In 2021 we saw a big wave of crypto-related companies going public in stock markets worldwide. Miners were listed left, right, and centre along with the second-biggest exchange by volume, Coinbase (according to CoinMarketCap). On top of that, we have many pre-existing companies venturing into the growing sector. Therefore, it’s good to look at those companies that stand to benefit from the growth of cryptocurrencies in general. Often times you can find big gains by looking at not the ones in the spotlight but rather the ones that will benefit from someone else being in the spotlight.
You already have a few reasons in the introduction, but I thought I’d elaborate on the first reason a little bit. Let’s take as an example the gaming industry. Let’s say that games are the core of the gaming industry. That doesn’t mean that there aren’t any other industries and companies that will benefit from gaming. First of all, we have hardware manufacturers. We need something to play the game on, like a console, phone, or a computer to play the games. Then if we take it a step further, we have those who make the components for those consoles like chip manufacturers.
Furthermore, most of the games played nowadays are online, which means you’re likely to need an internet connection to play those games. If we continue this, we could go on forever. However, the important thing to realize is that so many sectors are connected, but naturally, the further to go, the weaker the link. The telecommunication companies won’t be as reliant on gamers and game developers as, for example, gaming computer manufacturers will be. Therefore, choosing companies that are somewhat related to another sector can reduce the risk while still being exposed to the industry.
The next reason to consider investing in crypto-related stocks is the potential to make additional rewards compared to crypto. Much of this has to do with how the companies are valued. I know I said I won’t be talking about individual valuations, but I’ll just explain how the extra profit can be found and then it’s up to you to do the calculations. Though it’s not a company, the best example is the Grayscale Bitcoin Trust (GBTC). You might have heard that this is now trading at a historically high discount calculated by looking at the market price and the net asset value. This discount opens up the possibility that when prices rise, and GBTC becomes more popular, the discount might erode away, leaving you with whatever gains the underlying asset has made plus the discount. Of course, this doesn’t always happen, and it might even be the other way around. However, the possibility that something like this can happen makes it potentially profitable for you as an investor. Companies that can have similar situations like GBTC are, for example, miners.
Crypto Mining: Marathon Digital Holdings
Marathon Digital is the largest publicly traded miner by market cap. Of course, other miners are good too, and some might even be better. However, what makes Marathon Digital stand out from the crowd is its extremely aggressive growth. In 2021 they mined 3,197 BTC, an 846 % increase from the previous year. In December alone, they mined 484 BTC. If you’re fast, you calculated that if they continue the December rate, they’ll mine a total of 5,808 BTC in 2022. That would already be a significant increase from 2021, but Marathon has something else in mind. Their latest report highlighted that by mid-2022, their hash rate should grow to 13.3 EH/s, and by the end of 2022, it should be up to 23.3 EH/s. That’s a tremendous increase considering that currently, they only have 3.5 EH/s deployed.
By doing some simple calculations, we could calculate that if they produced 484 BTC a month with 3.5 EH/s, they could theoretically mine about 3,000 BTC a month with 23 EH/s. That would be 36,000 BTC for the entire year of 2023, and with a price of $40,000 per BTC, it would mean $1.44 billion in revenue. Unfortunately, it isn’t that simple. First of all, when more miners join the network, the difficulty in producing one BTC will rise, meaning that you’ll make fewer BTC with the same amount of hash rate. Second, we can’t be sure that everything in the deployment of miners goes smoothly or that nothing happens to the existing miners. They could either face serious delays due to supply chain issues, or they could potentially decide to purchase even more miners. Thirdly, we have no idea what the price of BTC will be. Naturally, the hope is that BTC will be over $100k, more than doubling the calculated revenue. However, if a bear market hits, the price could go as low as $20,000 or even lower.
Furthermore, I think it’s important to point out that Marathon also holds a large number of BTC on its balance sheet. Currently, it’s about 8,000, but the expectation would be that they’ll keep at least some of their future earnings in BTC. That means that on top of the future earnings, they’ll also receive the potential capital gain from Bitcoin, something to consider as well when doing your calculations.
Then lastly, before addressing some risks, we’ll look at what analysts think. According to MarketBeat, six analysts are following Marathon, and they all give it a buy rating. In addition, the consensus price target is $55, which leaves a potential upside of 150%. Now naturally, I wouldn’t look too much at this since, especially for this stock, there are so many moving variables that I don’t think anyone can with any certainty calculate.
