Cryptocurrencies are exciting. They're also extremely volatile, and there's a good possibility you could lose your entire investment if you buy bitcoin, Ethereum, Ripple, or any other cryptocurrency. In short, buying cryptocurrencies is a form of speculation, not investing.
Instead, consider investing in companies that could potentially benefit from the surging cryptocurrency market but will also do just fine if cryptocurrencies start to fizzle out. Here's why our contributors think Square (NYSE:SQ), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), and Seagate Technology (NASDAQ:STX) are smarter ways to go.
The right way to invest in cryptocurrencies
Matt Frankel (Square): The best way that investors -- not speculators -- can get a piece of the growth in the cryptocurrency market isn't to buy bitcoin, Ethereum, or any other cryptocurrencies. It's also not a good idea to invest in a company that adds "blockchain" to its name, or to put your money into an initial coin offering.
Instead, the smartest way to play the cryptocurrency trend is to invest in a company with a thriving, growing business that could also benefit if cryptocurrencies start to become more mainstream. Payment-processing company Square is my favorite example.
Companies are adopting Square's small-business payment solutions all over the U.S. and the other four countries Square currently operates in. Over the past year alone, the gross payment volume processed through Square's platform grew by 31%. And since two-thirds of businesses around the world still don't accept card payments, there's tremendous opportunity for growth. Square Capital, the company's business loan service; Caviar, its food delivery platform; and the Square Cash payments app are all growing strongly as well, just to name a few of the company's businesses.
In November, Square announced that it was testing support for bitcoin buying and selling through its Square Cash app. While this is a small-scale test at this point, it could prove to be a serious revenue driver for Square if it's successful -- especially if it means that Square's payment-processing platform eventually accepts bitcoin (and maybe even other cryptocurrency) payments.
A royalty on internet traffic
Jordan Wathen (Alphabet): It's hard to imagine a world where internet search becomes less important, and less profitable, in the future than it is today. Alphabet's best and most valuable asset is its search engine, Google, and display advertising properties such as YouTube should grow revenue and profit at a double-digit clip for a long time to come.
The core search and advertising business has meaningful growth drivers in the form of click growth, rising prices in emerging markets, and improved monetization within particularly valuable corners of e-commerce, including travel, where Google is already soaking up billions of dollars in annual advertising revenue.
The biggest risk to Alphabet is the rise of advertising blockers, in my view. Google will soon implement a native ad blocker in its browser, Chrome, which I see as a smart defensive move. This update will go live on Feb. 15, and will block ads that fail to meet standards for usability.
I don't know what to make of Alphabet's interesting, though money-losing, "other bets" -- long-shot investments that could become the next star like YouTube, or the next flop like Google Reader. But I think these could continue to be perpetual money losers even as Alphabet still generates market-beating returns. Though it's far from optically cheap -- shares trade at about 35 times trailing earnings after backing out its excess cash -- a long runway for growth makes its multiple more digestible for investors who take the long view.
Save this idea for your portfolio
Dan Caplinger (Seagate Technology): The primary problem I have with investing in cryptocurrency is that I have no confidence in the intrinsic value of the tokens themselves. What I'd like to own are companies that are profiting from the rise in cryptocurrencies, but most of them aren't publicly traded. Seagate, however, has a link to the cryptocurrency world that makes it an intriguing play on the trend.
Seagate was one of the initial investors in the company now known as Ripple Labs, which has created 100 billion tokens of what it calls ripple. Even though the cryptocurrency has fallen dramatically from its highs, ripple still sold for more than $1 as of Jan. 30. It's uncertain what stake Seagate has in ripple or Ripple Labs, but the position ties its fortunes to those of cryptocurrencies to some extent.
Meanwhile, Seagate also has its core data storage business to drive performance. Even though traditional hard disk drives are arguably on their way out, the need for high-volume data center storage has helped Seagate make maximum use of its full range of technology. More advanced solid-state drives help provide greater speed when necessary, and Seagate is aiming squarely at that market as well. In all, Seagate is a diversified play on several promising tech trends.