3 “Backdoor” Crypto Investments You Won’t Want to Miss

A month is a lifetime in crypto. In April, The New York Times boldly proclaimed “we’re all crypto people now” as the price of bitcoin surged past the $60,000 mark. 

They weren’t wrong: 2021 is the year crypto went from a mere curiosity in the minds of mom-and-pop investors to a serious asset class worthy of inclusion in the business section of the most storied financial news outlets.

(Fun fact: a recent study from New York Digital Investment Group found that 46 million Americans now own some amount of bitcoin!

Well, it hasn’t all been upside since that NYT story. In fact, most cryptocurrency investors have endured a harsh sell-off since that article was printed. As of the time of this writing, serious cryptocurrency tokens bitcoin and Ethereum are down 24% and 21% respectively in the last month while “meme token” dogecoin has fallen 28%. 

Although cryptocurrencies lack the financial metrics associated with stocks, there are quite a few fundamental reasons for crypto’s harsh sell-off. In the last month, most of the news concerning crypto’s adoption has been decidedly negative. Here are just a few high-level events in the crypto space in the last few weeks alone: 

  • Aggressive cryptocurrency leverage—as high as 100-to-1 ratios—has been reported by CNBC and other outlets.
  • Self-appointed crypto meme guru Elon Musk quickly reversed Tesla’s stance of accepting bitcoin due to concerns about environmental impacts. 
  • Regulatory bodies from both China and the United States have begun to look more forcefully into regulation, including bans on mining, limitations on acceptance, and/or more disclosure on transactions.
  • Fallout from the Colonial Pipeline’s cyberattack, including the fact the ransom was paid in bitcoin. This was a harsh reminder that the current use case for cryptocurrencies is often for illegal and nefarious transactions. 

As a result of these bearish headlines, many recent cryptocurrency investors are concerned about the asset class going forward. While sell-offs can be hard to stomach, that is a natural part of investing in a speculative asset class like cryptocurrency

In the short run, investors should expect continued volatility as the ranks of new investors move into crypto. Like all investments, it’s important to take a long-term focus: despite the 1-month pullback, bitcoin, Ethereum, and Dogecoin are up 320%, 1180%, and 14,540% over the last year. 

Here at Millennial Money, we’re long-term bullish on cryptocurrencies with well-developed blockchain technologies like bitcoin and Ethereum but understand many investors are looking for lower-volatility ways to take advantage of crypto’s adoption and growth. 

Below we’re highlighting three stocks that have significant exposure to the growth of cryptocurrencies without needing to buy the underlying assets. This could be a particularly compelling way to invest in the asset class if you’re a more risk-averse investor. 

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Motley Fool Rule Breakers is led by legendary investor David Gardner and pinpointed Tesla at $6.29, Salesforce at $6.89, and Shopify at $21.02. (It trades for more than $1,000 per share today!)

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Square

Square (NYSE: SQ) 

Market Cap: $101 billion
Revenue Growth: 44%, ex-bitcoin  

If you could choose between:

  • A leading cryptocurrency company whose revenue in the space grew elevenfold over the past year. 
  • A “digital bank” with a leading app growing profits at 171% per year. 
  • OR a strong “reopening play” on 330 million Americans getting back to normal life this summer…

… which would you pick? 

Well, our stock of the week means you don’t have to choose, because Square is all three of those things all wrapped in one! 

Why is Square in such a great position in so many markets?

For one, it’s ahead of traditional banks on crypto. Banks dragged their feet on crypto, afraid of its decentralized nature. Square, on the other hand, was one of the early crypto adopters and introduced the ability to buy and sell bitcoin in 2018 through its peer-to-peer financial network, Cash App. 

Square is a true believer in crypto, even buying $200 million in bitcoin for its own balance sheet. In April, Square created the Crypto Council for Innovation with Coinbase and Fidelity with the aim of lobbying regulators on crypto-related matters. Square stock had an amazing run in 2020, with the stock advancing 250% higher on bullish crypto developments.

But here’s the thing: crypto might not be the biggest catalyst for Square in 2021. 

Instead, Square’s stock could be led by another 2021 theme: the post-pandemic reopening.

Last year was tough for the company, with full-year revenue rising 17% (excluding bitcoin-related purchases), a rate that while fine, is significantly below Square’s long-term potential. 

The reason for last year’s “slump?” 2020 was particularly difficult for Square’s seller ecosystem (think the merchants that use its trademark white card readers). Many of Square’s merchants are small businesses with on-premise operations—exactly the kind of businesses that were disproportionately affected by COVID-19.

For example, during that period Square’s “card present” transactions fell 4%. However, the company worked with many of these vendors to set up an online presence, increasing “card not present” transactions by 26%. 

As a result, last year the company generated $1.51 billion in gross profits from its seller ecosystem, an 8% increase over the prior year. While impressive, it was certainly lower than it would have been without the pandemic. 