Bitcoin: MicroStrategy
This is another company often talked about in crypto circles. MicroStrategy is a business intelligence company led by Michael Saylor. However, something which has taken a far more prominent role in the company is its Bitcoin strategy. Currently, MicroStrategy owns 122,478 BTC purchased at an average price of $29,861, according to their investor day presentation last December. That translates to about $4.5 billion at today’s prices. On the other hand, their business intelligence business makes about half a billion in annual revenue.
Due to their aggressive investments in Bitcoin, the company’s stock almost completely mirrors the price of BTC. Still, there might be opportunities to buy if MicroStrategy falls significantly more than Bitcoin resulting in it trading under its Bitcoin holdings value (kind of like GBTC). That’s currently the case; their market cap is only $3.8 billion. However, it’s, of course, not that simple. MicroStrategy has a large amount of debt which means not all their holdings are technically theirs, only those left after they pay their debt. On top of that, their debt is also a potential risk. If the price of Bitcoin was to fall a lot, it could cause them to have to file for bankruptcy.
The positive with MicroStrategy compared to holding Bitcoin itself is similar to what the miners have. Miners produce more Bitcoin when mining. On the other hand, MicroStrategy has an underlying business that produces cash flow. That cash flow can then be used to purchase more BTC. That means that if Bitcoin rises, you’ll be exposed to the upside move as well as the additional BTC being produced. However, there is the risk that MicroStrategy is left at a discount since other companies like miners give you the same potential upside.
Crypto Exchange: Coinbase
To quote what Goldman Sachs said about Coinbase, it’s “the blue-chip way” to gain crypto exposure, and that seems about right for a plethora of reasons. First, unlike the previous two companies, Coinbase has indirect exposure to many cryptocurrencies. Second, Coinbase is the second-largest exchange based on volume according to CoinMarketCap, which means BTC isn’t the only thing traded there. Naturally, BTC and ETH account for a high percentage of all trades. Still, many more cryptos are available, and Coinbase is looking to expand its offering aggressively.
Secondly, Coinbase has multiple revenue streams on top of trading (although that accounts for a significant portion). On top of trading, they have custody services, blockchain rewards, earn campaigns, interest income, and other services. Then if the existing ones aren’t enough, they are planning to offer derivatives trading, and they’re building an NFT marketplace of their own. Many believe that the NFT platform itself could become a huge business. That’s based on the already extremely high volume seen on OpenSea (over $3.5 billion in January). Coinbase also announced a partnership with Mastercard, which will make it possible for customers to purchase NFTs with their Mastercard. That is hugely bullish for both Coinbase and NFTs since it would make them much more easily accessible.
Coinbase is building a comprehensive offering of crypto-related services, which is why it could be considered a blue-chip. At least that’s what analysts are betting on. As a result, Coinbase has a consensus rating of Buy and a potential upside of roughly 150 %. However, there are more bearish analysts, too, and one of them comes from Mizuho. They believe that Coinbase will face significant headwinds in the mid-term due to low volume in cryptocurrency trading.
That also brings us to the risks of Coinbase. First of all, cryptocurrency is a risk itself. Since Coinbase’s whole business model is around cryptocurrency, it’s one to think about. Secondly, here too, there are strong regulatory concerns. One of the biggest concerns is the SEC going after unregistered securities. Currently, Bitcoin is the only crypto cleared by the SEC which means that many of the coins trading on Coinbase could be considered securities. Now that’s a big concern since an exchange with only Bitcoin isn’t likely to be all that popular. Thirdly, there’s heavy competition from others. There’s no doubt that Coinbase has gotten a slight head start with all the publicity due to its IPO, but there’s also no denying that others are catching up. For example, both Crypto.com and FTX have done large marketing campaigns in the US and other countries to gain market share. Meanwhile, Coinbase has been quite shy about informing big-name partnerships.
Chip Manufacturers
Nvidia, AMD, Qualcomm, Intel, and others. There are many chip manufacturers, and they’re all likely to benefit from cryptocurrency adoption. They’re also likely to be the ones who benefit the most from the metaverse. The investment case is quite apparent. We need electronic devices to access both crypto and the metaverse. The metaverse, in particular, will also need high-quality chips for the experience to be seamless.
