Trading Crypto-Related Equities: Complete Guide
Since the creation of cryptocurrencies, their returns have been amazing. If you entered before the last bull market or, even better, the one before that, then you will have made a ton of money. These huge returns from the crypto markets have caught the attention of many people.
Many have started to wonder whether they too could become millionaires by just investing a few thousand into the crypto markets. But the thing that stops many is the lack of knowledge and the fear of losing 50-90 per cent when the next bear market hits. So what do people do?
Well, many have started to look for crypto-related equities. Many feel that they offer relatively good exposure to the crypto market while still being a lower-risk investment than if you simply buy cryptocurrencies. It can also be easier to manage your equity, taxes, and other legal obligations if you do not know anything about how your country views cryptos.
In this article, we will take a look at some crypto-related equities and see if they truly are lower-risk investments and whether you should consider trading and investing in them.
The first companies that many think of when talking about crypto-related equities are probably Tesla, Coinbase, and Microstrategy. Many would potentially categorize these as crypto-related equities, and yes, to some extent, they are all related to cryptocurrencies, but it is important to see the difference between them.
Tesla, which is best known for its electric cars, is not necessarily the best investment if you are looking to gain significant exposure to the crypto market. The reason is that although Tesla seemed to move the way Bitcoin moved (called correlation) when it first announced its $1.5 billion Bitcoin purchase, this is still a relatively small amount compared to their other businesses. Tesla's stock will not be moved by the price action of Bitcoin but rather by what happens in their primary business consisting of cars and batteries.
If you are looking for a company that, to some extent, mirrors the price of a cryptocurrency, then you might want to consider the company led by Michael Saylor, Microstrategy. You might have read the news that they recently passed the mark of owning over 100,000 bitcoins, which is quite a lot.
Microstrategy is a company that provides business analytics software services, so it does also have something more than just Bitcoin. However, their Bitcoin holdings are perhaps nowadays their most important thing. If you look at their market cap of $5.2 billion and compare it to their BTC holdings - which with a $40k price would be worth $4.2 billion - this leaves only a valuation of about a billion dollars for everything else that Microstrategy does, and that generated almost half a billion dollars in revenue in 2020.
Naturally, the price of Bitcoin changes rapidly. So understandably, Microstrategy might be a bit undervalued since it would also be improbable that they could sell all their Bitcoins at once without causing some fear in the markets.
As mentioned, Tesla is a company with only a small exposure to the upside of cryptos, while Microstrategy gives a far more significant exposure to the upside of Bitcoin. Now you might think that you can only benefit from the upward price movements of cryptos. But one company already mentioned could benefit from the downwards movement of crypto prices too, and that company is Coinbase.
Coinbase, which according to most recent statistics, is the third-largest crypto exchange, and maybe the best known for new investors, makes most of its money from trading fees. This means that as long as cryptos are traded in large volumes, and if Coinbase manages to attract new customers, then they will most definitely be a company to keep your eyes on as an investor.
After Coinbase’s IPO in April, its share price has largely moved along with the crypto markets in general, which some analysts believe is entirely wrong since Coinbase’s earnings are not tied to Bitcoin’s price. Coinbase CEO Brian Armstrong also mentioned this lack of correlation in its latest earnings release. Coinbase is also the stock for which Goldman Sachs analyst Will Nance gave a buy rating and said it’s the best stock to gain exposure to the crypto markets.
So as an overview of crypto-related equities, you need to remember that there are many different kinds. First, there are those who almost completely follow the price actions of Bitcoin and other cryptos, like Microstrategy and some mining companies. Then we have those who benefit more from the adoption and continued interest in cryptos like Coinbase. And then lastly, we have companies that have only adopted cryptos as a means of payment and maybe made a small investment in it, like Tesla.
Crypto-related Equities vs Cryptocurrencies
The easy answer to crypto equities vs actual crypto is that if you are looking for huge gains and high risk, cryptos are the answer. But if you are looking for a more modest risk and maybe don’t know how, or don’t want to go through the process of using crypto exchanges and setting up a wallet, then crypto-related equities are likely for you.
Crypto-related equities with a price lightly attached to Bitcoin might also be a good diversification for your portfolio. But let’s dive in a little deeper to see what might be best for you.
First, let's consider only trading rather than long-term investments. If you only want to trade and aren't considering investing for the long-term, there are a few things worth considering. The thing with cryptos is that you've probably heard about people who have made a few hundred per cent in one week or even a single day.
That sounds great, right? On the flip side, you have to remember that every time someone makes a hundred per cent, there are likely at least five people who lost just as much. You just don't know about them since they are not the ones highlighted on social media.
Therefore you need to remember that when trading cryptos, the risk is very high and especially high in those small-cap coins that could potentially offer the biggest gains. On the other hand, crypto-related equities usually are fairly stable. While some do tend to follow the price action of Bitcoin, there is one key consideration with equities that is much stronger than with cryptos - fundamentals.
