It's been almost two years since cryptocurrencies went mainstream.
Back in the fall of 2017, the price of Bitcoin rose over 500% in three months as investors all suddenly became aware of the apparent future of payments and saw a flurry of headlines like: As Bitcoin Scrapes $10,000, an Investment Boom Like No Other. But those highs were short-lived.
From "peak crypto" most actual cryptocurrencies are worth a fraction of what they were back in early 2018.
But some investors that played the craze without actually buying cryptocurrencies have done quite well. They've bought stocks that have beaten the S&P 500 by 30%, 60%, even 160%!
While crypto ripped through the hype cycle, the core trends pushing it forward are still incredibly strong and they continue to create interesting opportunities for savvy investors.
And so our analysts have been looking for more "backdoor" plays on cryptocurrencies and blockchain that offer big upside and stable core businesses, to boot. In this broadcast from our YouTube channel, they walk through their outlook on cryptocurrencies like Bitcoin and Ethereum, some interesting ways to play the future of payments, and a few cryptocurrencies investors should keep their eye on.
A full transcript will post after the broadcast is over.
Shannon Jones: Hello and welcome to Motley Fool global headquarters here in Alexandria, Virginia. I am Shannon Jones. I'm the director of programming and I'm thrilled to be here today with none other than Foolish analysts Jason Moser and Aaron Bush. Guys, so glad to be in the studio with you!
Aaron Bush: Happy to be here!
Jones: I'm thrilled because this is an exciting topic. We're going to be diving into the best ways to play Bitcoin and cryptocurrency. We've got a lot of ground to cover today so I want to make sure we have time to get it all in. But just to give you a lay of the land, we're going to go over some basics. Then also, we're going to talk about the market, some of the biggest misconceptions when it comes to cryptocurrencies, and then of course give you some investable ideas. And then of course, we're also going to allow you to ask us some questions live here. Be sure to type in your questions into the comments box right below. We'll get to those at the end. Finally, just want to say, we've got a special report offer just for you. It's our free investing starter kit. If you've never invested in stocks before, we have you covered. Matter of fact, we're going to tell you everything you need to know to get started today and give you five stocks to get you off to a great start. Just go to fool.com/start to check that out.
How about we dive right in?
Bush: Let's do it!
Jones: Alright, I want to make sure, because I know we've got some YouTube viewers today who probably are pretty new to this space. They want to know the basics. Aaron, I'll kick it off with you. When we're talking about cryptocurrencies, what exactly is a cryptocurrency?
Bush: I might take a couple of moments to unpack this. It sounds like an easy question, but it really isn't. Crypto is a pretty complex topic. Cryptocurrencies live in the intersection of technology, economics, politics, sociology, lots of different things. Really at the core, cryptocurrencies are blockchains, which is a new type of database or ledger that was invented in 2009. It's a product of a few things. It was a result of progress in peer-to-peer networks, public key cryptography, but also a solution to an old-time computer science problem called the Byzantine generals' problem. Without getting too technical about any of this, the problem that people were trying to solve is that for digital money to be a thing, people have to be able to trust each other. But with code, how do you stop people from spending digital money twice? How can you get a network that fully supports itself on its own without any other intermediary? That was figured out with Bitcoin in 2009.
What this innovation makes possible is, it allows anonymous people from anywhere in the world to financially trust each other through technology. As a result, we've created a new way for people to organize and for people to govern themselves digitally. But instead of governing themselves like a democracy or an autocracy, they're able to do so in a resource-based way and in a merit-based way from around the world.
If you think about the different projects that are out there, it allows us to remake things that would otherwise require a centralized authority, but we can do it in a decentralized way. Thinking about, we're recreating stored value with Bitcoin. We're rethinking and recreating how financial contracts work with something like Ethereum, or how identity networks work with another project called blockstack. Lots of different things. This is very much a technological breakthrough. It's also very much a money breakthrough.