I mentioned many projects because I’m not a tech genius, and I can’t in any way tell you who has the best product for different purposes. Nvidia is by far the most popular when it comes to gaming, and they’re likely to benefit from the metaverse and play-to-earn move. But one missed step, and someone else might take the lead, leaving them with outdated chips. Nvidia also needs a separate mention since they have a GPU made explicitly for mining. However, sales for that one dropped significantly after the initial hype. Regardless of the news, it didn’t seem to be stopping Intel. Intel is also coming out with its own crypto miner. While these miners seem bullish, they add the proof-of-work risk for chip manufacturers already mentioned with mining companies.
Payments: Block
Block, formerly known as Square, is the next step from those pure crypto plays. Block consists of 5 different divisions: Square, Cash App, Spiral (formerly Square Crypto), TIDAL, and TBD54566975. The first two divisions account for the majority of Blocks, roughly $13 million in 2021 revenue so far. Square provides commerce solutions, business software and banking services. Cash App is probably known for many, but for those who don’t know, it’s a mobile payment service. I won’t dive into these divisions too much since Spiral is more crypto centred. However, it’s important to understand that those two divisions are the biggest for Block, and those will also be the biggest contributors to the future share price of Block. Both Square and Cash App also play a significant role for cryptocurrency since Square has the opportunity to help merchants accept crypto, and Cash App already allows customers to buy Bitcoin directly from their app.
The leading reason why Block is moving heavily into crypto with all the rebranding and new products is the founder and CEO, Jack Dorsey. Dorsey is known to be kind of a Bitcoin maximalist, and he’s also the former CEO of Twitter and the founder of Twitter. While Dorsey is considered a brilliant person, I immediately have to point out him as a potential risk for the success of Block. Dorsey is driven by his own vision. If he only focuses on Bitcoin, the company might miss out on many opportunities.
My thesis is further backed by what Spiral is doing in crypto. The greetings you get from entering their website is “Making bitcoin more than an investment”, not crypto, rather Bitcoin. However, I’m not saying that what Spiral is doing is terrible; it’s actually the opposite. They have many exciting developments, the latest of them being creating their own Bitcoin mining machines. It’s just that there is more than one cryptocurrency, and others might even be better suited for monetization than Bitcoin. Also, I need to explain what TBD54566975 is; it’s also crypto-related. This division is building an open developer platform to make it easier for others to access Bitcoin and other blockchain technologies.
The strength of Block lies with its existing business and strong userbase. A clear lack in cryptocurrency is user-friendliness, and that’s precisely what Block and other payment companies like PayPal can offer. The point with crypto is to eliminate the middleman, but that’s not very likely, at least in the short term. Therefore, Block has the opportunity to help merchants with their Square division and consumers with Cash App. Also, these two divisions will live even if cryptocurrency takes a huge beating, meaning that your investment will have some diversification out of crypto. Still, the heavy move towards crypto, or Bitcoin, that Block is doing does mean that you will have good upside since Block isn’t that big yet and has a lot of room to grow.
Then lastly, about the analysts and risks. Block gets a consensus rating of Buy and a potential upside of 110 %. The risk with Block is the end to its massive growth, which might impact the share price quite negatively. This is actually seen with PayPal, which just released its quarterly earnings. They predicted slower user growth, and the stock plummeted by almost 20%. Another risk is the already mentioned heavy Bitcoin focused mindset.
Conclusion
There you have a handful of crypto-related stocks. Naturally, there are a ton more out there, and new ones are coming all the time. For example, as mentioned, there are multiple different mining stocks, and I strongly recommend you look into many of those before making any decisions. Then for Block, I would view PayPal as a suitable replacement if you like that one more.
Lastly, to look at the example I gave earlier where you can move further away while still having exposure to the wanted asset, this could have been done even further than I did here. However, the effect is negligible when you go too far, and there’s no point in me rambling about those companies. Take as an example Alphabet (parent company of Google). They’ve formed some partnerships in the blockchain and crypto space. Their other businesses are also likely to benefit from the metaverse and crypto to some extent. However, to an almost $2 trillion market cap company, the effects of crypto are relatively small, and the investment from a crypto standpoint is quite pointless.
This was what I had to say, and now it’s up to you to go and do your own research on the companies I’ve listed here and see if you find any of them worth the investment.
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