ethereum, Bitcoin Cash and Litecoin cryptocurrencies.
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 five 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 when it begins to apply its fees to crypto transactions in 2021.
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 (NYSE:SQ)
- Market value: $99.2 billion
- Earnings growth rate: 24.2%
- Profit margin: 4.1%
- Return on equity: 18.7%
Square, 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.
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