There are a lot of hot investments right now, including electric vehicles, renewable energy, and anything having to do with the cloud. One investment arguably dwarfs them all in popularity: bitcoin.
Bitcoin has nearly tripled over the trailing three months, has more than quadrupled over the trailing year, and is up close to 7,200% over the past five years. Unless you were lucky enough to latch onto a low-volume, undiscovered small-cap company in early 2016, you probably don't have a stock that's outperformed bitcoin.
The world's largest cryptocurrency is a dangerous investment
But in spite of its gains, I also view bitcoin as an inherently dangerous investment. That's because it suffers from the fatal flaw of scarcity vs. utility.
Bullish bitcoin backers view the 21 million token cap on bitcoin as the driving force behind this rally. Having a limited number of mineable tokens means bitcoin will avoid the deflationary aspect that plagues fiat currencies, like the U.S. dollar. The belief is that as the U.S. (and global) money supply grows, the value of each bitcoin will soar.
Optimists also tout the utility of bitcoin. Divisible down to eight decimal places, getting in on the bitcoin craze can be done with just a few dollars. Further, more businesses than ever accept bitcoin as a form of payment.
The issue is that bitcoin's value appears to be dependent on scarcity and utility -- yet its design makes it such that only one is possible. If it's viewed as scarce, then there will never be enough tokens in circulation to make it a reliable medium of exchange (i.e., minimal utility). Meanwhile, if the goal is to make bitcoin a replacement for cash, then it won't be scarce, because its token limit will need to be raised.
What's more, a valid argument could be made that bitcoin provides nothing more than the false perception of scarcity. Rather than being constrained by anything physical, the only thing stopping bitcoin's token limit from being raised is community consensus. Personally, I trust physical scarcity more than what are effectively pinky promises not to raise the token limit.
There's a better way to get rich off of bitcoin
You can still get rich off of bitcoin without actually owning it. The smart way to do so would be to buy ancillary businesses that directly benefit from the bitcoin craze, no matter how well or poorly bitcoin actually does. Here are three ways bitcoin can make you rich without the nauseating volatility.
Trading fuels the boom
While buying a stake in online brokerages or even shares of the CBOE Global Markets would give investors exposure to bitcoin futures trading, the no-brainer way to take advantage of increased trading is through digital payment companies like PayPal (NASDAQ:PYPL) and Square (NYSE:SQ).
In October, PayPal announced that it would allow its users to buy, hold, and sell cryptocurrency directly through its PayPal app. This means the company's 361 million active accounts can purchase crypto tokens and use them to make purchases with the platforms' 26 million merchants. This same functionality will be brought to Venmo in 2021.
Meanwhile, Square's Cash App has seen its monthly active user count more than quadruple to 30 million between the end of 2017 and mid-2020. Though Cash App has seen greater adoption for everyday purchases and bank transfers, investing and bitcoin exchange are predominantly sending Square's revenue through the roof. In fact, to support Square's role as a bitcoin exchange intermediary, the company acquired $50 million worth of bitcoin in October. This works out to about 1% of the company's assets.
Instead of buying bitcoin, purchase PayPal or Square and profit from the peer-to-peer digital payment and trading revolution.
Graphics processing units powering bitcoin miners
Another smart way to make bank on bitcoin without exposing yourself to its immeasurable risk is to buy into companies that manufacture graphics processing units (GPU).
Cryptocurrency miners are responsible for validating transactions that have been executed over a blockchain network. By "validating," I mean ensuring that a transaction is accurate and true. For bitcoin, cryptocurrency miners use high-powered computers to solve mathematical equations that correlate to a block (a group of transactions). If a person or business entity is the first to solve and verify a block of transactions, they're given a block reward, which, as of today, amounts to 6.25 bitcoin tokens (about $216,000). High-powered GPUs make all this happen.
At the center of this GPU madness is graphics card powerhouse NVIDIA (NASDAQ:NVDA). Make no mistake about it: NVIDIA generates the bulk of its sales from the gaming industry and data centers. However, RBC Capital Markets analyst Mitch Steves notes that at least $175 million of NVIDIA's $2.27 billion in gaming revenue during the third quarter came from selling GPUs to crypto miners. Keep in mind that bitcoin isn't the only cryptocurrency that validates via the proof-of-work model.
With bitcoin recently ascending to the heavens, NVIDIA might be able to generate more than 4% of its total sales from crypto mining going forward.
Bitcoin rewards can pay off
Finally, consider putting some money to work in businesses that dangle bitcoin as a reward, like payment facilitator Visa (NYSE:V).
In early December, Visa announced that it had partnered with fintech company BlockFi to introduce a bitcoin rewards credit card. It will debut during the upcoming spring. As with cash-back rewards cards, consumers will earn 1.5% cash back on their purchases. But rather than these rewards being paid in miles or fiat currency, they'll immediately be converted into bitcoin tokens that the cardholder can withdraw, trade, or use as collateral for a crypto-backed loan.
As some of you may already know, Visa is a juggernaut in the cashless payments space. It handles more than half of all credit card network purchase volume in the U.S. (the largest economy in the world), and its avoidance of lending ensures it never has to worry about setting aside cash for credit delinquencies. It didn't need to introduce a bitcoin rewards card, but this act will give it an even greater presence in the cashless payments space.
In short, ancillary cryptocurrency stocks, not bitcoin, are the smart way to play this euphoria.