I don’t buy cryptocurrencies. They make me nervous and confused. Cryptocurrencies have no inherent value. You can't eat them or hold them. There is no company generating innovation and income. In most places, you can’t even spend them! Crypto enthusiasts, like gold enthusiasts, argue they are a store of value. One argument for gold and crypto is that when shit hits the fan or the end times come, having nongovernmental assets will save you. I disagree. If banks and governments collapse the kingmaker will be a large stash of baby food, toilet paper, and liquor. Not a pile of gold or crypto, which you can’t even access without electricity and internet. Have they considered this? It’s like folks who stock their bunker with dehydrated food without enough water to rehydrate it.
Is there money to be made from crypto? Of course. But there is also a lot of uncertainty and potential loss. An asset that can rise or fall over 30% in value due to a tweet or policy statement from China is not a store of value. If Bitcoin is actually a currency it most resembles those of Venezuela and Zimbabwe. Would you buy a pallet of Venezuelan bolivars or Zimbabwean dollars as a store of value?
It would be a shame not to profit from the crypto craze. Fortunately some of my favorite companies profit from crypto. Better yet they make money whether crypto prices go up or down.
The first is Nvidia (NVDA) which makes graphics processing units (GPUs) required to mine crypto currency, maintain blockchains, and process crypto transactions. I originally bought Nvidia stock several years ago because they make the best graphics cards, GPUs, and other components for gaming. I have no idea which video games or game companies are popular but they all need Nvidia components. It turns out that crypto miners also buy thousands of them.
Square (SQ) has been among my best performing stocks rising 235% in the past three years. At its peak in February it was up 365%. PayPal (PYPL) has also crushed it, rising 200% over the same period. I originally purchased these stocks to profit from the transition from cash to electronic payments (using actual currencies). Square and PayPal allow people to transfer money, pay online, and pay merchants in person from their apps. Square has its Cash app. PayPal has the PayPal app and the increasingly popular Venmo app.
Now these two companies allow people to buy and sell crypto currency in their apps and also to spend crypto currency at select online and in person merchants. Square and PayPal profit from transaction fees and by selling crypto at a slight markup to the going rate just like traditional currency exchange companies. So the value of Bitcoin or other cryptos doesn’t matter. As long as people buy, sell, or spend crypto currencies, these companies make money. Square’s Bitcoin revenue increased 11x this year to $3.5B adding 70% to their total revenue for the year. PayPal total revenue increased 33% year-over-year. They enabled crypto trading recently but they have over 360 million active accounts. If even a small portion of those users make crypto transactions it will generate a lot of revenue. Most importantly to me, if Bitcoin or other cryptos disappear tomorrow, Square and PayPal will still make tons of money just like they did before.
Two of my other favorite companies, Visa (V) and MasterCard (MA), have two of the largest financial transaction networks in the world. They are well positioned to profit from crypto in multiple ways. Apparently, people have been buying crypto with credit cards (this doesn’t seem like a good idea) so Visa and MasterCard take transaction fees on these purchases just like they do for other purchases. This year both companies began integrating crypto into their operations allowing people to transact with crypto and even issuing crypto cards that allow people to instantly convert crypto currency to fiat currency at the point of sale. This too will generate fees. As with Square and PayPal, Visa and MasterCard have been impressive stocks long before crypto with both up over 80% over 3 years compared to the S&P 500’s 51%. They won’t be hurt if crypto prices collapse.
There are other companies that profit more directly from crypto currency like Coinbase (COIN), a platform that allows people to buy, sell, and store crypto currency and Riot Blockchain (RIOT), a crypto mining company (probably using Nvidia GPUs), and many others. I don’t know enough about these companies or their fundamentals to consider them and the more directly a company is tied to crypto prices the wilder the fluctuations will be. I may regret not jumping on the crypto train (or roller coaster) at some point. But for now I am happy with my exposure and gains from these five solid companies.
This article was originally sent by email to subscribers of our Stock Musings newsletter. We don't post all the newsletters on the blog. If you would like to receive the email edition of Stock Musings contact me here. Access past Stock Musings in the archive.