As bitcoin has become a widely discussed investment topic, investors are looking for more opportunities to integrate bitcoin into their portfolios. As many investors are comfortable using ETFs and other indexed products due to their relative convenience and diversification benefits, they may notice that US ETFs are not yet eligible to have spot exposure to Bitcoin.
Instead, most indices and the ETF world use crypto-related stocks as a method of exposure to Bitcoin, while also exploring thematic trends related to digital transformation.
But not all crypto stocks are built equally – some have a direct relationship between their profitability and the price of Bitcoin, while others may simply share broader themes or underlying blockchain technology.
This note provides a high-level overview of crypto-related stocks – a relatively new area that many investors may not be as familiar with – and how different sub-sectors are exposed to Bitcoin.
In general, crypto stocks can offer exposure to high-growth emerging tech companies as part of the digital transformation megatrend.
Most crypto-related stocks tend to be small-cap tech companies with high growth characteristics. Although correlations with Bitcoin prices vary, most crypto-related stocks have profits that are ultimately determined by Bitcoin prices and/or volumes.
Investors interested in crypto stocks are generally bullish on Bitcoin and other crypto assets, but may seek additional equity exposure to supplement their Bitcoin allocation or a high risk/reward investment in emerging technologies that support long-term digital disruption trends.
The Alerian Galaxy Global Cryptocurrency-Focused Blockchain Equity, Trusts and ETPs Index (CRYPTO), which tracks exposure to a basket of crypto miners, crypto-enabling technologies and crypto buyers, currently has a weighting of 45.4% for technology stocks and a weighting of 62.3%. to small capitalization equities.(1)
The Alerian Galaxy Global Blockchain Equity, Trusts and ETPs (BCHAIN) Index, which tracks exposure to the above sectors in addition to companies that use blockchain for non-crypto related purposes, has less weight to equities small-cap and/or tech since blockchain users are often large diversified companies using blockchain to modernize their operations – currently all blockchain user constituents within BCHAIN have market capitalizations over 100 billion of dollars. In total, BCHAIN has a 38.7% weighting for tech stocks and a 35.7% weighting for small cap stocks.
Crypto mining companies operate a network of machines to verify crypto transactions and are rewarded with a share of crypto. Like typical commodity miners (e.g. gold miners, coal miners), crypto miners are directly influenced by the prices of the underlying commodity, and profitability depends on the price of bitcoin being mined minus the costs of electricity, equipment and other factors.
While industry profitability has been impacted during the recent Bitcoin selloff, larger crypto miners may be better positioned over the long term to weather Bitcoin’s volatility by using their size and capital to invest in facilities, machinery and efficient energy sources to reduce costs.
Crypto miners include companies like Marathon Digital Holdings (MARA) and Riot Blockchain (RIOT). Crypto miners currently represent 39.2% of the index weight in CRYPTO and 22.6% of the index weight in BCHAIN.
Crypto Enabling Technologies: Crypto Ecosystem Support
Crypto-enabling technologies include companies such as crypto exchanges, crypto payment processors, and crypto hardware manufacturers that support the crypto ecosystem. Profitability varies greatly from company to company.
Crypto exchanges like Coinbase (COIN) generate almost all of their revenue from transaction fees, which are based on both quantity and price – so volumes can help generate income even in the face of short-term price volatility.
Silvergate Capital (SI), a digital asset bank, was able to double its year-over-year net profit in its latest 1Q22 earnings report despite selling off crypto. Net income was driven by interest income, while long-term Bitcoin support contributed to the increase in customers and deposits during the quarter. Crypto technologies represent 37.1% of the index weight in CRYPTO and 26.9% of the index weight in BCHAIN.
Crypto Buyers: Investing in Crypto
Crypto buyers hold crypto assets on their balance sheets in order to take advantage of rising prices. Many of these companies, like Tesla (TSLA), are diversified and derive the majority of their revenue from other business segments. In comparison, companies like MicroStrategy (MSTR) hold Bitcoin long-term as one of their main sources of income.
The company’s earnings are highly exposed to crypto price volatility – even with unrealized losses, the company must recognize impairment losses on its statements when Bitcoin prices fall below book value, which means that the long-term value of the company could be misaligned with quarterly results. Cryptocurrency buyers represent 8.1% of the index weight in CRYPTO and BCHAIN.
Blockchain Users – Diverse “Tech-Forward” Use Cases Beyond Crypto
Blockchain use cases are growing across industries. Unlike most other crypto stocks that were newly formed alongside the emergence of Bitcoin, many blockchain users are established businesses that are adopting blockchain technology.
These companies typically do not have profitability tied to Bitcoin prices – instead, these companies are “state-of-the-art” companies that incorporate blockchain into their non-cryptocurrency operations.
These include financial companies like Mastercard (MA) who have explored methods to make financial transactions more secure or companies like Nestlé SA (OTCPK: NSRGY) who have used blockchain technology to add visibility to their chains. supply. Blockchain users represent 27.0% of the index weight in BCHAIN.
If you’re looking beyond bitcoin and want to explore opportunities within the broader digital asset ecosystem, crypto-related stocks can serve as a complement to direct bitcoin investing while providing exposure to a technology. high-growth emerging market that supports longer-term digital transformation.
As stock picking becomes more difficult in riskier sectors, an indexed product like an ETF may be able to offer access to crypto-related stocks while diversifying the risk of a single security.
The Alerian Galaxy Global Cryptocurrency-Focused Blockchain Equity, Trusts and ETPs (CRYPTO) Index is the underlying index of the Invesco Alerian Galaxy Crypto Economy (SATO) ETF.
The Alerian Galaxy Global Blockchain Equity, Trusts and ETPs (BCHAIN) Index is the underlying index of the Invesco Alerian Galaxy Blockchain Users and Decentralized Commerce (BLKC) ETF.
(1) All index weightings are as of May 24, 2022
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Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.
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