A Complete Guide to Investing in Blockchain Stocks
If you’re a recruiter in the financial industry, one place to find ambitious young talent is by looking for people who spent time as a summer associate at a top-five investment bank but weren’t extended a job offer afterwards. Getting into a summer program at an investment bank is nearly impossible, and those who manage to – provided the hiring was merit-based – had to fight tooth and nail for those coveted slots. During the process, they were vetted by some of the most selective hiring processes out there – at least they used to be.
If what Goldman Sachs throws out is worth pursuing, what they keep is even better. The people that make the cut aren’t just extremely intelligent, most carry the title of PhD – Poor, Hungry, and Determined. Still, having the smartest, most hardworking people on the planet doesn’t mean you’ll always get things right. Today, we’re going to talk about what one of the world’s biggest collection of bright minds has to say about blockchain stocks.
We’ve written extensively about what blockchain technology is for those who wish to do some background reading, but for those who don’t, it’s quite simple. Blockchain is an indisputable ledger that tracks ownership over time. On top of that ledger, you can create currencies, what’s called cryptocurrencies. You can also attach things of value to the blockchain record to divvy up assets, or in the case of ICOs and NFTs, attach nothing of value and people will buy it anyway. Bitcoin and Ethereum are arguably the two most popular cryptocurrencies.
The bullish case for blockchain is that it will soon be used for all kinds of applications across all industries. Blockchain technology stands to streamline the mortgage workflow, create smart contracts for the oil industry, and transform supply chains. Blockchain is simply a tool, so you could argue there’s nothing really to invest in. You could invest in the companies that are adopting blockchain in the same way you’d invest in companies adopting AI. Today, all companies are adopting AI in some form or another. Not so much with blockchain, though there are some green shoots popping up.
The recent announcement by Goldman Sachs of the first blockchain bond shows traction from the biggest names in finance. Tesla wants to accept Bitcoin for car purchases. And Andreessen’s planning a $1 billion crypto fund. In the words of Gertrude Stein, there’s some there there.
Do Blockchain Stocks Outperform?
Our story starts with a recent newsletter from Blockdata that said the following:
Stocks to blow off your socks: Goldman Sachs identified 19 blockchain stocks that outperform the S&P 500 this year. Big deal because it is forcing many non-believers to reconsider their position.Credit: Blockdata
This sort of shoot-from-the-hip commentary has no place in an already hyped space. Something that’s “outperformed the S&P 500 this year” doesn’t mean squat when you’re talking about a 117-day time frame. And then what? Do we sell these “blockchain stocks” now because they outperformed? Buy more? And what about the choice of benchmarks? The NASDAQ is definitely a better benchmark to use than the S&P 500 since blockchain is a technology. Critiques aside, let’s focus on the most valuable thing to come out of this exercise – a list of 19 blockchain stocks.
A List of 19 Blockchain Stocks
An article by Barron’s talks about how a couple of Goldman Sachs analysts put together a list of blockchain stocks in a manner akin to how we often do. Start with the ETF providers (there are six of them for blockchain now) and find common names while eliminating anything under a market cap of $1 billion. Some added steps by Goldman were to look at the correlation of these stocks to Bitcoin over the past twelve months (60% correlation across the bunch) and also examine how often these companies talked about Bitcoin or blockchain. Here’s the list they came up with.
Some of these names don’t belong based on our belief that thematic stocks ought to be pure plays. Analysts seem to think you can “invest in everything with Google,” though GOOG didn’t make Goldman’s list. Facebook did, and we’re not convinced this $856 billion stock is a good way to get exposure to blockchain. Just because Elon Musk talks a lot about Bitcoin doesn’t mean Tesla is a Bitcoin stock either.
Square is starting to record Bitcoin they’re selling as revenues, something we think is absolute rubbish. Strike them off the list, along with PayPal which may transact in cryptocurrencies, but hardly possesses the blockchain technology exposure we’re looking for. Let’s also remove the old school financial firms that are trying to be relevant by mentioning blockchain a lot in conference calls – JPM, Visa, Mastercard, BNY Mellon, and Broadridge. While IBM does dabble in blockchain, they’re in the process of recovering from the massive hangover they incurred from drinking too much Ginni Rometty. Since blockchain is a small part of what they do, we’d remove them too.
After removing NVIDIA (gaming and AI chips) and Overstock (an Internet retailer that sells mainly furniture), we’re then left with seven names that might be considered pure-play blockchain/cryptocurrency stocks.
|Company Name||Ticker||Market Cap||Business Focus|
|MicroStrategy||MSTR||6.2||Enterprise software & Bitcoin|
|Marathon Digital||MARA||3.6||Bitcoin mining|
|Riot Blockchain||RIOT||3.4||Bitcoin mining|
|Silvergate Capital||SI||2.6||Banking & cryptocurrencies|
|Investview||INVU||1||Edtech, fintech, & blockchain|
|Ideanomics||IDEX||1.2||Electric vehicles and fintech|
Seven Pure-Play Blockchain / Crypto Stocks
We previously wrote about how MicroStrategy Stock is Not a Good Bitcoin Investment, primarily because you’re investing in a mediocre software company whose CEO appears distracted as he touts Bitcoin using every media channel that will let him. “If you’re looking for Bitcoin exposure, just buy Bitcoin,” we said about MicroStrategy back in November 2020. Since then, Bitcoin returned +274% while MicroStrategy brought in +308% while their revenues continue to decline. Our conclusion is still the same – if you want exposure to Bitcoin, buy and hold Bitcoin.
