Have you ever thought about investing in cryptocurrency stocks and blockchain technology stocks? The rise of cryptocurrencies has created a new asset class for investors who want to diversify their holdings. If you had the foresight (or the luck) to buy Bitcoin as recently as two years ago, you would have seen massive gains.
Of course, Bitcoin is not the only cryptocurrency to have delivered an exceptional level of returns. Here is how much the top five digital currencies by market capitalization have appreciated in value in the last two years:
|Cryptocurrency||Price on May 17, 2018||Price two years ago (May 18, 2016)||Gain in the last two years|
*price on July 23, 2017. Bitcoin cash, an offshoot of Bitcoin was created in 2017. **price on July 1, 2017.
- Advantages of the blockchain technology
- Cryptocurrency stocks and blockchain technology stocks offer great potential
- Blockchain technology stocks can be safer than a direct investment in cryptocurrencies
- Should you invest in cryptocurrency stocks?
Advantages of the blockchain technology
What exactly is the blockchain and why have some of the cryptocurrencies that this new technology has given rise to, skyrocketed in value in recent years? Blockchain tech’s primary strength is that it does not require a central authority to validate transactions. All records are maintained in a decentralized ledger across a peer-to-peer network. Consequently, a currency based on this technology is not controlled by the government of any country.
Blockchain technology has a number of applications and cryptocurrency tokens play a central role in allowing the blockchain to function. The following infographic summarizes how the blockchain and digital currencies work and some of the different applications that this technology can support:
Blockchain solutions can be used in a wide range of industries. The current and potential applications include speeding up fund transfers, improving efficiencies in healthcare and electoral systems, and even restructuring the manner in which users consume content on the internet. The growing realization that blockchain technology holds great promise has led to a sharp rise in the price of many digital currencies. Investors can capitalize on the rise in cryptocurrency prices by purchasing Bitcoin-related stocks and digital currency stocks.
Cryptocurrency stocks and blockchain technology stocks offer great potential
If you can identify the right cryptocurrency stocks to buy, it is possible to earn a high return on your investment. Here is a brief description of some of the top blockchain stocks that you can buy:
Hive Blockchain Technologies
Hive Blockchain Technologies is listed on the TSX Venture Exchange in Canada. Hive is a prominent blockchain firm that is actively involved in cryptocurrency mining. The firm uses high-powered computers to solve the complicated mathematical problems associated with mining crypto tokens.
The company has tied up with Genesis Mining Ltd, a cryptocurrency mining hashrate provider. This association gives it an advantage in completing the computations faster and claiming the reward in the form of Bitcoin or other digital currencies. The computers that are involved in crypto mining consume a great amount of electricity. In an effort to control costs, Hive is increasing its level of operations in Sweden and Iceland, both of which offer commercial power costs that are lower than those available in other European countries.
Obviously, the company’s revenues and profits are dependent upon the price of Bitcoin and other cryptocurrencies. If digital currency valuations increase, it is likely that the company’s bottom line will improve. In the nine months to December 31, 2017, Hive reported revenues of $3.4 million and a net loss of $19.7 million. The loss was primarily due to the acquisition cost of group companies. Buying Hive stock could be a high-risk investment. But if Bitcoin prices rise, investors could make a significant return.
American tech company Nvidia is headquartered in Santa Clara, California. Nvidia makes high-performance graphics processors. These were originally designed for video games. But they are increasingly being used in cryptocurrency mining. The company has seen a surge in the demand for its products as digital currency prices have risen.
If you want to make a choice between directly investing in cryptocurrency vs. stocks and you opt for the latter, Nvidia could be a good option. Although it is not a pure play Bitcoin stock, it offers the advantages of a blockchain stock while retaining its ability to provide high returns even if cryptocurrency markets trend downwards. Here’s how the Nvidia stock has performed in the last 12 months:
The Nvidia stock was trading at $136 on May 19, 2017. A year later, it is at $246, an increase of 81%. Does the Nvidia stock have the potential to rise any further? The demand for the company’s products remains very strong. If digital currency valuations rise, Nvidia stock valuations could see even greater growth.