Now that people can work together in new, more decentralized ways, there has to be also a decentralized way to track who owns what, who is contributing what resources to the network at any given time. That is the blockchain. That is what allows digital scarcity to exist. When digital scarcity exists, the default is that the code becomes money. Bitcoin, again, was the first breakthrough cryptocurrency 10 years ago, but since then, that really opened the floodgates. People are realizing that all of these other types of networks are possible. We've seen new types of currencies come out with new unique use cases, most of which will fail, but now that the floodgates are open, the genie can't really be put back into the bottle. At the end of the day, it's an interesting and deep field on many levels.
Jones: So true. We definitely saw toward the latter end of 2017, early 2018, the crypto craze took off. We saw some exploding highs in this space, and then a huge sell-off. But this year, we've actually started to see somewhat of a rally, albeit a little bit slow. But gradually, we started to see a rally. What's really driving this now, as we're trying to make sense of this?
Jason Moser: I wonder if what we're seeing now, because we've seen so much shake out as far as players try to get into the space that probably shouldn't have been in this space -- like you said there are going to be a lot that fail. We've seen a lot that have jumped in and have failed. When I think of cryptocurrency, I don't know about you, but the first thing I think of is Bitcoin. Bitcoin is probably the most stable of the entire system. We've seen a lot of failure. We've seen a lot of ways taken out of the system. Perhaps now we can get back to really being optimistic about what does work in the system. Whether it's Ethereum or Bitcoin, I don't know. Coming from someone who's generally been pretty skeptical on cryptocurrency in general -- I should say, skeptical on investing in it. I'm not skeptical on the technology, why it exists, what it does. But from the investor's perspective, I've said more than once, I'm not interested in investing in it. By that token, it doesn't mean that there won't be opportunities. I could be dead wrong. We've seen a lot of the waste extracted from the system. Now we have players that have, perhaps, a little bit of a better future there. Maybe that's where some of the interest is picking up from. But it's also developed. Technology moves quickly. It's been a long time, technologically speaking, since we've seen that loss of interest. Maybe now the technology's changed, we know a little bit more, and there's more reason to be optimistic.
Bush: Yeah, the hype cycle is real for whatever technology is rolling out at any given time. There's always something intriguing about these big, nebulous tech ideas -- AI, VR, 5G, crypto --
Moser: "I don't know how it works, but let me tell you how big the market opportunity really is."
Bush: Exactly. Crypto was a little bit different in the sense that it is money. Unlike a lot of those other trends, earlier stage, it's publicly traded. People are able to get in on it, and are able to see everybody else get rich. Money being one of the most powerful network effects in the world, especially if you can get in early on a new monetary network, it makes sense why Bitcoin and this whole ecosystem was turbocharged and just grew massively, so fast, to the point of just crazy mania. Mania we haven't seen probably since something like the tech bubble in 2000 and 2001. That also means that it falls really hard, too. That's what we've seen. A lot of the projects that have raised money, a lot of them trick people. There are a lot of scams going on. Regulatory guidelines, what it means in different parts of the world, still a lot of questions.
I think for the most part, it's a good thing that a lot of that noise is over. Now it's just back to the fundamentals, back to building and back to innovating and thinking about what networks can be.
Moser: I wonder if part of this also has to do with the fact that -- we've talked about Facebook Libra and the initiative behind that, and that it's based on a stable coin. Stable coin, essentially being a bit more reliable, you know that it's going to hold a little bit more value. Supposedly, at least. Maybe there is that feeling now with this stable coin that there's a firmer footing, a better foundation on which to build this system.
Bush: I guess. Stable coins are traditionally backed by fiat currency. You're literally just buying a digital version of the dollar. What Facebook and Libra is trying to do, they're really just trying to build a payment platform, a global payment system first and foremost. Having a currency in there helps facilitate certain behaviors. In general, stable coins, I think they have a place. They're valuable as long as currencies remain volatile, and they will for some time. At the end of the day, like any currency, I think stability is an emergent property. The more things become developed, the more use cases emerge, and the more people use it. Because of that, the more stability other projects and other currencies will have. The whole idea of stable coin will be something left in the past.
