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Investing in Cryptocurrency Stocks

Updated: June 10, 2021, 3:38 p.m.

Cryptocurrency has captured investors’ imaginations. The surging value of digital currencies such as Bitcoin (CRYPTO:BTC) has created immense wealth for early investors. Interest in finding and investing in the next hot cryptocurrency is high.

But with more than 4,000 different digital currencies on the market -- and the world getting pushed further into the digital realm by COVID-19 -- investing in the technology that enables crypto ecosystems to function could be even more lucrative than trying to guess the next big digital asset. And there is no shortage of companies working to develop crypto technology.

Crypto holds major potential for leading tech

The original idea behind blockchain -- a digital ledger that automatically tracks transactions between parties and confirms ownership of a crypto asset -- was creating new financial transaction technology for use on the internet. But crypto assets are now being developed to help secure all sorts of things from medical records to copyright protection to digital identification.

Investors can certainly take positions in crypto assets themselves, perhaps by buying small amounts of several different cryptocurrencies. But a better way to gain exposure to the sector is to invest in companies -- even bigger, more established companies -- that benefit from blockchain and crypto asset uptake. The amount of revenue these crypto service providers derive from blockchain tech is still small, but that could dramatically change in the decades ahead.

In keeping with that guidance, here are some of the best cryptocurrency stocks to consider:

Coinbase Global

Coinbase Global (NASDAQ:COIN), a top cryptocurrency trading exchange, made its public debut in early 2021. The company is a top play on popular cryptos such as Bitcoin and Ethereum (CRYPTO:ETH) and allows users to trade more than 50 digital currencies.

To date, this crypto trading platform’s success has been contingent on the increase in crypto prices -- which, in turn, has led to millions of users signing up for an account. Coinbase earns a small transaction fee every time someone places an order to buy or sell a crypto. But the company aspires to be more than just a place to trade. It also sponsors a debit card that allows consumers to spend from the balance in their digital wallet, it started a line of credit product for Bitcoin owners, and it launched a cloud platform for companies using and storing digital currencies.

As cryptocurrencies and blockchain technology become more widely used and accepted, new use cases are being discovered outside of digital payments. For example, NFTs (non-fungible tokens) are being used as a way to guarantee digital art as authentic. NFTs could even be used to verify and authenticate real-world assets like art or real estate. As crypto use proliferates, Coinbase could be a top beneficiary as a platform supporting its spread.

Square and PayPal Holdings

Investor interest has grown as crypto asset prices have soared, but trading was never the original idea behind blockchain and cryptocurrencies. Digital payments with fewer intermediaries (and therefore lower cost for businesses and consumers) was a primary goal. Thus, enabling the purchase and ability to hold cryptocurrencies within a digital wallet is a natural fit for Square (NYSE:SQ) and PayPal Holdings (NASDAQ:PYPL) if these assets gain acceptance over time as a form of payment.

In late 2017, Square’s Cash App consumer-facing application started allowing Bitcoin trading. In 2020 and 2021, Bitcoin was a huge revenue generator for Square, although the trading feature did little to help Square’s bottom line. However, the company is helping to foster use of Bitcoin among its business users (through the Square ecosystem) and could become a top platform for transacting cryptos between companies and their customers. For now, though, Cash App is a top trading app, complete with basic banking features.

Something similar can be said of PayPal’s Venmo digital wallet and peer-to-peer payments app, which unlocked crypto trading in early 2021. At initial launch, Venmo supported the trading of Bitcoin, Bitcoin Cash (CRYPTO:BCH), Ethereum, and Litecoin (CRYPTO:LTC). With the most users of any peer-to-peer money movement app, Venmo could become a leading cryptocurrency platform with this new feature.

[Cryptocurrency] is a new asset class, but like real estate, there's only so much Earth. So it's defined, and therefore this moving price of the commodity is just how much, within this finite class of a commodity, this new asset class, how much people value it or want it.

David Gardner, co-founder, The Motley Fool

NVIDIA and AMD

Chipmakers NVIDIA (NASDAQ:NVDA) and AMD (NASDAQ:AMD) don’t deal with cryptocurrencies directly, but these two semiconductor companies are the leading designers of graphics processing units (GPUs). Best known for powering high-end video game graphics, GPUs now enable computing-intensive applications such as data centers, artificial intelligence, and the creation of crypto assets.

Cryptography and blockchain creation require immense computational power, and GPUs are well-suited for the job. Back in 2018, booming cryptocurrency prices were a driving force for NVIDIA’s and AMD's stock price increases, as digital currency “miners” (people using their computers to create new units of digital assets) scrambled to purchase GPUs for the task. GPUs remain a fundamental piece of hardware for the creation and management of crypto assets. NVIDIA even launched a new lineup of chips specifically for crypto mining in early 2021.

Both NVIDIA and AMD recently announced acquisitions that will likely further cement their positions as leaders in chip technology. NVIDIA is purchasing ARM Holdings, a licensor of chip architecture design for data centers and smartphones, and AMD is acquiring field-programmable chip leader Xilinx (NASDAQ:XLNX). Both NVIDIA and AMD are poised to continue taking market share of the semiconductor industry and leading the way in developing emerging technologies such as blockchain.

CME Group

CME Group (NASDAQ:CME) operates the world’s largest financial derivatives exchange, allowing investors to trade futures, which bet on or secure the future price of an asset, and options, which grant investors the option to sell or buy an asset in the future at a predetermined price. CME Group's exchange trades a diverse assortment of assets, including agricultural and mining products, energy, stocks, and currencies. It’s the latter that makes CME Group a crypto stock.

At the end of 2017, CME established the first market for bitcoin futures, and, at the start of 2020, the company created a market for options on Bitcoin futures. As of February 2021, Ether (units of the crypto platform Ethereum) also has futures available on the exchange. Establishing an exchange for derivatives of the best-known cryptocurrencies has given Bitcoin and Ethereum some extra legitimacy and provided a way for digital currency owners (both individuals and a growing list of businesses that accept cryptocurrencies as payment) to mitigate risk from changes in cryptocurrency prices. Cryptocurrency derivatives are still a small market for CME Group, but adding more exchanges for crypto assets in the future is possible -- and even likely.

Crypto stocks are not crypto pure plays

None of these stocks is a pure play on cryptocurrency, but it’s important to remember that crypto asset use is still far from mainstream. Serious obstacles to its widespread adoption lay ahead, including convincing consumers to stop using currencies issued by governments and overcoming regulatory scrutiny from those governments. Nevertheless, if and when crypto assets gain traction, the companies that are early in facilitating their development could reap major financial rewards in the decades ahead.

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