When the dust finally settles and the calendar changes over to 2018, investors are likely to look back on 2017 as the year of the cryptocurrency. Having begun the year with a $17.65 billion aggregate valuation, the market cap of all cryptocurrencies combined reached $199.37 billion as of Nov. 4. That's a year-to-date return of 1,030%. To put this in some context, it's taken the broad-based S&P 500 decades to return more than 1,000%, but the average digital currency has done so in roughly 10 months.
Leading the way, even though it's "underperformed" its digital peers this year, is bitcoin. After beginning the year below $1,000 per coin, bitcoin recently surged as high as $7,500, marking a gain through the first 10 months and four days of roughly 675%. Its current market cap of $122 billion comprises more than 60% of the aggregate market cap of the nearly 1,200 virtual currencies, and it's left investors wondering if bitcoin stocks could be the next hottest thing.
Three reasons bitcoin has been unstoppable in 2017
Pushing bitcoin higher has been a mix of fundamental, emotional, and news-driven events. Fundamentally, investors are excited about the potential for blockchain, the underlying technology of many cryptocurrencies, including bitcoin. This digital and decentralized ledger records transactions without the need for a financial intermediary like a bank, and it's expected to be a major step forward in security for the financial services industry.
Emotionally, bitcoin has appealed to retail investors who don't want to miss the boat. These once-in-a-lifetime gains have attracted investors, big and small, but it's mostly kept institutional investors relegated to the sidelines because of the unregulated nature of the currency.
More recently, news has been the biggest price driver. An upgrade to bitcoin's blockchain during this past summer is expected to attract enterprise customers, while news released last week that the CME Group will be listing bitcoin futures for trading by the end of the year sent its price blasting higher. The entrance of institutional investors through futures trading should help calm bitcoin's wild volatility, and perhaps improve liquidity.
Are there any bitcoin stocks to consider buying?
The big question for many investors is how they can take advantage of bitcoin without having to actually buy bitcoin. After all, until those future contracts are up and running on CME Group's exchange, buying and selling bitcoin can only be done on decentralized exchanges, which often have wild volatility and potentially limited liquidity. The following stocks offer some degree of correlation to bitcoin, but not all are worthy of consideration.
Bitcoin Investment Trust
In theory, the most direct correlation to bitcoin should be found with the Bitcoin Investment Trust (GBTC -4.42%), run by Grayscale. This is a relatively passive fund that owns bitcoin and gives investors a potentially more liquid approach to investing in the virtual currency through their broker.
As of the end of October 2017, the Bitcoin Investment Trust held 172,144 coins, which at $7,390 would be worth $1.27 billion. However, the trust ended Nov. 3 with a market cap of $1.62 billion, representing a 28% premium to the current price. There's really no explanation for this premium, other than improved liquidity over decentralized exchanges, but that doesn't really merit a premium of this magnitude. Tack on a steep 2% annual management fee for a Trust that has virtually no active management, and this has all the hallmarks of a dangerous investment.
Perhaps no publicly traded company has gone all-in with virtual currencies more than online retailer Overstock.com (OSTK -0.19%). In addition to being the only major retailer to accept bitcoin, Ethereum, bitcoin cash, Litecoin, Monero, and Dash, it's also on the cusp of what could be a $500 million initial coin offering through subsidiary tZero (t0). The build-out of the Medici t0 blockchain is incredibly exciting because it's designed to be a blockchain-based securities lending system that goes head-to-head with Wall Street at a more efficient and cheaper rate.
But is Overstock worth considering as a bitcoin stock? Honestly, the company has struggled to deliver consistent growth, and as of now its virtual currency blockchain operations are costing it money rather than helping. That isn't to say things won't change, but Overstock.com comes with a lot of inherent risks to investors.
Another "bitcoin stock" is video graphics giant NVIDIA (NVDA -3.04%). Though the company is well known for its high-powered graphics cards for the gaming industry, it turns out that these graphic cards come in particularly handy when mining cryptocurrencies. Unfortunately for investors, NVIDIA doesn't break out what percentage of revenue is derived from virtual currency mining, which leaves Wall Street guessing. Nonetheless, record high after record high for bitcoin and its peers are bound to continue attracting new miners, which could be a good thing for NVIDIA.
But the real investment thesis with NVIDIA revolves around the cloud and data centers. With enterprises moving into the digital realm, the demand for data is only expected to increase, which should provide NVIDIA with a double-digit percentage annual growth opportunity. NVIDIA isn't a cheap stock by any means, but it appears to be on considerably more solid ground than Overstock or the Bitcoin Investment Trust.
Advanced Micro Devices
The same could be said for Advanced Micro Devices (AMD -5.15%), or AMD as it's more commonly known. Traditionally known as a chipmaker and the biggest rival to Intel in the personal-computing market, AMD has switched gears in recent years and focused its efforts on the expanding graphics card arena. Like NVIDIA above, AMD has benefited from a surge in sales to virtual currency miners with cryptocurrencies hitting all-time highs. While neither AMD nor NVIDIA specifically benefit in a big way from bitcoin mining anymore, with a more specialized chipset known as ASIC handling mining of the most popular digital currency, other currencies like Monero, LiteCoin, and Ethereum are still popular mining destinations for AMD graphic-card users.
But is AMD really a bitcoin stock to considering buying? Maybe not, considering that its legacy PC business is struggling mightily. It would probably also be difficult to keep up its recent rapid growth derived from virtual currency mining.
First Bitcoin Capital Corp.
In terms of the worst bitcoin stock, I give you the over-the-counter-traded First Bitcoin Capital Corp. (BITCF). This company describes itself as a developer of virtual currencies, blockchain technology, and cryptocurrency exchanges, but it's generally produced nothing but losses since its inception. Having only recently become a digital currency-focused company, First Bitcoin Capital previously owned mineral rights in Venezuela. In other words, it made quite the logistical jump back in 2014 from a gold-focused company to a completely new mode of business.
Recently, the company faced a two-week trading halt initiated by the Securities and Exchange Commission, and it had the first-ever cryptocurrency dividend put on hold because of the somehow unforeseen complications of issuing a virtual currency as a dividend. Though it has bitcoin in the name, this company is no way emblematic of the gains bitcoin has seen in 2017. Stay far away.
In other words, there really aren't any bitcoin stocks worth buying as an alternative for investing in bitcoin. NVIDIA appears to be the strongest of the bunch, but its strength lies with expectations for cloud and data-center growth, not cryptocurrency mining or anything having to do with bitcoin. Since my opinion is that bitcoin is looking more like a bubble by the day, I'd suggest investors keep their distance.