Add it up, and last year was an odd scenario in which revenue was negatively affected by the pandemic but positively affected by bitcoin. This year it’s likely to see a reversal: Square’s seller ecosystem should return in a major way during the reopening, while bitcoin will be less of a boost to the top line. Square stock doesn’t need cryptocurrency to explode higher, but it is a nice option to have.  

PayPal

Paypal (Nasdaq: PYPL)

Market Cap: $304 billion 
Revenue Growth: 31%  

By now you’re probably seeing a theme: Our best way to take advantage of the growth in cryptocurrency acceptance is by investing in companies well-situated to help build out the cryptocurrency transactional ecosystem. Right now, fintech payment providers are among the best pick-and-shovels way to benefit with significantly lower levels of volatility. 

And when you’re thinking about digital payment providers, it doesn’t get any bigger and more established than PayPal. Founded by a consortium of current crypto acolytes, including Tesla’s Elon Musk and venture capitalist Peter Thiel, PayPal has grown likely beyond even their wildest aspirations. In addition to increased demand for digital transfers via its original product, PayPal stock has been boosted by its history of successful fintech acquisitions, ranging from Venmo to Xoom.

Although it was later to the crypto party than Square, PayPal might have a stronger overall crypto value proposition. In October, PayPal announced it would allow its massive 400-million-strong user base to buy, store, and sell bitcoin along with other cryptocurrencies. Unlike Square, which has gone all in on bitcoin, PayPal allows users to buy other tokens: Ethereum, bitcoin cash, and litecoin. 

In addition to allowing more diversification, PayPal is on the forefront of fostering transactional adoption by launching “Checkout with Crypto.” This allows PayPal users the ability to transact in crypto at millions of merchant sites. Crypto fans were not initially enamored with the fact that this payment process converts crypto to fiat before the transaction, but by doing so it’s likely PayPal will ultimately speed up adoption and acceptance among merchants. 

While crypto is a nice option for PayPal’s growth, it’s not needed for the company to continue to reward investors. In the first quarter, PayPal’s revenue increased 31% on the back of total payment volume—total transactions processed on its platform—exploding 46% (currency neutral) over the year-ago period. 

The world continues to move away from cash and companies like PayPal will lead the way forward. Consider crypto just another driver for PayPal.

Coinbase 

Coinbase (Nasdaq: COIN) 

Market Cap: $64 billion 
Revenue Growth: 845% 

Admittedly, Coinbase is the stock most tethered to the price of cryptocurrencies for two reasons. First, as cryptocurrency prices increase, the company experiences a surge of new users looking for profit. Additionally, the company uses percentage-of-transaction pricing, which means the company books more revenue per transaction when crypto prices are higher, much like realtors make more commission on higher-priced homes. 

Look no further than Coinbase’s first quarter results. The company reported mind-boggling revenue growth of 844% over the prior year’s period, from $190.6 million to $1.8 billion, as the price of cryptocurrencies swelled. While that was an extreme increase, the company is well situated for significant growth as analysts expect the company to report full-year revenue to rise 400% in 2021. 

But Coinbase will do well when crypto prices fall. In the end, Coinbase is an exchange and (like stock exchanges) volatility is the biggest driver of transactions. Although prices might be lower, transactions and engagement will increase.

As an example, on May 19 the sell-off in bitcoin and Ethereum led to a surge in traffic that temporarily crashed Coinbase’s website. Admittedly, Coinbase will have to ensure their infrastructure and reliability are up to the task in future crashes, but price changes drive engagement. 

However, the company’s newest efforts deserve more attention. Coinbase is working to grow revenue outside of transaction fees, most notably by leading efforts to build out the cryptocurrency ecosystem. 

In February, Coinbase bought blockchain infrastructure platform-as-a-service Bison Trails, later renaming the service Coinbase Cloud. This acquisition is aimed at helping institutions quickly integrate blockchain infrastructure into their operations, which is important because it is institutions that will spur future cryptocurrency adoption.

It’s been well established that blockchain and crypto are becoming must-haves for merchants, but increasingly governments are paying close attention to the technology. In fact, a report issued by (then) Bison Trails reported that 80% of central banks are exploring central bank digital currencies.

Whether crypto continues to underperform or drive higher, Coinbase’s 56 million users and multi-billion-dollar trading volume will continue to be a formidable force in cryptocurrency.  

Looking for more stock ideas? We’ve got you covered!

Where to invest $500 right now

Are you ready for “maximum upside?”

Motley Fool Rule Breakers is led by legendary investor David Gardner and pinpointed Tesla at $6.29, Salesforce at $6.89, and Shopify at $21.02. (It trades for more than $1,000 per share today!)

Here’s why you’ll want to get the full details on Rule Breakers today. The service just announced its top 10 “best buys now” across the entire stock market. Whether you’re starting with $100, $500, or more, you’ll want to get the full details!

Click here to learn more

Jamal Carnette, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends PayPal Holdings and Square. The Motley Fool recommends the following options: long January 2022 $75 calls on PayPal Holdings. Millennial Money is part of The Motley Fool network. Millennial Money has a disclosure policy.

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