As mentioned earlier, Microstrategy is a good example of a company that actually might be fundamentally undervalued if you believe in a rising price for Bitcoin. This offers a great opportunity for some swing trading (where you keep the asset, say a couple of days to a few months).
You might purchase Microstrategy when the price of Bitcoin starts showing some signs of a bullish price movement if you want to be aggressive. Or you could be more conservative by waiting for the price of Microstrategy to start rising along with Bitcoins price. Then if the market cap of Microstrategy starts taking off more than the market cap of BTC, it might be a good time to sell.
This price action can happen because Microstrategy attracts many non-professional retail traders, resulting in overreactions in both directions compared to Bitcoins price. In these situations, it is good to keep your eyes on both the market cap of BTC and the correlated company's market cap; then, when you compare that to their historical correlation, you can find good opportunities to buy and sell.
So if you are trading crypto-related equities, then technical analysis is possibly not the best strategy since you can sometimes find better opportunities in swing trading with the information found about a company's fundamentals. For example, with Coinbase, you could analyze the trading volume of the crypto market and see if the volumes have gone up, but the price of Coinbase is down. If that happens, then you might find a good price to enter.
For long-term investing, the best benefit from crypto-related equities compared to cryptocurrencies is diversification. On the other hand, a portfolio consisting of only cryptocurrencies is very high risk. If you have a family to provide for (or even just yourself), watching dips of 50-90% can make you more than nervous.
Suppose you believe in a world where crypto isn't everything. In that case, you might consider companies like Tesla, which can benefit a tremendous amount from being an early adopter of cryptos. And simultaneously, you own one of the world's most advanced companies when it comes to electric vehicles.
So if you are looking for something to diversify your portfolio, I suggest you take an especially close look at those companies in the next section, which I've ranked as low and medium correlation to crypto markets.
Low & Medium Correlated Crypto-related Equities
An important thing to remember before you read about these companies and invest in them is that some of these equities might not benefit from crypto adoption. Indeed, some might not belong in the crypto space at all. In addition, these are also publicly traded companies, and their prices can vary a lot from their intrinsic value, so even when the company succeeds, it might not guarantee stock gains. Therefore you must do your own research before investing in any company.
Tesla - Amazon - Apple
Correlation to cryptos: Low (Though Tesla can mirror the price of Bitcoin at certain times)
Potential benefit from cryptos: Fair-Good
You might be wondering why I have added Amazon and Apple in here with Tesla, so I'll explain. As we already know, Tesla has Bought bitcoin, and with CEO Elon Musk running the show, they are more than likely to continue working with cryptocurrencies. Apple and Amazon are both huge companies that have the power to attract the most brilliant minds on the planet, and they have money to do the wildest things you could ever imagine. This will allow them to invest heavily into crypto once the timing is right.
As it looks now, that time could be very soon, or even now. Amazon and Apple have both been looking for employees to join their digital currency divisions and other positions related to cryptocurrencies, which shows that they are making increasing efforts to adopt cryptocurrencies and blockchain technology. There was also a rumour that Apple bought $2.5 billion worth of BTC, but that hasn't been confirmed.
I've listed these three companies together because they are all companies where cryptos are not their primary focus. Plus, they are all excellent companies, which will not suffer catastrophically if cryptos plummet. They will probably not mirror the price of any crypto or the crypto markets in general.
Crypto-related income might not be a big part of their earnings since they are all mega-cap companies with huge revenues from other sources (especially Apple and Amazon). Still, they have the resources to make good use of blockchain technology and be frontrunners in this revolution.
Other names in this category are Microsoft, Alphabet, and Facebook, each of which also holds a vast amount of talent and money. In addition, Facebook has already talked about launching their own token, which shows their interest in the crypto space.
Twitter & Square - The Jack Dorsey Empire
Correlation to cryptos: Twitter: Low, Square: Medium-High
Potential benefit from cryptos: Twitter: Good-Great, Square: Great
As most of you know, Jack Dorsey, the CEO of both the social media company Twitter and the payments company Square, is a prominent backer of Bitcoin. Dorsey is a hardcore Bitcoin fan, and he believes that the only promising cryptocurrency is BTC.
Twitter is on this list because, in the latest quarterly report, Twitter CEO Jack Dorsey said he believes Bitcoin can be much more than just a currency. He was talking about implementing Bitcoin on Twitter with tip jars and super likes. He spoke of a decentralized social media platform with Bitcoin playing an increasing role in the future of Twitter.
Square is a more hardcore Bitcoin player and a much more "true" crypto investment. Square bought about $230 million in BTC, first in Q4 in 2020 for $50 million and then in Q1 of 2021, after the big dip, for $170 million. Still, their crypto investments aren't their most significant crypto-related income stream.
