Investing in cryptocurrencies can be a gut-wrenching endeavor. It's been just over a decade since Bitcoin (BTC -0.42%) made its debut, and thousands of other blockchain, digital token, and coin projects have been launched in the wake of the original crypto's success. Add in ambitious concepts closely tied to crypto like web 3.0, the metaverse, and decentralized finance, and it all sums up to a daunting new tech movement that can be difficult to decipher and invest in.
Not to worry, though. If crypto investing has been unkind to you thus far, or you just aren't sure where to start, a handful of stocks might be up your alley. Three Fool.com contributors think Block (SQ 0.23%), MicroStrategy (MSTR 4.69%), and Interactive Brokers (IBKR 1.79%) are worth a look right now. Here's why.
Betting big on Bitcoin, without directly buying Bitcoin
Nicholas Rossolillo (Block): Investing is all about future cash flows, so buying shares of a company that does something with an asset can be a far better generator of wealth in the long term than simply buying the asset itself. The same goes for crypto, which is why Block (formerly known as Square) is one of my favorite ways to play the blockchain revolution.
In late 2017, Block subsidiary Cash App started testing Bitcoin trading capabilities, and it's been a huge catalyst for new user additions ever since. But this is more than just a crypto trading app. To help facilitate the feature, Block had a little over 8,000 Bitcoins on its own balance sheet at last report -- worth over $390 million as of this writing. So if you own Block stock, you also indirectly have a notable position in Bitcoin as well.
But there's a lot more at work here than a passive play on Bitcoin or consumer interest in trading it. Block's recent name change reflects the company's belief that blockchain technology and cryptos will play an integral role in the future of the digital economy. Two other Bitcoin-focused Block subsidiaries, Spiral and TBD, are working on new everyday uses for the digital currency -- perhaps more digital payments capabilities, lending products, and other digital transactions. CEO Jack Dorsey has even said the company might be considering setting up its own Bitcoin mining operation.
While Block champions this new tech frontier, shareholders get a growing business focused on both small business and consumer digital financial services. Gross profit, which mostly strips away the Bitcoin trading segment, was up 43% year over year to $1.13 billion in Q3 2021. Shares currently trade for just over 18 times trailing-12-month gross profit-to-enterprise value. It's a premium price tag, but not unreasonable for a fast-expanding company with big aspirations for the financial services sector of the global economy. If you want to invest in crypto, I believe Block is a great place to get started.
Higher returns and limited risk -- where do I sign up?
Anders Bylund (MicroStrategy): Let me be clear: MicroStrategy is a bit of a risky bet. This is not the kind of investment you make in order to avoid the volatility of the cryptocurrency market. MicroStrategy is an aggressive play right now, arguably delivering both higher risk and the promise of greater returns than Bitcoin itself.
Here's the deal. MicroStrategy is a business intelligence company that has been providing software and analytics services to businesses since 1989. The company took a sharp turn in the fall of 2020, converting all of its long-term investments and most of its cash into Bitcoin tokens. Since then, MicroStrategy has raised $2.4 billion in new debt and stock offerings in order to buy more Bitcoin. Furthermore, it has generated $110 million of free cash flow since the Bitcoin strategy started. Those cash profits were also invested in more Bitcoin.
The company now holds at least 122,478 Bitcoin tokens on its balance sheet, worth $6.2 billion at Friday's cryptocurrency prices.
At the same time, MicroStrategy's market cap stands at just $6.1 billion. In other words, this stock effectively lets you access MicroStrategy's Bitcoin reserves at a discount to the digital asset's actual market value -- and the company's profitable operations in business intelligence are thrown in for free, too. Meanwhile, the company keeps adding to its Bitcoin stash at every opportunity, which should produce an amplified version of the underlying cryptocurrency's long-term returns.
Market makers are clearly applying some risk-based discounts to the stock price, which makes sense. However, MicroStrategy is well-equipped to handle a couple of years with lower Bitcoin prices. Like I said, the company generates positive cash profits from its actual business.
Importantly, the first of the new debt papers is due for repayment in December 2025, four years from now. The cryptocurrency crash of 2018 lasted less than three years. History doesn't exactly repeat itself but it does echo. MicroStrategy looks ready to tackle anything milder than a complete and permanent meltdown of the cryptocurrency market.
And you can buy into this magnified Bitcoin bet at a 2% discount to simply buying the cryptocurrency directly. Keep those body blows coming -- MicroStrategy looks like a winner with serious staying power.
This "old-school" discount brokerage has the lowest crypto commissions around
Billy Duberstein (Interactive Brokers): Cryptocurrencies have been volatile lately, and while some view them as a potential hedge against inflation, they haven't performed especially well amid fears of inflation and higher interest rates. In reality, cryptocurrencies currently trade like speculative penny stocks -- at least so far.
But you know what stocks would benefit from rising rates, assuming no recession? Lenders that charge floating rate interest. One particularly interesting type of this kind of lender is the discount brokerages, who make a large portion of their revenues from margin loans. Brokerage leader Interactive Brokers not only has the lowest commissions and margin interest rates in the industry, but it also just enabled cryptocurrency trading on its platform a mere two months ago.
On Oct. 18, Interactive Brokers began allowing registered investment advisors to trade cryptocurrencies on its platform alongside stocks and other approved assets. However, only a few of the mainstream cryptocurrencies (Bitcoin, Ethereum, Litecoin, and Bitcoin Cash) are currently available. Interactive Brokers will actually not take possession of the assets themselves, but rather has a partnership with Paxos Trust Company that will be the "real" custodian. Still, the ability to trade these cryptocurrencies directly in current brokerage accounts is a big initial step.
As an established leader known for its top-notch security and rock-bottom costs, Interactive Brokers was just rated "best online brokerage" by Barron's for the fourth year in a row. Its crypto operations aim to keep up that reputation; it's currently offering crypto trading with commissions as low as 0.18%, with a $1.75 minimum per order. That's much cheaper than current investor favorites Coinbase Pro, or SoFi, which would charge about 0.5% and 1.25%, respectively, on a theoretical $1,000 crypto order. And in the announcement, Interactive Brokers touts partner Paxos as an established custodian with "military-grade" security technology.
One of the dangers with red-hot crypto brokerages like Coinbase is that while the crypto market is likely to grow, they may see some pressure on the outsized fees they currently charge. After all, the equity discount brokerages eventually cut commissions to zero (or close to it). Interactive Brokers also allows clients to trade with no commissions, with the knowledge that they may sell your order flow to high-frequency traders, or to trade for its trademark low commissions well below the old industry standard with superior execution.
Unlike cryptos themselves, which are speculative, or these new crypto brokerages, Interactive Brokers' stock trades at a very reasonable 22 times earnings. That's not expensive, especially since this best-in-class brokerage grew its customer accounts by 57% last quarter. Now armed with (partial) crypto trading, Interactive Brokers looks like a solid value heading into a higher-rate environment.