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Investing in Cryptocurrency Stocks

Updated: Dec. 18, 2021, 4:34 p.m.

Cryptocurrencies have quickly become the hottest investment that's gaining mainstream adoption. Markets for digital currencies such as Bitcoin (CRYPTO:BTC) were virtually unheard of back in 2012. But since then, it has grown into an industry worth more than $2 trillion and counting. This sudden surge in value and rapid evolution has created immense wealth for early crypto investors. As a result, there is huge interest in finding and investing in the next cryptocurrency unicorn.

With more than 11,000 different cryptocurrencies on the market -- and the world getting pushed further into the digital realm by COVID-19 -- investing in technologies that serve as the gateway between the blockchain cyberspace and our society could be even more lucrative than trying to guess which token will become the next Bitcoin or Ethereum (CRYPTO:ETH). And there is no shortage of innovative companies trying to bridge the gap between the two worlds.

Digital currency companies hold major potential

The original idea behind blockchain technology -- a digital ledger that automatically tracks transactions between parties and confirms ownership of a crypto asset -- was to create a borderless, peer-to-peer electronic cash payment system that's efficient and secure.

Investors can certainly invest in cryptos 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. This is because the amount of revenue these crypto service providers derive from blockchain tech has seen explosive growth over the years.

Companies that adopt blockchain technology, especially those in finance, could then gain a huge edge over their traditional competitors in processing payments. Moreover, brokers that offer digital assets could also attract more customers than exchanges that only offer traditional assets such as stocks and bonds.

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 IPO debut in April 2021. The company is a popular platform to purchase major cryptocurrencies such as Bitcoin, Ethereum (CRYPTO:ETH), and Cardano (CRYPTO:ADA), and it allows users to trade more than 50 altcoins.

To date, this crypto trading platform’s success has been contingent upon the increase in crypto prices -- which, in turn, has led to millions of new users creating accounts. Coinbase earns a small transaction fee every time someone places an order to buy or sell a cryptocurrency. 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. What’s more, it launched a cloud platform for companies using and storing digital currencies.

Coinbase offers two game-changing innovations. The first is bringing the practice of asset loans -- which were previously only available to affluent investors -- to the masses. Users can pledge their Bitcoin or other cryptocurrencies as collateral on the platform and receive a low-interest loan to cover their everyday expenses. This way, investors don’t have to sell their assets when emergencies arise, allowing their principal to continue compounding while they deal with matters at hand.

The second is the rising adoption of Coinbase’s blockchain analytics by governments and financial institutions alike. Because most blockchains operate on a public ledger, the company can harness this data and monitor for illicit transactions and wallet addresses.

Suppose hackers managed to break through an individual's computer and demand ransom in the form of Bitcoin to unlock the machine. In that case, Coinbase could then match the hacker's wallet address with millions of know-your-customer (KYC) data points stored on its platform. This could help law enforcement track down the flow of funds and apprehend the cybercriminals -- building greater trust in the crypto space.

[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

Square and PayPal Holdings

At the heart of every digital payment protocol is the absence of central intermediaries (and, therefore, lower costs for businesses and consumers). Thus, the next steps in business expansion for Square (NYSE:SQ) and PayPal Holdings (NASDAQ:PYPL) was to enable users to purchase and hold cryptocurrencies within a digital wallet.

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 the use of Bitcoin among its business users (through the Square ecosystem), and it could become a top platform for transacting cryptos between companies and their customers. This is especially promising for disrupting traditional international transactions where banks often charge hefty foreign exchange fees. But for now, Cash App is mostly used for cryptocurrency trading, complete with basic banking features.

One can say similar things about PayPal’s Venmo digital wallet and peer-to-peer payments app, which unlocked crypto trading in early 2021. At the 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. It serves as a solid access point for investors who wish to buy major cryptocurrencies and then use them to purchase altcoins or access decentralized finance applications.