Moser: David Gardner, way back when he recommended Amazon at first, this notion that someone would dare enter their credit card online and pay for something sight unseen? Nobody's going to do that. Fast forward to today, there's confidence in the system. That's all we do. You can see over time, you get some confidence in the system, some success, some more use cases under your belt, then it slowly grows.
Jones: Jason, you've been pretty vocal about Facebook and Libra.
Moser: Well... [laughs]
Jones: Maybe a little vocal? [laughs]
Moser: It tends to be a bit more of a Facebook thing for me than a Libra thing or a cryptocurrency thing. I tend to feel like they're grasping a little bit to try to figure out how to take that business beyond the advertising model. I'm not sure that the problem that they say they're trying to solve with Libra, bringing more services to the unbanked and the underbanked -- there are a lot of companies out there that are already doing a really good job with that. I don't see what gives Facebook an edge, other than the size of their network. That's what I've been most critical about. I have said on more than one occasion, I do not think Libra will happen. I'll stick by that.
Jones: He's sticking with it. Alright, I do want to talk about a lot that's out there that's just plain wrong about cryptocurrency. What are some of the biggest misconceptions that you've heard that you want to dispel the myth right here, right now?
Moser: What do you think?
Bush: One thing that has always driven me crazy is the whole idea, when people say, "I like blockchain."
Moser: [laughs] I was going to say that. I'm kidding.
Bush: It just doesn't make sense. As I was explaining earlier, the whole idea of a ledger keeping track of who owns what, when, being native to networks on the internet, currencies are just a byproduct of how blockchains were intended to be used. Blockchains maybe have a use case in some enterprises, like certain back-office financial functions, or supply chain functions. But at the end of the day, you have to realize that a blockchain in most use cases is actually a far less efficient technology. It takes what used to be just one centralized database and splits it up into lots of different pieces all over the place. It's useful when you're trying to decentralize something, when you're trying to not have that central authority be in charge. But for companies trying to find a way to use it, I think it makes sense why a lot of the traction there has not been as strong as it could have been. That's just one thing that has driven me crazy.
Jones: [laughs] Fair enough. Jason?
Moser: For me, it's the investors who have wanted to jump in and try to get rich quick. They see this mania, and it's very difficult to try to talk them back from it a little bit and recognize the fact that this is a new space, there's a lot we don't know, there'll be people that will get into it and they'll talk to you like they invented the system. Obviously, no one is really an expert in this field yet, save maybe a few people. I think there is a level of overconfidence when it comes to investing in cryptocurrencies. I'm happy to tell you what I don't know. A lot of people have not yet quite made that leap. There's a lot we don't know, and it does seem there's a lot of overconfidence in the space.
Bush: Yeah, investing in crypto is definitely a lot harder than investing in stocks for many reasons.
One other thing I would add is, I think it's important, when you think about crypto, to look beyond your own world. What I mean by that is, yes, Bitcoin broke the modern government's monopoly on money. That's a really huge deal. That will have ripple effects for centuries to come. But a lot of people probably rightfully, say, "OK, that's cool, but it's not going to replace the dollar. The dollar works just fine." I think it's important to understand that, yes, and that's not exactly the point of what's going on. A lot of people think, just how this narrative has been taken, that the whole point of cryptocurrencies is to just create alternative currencies where the U.S. dollar or whatever other government currency is just useless. Some people believe that. That's fine. Maybe in certain cases, it'll happen. Probably a lot of government currencies actually will get digitized, and will become their own cryptocurrencies. But something like Bitcoin is really much more taking on gold at this point. A lot of the technology just isn't even close to being scalable yet to where it could be used at scale, thousands of transactions at any given moment. And, with the government's monopoly on money being broken -- again, in the U.S., that might not be a big deal, but there are a lot of governments out there that probably don't deserve their monopoly on money. If you think about a lot of autocratic nations that have dictators who have abused the currency and have created hyperinflation... not to say that something like Bitcoin can just suddenly come in and solve all of their problems. It can't. But, ultimately, more competition for money, more innovation around money, is still a sacred cow in a lot of people's minds, but like any market with competition, probably leads to better outcomes over the long run.