An added advantage of buying this stock is that the company is not wholly dependent upon blockchain technologies for its long term success. According to a report in Forbes, Nvidia recently received a $200 million advance from Microsoft for the supply of graphics components for the new Xbox game console.
A number of new blockchain companies have sprung up to cash in on the cryptocurrency boom. Riot Blockchain, which was formerly known as Bioptix, is one of them. It was previously involved in providing diagnostic equipment to companies in the biotech industry.
However, in a recent pivot, the company changed its name to Riot Blockchain and shifted its focus to blockchain technologies and investments. It is also involved in Bitcoin mining. In a press release dated May 4, 2018, the company announced that it had a mining production yield of approximately 100 Bitcoins and 61 Bitcoin cash in April 2018. At current valuations, that works out to a total of about $900,000.
Riot has also made an investment in Verady, a company that provides clients with accounting and verification services for blockchain-based assets. The company’s share price has exhibited a high level of volatility:
At the height of the digital currency boom in December 2017, when Bitcoin prices approached $20,000, Riot’s stock valuation peaked at $38.60. But this blockchain stock has subsequently seen a sharp fall. It currently trades at about $8.90. When you are thinking about how to invest in Bitcoin stocks, there is another factor that you need to consider. The regulatory framework for cryptocurrencies is not yet in place. Consequently, blockchain technology stocks can see wild swings in valuation because of the regulatory issues associated with digital currencies.
Riot Blockchain is currently under investigation by the Securities and Exchange Commission (SEC), the U.S. government agency responsible for protecting the interests of investors. At a recent shareholder meeting, Riot’s CEO, John O’Rourke said, “I cannot comment on the (SEC) subpoena. We don’t know the nature of the investigation…”.
Bitcoin Investment Trust
If you want to buy or sell Bitcoin without actually transacting directly in the cryptocurrency, you can consider the Bitcoin Investment Trust. This is a cryptocurrency stock that currently trades at $13.53. The company holds Bitcoin in its portfolio and each share in Bitcoin Investment Trust represents a fraction of one Bitcoin. According to the company’s website, one share currently represents 0.00100231 Bitcoin. At the current price of $8,094.32 per Bitcoin that fraction works out to $8.11. But one share of the Bitcoin Investment Trust is currently valued at $13.53.
Why does the share carry such a large premium? One possible reason is that investors value the convenience and safety of owning cryptocurrency stocks as opposed to investing directly in cryptocurrencies. Many individuals feel a lot safer transacting in the stock market as opposed to participating in cryptocurrency trading in a Bitcoin exchange.
The company Overstock started as an online retailer way back in 1999. Last year, it registered sales volumes of $1.75 billion. But its founder, Patrick Byrne, was one of the early believers in the world’s fastest growing cryptocurrency, Bitcoin. Overstock has launched an Initial Coin Offering (ICO) that eventually plans to raise $500 million. An ICO is similar to an Initial Public Offering (IPO), but does not involve an exchange-listed security. Additionally, investors put up crypto-coins instead of cash.
What will the sum that is being raised be used for? The company plans to launch tZERO, which it says will function as a general ledger system for capital markets. But tZERO is a risky venture. In Mr. Byrne’s words, “…I want to emphasize this is extraordinarily risky – extremely dangerous. The general public should think of coming nowhere close”. Currently tZERO is a subsidiary of Overtstock.com. Here’s how the company’s stock price has reacted to the tZERO venture:
Overstock’s stock price reached a level of $84.35 on January 1, 2018. Subsequently, it has fallen to less than half that amount. It’s a high-risk investment, but if you can stomach the volatility and if the tZERO venture succeeds, there is the possibility of making significant gains.