Canaan and Hut 8 Mining

Bitcoin mining has changed dramatically over the past few years. Nowadays, companies such as Canaan (NASDAQ:CAN) design high-powered, application-specific integrated circuit (ASIC) machines specifically for the purpose of brute force guessing the network's correct hash (passcode). Canaan's next-generation Avalon ASICs can make tens of trillions of guesses every second as to the right hash to validate blocks on the Bitcoin network, which is millions of times more powerful than AMD (NASDAQ:AMD) and Nvidia's (NASDAQ:NVDA) latest GPUs. Sales have been skyrocketing for some time due to the device's affordability and relatively low energy consumption -- meaning greater profits for miners.

Speaking of miners, one of the most popular Bitcoin mining stocks is Hut 8 Mining (NASDAQ:HUT). The company, based in Canada, commands a sizable minority stake on the overall Bitcoin network, and it generates very strong cash flows compared to revenue. Instead of selling the Bitcoins it mines on the market, Hut 8 Mining maximizes returns for shareholders by lending them out and farming yields, leading to compounded returns. Furthermore, investors can be assured that the company won't be embroiled in environmental concerns regarding the practice. Hut 8 Mining uses a mix of wind, solar, and natural gas sources for its electricity with decade-long leases, ensuring the sustainability of its operations.

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 trying to purchase ARM Holdings, a licensor of chip architecture design for data centers and smartphones, and AMD is planning to acquire field-programmable chip leader Xilinx (NASDAQ:XLNX). Both Nvidia and AMD are poised to continue taking market share of the semiconductor industry and lead the way in developing more emerging technologies such as blockchain.

Facebook and Shopify

Facebook (NASDAQ:FB) has long been at work developing a new cryptocurrency called Diem (formerly Libra). Diem is envisioned as a global financial payment and infrastructure platform accessible to everyone, including the nearly one-third of the global population that doesn't have bank accounts. The project has had some setbacks, including losing Visa (NYSE:V), Mastercard (NYSE:MA), and PayPal from its consortium of high-profile members. Government regulators have expressed skepticism about Diem since cryptocurrency is still largely unregulated, and some reports suggest Diem may need to be pegged to the U.S. dollar or another government-issued currency. Nevertheless, work on the project is continuing, and Facebook is reportedly revamping efforts to achieve its development goals. Diem could be released in 2021.

E-commerce infrastructure and software provider Shopify (NYSE:SHOP) allows merchants using its platform to accept cryptocurrencies as payment. It recently deepened that capability by integrating with cryptocurrency payments processor CoinPayments. In spring 2020, Facebook Shops was announced as a new offering for small business e-commerce, with Shopify as a third-party software provider powering the new online stores. Together, Facebook and Shopify are primed to benefit if the adoption of digital assets continues among small businesses and entrepreneurs.

Robinhood Markets

Robinhood Markets (NASDAQ:HOOD) is a popular discount brokerage app that allows users to buy stocks, options, rare metals, and now, cryptocurrencies. Investors can buy and sell Bitcoin, Ethereum, and Dogecoin (CRYPTO:DOGE) commission-free on the platform 24/7. The company already holds tens of billions of crypto assets under custody, with crypto trading revenue now comprising a significant portion of overall sales.

The sky is truly the limit as Robinhood can combine its commission-free model with scaling the number of cryptocurrencies on the platform, thereby gaining a massive competitive advantage over both traditional and decentralized exchanges. What's more, the company could offer the same crypto analytics services as Coinbase to further promote trust in this roaring sector and boost its adoption.

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.

The beauty of crypto stocks

The best part about cryptocurrency stocks is that most of them are not pure plays on the industry -- giving investors the reward of ample diversification. Cryptocurrencies are quite volatile and can cause wild swings in the revenue and earnings of companies with sector exposure. However, the crypto realm is rapidly gaining mainstream adoption. In August 2021, United Wholesale Mortgage (NYSE:UWMC), the second-largest mortgage lender in the country, announced it would accept Bitcoin as mortgage payments from its customers. Expect further momentum in crypto stocks as more and more companies join in the blockchain revolution.