Jones: Yeah. Speaking of government, what about taxes? I think that's a huge misconception when it comes to cryptocurrencies. Uncle Sam wants his cut.
Bush: Yeah, Uncle Sam does want his cut. Regulations around crypto is probably one of the most annoying topics to dig into. [laughs] It's just complicated. Every government thinks about it differently. Our own government can't make up its mind on how things work. But yes, as it stands, many cryptocurrencies are treated as securities. And just like any other security, like stocks, if you sell with capital gains, you've got to pay your capital gains taxes. Not fun for many of us, but that's the way it is.
Jones: The way of the world. Alright, I want to talk about some ideas for people that are looking for different ways to play in the crypto space. Let's just start off. Let's face it, the currencies themselves are really fun to watch, but also extremely volatile. Is there one cryptocurrency that's a good one to watch?
Bush: Yeah, Bitcoin. Not to sound boring by saying Bitcoin. Bitcoin is the dominant cryptocurrency. Something like two-thirds of the entire market cap of all cryptocurrencies is Bitcoin's market cap. It's dominant, but it's dominant for a reason. It's the most used. It has the greatest security. So far, it seems to have a use case that people find interesting, like an alternative store of assets to gold. It's one of those things that, either it'll work out, or it won't. I think it's probably pretty binary. If it doesn't, the price right now is $8,000 per Bitcoin. Yeah, it could fall 80%, 90% plus from here. But also, if things do work out as planned, it's a 50-bagger. In my mind, it's the most asymmetric investment out there. There will be other successful cryptocurrencies. But if you have to start with one, start with Bitcoin. It's the most legit by far.
Jones: Gotcha. But there are some safer ways to play in this space as well. Jason, for you, is there a stock in mind that investors can buy when they want to get some cryptocurrency exposure?
Moser: There are a couple that come to mind right now. Aaron and I spoke about this earlier today. The one that probably everybody out there is familiar with is Square because Jack Dorsey believes in Bitcoin's futures. He's facilitated that platform so that you can actually utilize Bitcoin, buy and sell Bitcoin. One that we both like a lot, one that seems like it fits right in this wheelhouse, even though it may not necessarily seem like it initially, is DocuSign. I've talked about DocuSign here before. DocuSign is essentially those electronic signatures. Electronic contracts, when you get something from your landlord, or your mortgage company, or the DMV, and you can sign these contracts without having to actually get a notary or whatever, just digital signatures. When you look at what DocuSign does -- we talked about these smart contracts, Aaron was talking about earlier. That is very much in line with what DocuSign is essentially doing. CEO of DocuSign has also talked about, Dan Springer's talked about the importance of blockchain technology and how they've already incorporated it with the agreements with Ethereum into what they do. It may be one where you don't realize it directly, but there are blockchain technology implications with a company like DocuSign. Certainly, as we move into this digital world, whether it's currency or agreements, DocuSign seems to be a company that's playing a big role in shaping that space.
Bush: They give companies the options to secure their data on the Ethereum blockchain. When I was looking at this a year ago, I thought it was funny because there is a crypto-native competitor -- at least, there used to be -- called Blockusign. That shows, yeah, this actually is a good application for this technology. I think it'll be easier for DocuSign to take its 500,000-plus customers and give them blockchain solutions than some blockchain-native company trying to get their 500,000 customers. I agree.