Blockchain technology stocks are safer than a direct investment in cryptocurrencies
Many investors are still reluctant to buy Bitcoin and other cryptocurrencies from a cryptocurrency exchange. These exchanges are largely unregulated and it is quite possible to lose your money to hackers. Why are blockchain technology stocks a safer bet than a direct investment in Bitcoin or some other cryptocurrency? There are three important reasons for investing in cryptocurrency stocks vs. direct cryptocurrency investments:
- Cryptocurrencies operate in unregulated markets
- Crypto exchanges can be hacked
- Stocks could be a safer investment because of the company’s diversified business model
Cryptocurrencies operate in unregulated markets
A recent public statement issued by the SEC states that a number of online trading platforms for cryptocurrencies “appear to investors as SEC-registered and regulated marketplaces when they are not”. Each platform that is registered as a national security exchange is listed on this link provided by the SEC. While transacting on these exchanges can provide a certain degree of security, investors dealing with unregulated cryptocurrency exchanges can be exposed to a high degree of risk.
Cryptocurrency stocks can present a better option in many ways. Stock exchanges are highly regulated and you are unlikely to be cheated of your money to fraudsters if you buy and sell blockchain stocks on a stock exchange. Of course, your investment in a cryptocurrency stock could lose value if the company that you have invested in incurs losses or closes down.
Crypto exchanges can be hacked
Mt. Gox, a crypto exchange based in Japan was hacked twice. In June 2011, a hacker stole 2,609 Bitcoin by fraudulently accessing the password of the Mt. Gox auditor. But the next hacking attack, which took place in 2014, was more serious. At that time Mt. Gox was handling very large volumes of Bitcoin transactions. Hackers managed to get away with more than 750,000 Bitcoin. At current prices that’s worth about $6 billion.
Unfortunately, there have been several instances of cryptocurrency hackers accessing the computer systems of exchanges. In September 2012, BitFloor, lost 24,000 Bitcoin to hackers. However, investors did not lose any money as the exchange was able to provide compensation. But BitFloor was closed down due to regulatory issues.
Stocks could be a safer investment because of the company’s diversified business model
If you buy Bitcoin or some other cryptocurrency, you could suffer significant losses if the digital tokens lose value. Cryptocurrency prices are notoriously volatile and the wild swings in valuations can be unnerving. Blockchain technology stocks can offer a better option. The prices of cryptocurrency stocks are not likely to rise and fall as rapidly as those of digital currencies. This can be especially true of stocks that have a diversified business model.
Companies like Nvidia and Advanced Micro Devices (AMD) are reaping the benefits of high Bitcoin valuations. But they are dependent upon cryptocurrencies for only a small portion of their revenues. Investors who purchase this category of blockchain and cryptocurrency stocks are less likely to be affected by a fall in digital currency valuations.
Should you invest in cryptocurrency stocks?
Blockchain technology holds great promise for the companies that are active in the financial services sector. A number of startups that use blockchain platforms are providing cross border payment facilities that operate in real time. Blockchain technology has a number of other applications as well.
Additionally, many new companies that use blockchain tech are entering into joint ventures with incumbents to provide financial services at a fraction of the existing cost. The rising popularity of this new technology has led to a sharp rise in cryptocurrency prices in the last few years.
But can the upward trend in Bitcoin prices be maintained? Jamie Dimon, the CEO of JPMorgan Chase, one of America’s largest banks, famously called Bitcoin a fraud although he partially retracted that statement later. Wences Casares, CEO of Bitcoin wallet Xapo and a member of PayPal’s board, thinks that Bitcoin valuations will reach $1 million in five to ten years.
Conclusion: Investing in blockchain and cryptocurrency stocks
Which view is correct? Should you remain invested in cryptocurrencies or are the risks too great? The best strategy could be to invest a certain portion of your portfolio, say 5% to 10%, in cryptocurrency stocks. This will allow you to benefit from the gains that Bitcoin could make in the future. Even if prices stagnate or fall, your limited exposure will keep your losses in check. What are your thoughts on cryptocurrencies and blockchain technology?