The sharp sell-off in crypto has potentially provided entry points for long-term investors. Many however, are looking for diverse plays on crypto, beyond owning the currencies directly. We look at some of the listed companies that offer crypto exposure.
Over the last few years, cryptocurrencies have gained enormously, but investors often do not realise how many options they have in terms of investments, as the crypto environment is evolving rapidly. For example, there are the crypto mining companies, the companies facilitating transactions and custody, and the companies that sell the pick and shovels to miners, as well as companies that are adding crypto to their balance sheets.
Depth of the pull-back
It is interesting to remember that crypto has been the best performing asset class of the past 10 years. However, the crypto rise has been enormous volatility, bear markets, and a high level of scepticism. More recently, crypto assets have sharply corrected since 20th November 2021.
A more defensive crypto strategy is to look for those companies that are not dependent on crypto, but where crypto is a strong optionality. For example, some well-established banks have developed a crypto business. In addition, established traditional exchanges, and semiconductor companies also provide exposure to crypto, with the peace of mind that they still have existing profitable businesses not related to crypto. From a portfolio asset allocation perspective, a diversified exposure can help cushion the ups and down in different groups of crypto stocks and still offer long-term exposure.
Below, we will touch on different groups of stocks, with ties to the crypto industry.
Mining companies
Crypto mining companies use sophisticated computers to solve computational problems, verify transactions, and in turn generate new cryptocurrency coins. Cryptocurrencies are then generally sold on the market, and in some cases a portion is kept on the balance sheet.
Crypto miners behave mostly as leveraged plays on crypto, as their profitability is very sensitive to the evolutions of crypto prices. Mining is the engine that fuels the bitcoin ecosystem. Here are examples of some of the largest listed mining companies by market cap.
- Marathon Digital Holdings: The company aims to build the largest mining operations in North America. In 2021, annual bitcoin production increased 846% year-on-year, to 3’197 coins.
- Riot Blockchain: The company is focused on bitcoin mining and the blockchain ecosystem. In the first three quarters of 2021, it mined a total of 1’292 bitcoin. It is still expanding its facilities, and in the last three years it saw its revenue grow at 105% per year.
- Hut 8 Mining: The company operates as a cryptocurrency mining company, based in Canada. It mines both bitcoin and Ethereum, focusing on mining crypto with a low environmental impact.
- Terawulf: The mining company focuses on mining bitcoin by maximising the energy-to-crypto value chain through power-supply optimisation. It uses more than 90% + zero carbon energy.
Exchanges
Exchange companies also provide significant exposure to cryptocurrencies. In other words, they are the companies facilitating crypto transactions, as well as acting as custodians.
- Coinbase: The US company offers a crypto platform for customers to buy and sell crypto. It counts approximately 73 million users, with USD255 billion assets on the platform.
- Bakkt Holdings: The US platform is a digital wallet where consumers can view and transact in digital assets, including cryptos, loyalty and reward points, and gift cards. It also provides institutional solutions.
- Voyager Digital: The company offers a secure way to trade over 60 different crypto assets using an easy-to-use mobile application and earn reward points on cryptocurrencies.
- Mogo: The fintech empowers its 1.5 million members get in financial shape. It offers easy solutions to buy and sell bitcoin.
Banks
Existing financial players that are developing a crypto expertise and offer services linked to crypto. These offer exposure through a more defensive approach as their business model is not entirely based on crypto.
- Silvergate Bank: The bank, which has been profitable for the last 21 years, counts more than 700 digital currency and fintech customers using its financial infrastructure platform developed since 2013 to serve the digital currency industry. For its digital currency unit, in 2021, the number of customers grew 43% and fee income leaped 222%. Overall net income increased 190%.
- Signature Bank: New-York based Signature Bank, a well-established full-service commercial bank with USD80 billion in assets, enhanced its offering with a crypto strategy. It offers crypto services, including blockchain payment solutions and crypto-backed loans.
- Galaxy Digital: The financial services company offers trading and asset management solutions for digital assets. It counts more than USD2.9 billion assets under management.
- Metropolitan Bank: The New-York based lender counts around 4% of its deposits from digital currency clients. Some of its clients are well-know names such as crypto.com, Voyager, and Coinbase. Revenue from crypto clients is around 1% of the bank’s total revenue.
Other
Other crypto stocks include companies using their balance sheets to buy cryptocurrencies outright, and chip companies selling products intended for crypto mining companies.
i. Balance sheet crypto plays
Perhaps what is most fascinating in the crypto space is how many billionaire investors have gone ‘all in’ on the asset class. Jack Dorsey famously calls bitcoin the “currency of the internet”. Similarly, Michael Saylor, MicroStrategy co-founder and CEO is a big believer in bitcoin in the sense that MicroStrategy has shifted its balance sheet strategy towards acquiring as many bitcoins as possible. I order to do that, it has repeatedly issued stock and debt on capital markets, for the purpose of buying bitcoins. As a result, it has become the largest corporate bitcoin investor, ahead of Tesla, with over 125’000 bitcoins. The company’s revenue is around USD500 million, with a market cap of around USD4 billion. The company’s future is dependent on the price of bitcoin and the stock is very volatile.
Michael Saylor writes frequent Twitter updates on MicroStrategy’s bitcoin acquisition strategy and holds bitcoin outlook. He is a supporter of other corporates buying bitcoin.
There are many other listed companies that have bought bitcoin. However, MicroStrategy remains the most aggressive one, with bitcoin playing a major role in its corporate strategy.
ii. Chips suppliers
Semiconductor stocks including Nvidia, and AMD have some exposure to the crypto industry. Miners buy their specifically designed chips for crypto mining. However, this part of their business is small and most of their revenue will be derived from other areas such as need EVs, consumer electronics, robotics etc. However, these companies could still be a defensive play on crypto and blockchain, with the view that potentially higher prices could boost the number of crypto mining customers.
Investing through funds
Fund offers diversification and simplicity. To offer an example, the Amplify Transformational Data Sharing ETF below tracks companies involved in crypto and blockchain technology.
Conclusion
After a sharp sell-off, it is interesting to evaluate one’s options of gaining exposure to cryptocurrencies. There are more defensive ways through well-established companies, where crypto is just one part of their business, and more aggressive plays such as crypto mining companies, which are geared to the price of crypto, but that come with operational risks. Changes in the regulatory environment will likely continue to direct shifts between crypto plays, making some groups more attractive than others, but the broad spectrum of exposure offers plenty of options.