Square has a cash app that supports Bitcoin peer-to-peer transactions along with the opportunity to invest and automatically dollar-cost-average into Bitcoin. Square's recent earnings release showed that Bitcoin transactions accounted for 80% of their revenue, as reported by CNBC. Square also recently announced they are building a DeFi business using Bitcoin. This would be somewhat of a competitor to Ethereum and could be bullish for both Bitcoin and Square.
Between these two companies, you can see that Square is the company for you if you want more significant exposure to cryptos and if you are bullish on Bitcoin. On the other hand, Twitter could be a front runner in decentralized social media since they have the publicity and fame, which gives them an edge over other decentralized social media platforms that are starting from scratch.
It is hard, though, to evaluate the potential of Twitter since we don't know what Dorsey's true plans are. The big risk with both companies is that they seem to be fully into Bitcoin and do not like, nor accept other cryptocurrencies. Many are arguing that Ethereum will overtake Bitcoin and that Bitcoin isn't suitable to be built on. If that becomes true, then, of course, that would be bad for Square and Twitter.
Visa & Mastercard
Correlation to cryptos: Low
Potential benefit from cryptos: Great
Both of these traditional payment processing companies are well known around the world. They are huge companies with valuations close to half a billion dollars each. The thing that makes them potential benefactors of the crypto boom is, of course, payments.
Already you can find crypto cards from both companies where maybe the most well-known one is the Crypto.com Visa card. Both Visa and Mastercard are putting increasing amounts of time and resources into the crypto space, which can be seen when reading their latest news.
Visa recently announced they would make it possible to pay with cryptos using all Visa cards. This would be huge for crypto adoption and would truly spark the actual use case of cryptocurrencies. Visa also said that in the first half of 2021, more than $1 billion worth of transactions were made through their crypto-related cards. The even more bullish case for both cryptos and Visa is that they also said that digital payments could potentially disrupt the $18 trillion annual consumer spending with cash and checks.
On the other hand, Mastercard announced a partnership with blockchain company R2 to develop cross-border payments, which could lead to enormous growth. Cross-border payment is one of crypto's best features since it takes so little time compared to traditional bank transfers, plus the fees are much lower.
From this bullish news, you can see that cryptos are coming, and those companies who are ready will benefit from it. In my opinion, it looks like right now like Visa is the front-runner of these two payments companies but let's not forget that Mastercard is a brilliant company with no lack of resources to dive deeper into the crypto space. Mastercard's market cap is also over $100 billion smaller than Visa's, which gives them more upside potential if they succeed in adopting cryptos.
Correlation to cryptos: Low-Medium
Potential benefit from cryptos: Great
Another company that stands to benefit from the increasing use of cryptos for payments is the original digital payments network Paypal. Paypal was early on in adopting cryptos and has gained many customers at the expense of not payment companies but rather exchanges. So yes, Paypal has seen an increasing activity of buying cryptos through them, and this will naturally hurt “traditional” crypto exchanges like Coinbase.
The reason I think Paypal might have gained popularity among people wanting to invest in cryptos is safety. I do not mean that Coinbase isn’t safe but rather that for newbies, a well-known traditional company might sound safer than a crypto exchange that only deals with cryptos.
Especially after all these stories when crypto exchanges have been huge scams and the founders have run off with all the money (Africrypt). Paypal is also suitable for those who buy and use cryptos as payments since you can do it all with just one company. Furthermore, you do not have to move your cryptos from wallets to exchanges and back.
Paypal is also a growth company with considerable talent behind its success. As a result, they can truly benefit from both increasing purchasing of cryptos as investments. Also, they can compete on crypto payments market share along with Visa, Mastercard, and Square. If you believe in the growing use of cryptocurrencies as payments, then a good diversification to all of these might not be a bad idea.
Correlation to cryptos: Low
Potential benefit from cryptos: Good-Great
IBM was one of the first big companies to invest heavily in blockchain technology. At the time, all their ideas and innovations sounded like something that could change the world. However, in an article from Coindesk from February 2021, it was said that the IBM blockchain is not even a thing anymore. Many people have been laid off, and only a fraction of the division is left. This was done after the blockchain division repeatedly missed revenue forecasts.
Despite that, I believe that the IBM blockchain transparent supply could have a major impact on our world. For a non-technical expert like me, all that was said in their presentation linked above sounded amazing. The problem now is the increased competition in the blockchain industry. It might be that IBM has just fallen behind others like it has so many times before. On the other hand, IBM also partnered with Stellar to create the stablecoin USD Anchor, which shows that there is some use of IBM technology.
Hopefully, IBM keeps working on their blockchain technology and makes more partnerships with cryptocurrencies. If they do this, then I believe that blockchain could become one of IBM's core income streams.
