In recent months, Bitcoin (BTC -3.34%) and GameStop (GME 7.58%) have both been hot topics in the investing world. That's not surprising, considering both have generated incredible returns in a very short period of time: In the last 12 months, Bitcoin's value is up 700% and shares of GameStop have surged over 5,000%.
Even so, I wouldn't buy GameStop stock with free money. Bitcoin, on the other hand, looks a better long-term investment. Here's why Bitcoin is the better buy between these two entities.
Bitcoin: The largest cryptocurrency
Bitcoin is by no means a safe investment -- cryptocurrency, in general, is highly volatile, and Bitcoin's value has been cut in half multiple times in the last decade. However, it has a few qualities that could make it more valuable over time.
Image source: Getty Images.
First, Bitcoin benefits from scarcity. Each time a miner processes a block of Bitcoin transactions, they receive a reward. Currently, the reward is 6.25 Bitcoin. However, that number is cut in half every 210,000 blocks, meaning that the reward will eventually be zero. That creates a finite supply -- only 21 million tokens will ever exist, and the last one is expected to be mined in the year 2140.
To understand why that matters, let's consider another finite asset. Gold has value because it is scarce -- there is only so much gold on the planet, so people are willing to pay high prices to own it. Bitcoin benefits from the same economic principles. In fact, Bitcoin is often referred to as digital gold.
Second, Bitcoin is the largest cryptocurrency, with a market cap of over $1.1 trillion. By comparison, Ethereum is the second largest, with a market cap of nearly $250 billion. Additionally, Bitcoin is the most popular cryptocurrency in terms of the number of active addresses, with roughly 1.2 million. Again, Ethereum ranks second, with nearly 510,000.
That popularity gives Bitcoin an advantage. As more merchants and payment processors support crypto transactions, they are likely to adopt the most popular token(s) first. In other words, Bitcoin will almost certainly be at the top of every list. That means Bitcoin will become mainstream more quickly, which should create a network effect that drives its popularity even higher.
GameStop: On the wrong side of history
Last year, software sales represented 39% of GameStop's revenue, while hardware and collectibles accounted for 50% and 11%, respectively. That's a big problem. To understand why, let's go back in time.
In 1999, salesforce.com pioneered the software-as-a-service (SaaS) industry, choosing cloud-based delivery over physical discs. Today, SaaS has become mainstream due the efficiency and scalability for publishers, and the convenience for consumers.
Similarly, after peaking in 2005, DVD sales have steadily declined, replaced by digital purchases and digital rentals. In this case, the benefits of cloud-based delivery have led to the rise of streaming services like Netflix. Do you see a pattern?
In 2010, 71% of video games were sold as physical discs, but that number dropped to 17% by 2018, according to the Entertainment Software Association. Again, the rise of cloud-based streaming services -- think Microsoft's Xbox Game Pass, Alphabet's Google Stadia, and NVIDIA GeForce Now -- has powered this trend.
To be fair, some of GameStop's software revenue comes from digital downloads. But the shift toward digital delivery is still bad news for the company. Enterprises like Microsoft and Alphabet have a significant advantage in terms of infrastructure and capital, meaning they are much better positioned to act as distribution platforms.
Not surprisingly, GameStop's financial performance has deteriorated in recent years.
|
Metric |
2017 |
2020 |
Change |
|---|---|---|---|
|
Revenue |
$8.5 billion |
$5.1 billion |
(16%) |
|
Free Cash Flow |
$322 million |
$63.7 million |
(42%) |
Source: GameStop SEC Filings.
It's worth mentioning that the company's revenue and free cash flow were already trending downward before the pandemic in 2020, but that certainly made things worse. Regardless, there may be more trouble on the horizon.
Some industry analysts have questioned whether gaming consoles are necessary. After all, mobile gaming is the largest and fastest-growing segment of the market, according to NPD Group. Moreover, the rise of streaming services means consumers can enjoy high-quality gameplay on regular PCs. As that trend continues to gain traction, it could cut deeper into this retailer's top line.
