Crypto Chronicles: Looking Beyond Bitcoin in Crypto Stocks - Nasdaq

Crypto Chronicles: Looking Beyond Bitcoin in Crypto Stocks – Nasdaq

aBitcoin has become a widely discussed investment topic, investors are looking for more opportunities to incorporate Bitcoin into their portfolios. Since many investors are comfortable using ETFs and other index-linked products due to their relative ease and diversification advantages, they may note that US ETFs are not yet eligible for instant Bitcoin exposure. Instead, most indices and the ETF world are using crypto-related stocks as a way to provide exposure to bitcoin, while exploring thematic trends related to digital transformation. But not all crypto stocks are built equal – some have a direct relationship between their profitability and the price of bitcoin, while some may share broader topics or underlying blockchain technology. This note provides a high-level overview of crypto-related stocks – a relatively new area that many investors may not be familiar with – and how different sub-sectors are exposed to bitcoin.

Overall, crypto stocks can provide exposure to high growth and emerging technology companies within the mega-thrust of digital transformation.

Most of the stocks related to cryptocurrency are generally small-cap technology companies with high growth characteristics. While correlations with bitcoin prices vary, most crypto-related stocks have earnings ultimately driven by bitcoin prices and/or volumes. Investors interested in crypto-equities are generally optimistic about Bitcoin and other crypto assets but may look for additional exposure to equities to complement the Bitcoin allocation or a higher-risk/return investment in emerging technologies that support long-term trends in digital disruption. The Alerian Galaxy Global Cryptocurrency Equity and Trusts and ETPs Index (CRYPTO), which tracks exposure to a basket of crypto miners, crypto-enabled technologies, and cryptocurrency buyers, currently has a weight of 45.4% towards tech stocks and 62.3% to small stocks. (1)[1)Alerian Galaxy Global Blockchain Equity and Trusts and ETPs Index (BCHAIN), which tracks exposure to the aforementioned sectors as well as companies using the blockchain for non-crypto-related purposes, has less weight for small-cap and/or tech stocks since blockchain users are often large, diversified companies that use blockchain in order to modernize their operations – in Currently, all components of the blockchain user within BCHAIN ​​have a market cap of over $100 billion. In total, BCHAIN ​​holds a weight of 38.7% of technology stocks and 35.7% of small cap stocks.

Cryptocurrency miners: mining for digital gold

Cryptocurrency mining companies operate a network of machines to verify crypto transactions and are rewarded with a share of cryptocurrency. Like typical commodity miners (for example, gold miners, coal miners), crypto miners are raised directly to the price of the underlying commodity, and profitability depends on the price of bitcoin mined at lower costs of electricity, equipment, and other factors. While the industry’s profitability has been hit during the recent Bitcoin selloff, larger miners may be in a better position in the long run to withstand Bitcoin’s volatility by using their size and capital to invest in efficient facilities, machinery, and energy sources to reduce costs. Crypto mining companies include companies such as Marathon Digital Holdings (MARA) and Riot Blockchain (RIOT). Crypto miners currently account for 39.2% of the index weight in CRYPTO and 22.6% of the index weight in BCHAIN.

Cryptographic Enable Technologies: Encryption Ecosystem Support

Cryptographic-enabled technologies include companies such as crypto exchanges, crypto payment processors, and manufacturers of cryptographic devices that support the crypto ecosystem. Profitability varies greatly depending on the company. Cryptocurrency exchanges like Coinbase (COIN) generate all of their revenue largely from transaction fees, which are based on both quantity and price – so volumes can help boost revenue even if there is price volatility in the short term. Silvergate Capital (SI), a digital asset bank, managed to double its net income year on year in its latest earnings report for the first quarter of 22 despite the cryptocurrency sale. Net income was driven by interest earnings, while long-term support for bitcoin helped drive increases in both customers and deposits this quarter. Crypto-enabled techniques account for 37.1% of the index weight in CRYPTO and 26.9% of the index weight in BCHAIN.

Cryptocurrency Buyers: Investing in Cryptocurrency

Cryptocurrency buyers hold crypto assets on their balance sheets in order to profit from higher prices. Many of these companies, such as Tesla (TSLA) are diversified and generate the majority of revenue from other business segments. In comparison, companies like MicroStrategy (MC) hold bitcoin for the long term as one of their primary revenue streams. The company’s earnings are highly exposed to cryptocurrency price volatility — even with unrealized losses, the company has to account for impairment losses in its statements when bitcoin prices fall below book value, which means the company’s long-term value can be inconsistent with quarterly earnings results. Cryptocurrency buyers account for 8.1% of the index weight in both CRYPTO and BCHAIN.

Blockchain Users – Various ‘Tech-Forward’ Use Cases Other than Cryptography

Blockchain use cases are increasing across sectors. Unlike most other crypto stocks that were newly formed along with the emergence of Bitcoin, many of the blockchain users are established companies that adopt blockchain technology. These companies do not usually have profitability tied to Bitcoin prices – instead, these companies are “high-tech” companies that integrate blockchain into their non-crypto operations. These include financial companies like Mastercard (MA) that are exploring ways to make financial transactions more secure or companies like Nestle SA (NESN) that are using blockchain technology to add visibility to their supply chains. Blockchain users account for 27.0% of the index weight in BCHAIN.

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If you are looking beyond Bitcoin and want to explore opportunities within the broader ecosystem of digital assets, crypto-related stocks can serve as a complement to direct Bitcoin investment while providing exposure to a high-growth emerging technology that supports long-term digital transformation. As stock picking becomes more difficult in riskier sectors, an index-linked product such as an ETF may be able to provide access to crypto-related stocks while diversifying individual security risks.

The Alerian Galaxy Global Cryptocurrency & Trusts and ETPs (CRYPTO) Index is the underlying index of the Invesco Alerian Galaxy Crypto Economy ETF (SATO).

The Alerian Galaxy Global Blockchain Equity, Trusts and ETPs (BCHAIN) Index is the primary index for users of the Invesco Alerian Galaxy Blockchain and Decentralized Trade ETF (BLKC).

(1) All index weights as of May 24, 2022

Related research:
Encoder logs: Encoder goes from Meme to Mainstream
Cryptographic records: geopolitics and digital assets
Cryptocurrency mining for digital gold turns green
Investing in Digital Transformation: Access to Blockchain and Crypto with Stock Investments

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Originally published By Alerian on May 31, 2022.

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The opinions and opinions expressed here are those of the author and do not necessarily reflect the views and opinions of Nasdaq, Inc.

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