Amid the chaos of 2020, it's not just tech stocks that have been a pleasant surprise. The most popular and valuable cryptocurrency on the planet, bitcoin, ended Saturday, Oct. 10, having gained 57% on a year-to-date basis.
There are a number of reasons for bitcoin's ascent in 2020. For example, bitcoin's block rewards -- i.e., the amount of bitcoin awarded to cryptocurrency miners for proving the validity of transactions across its blockchain -- were halved on May 11. Historically, bitcoin has run up substantially prior to a halving event.
Bitcoin has also benefited as a safe-haven investment in the wake of the coronavirus recession. With cash use discouraged due to possible virus transmission, a strong case has been made for digital payments to replace cash.
Also, don't forget that bitcoin acts as the bridge currency that investors often have to purchase if they choose to invest in other less-common cryptocurrencies (those not named Ethereum or Ripple). This creates a steady level of demand and ownership for what's perceived to be a limited token.
Forget bitcoin -- these stocks are smarter buys
But if you ask me, there are much better ways to invest your money than by purchasing bitcoin. The issue with the most popular cryptocurrency is twofold.
First, there's a scarcity-versus-utility problem. Since a substantive percentage of outstanding tokens are held by investors who have no intention of using their coins to make purchases, the utility of bitcoin as a purveyor of digital transactions is quite low. Since programming is all that keeps bitcoin's token limit at 21 million, this could be overridden in the future. Thus, bitcoin either has limited utility or scarcity -- not both.
The other issue I have with bitcoin is that fiat currencies are being tested in conjunction with blockchain. The real value in crypto technology is in the underlying blockchain, not the token itself. Since buying into bitcoin gives folks no ownership of the blockchain, investors are, arguably, buying into the wrong asset.
Instead of buying bitcoin, here are three considerably smarter stocks to buy with your hard-earned money.
Square's longest-running operating segment, and the one most folks are going to be familiar with, is its seller ecosystem. Square has been supplying point-of-sale devices and analytics to small businesses for the past eight years. The seller ecosystem primarily generates revenue from merchant fees, and has seen gross payment volume traversing its network grow by a compound annual rate of 49% between 2012 and 2019.
However, the long-term growth driver for Square is peer-to-peer digital payment platform Cash App. In the 2-1/2 years between the end of 2017 and June 2020, Cash App's monthly active user (MAU) count more than quadrupled to 30 million, with some 7 million MAUs also using Cash Card. Cash Card is a traditional debit-card that links to a users' Cash App balance.
Last week, Square announced that it had purchased 4,709 bitcoin for $50 million, bringing its total assets tied up in in the most popular digital token to approximately 1%. While Cash App does collect merchant fees and expedited transfer fees from its users, it's especially popular for bitcoin exchange and investment. If you want to put your money to work in a company with a bright future and exposure to bitcoin, Square is it.
Another smart way to put your money to work is to buy Singapore-based Sea Limited (NYSE:SE). Sea gives investors access to Southeastern Asia, which remains a largely underbanked region of the world, yet is experiencing a windfall of growth from a burgeoning middle class throughout the region.
To date, Sea's gaming division has been its breadwinner. Mobile hit game Free Fire helped push adjusted revenue in its digital entertainment segment up 62% from the prior-year period in the second quarter. The company also announced that quarterly paying users jumped 91% from the prior-year period. But the dominance of digital entertainment won't be long-lived for Sea Limited -- and that's actually a good thing for investors.
The far more exciting operating segment for the company is its Shopee e-commerce platform. Adjusted revenue rose by more than 187% in the most recent quarter, with gross orders up 150% from the prior-year period and gross merchandise value crossing its network more than doubling to $8 billion. Without question, the pandemic played a role in bolstering online orders throughout Southeastern Asia. But it's not as if Shopee wasn't growing like a weed before the coronavirus pandemic hit.
Additionally, Sea launched SeaMoney in 2014, which today provides mobile wallet services and payment processing for individuals and businesses. In Q2 2020, the number of paying users for its mobile wallet services topped 15 million.
If your heart is set on digital payments, skip bitcoin and enjoy the high-growth and digital exposure you'll get with Sea Limited.
Third and finally, I'd encourage investors to avoid bitcoin and buy into Shopify (NYSE:SHOP). If your thesis surrounding bitcoin is that it could lead to a digital purchasing revolution, cloud-based e-commerce solutions provider Shopify is the company for you.
According to the company, it already possesses the second-highest share (5.9%) of U.S. retail e-commerce in the consumption-dependent United States. While that's more than 31 percentage points behind Amazon, which dominates the online retail space, Shopify has seen gross merchandise volume (GMV) catapult from $7.8 billion in 2015 to $61.1 billion by 2019. For context, Shopify's GMV was over $30 billion just in the coronavirus-challenged second quarter, so it's well on its way to surpassing its GMV from last year.
The beauty of the Shopify platform is that the company is only scratching the surface, in terms of addressable market, yet is already the second-largest online retailer by GMV. Only within the past couple of years have larger businesses begun using its cloud-based e-commerce solutions, which comes atop an estimated $78 billion in total addressable market from small businesses (which have long been the company's primary target).
What's more, this is a subscription-driven business model that's highlighted by robust margins and minimal client churn. During the second quarter, monthly recurring revenue from its core solutions and Shopify Plus accounted for 86% of total sales.
This is a high-growth company that's still in the early innings, and investors would be wise to choose it over an investment in bitcoin.