Jones: So, we've got DocuSign. That's one safer play. For our viewers out there, if you haven't already, if you like what you see, give us a thumbs up just below this video. Aaron, I'm going to kick it over to you. What's a good safer way to play in the space, from your perspective?
Bush: One company I like is CME Group, CME. They are the world's largest futures and options exchange. They're a $75 billion company, pretty big. This is a company where, if you want to bet on anything -- equities, commodities, metals, whatever -- you can do it with CME. The company has also been at the forefront of crypto futures, which hold a lot of use cases for institutions looking to gain exposure to crypto or hedge their exposure to crypto. A few companies have tried this, but CME Group, from what I can tell, is the clear winner in terms of trading volumes by a mile. With the latest market pullback, just pulling back from the highs of the mania, I think the expectations haven't lived exactly up to what was expected. But they still have been pretty good and market-leading. I expect them to launch more crypto futures products and different currencies and such going forward.
Crypto aside, this is a remarkable business. They make money from transactions. They don't really have to pay much for those transactions. Every dollar in revenue that comes in, they make over $0.50 in free cash flow. It really is very much almost a tollbooth style business model. Then, they're able to use that cash to buy other companies to strengthen their market position, buyback shares, pay a dividend. This isn't as much of a major growth stock as DocuSign. It's much more of a stalwart play, more of a dividend play. But I like it. It's a great business.
Moser: Put them together. That's a nice little risk profile.
Jones: There you go. Alright, I want to make sure we dive into some questions. If you haven't, you can submit a question right now in the comments box just below. We've gotten several already. Thank you so much for engaging! I'm going to go with Chuck. Chuck asked, "Are cryptocurrency something that are better to trade short-term? It seems like there are profits to be had, but then it all vanishes days, weeks, even months after." So true, Chuck.
Bush: I don't think so. It's interesting, I actually would have maybe said yes -- this is very counter to what The Fool says -- in the earliest days of crypto, even a couple of years ago, when markets across the world were popping up. There were major price discrepancies between the different exchanges that were out there. There were crypto hedge funds making good money just looking for those discrepancies. But naturally, as the market matures, those discrepancies go away. That's where we are now. I cannot think of any reasonable way where people can have a good, long-term, sustainable advantage through trading. You have to think about, what is the big idea here? What is the upside? What's the risk? And hold it for the long run.
Jones: Several people asking this question. We've talked about scams a little bit. How can you spot a scam and tell it apart from a legitimate idea?
Moser: I'd be looking for, No. 1, the actual amount of liquidity or money in whatever currency is being lobbed up there. It does seem like you can look at some of the names and think, "That doesn't make any sense." We were talking earlier about pot coin. That was one of those things that seemed like, maybe you ought to give that a little bit more due diligence before considering it. Sometimes, it is as it seems. It's such a new space, it's hard to really have track records to go by. But that, I think, is what makes Bitcoin look a lot nicer today. We have a real track record to go with it here, and a lot of buy-in from a lot of important parties around the globe. I hope that at least helps. What do you think?
Bush: I think that's good. I think, when in doubt, just ask you this one question: does it work? If it doesn't work, it could be legit and they're still working on it, but there's more risk anyways. But if it does work, probably not a scam.
Jones: Fair enough. Another question. This is a good one. "Should we fear government central bank intervention or regulation?" This is coming from Sandeep. Thank you, Sandeep! He says it seems like something they could want to have a hand on at some point in time.
Moser: I imagine they will want to have a hand on it at some point in time. From that perspective, if you're looking at this as an investment because it will supersede any government intervention, I would probably push back on that.
Bush: Yeah, I think this is the No. 1 largest hurdle for all of crypto for the next many years. If you look at our own U.S. government, I think we can start to see that although there are people that are asking hard questions and are saying, "Hey, this will undermine the U.S. dollar," more or less people are accepting that Bitcoin is here, it's here to stay. Nothing you can really do about it because it's decentralized around the globe. You can't really shut it down. But other countries -- like China, even India's had some more pressing regulatory scrutiny -- yeah, I think it is more up in the air. Even if they can't shut down Bitcoin, they can stop merchants from using it, they can cut off a lot of use cases. I think it is a good question.
