3 stocks with indirect crypto exposure
Despite relentless volatility, cryptocurrencies continue to march toward the mainstream as more institutions and companies embrace digital assets. One of the most high-profile crypto adopters has been Google. The Silicon Valley tech behemoth recently announced that it would begin allowing its customers to pay for cloud services with cryptocurrency next year.
However, some investors remain averse to stomach-churning swings in crypto prices. Fortunately, they don’t need to own virtual assets outright to gain exposure to the fast-growing asset class.
A relatively safer way to play the cryptocurrency market is to buy shares of companies plugged into the blockchain economy. The following names in the Morningstar coverage universe provide indirect crypto exposure for long-term investors with a high risk tolerance.
PayPal (PYPL) offers electronic payment solutions to merchants and consumers, with a focus on online transactions. The company has 426 million active accounts, including 34 million merchant accounts. PayPal also owns Xoom, an international money transfer business, and Venmo, a person-to-person payment platform.
PayPal began allowing customers to buy, sell and hold crypto in 2020, but users were not allowed to move crypto holdings off the platform. That changed this year. Consumers can now use the PayPal app to buy, transfer and sell cryptocurrencies including Bitcoin, Bitcoin Cash, Ethereum and Litecoin to, outside and within the PayPal platform.
Getting in early in the development of e-commerce enabled the company to build and maintain an enviable competitive position. “In recent years, PayPal’s growth has been turbocharged by the ongoing shift toward electronic payments and the rise of e-commerce, which the coronavirus has further accelerated the shift toward,” said a Morningstar stock report.
As a unique player in the payments space, PayPal remains a preferred partner and can leverage this to an increasing presence in point-of-sale transactions. While its position on both the merchant and consumer sides may be challenged over time, “the company can hold its own,” assures Morningstar equity analyst Brett Horn, who recently lowered the stock’s fair value from $139 to $135, prompted by assumptions of lower growth in 2022 .
However, Horn assures that the firm “has a clear path to strong growth over the next few years, and that it can continue to generate solid growth in the long term.”
The leading cryptocurrency exchange platform in the US, Coinbase (COIN), provides the most direct exposure to crypto to investors without actually owning anything. The company offers secure and regulatory compliant crypto gaming to retail investors and institutions.
Recently, the firm has expanded into adjacent businesses, such as prime brokerage, data analytics and collateralized lending.
“Coinbase has been able to carve out a strong place in the cryptocurrency exchange industry by positioning itself as a trusted and compliant place to buy and sell cryptocurrency in an industry fraught with risk, lax security practices and shaky regulatory enforcement,” says a Morningstar. equity report.
These characteristics have enabled the company to successfully charge higher fees than its peers, the report adds.
Due to its reputation and regulatory compliance, Coinbase has been able to capture market share in the rapidly growing space. “Coinbase’s network effects, switching costs and intangible assets have allowed it to stand out and increase market share in a crowded industry,” says Morningstar equity analyst Michael Miller, who pegs the stock’s fair value at $110.
The platform’s long-term revenue growth is tied to the overall health of the cryptocurrency market. “Cryptocurrency adoption continues to increase, but questions regarding the long-term viability of cryptocurrency and the role of speculation in current market prices remain unanswered,” warns Miller.
The recent connection with Google enables Coinbase to use Google Cloud’s computing platform to process blockchain data at scale to increase the global footprint of its crypto services.
CME Group (CME) operates a derivatives exchange that trades futures contracts and options on futures, interest rates, stock indices, foreign currencies and commodities. The company also holds a 27% stake in S&P Dow Jones Indices, making CME the exclusive venue for trading and clearing S&P futures contracts.
One of the world’s largest derivatives exchanges, CME ranks among the top 10 trading platforms for bitcoin futures, accounting for nearly 10% of all open interest, valued at $1.46 billion as of October 14.
More recently, CME pushed deeper into the cryptocurrency market with two new futures offerings – Bitcoin and Ether Euro futures. Analysts point out that euro-denominated cryptocurrencies are the second most traded fiat after the US dollar.
“After two years of disappointing earnings growth, CME Group is enjoying far more favorable market conditions in 2022 as volatility across multiple asset classes drives increased trading volume,” a Morningstar stock report said.
Until recently, the company’s compound interest, its largest source of income, had been subject to downward pressure due to low short-term interest rates. When interest rates remain low, there is less need for interest hedging and less incentive for speculation, which creates a drag on CME’s trading volume.
With interest rates rising in 2022, this drag has been removed, benefiting the company’s growth, the report added.
“CME also has a history of generating incremental growth through the introduction of new futures contracts, such as the micro E-mini S&P 500 contract and Bitcoin futures,” argues Miller, who puts the stock’s fair value at $220 and estimates that CME’s revenue will grow by around 5.5% annually from 2021 to 2026.
