Cryptocurrencies are booming as we turn the calendar over into 2021. Three of the four largest cryptocurrency tokens posted massive gains last year, driving the industry's total market value to $860 billion on January 4, according to data from Coinmarketcap.com. The once-reviled asset class is gaining respect and interest from governments and financial giants around the world.
If you haven't added a handful of leading cryptocurrency names to your portfolio yet, this would be a great time to dip your toes into the waters of crypto tokens such as bitcoin and Ethereum. At the very least, you should absolutely become familiar with the cryptocurrency market. And you can do it all without buying any of the tokens.
Let me show you a couple of different paths you can take toward entering the cryptocurrency market, with just a quick stop on Wall Street. How spicy do you want your crypto investments?
Some tickers with close ties to the cryptocurrency industry left the actual crypto tokens in the dust last year. Next to the incredible gains in Bit Digital (BTBT -5.00%), Riot Blockchain (RIOT -6.84%), and Marathon Patent Group, bitcoin's 308% return looks like a forgettable rounding error:
These companies are direct bets on the machinery behind the scenes.
- Bit Digital started a global bitcoin mining network in early 2020, adding thousands of specialized mining computers throughout the year.
- Riot Blockchain started buying bitcoin and Ethereum miners in 2017 with a geographical focus on mining facilities across North America.
- Marathon Patent Group used to manage intellectual property assets with the intention to reach licensing deals or to enforce its patent claims in the courtroom. That business model turned out to be unprofitable in the long run, so the company acquired a smaller cryptocurrency mining company in 2017. These days, the company runs two bitcoin mining centers in Montana and North Dakota.
These companies may be able to outgrow the bitcoin and Ethereum tokens by adding more mining capacity and optimizing their networks along the way. The potential for long-term growth here is absolutely stupendous, assuming that the companies play their cards right.
That being said, mining specialists also magnify the potential risks for investors. The market caps of these three stocks have passed the $500 million mark and Riot Blockchain sits a stone's throw away from the billion-dollar mark. They are not yet profitable and their annual top-line revenues range from Marathon's $2 million to $13 million for Bit Digital.
There is room for fabulous growth here, assuming that cryptocurrency prices continue to rise. The stocks are also valued for absolute perfection. Another sharp correction in bitcoin and Litecoin prices could be catastrophic for these companies. Rising energy prices would also hamper their climb toward positive bottom-line profits, and each company's strategic decisions along the way could hamper or help them in the long run.
So this bucket of cryptocurrency miners is not for the faint of heart. If you're reaching for any of these tickers today, make sure that you can accept a total loss in case things don't work out. A small investment in these speculative tickers makes more sense.
Medium: Ordinary companies with large bitcoin investments
A small number of publicly traded companies have decided to reinvest some or all of their cash reserves in bitcoin tokens. The largest and most vocal member of this group is business intelligence company MicroStrategy (MSTR -6.90%), according to Bitcoin Treasuries. MicroStrategy's entire cash reserves has been converted into bitcoin. The company held 70,470 bitcoin tokens as of December 21, purchased for a total price of $1.13 billion and valued at $2.17 billion today.
"The Company continues to believe bitcoin will provide the opportunity for better returns and preserve the value of our capital over time compared to holding cash," said MicroStrategy CFO Phong Le in a recent press release.
Digital payments expert Square (SQ 6.13%) invested $50 million in bitcoin tokens in October. "We believe cryptocurrencies are an instrument of economic empowerment and aligns with the company's purpose," Square said in its third-quarter earnings report. That investment has nearly tripled to $144 million.
It's a small portion of Square's total cash equivalents, which stood at $2.9 billion at the end of September. The company may very well boost its bitcoin investment over time, based on management's assessment of the risk/reward situation. At the same time, bitcoin transactions in Square's Cash App payment system accounted for 54% of Square's total revenues in the third quarter. This company treats bitcoin as a promising vehicle for value storage, and as an efficient tool for managing e-commerce transactions.
Square and MicroStrategy are safer bets on the cryptocurrency market than the miners above, and arguably safer than simply buying bitcoin. Both companies have substantial business assets and operations with no direct ties to the crypto market, which could come in handy if bitcoin prices come back down again.
Mild: Forward-looking financial giants
You will actually find good cryptocurrency investments in every corner of the traditional finance market. Every bank, payment processor, and fintech company worth its salt is weighing its cryptocurrency strategy right now, and many of them have already taken action.
Credit card giant MasterCard (MA 0.85%) filed for dozens of blockchain and cryptocurrency patents in recent years. Keep an eye out for these management comments, because they will help you separate the innovators from the imitators.
"We are the leading payment player when it comes to patents around crypto," MasterCard president Michael Miebach said in the company's third-quarter earnings call. "Once you have a central bank digital currency, it's going to make a difference to the consumers. And so how do you actually spend it? So the link into an acceptance network is critical. So we hold some patents in that space that link these transactions right back into our network where it can be used. And this is how we can bring value, and it brings value to us."
MasterCard is an established titan of financial services with a massive market cap and a global business reach, and it's hard to find a lower-risk investment than that. And the company is putting in the work to make the most of the exploding cryptocurrency market, rather than resting on its laurels while other companies pass it by in the fast lane.
It's time to take action
In early November, fellow Fool Dan Caplinger said that bitcoin's defining moment was at hand -- a make-or-break tipping point that would clarify whether the cryptocurrency is headed for great gains or a terrible crash. Bitcoin prices have doubled since then. My crystal ball is in for repairs but the crypto market does look healthy.
The stocks above can help you get started with cryptocurrency investments, even if you're not yet ready to trade the cryptocurrency tokens themselves. Pick your level of risk tolerance, make your New Year's resolution, and get ready to make some money in crypto stocks.