Correlation to cryptos: High
Potential benefit from cryptos: Great
Riot Blockchain is a mining company, and I do not think it needs too much explaining. We all know that mining is costly and is therefore out of reach for many people. When investing in Riot Blockchain, you are doing mining without running your own mining rigs.
Your earnings from this company will be linked to the performance of Bitcoin mining. The risk with Riot is that they might make bad investments in equipment or companies or do something illegal, which you wouldn’t do if you mined Bitcoin yourself. This could result in a lot of the profits going to solving unnecessary problems.
On the other hand, that same argument for risk is also the great benefit from owning Riot instead of mining at home. It takes a lot of money and effort to start mining, so you can imagine how much it will take if you need to upgrade equipment continually or grow to become a larger miner.
Riot has the resources to complete significant acquisitions by taking some debt- if needed - to scale up their mining operations. I also believe that in the future, when they get their mining setup in order and if, and when Bitcoin prices rise that they can be a solid and good dividend payer. There are also other mining companies like Marathon Patent Group, but Riot is the biggest one.
Correlation to cryptos: Low
Potential benefit from cryptos: Great
Nvidia is a well-known company for many gamers and also those who actively follow stock market news. Nvidia operates in two segments, Graphics and Compute & Networking. The important segment for cryptos is graphics which includes Nvidia's graphic processing units.
Nvidia has one of the most advanced GPUs for PCs and gaming, and these were widely used to mine cryptos in late 2020 (many still use them). However, Nvidia noticed the increased use for mining and made an upgrade which lowered the performance of their gaming GPUs if used for mining.
This might sound bad, and as if Nvidia doesn't support cryptos, but the reason was not that. They had to restrict the use for mining because their core customers, gamers, couldn't get their hands on these GPUs because miners bought them all up.
Then in February of 2021, Nvidia released a new processor made specifically for mining. In the first quarter of 2021, they said that crypto mining had generated $150 million in revenue, as stated in this CNBC article. That seems like a small number compared to their core business which generated $2.76 billion in revenue. Still, such a quick rise of revenue and a $400 million crypto-related revenue forecast for the second quarter shows how much potential there is.
Nvidia could have the potential to become the number one mining equipment manufacturer. They do not lack the technical expertise needed, and their well-established brand makes them the go-to place for a beginner or even a professional. However, as an investment, the problem with Nvidia is its valuation, and you ought to take a look at that before making any decisions. They have a price-to-sales ratio of 25, which is very high and expose them to quite the downside risk, at least in the short term.
Correlation to cryptos: Low
Potential benefit from cryptos: Good
Extreme Networks is an American networking solutions provider. They manufacture wireless and wired networking solutions and offer cloud-based end-to-end solutions. The company lacks any news related directly to the crypto industry, but their core business with networking and cloud makes them a perfect benefactor of digital assets.
Nowadays, paying with cash can be quite odd for many and in some places, they don’t even accept cash. Therefore all stores need a reliable internet connection for their business to operate. This need will further increase when we transit fiat to digital assets like Bitcoin. It can be troublesome to buy with Bitcoin if you can’t enter your Paypal or Square cash app.
Therefore, investing in a well-situated company for an increasing transition to the cloud might not be a bad idea. However, extreme Networks is a relatively small company with a market cap of only $1.2 billion and can therefore be a bit risky. If you want to look for some more prominent and maybe more stable companies, you could turn your head to Scandinavia, where there is Nokia and Ericsson, who compete with Huawei in manufacturing the underlying infrastructure for networks (5G).
As you can see, many companies might benefit from cryptocurrencies and digital assets. It is safe to say that at least some of them will be huge contributors to this transformation. There are also many more companies from different industries that could have been included in this list, for example, Norton Lifelock, a cybersecurity company that now offers you a way to mine cryptos more safely. I also didn't include Coinbase and Microstrategy in this list since I covered them quite in-depth in the earlier parts of this article. However, I would rate them both High (Microstrategy almost equal to BTC) and Great for their correlation and potential, respectively.
The benefit you get to your portfolio from diversifying your crypto holdings into the equity markets might make you sleep better at night. It is worth considering whether you believe we will see something other than blockchains in the future and then look for companies you like and see if they are well positioned - or have already- to transform alongside our digitalised world. If you are only looking to make some gains with trading, then I suggest you take time to learn how to analyse a company's fundamentals and learn how to tell if a company's intrinsic value is higher than its market cap.
Then lastly, I would like to point out that in addition to Coinbase's IPO, other crypto-related companies are looking to go public. The first one that comes to mind is, of course, the UDSC issuer Circle. Circle can be quite risky since we do not know what regulations they are planning on implementing for stablecoins. Still, all in all, it is a good idea to keep your eyes open for new IPOs.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.