Also, not every government has to agree on for it to be successful. It's a big world. Even if it's just viable in the U.S. and several other countries, but not available somewhere like China, it could still be a very interesting technology and investment idea.
Moser: It's not about replacing what we're doing today. It's more about just trying to make it better. There are a lot of examples where technology isn't about replacing something as much as just trying to make a given system better. It feels like that's what this is. It's just working its way to that point.
Bush: I think if you play things out over the long run, definitely it's a threat to nation states, but not yet.
Jones: Not yet. Alright. A lot to watch there. Another question. "Can you give me a few examples of how blockchain will be used by companies?"
Bush: DocuSign was one example. Using e-signatures. That's something. If you want to make sure that something is kept sound, untouched, undisturbed, put it on the Ethereum blockchain, good to go. I think that can apply to other pieces of data beyond just signatures. Companies wanting to store medical records and other sensitive pieces of data that they don't want tampered with, putting it on a blockchain is almost like another security measure.
Moser: Real estate transactions, probably. You think about the inefficiencies in that system. If you've ever had to close on a house sale or purchase, there's a lot involved there. It always struck me as a great opportunity to try to wring out some efficiencies.
Jones: Yeah. Even universities. Some universities are testing it out with like transcripts, being able to verify that this is a legit transcript when you're sending it out to employers or whoever. There are a lot.
Bush: Yeah, there are several use cases. It's hard to get them to work efficiently. But where it does work, it can save some money.
Jones: Next question. "Does it make sense to use any cryptocurrencies as currencies? When does that happen? When should it happen?"
Bush: I don't think we're there yet. I think people have tried, it's just not efficient. If you look at something like Bitcoin, there is development on what people call level two. The Lightning Network is the No. 1 level two player at this point. That essentially means that you can open up these payment channels, these new payment rails, and then transact with far less expense, far more efficiently. People are working on solutions to make it possible. I expect this will get us closer to that reality. But it's still a ways out.
Jones: We've got a lot of chatter about Ripple right now in the chat box. Do you guys have a specific outlook on Ripple right now? That's XRP.
Bush: Kind of. I think the underlying technology of Ripple is legit, helping banks better move money around the world between other banks. I think there are efficiencies to unlock. I think the biggest question for Ripple is whether or not the token XRP is really needed in a lot of those transactions. I think that is something it hasn't been proven yet. And even though the price is down quite a bit, there's still a lot of speculation built into the price. I have very big questions about XRP. The company itself, though, is more legit.
Jones: Alright, one last question. RK asks, "There are a lot of headlines around cryptos being used for illicit activities. How does that factor into the thesis?"
Bush: Some of that is true, a lot of it isn't. The No. 1 used currency for illicit activity is U.S. dollars. In fact, something like Bitcoin is the most transparent currency out there. It literally is a ledger of who owns what, when, who transacted when. There are some more privacy-centric coins that attempt to block out who was trading, how much was trading, when there were trades. Some of those have been getting banned more by governments. That is something to be thinking about. But the volumes on that are pretty low. It's still U.S. dollars and fiat currency that are the main problem there.
Jones: Gotcha! Alright, that will do it for us here at Motley Fool global headquarters! I want to thank you, our YouTube audience, for tuning in. If you haven't already, be sure to get that free investing starter kit. Just go to fool.com/start to get that. Also, be sure to subscribe to this YouTube channel. We have a ton of content designed to make you smarter, richer, and happier. Also, give us a thumbs up if you like what you're seeing here.
As for Aaron Bush, Jason Moser and myself, and everybody here at The Motley Fool, thanks so much for tuning in and Fool on!