Bitcoin just rose over $16,000 for the first time since January 2018- the month after it reached an all-time high. Which stocks stand to benefit from the rally?
- The price of Bitcoin has reached over $16,000 for the first time since January 2018
- The latest price surge came after famed investor and billionaire Stanley Drukenmiller revealed he owned Bitcoin and considers it an asset class with a lot of potential
- Rising belief in wider adoption of the cryptocurrency was stirred up by two digital payment companies.
- We discuss why PayPal (PYPL) and Square (SQ) could benefit from a crypto bull market because of their adoption of Bitcoin.
Bitcoin vs. Square vs. PayPal
1) SQUARE (ticker: SQ)
"The world ultimately will have a single currency; the internet will have a single currency. I personally believe that it will be Bitcoin." - Jack Dorsey, the founder and CEO of Square
In October, Square bought $50 million worth of Bitcoin. The logic is that companies store their cash in different asset classes as well as different currencies depending on their business operations. This is typically held in money market account in different currencies – but it is definitely not normally in cryptocurrencies. Square now has an estimated 1-2% of its cash reserves in Bitcoin. So having some reserves in Bitcoin will naturally bolster the assets of Square if Bitcoin's price rises.
Moreover, in Q3 2020 Square generated $1.63 billion in Bitcoin revenue – that’s up over 1000% from last year and it represents over 50% of the company’s total revenue. It is all being done through the company’s ‘Cash App’.
The Square stock price did jump alongside this last leg higher in Bitcoin but has pulled back alongside the broad tech sell–off and rotation into value stocks in the last week. This pullback represents a potential opportunity if Square stocks begin to better represent the importance of the Bitcoin for its business.
Source: Appinventiv.com (Nov 6, 2020)
2) PAYPAL (ticker: PYPL)
PayPal made waves with its plan to make Bitcoin and other major cryptocurrencies available as a funding instrument for its over 300 million account holders to pay for goods and services from the 28 million merchants that use PayPal.
We already discussed the pros and cons of what PayPal is offering for the future of Bitcoin in our blog Can PayPal finally take Bitcoin mainstream?
Now we are flipping this on its head by asking how will the bull market in PayPal help PayPal and its stock price? It’s observable that PayPal stock has already given up most of the ‘Bitcoin boost’ from its new service announcement. That is because investors are assuming a slow take-up of crypto among mainstream buyers and sellers using PayPal.
The correlation should be along these lines, the stronger the price gains in Bitcoin, the greater the interest in Bitcoin – and the more likely PayPal users will begin to use the cryptocurrency. This might especially be the case for buying products in foreign currencies when your own currency is falling in value.
This idea is in concert with Stanley Drukenmiller, who said that Bitcoin can serve as a useful store of value- similar to the way gold does. If your currency is being devalued, it takes more of your currency to make a transaction online. While Bitcoin is heading higher, there is some logic in the idea of holding your digital currency in Bitcoin over for example US dollars – so that when you come to make your intended purchase, you have not lost any purchasing power through your national devalued currency.
That the Bitcoin rally will continue is unknown but we can see that Square and PayPal are hitching their future to the cryptocurrency and higher Bitcoin prices tend to attract more interest – and possibly more payment transactions for these firms.
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