The cryptocurrency market has been crashing after its massive run-up last year. Similar to the stock market, investor sentiment changed, and investors started to prefer stable, reliable companies over speculative investments.
Crypto is arguably the most speculative investment you could make right now, so all cryptocurrencies got crushed. Even the most notable coins like Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH) are down over 50% year-to-date.
Now, MercadoLibre (MELI -1.26%) -- one of Latin America's leading e-commerce and fintech companies -- has built its own kind of cryptocurrency. With crypto in the dumps, could MercadoLibre's speculative bet pay off?
What could MercadoCoin do for MercadoLibre?
MercadoCoin will become a loyalty rewards program for MercadoLibre's e-commerce users. With rising competition in the e-commerce space from companies like Sea Limited (NYSE: SE) in Latin America, MercadoLibre seems to be looking for a way to grow brand loyalty and convince consumers to keep using MercadoLibre's e-commerce platform.
The solution: Consumers will get MercadoCoin, which can be seen as a form of cashback, for purchases made on MercadoLibre's e-commerce platform. Then consumers can either use it to buy more products or sell it for traditional money.
An important detail about this is that consumers can only trade MercadoCoin on Mercado Pago, the company's fintech platform. In theory, this should increase the stickiness between the two platforms and help bring consumers deeper into MercadoLibre's entire product ecosystem.
MercadoLibre plans to roll this out to 500,000 Brazilian consumers in the initial phase of this launch. This may sound like a lot, but it is just a drop in the bucket compared to the company's total 84 million active users as of Q2.
MercadoLibre's bigger businesses look much sweeter
Even with this announcement, MercadoLibre has only minor exposure to crypto. Before this, the company's primary exposure was that it allowed consumers to buy and sell crypto on its fintech platform. MercadoLibre did have roughly $7.8 million in Bitcoin on the balance sheet in May 2021. But even that is peanuts compared to its overall balance sheet: MercadoLibre had almost $3.9 billion in cash, restricted cash, and short-term investments, along with $456 million in long-term investments at the end of Q2 2022.
If MercadoCoin is successful, the company's crypto vulnerability would get bigger. That said, it would have to explode in popularity to reach the scale of its main businesses. Its e-commerce platform, for example, has immense scale across Latin America: In Q2, it sold 275 million items totaling almost $8.9 billion in gross merchandise value.
Additionally, its fintech business is seeing rapid adoption and gaining additional scale. In Q2, Pago saw its total payment volume jump 84% year-over-year on an FX-neutral basis to $30.2 billion. Its active fintech users also jumped 26.5% over the same period to 38.2 million. It also wouldn't be a shock to see the number of active users steadily rise if MercadoCoin brings more e-commerce users into the fintech ecosystem.
MercadoCoin is a feature, not necessarily a product itself. Therefore, given the scale of MercadoLibre's other platforms and the amount of revenue the company generates from them, MercadoCoin would have to reach an impossibly high scale to have a significant impact on the business.
MercadoLibre is a long-term play
While this bet on crypto and building its own cryptocurrency is risky, MercadoLibre is a company willing to take risks for long-term rewards. Its entire business model is built on capturing a long-term opportunity: the growing adoption of fintech and e-commerce in Latin America. Therefore, it's no wonder the company is taking a small bet on crypto.
That said, this is still a small fish in a large pond. It's unlikely to significantly affect MercadoLibre's tangible business if it does crash and burn, given the size of its revenue-generating platforms. It also has the potential to increase product stickiness and help it beat some fierce competition in the space.
Additionally, shares of MercadoLibre look very appealing right now. The company trades at 5.1 times sales, and shares have traded at a lower valuation only two times in its life as a public company. With shares so cheap and its core businesses continuing to flourish, it might make sense to buy shares now.