Another name on Goldman’s list we talked about before is Coinbase which had their recent IPO which now provides investors with a pick and shovel way to play cryptocurrencies, mainly Bitcoin and Ethereum trading pairs which drove over 56% of total trading volume in 2020. We said we were liking Coinbase at $128 a share, and it’s now trading at $294 a share. If you’re bullish on cryptocurrencies, this is a company you’d want to own while trusting their fearless leader to navigate the complexity of the cryptocurrency world.
Marathon Digital Stock
A recent piece by InvestorPlace talks about how this $3.58 billion company currently spends $2 to mine $1 worth of Bitcoin, barely clearing $5 million in revenues during 2020. That’s all going to change though as the company scales, eventually generating over $1 billion in revenues at around Bitcoin’s current price.
They’re able to compete with China – where some of the world’s cheapest electricity is produced – by partnering with a company called Beowulf Energy which is producing coal-fired energy and selling it to Marathon at a price that’s a quarter of the average U.S. domestic rate. (Yes, we have some questions about this too.) If a Bitcoin miner’s fate is tied to the price of Bitcoin and electricity, why take on operational risk by investing in the miner? Just buy Bitcoin. The same holds true for our next stock.
Riot Blockchain Stock
This $3.36 billion company is also focusing on cryptocurrency mining in North America, bringing in about $12 million in 2020. Unlike Marathon, Riot doesn’t give us an exact cost they can produce Bitcoin at, opting instead to say that their power costs are “amongst the lowest in the industry.”
Their latest investor deck is painfully difficult to navigate and understand, but one notable event was their acquisition of Whitstone which is technically the largest Bitcoin miner in North America. We say “technically” because Whitstone currently hosts Bitcoin mining operations for three institutional clients. So, they’re kind of a Bitcoin miner hosting service. When a business starts to become too complicated to understand, we simply move on.
Also in the “too complicated to understand” category is Ideanomics, a company that’s dabbling in electric vehicles and fintech stuff. Their investor deck shows off a collection of businesses from electric delivery mopeds to electric tractors. On the fintech side, they’re dabbling in real estate transaction services and digital securities/assets. It’s really hard to figure out what they’re focused on because it seems like a little of everything. The value proposition is so confusing that even financial pundits can’t decide what to make of it.
We’ve warned investors about electric vehicle stocks, and Ideanomics would fall in that same bucket.
We strongly advise investors to avoid any stock that trades on any over-the-counter (OTC) exchange, so Investview isn’t off to a good start. While this $1 billion company is planning an uplist to the Nasdaq, that may not make it any more appealing from where we’re sitting. Reporting Bitcoin mining revenues every month by press release and not supplying an investor deck are red flags for a company that’s “driving decentralization of education and finance through a commitment to blockchain technology,” whatever that means. Like Ideanomics, this collection of subsidiaries is best avoided.
Silvergate Capital Stock
Last but not least is Silvergate Capital, a bank that’s pivoted towards digital currencies. With nearly six billion in deposits, Silvergate is able to take that money and invest it in other assets or loan it out to people in the form of real estate loans (around 8% of which are either in full payment deferral or resumed partial interest-only payments because of The Rona). The Silvergate Exchange Network (SEN) helps facilitate cryptocurrency transactions and is being used by some of the biggest names out there like Coinbase and Binance.
It’s an interesting little company with consistently growing revenue streams and a rapidly growing list of institutional customers, but with too many moving parts for our liking.
Our Two Cents
It’s easy to play armchair quarterback with someone else’s stock picks, but we believe there’s a fundamental problem with this list of “blockchain stocks” starting with only seven being pure play and finishing with the pure plays being largely involved in cryptocurrencies. For risk-averse investors who want exposure to the growth of cryptocurrency, consider holding some Bitcoin or Coinbase stock. What we were hoping to find in this list of stocks from Goldman was a company with a software-as-a–service (SaaS) business model that’s selling a blockchain solution to 1000s of clients. Apparently, one doesn’t exist, or the brightest analysts in finance would have found it.
When Goldman says a collection of stocks are blockchain stocks, clients buy them, and the stocks go up. It becomes a self-fulfilling prophecy. Does it really matter whether or not the stocks have sufficient exposure to blockchain if Goldman says they do? It matters to us, and of the 19 stocks mentioned today, we think just two make for an appealing investment – Coinbase, and to a lesser extent, Silvergate Capital. We’re holding neither, though we we’re probably going to put Coinbase on our watch list as a “like.”
The King of SPACs said recently that nobody listens to Warren Buffet anymore, and he may be right. Today’s investor wants excitement and instant wealth. Any notion of delayed gratification seems to be going extinct. In Berkshire’s recent shareholder’s meeting, Mr. Buffet criticized SPACs and apps like Robinhood that turn the stock market into one big casino. His partner, Charlie Munger, called Bitcoin “disgusting and contrary to the interest of civilization.” At a minimum, Bitcoin along with all the other 10,000 cryptocurrencies out there, represents something extremely volatile that’s not quite understood by those dabbling in it. And as anyone who has ever watched The Big Short knows, that’s a recipe for disaster.
Goldman Sachs has some of the sharpest minds on the planet working on solving problems. One problem might be that their clients are asking for blockchain stocks, so Goldman provided some names. Of the pure plays we’ve looked at today, nearly all focus on cryptocurrencies, not industrial blockchain solutions. Given that just about everyone wants to “invest in cryptocurrencies,” it seems like just another symptom of a market that’s become quite overheated.
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