4 Stocks for Crypto Exposure

These companies offer cryptocurrency exposure without ‘hodl’ing digital coins.

Vikram Barhat 15 September, 2021 | 1:03AM
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Bitcoin

Cryptocurrencies have been on a tear this year as retail and institutional investors continue to pour money into various crypto assets. However, digital coins remain a risky bet for many investors unwilling to be exposed to the extreme volatility that characterizes the cryptoverse.

There’s a relatively safer way to play the cryptocurrency market, through stocks of companies that have a meaningful exposure to the cryptocurrency value chain. While crypto contributes a small portion of these company’s revenues right now, there’s potential for it to grow substantially over time.

By design, none of these stocks is a pure play on cryptocurrency, but when the mainstreaming of crypto assets gains traction, the companies that committed early to legitimizing crypto, either through investments, partnerships, or bolt-on ventures, could reap large financial windfall. Note also, that these stocks are currently either overvalued, or fairly valued, so it would make sense to wait for a more attractive valuation before considering them.

Square Inc

 

Ticker

SQ

 

Current yield:

-

 

Forward P/E:

114.94

 

Price

US$246.68

 

Fair value:

US$112

 

Value

121% premium

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

*

Data as of Sept 13, 2021

Twitter CEO Jack Dorsey-led Square Inc (SQ) provides payment acquiring and related services to merchants. The firm operates in Canada, Japan, Australia, and the U.S., with only about 5% of revenue is generated outside the U.S. Square has been aggressively buying up bitcoin. The company recently bought US$170 million worth of bitcoin, in addition to splurging US$50 million on the biggest cryptocurrency last year, the company revealed.

“The investment is part of Square’s ongoing commitment to bitcoin,” the company said.

Square was one of the earliest companies to integrate bitcoin into its digital payment app, Cash App, a person-to-person payment network that allows Bitcoin trading. “Cash App's performance compared with peers has been relatively strong, suggesting it is positioning itself to be a survivor,” says Morningstar equity analyst Brett Horn, stressing positive trends on the Cash App side have more than offset any pandemic-led weakness. Horn recently upped the stock’s fair value from US$89 to US$112.

PayPal Holdings

 

Ticker

PYPL

 

Current yield:

-

 

Forward P/E:

48.31

 

Price

US$280.49

 

Fair value:

US$147

 

Value

93% premium

 

Moat

Narrow

 

Moat Trend

Stable

 

Star rating

*

Data as of Sept 13, 2021

PayPal (PYPL) provides electronic payment solutions to merchants and consumers, with a focus on online transactions. The company, which had 377 million active accounts at the end of 2020, also owns Xoom, an international money transfer business, and Venmo, a person-to-person payment platform.

PayPal made a push into cryptoshpere in 2020 when it launched its crypto service enabling its U.S. customers to buy, hold and sell cryptocurrency directly from their PayPal account. It also plans to make crypto currencies available as a funding source for purchases at its 26 million merchants worldwide.

The company currently allows its U.S. customers (except Hawaii) to buy, sell, hold, and pay at checkout with Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. PayPal plans to expand its crypto service to other parts of the world including the U.K.

“In recent years, PayPal’s growth has remained turbocharged by the ongoing shift toward electronic payments and the rise of e-commerce, and the coronavirus further accelerated the shift toward e-commerce,” says Horn, who recently upped the stock’s fair value from US$139 to US$147.

Coinbase Global Inc

 

Ticker

COIN

 

Current yield:

-

 

Forward P/E:

45.05

 

Price

US$242.84

 

Fair value:

US$201

 

Value

29% premium

 

Moat

None

 

Moat Trend

Stable

 

Star rating

**

Data as of Sept 13, 2021

Leading U.S. cryptocurrency exchange Coinbase (COIN) facilitates cryptocurrency buying and selling for retail investors and institutions in a safe and regulation-compliant manner. Many investors choose Coinbase to act as a custodian for their cryptocurrency, allowing for greater consumer engagement than a conventional financial exchange.

“Coinbase has been able to carve out a strong place in the cryptocurrency exchange industry by intentionally positioning itself as a reliable and compliant place to buy and sell cryptocurrency in an industry filled with risk, weak security practices, and spotty regulatory enforcement,” a Morningstar equity report highlights. 

The company generates the bulk of its revenue from transaction fees. It’s reputation, regulatory compliance, and track record as a custodian have allowed it to maintain transaction fees above many of its peers despite operating in a crowded market.

 “Unlike traditional exchanges in the U.S., Coinbase fulfills multiple roles in the trading ecosystem by acting as an exchange, asset custodian, and broker,” says Morningstar equity analyst Michael Miller, who puts the stock’s fair value at US$201. 

As the company charges fees as a percentage of trade’s total value, its revenue is closely tied to the size of the cryptocurrency market. Hence, despite enjoying market dominance, “the value of [Coinbase’s] position will be reliant on the long-term success or failure of cryptocurrencies,” Miller cautions.

CME Group Inc

 

Ticker

CME

 

Current yield:

1.86%

 

Forward P/E:

26.60

 

Price

US$189.23

 

Fair value:

US$193

 

Value

Fairly valued

 

Moat

Wide

 

Moat Trend

Stable

 

Star rating

***

Data as of Sept 13, 2021

Chicago-based CME Group (CME) operates exchanges giving investors, suppliers, and businesses the ability to trade futures and derivatives based on interest rates, equity indexes, foreign currencies, energy, metals, and commodities.

As the world’s largest financial derivatives exchange, CME also offers bitcoin futures contracts.The exchange tops the list of the biggest bitcoin futures trading platforms, accounting for nearly 20% of all open interest, valued at US$2.1 billion.

“CME also has a history of generating incremental growth through the introduction of new futures contracts, like the micro E-mini S&P 500 contract and bitcoin futures, or adjusting the structure of existing products,” says a Morningstar equity report.

The surge in trading volume in equity markets picked up in 2021 right where it left off in 2020. Resultantly, CME’s equity index futures business experienced heavy trading volume. “The rise of $0 commissions, changes in investor behaviour, and the availability of futures on retail brokerage platforms will provide a permanent tailwind to CME’s equity business,” says Miller, who recently raised the stock’s fair value from US$153 to US$193.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
CME Group Inc Class A189.50 USD0.29Rating
Coinbase Global Inc Ordinary Shares - Class A241.52 USD-2.25Rating
PayPal Holdings Inc283.17 USD0.26Rating
Square Inc A253.14 USD1.74Rating

About Author

Vikram Barhat

Vikram Barhat  Vikram Barhat is a Toronto-based financial writer specializing in investing, stock markets, personal finance and other areas of the financial services industry. He also writes for CNBC, BBC, The Globe and Mail, and Toronto Star.

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