Q: Is it safer to buy stocks that could profit from bitcoin rather than buying bitcoin itself?
I consider bitcoin and other digital currencies to be highly speculative investments, and people shouldn't buy them with any money they can't afford to lose.
Stocks of companies that could profit by the surge in digital currencies can be a smart idea, but there are two categories of these "bitcoin stocks" that you need to be aware of.
First, there are companies who could use bitcoin to add to an existing, successful business model. Square (SQ 0.69%) is an excellent example. The company is building a small-business financial ecosystem, and its personal finance solutions, like its Square Cash app, are rapidly gaining popularity. Recently, the company announced that it planned to test out bitcoin buying and selling through the app. In other words, bitcoin adoption could certainly add to the company, but it isn't close to being Square's only focus.
On the other hand, some bitcoin-focused stocks are looking like even more of a euphoric bubble than the digital currency itself. For example, Riot Blockchain (RIOT 0.81%) was a struggling biotech company just three months ago. Then it decided to refocus -- and rename -- itself and invest in cryptocurrency assets.
It has become a purely speculative play on bitcoin, with no real revenue-generating business, and its share price has increased more than sixfold in the past two months. In fact, an analyst from Citron Research recently said that the company has a sum-of-the-parts valuation of less than one-quarter of the current stock price.
Investing in bitcoin through the stock market can be a smart way to play the surge in cryptocurrencies. However, stick to real businesses that are not completely reliant on cryptocurrencies for survival. After all, if you're going to take a gamble, you're probably better off just owning the cryptocurrencies themselves.