Despite relentless volatility, cryptocurrencies continue to march toward the mainstream as more institutions and corporations embrace digital assets. One of the most high-profile crypto adopters has been Google. The Silicon Valley tech behemoth recently announced it would start letting its customers pay for cloud services with cryptocurrencies next year.
However, some investors remain averse to stomach-churning swings in crypto prices. Fortunately, they don’t have to own virtual assets directly to gain exposure to the fast-growing asset class.
A relatively safer way to play the cryptocurrency market is to buy stocks of companies that are plugged into the blockchain economy. The following names in the Morningstar coverage universe provide indirect crypto exposure for long-term investors with high risk tolerance.
PayPal (PYPL) provides electronic payment solutions to merchants and consumers, with a focus on online transactions. The company boasts 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 started allowing customers to buy, sell and hold crypto in 2020, but users were not allowed to move crypto holdings off its 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 into, outside of, and within the PayPal platform.
Getting in early in the evolution of e-commerce allowed the company to build and maintain an enviable competitive position. “In recent years, PayPal’s growth has remained turbocharged by the ongoing shift toward electronic payments and the rise of e-commerce, which the coronavirus further accelerated the shift toward,” says a Morningstar equity report.
As a unique player in the payments field, PayPal remains a preferred partner and could leverage this into a growing presence in point-of-sale transactions. While its position on both the merchant and consumer side could 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 US$139 to US$135, prompted by assumptions of slower growth in 2022.
However, Horn assures the firm “has a clear path to strong growth over the next few years and that it can continue to generate solid growth over the long haul.”
The leading cryptocurrency exchange platform in the U.S., Coinbase (COIN) provides the most direct exposure to crypto to investors without needing to actually hold any. The company provides safe and regulation-compliant crypto play to retail investors and institutions.
More 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 reliable and compliant place to buy and sell cryptocurrency in an industry filled with risk, weak security practices, and spotty regulatory enforcement,” says a Morningstar equity report.
These attributes have allowed the company to successfully charge fees higher than peers, adds the report.
Owing to its reputation and regulatory compliance, Coinbase has been able to grab 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 US$110.
The platform’s long-term revenue growth is tied to the overall health of the cryptocurrency market. “Cryptocurrency adoption continues to rise, but questions regarding the long-term viability of cryptocurrency, and the role of speculation in current market prices remain unanswered,” cautions Miller.
The recent tie-up with Google enables Coinbase to use Google Cloud’s compute platform to process blockchain data at scale to boost the global footprint of its crypto services.
CME Group (CME) operates a derivatives exchange that trades futures contracts and options on futures, interest rates, equity indexes, foreign exchange, and commodities. The company also has a 27% stake in S&P Dow Jones Indices, making CME the exclusive venue to trade and clear S&P futures contracts.
One of the world's largest derivatives exchanges, CME ranks among the top 10 biggest bitcoin futures trading platforms, accounting for nearly 10% of all open interest, valued at US$1.46 billion, as of Oct 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 highest traded fiat after the U.S. dollar.
“After two years of disappointing revenue growth, CME Group is enjoying far more favourable market conditions in 2022 as volatility across multiple asset classes drives increased trading volume,” says a Morningstar equity report.
Up until recently, the company’s interest rate complex, its largest revenue source, had been facing downward pressure due to low short-term interest rates. When interest rates stay low there is less need for interest rate 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 adds.
“CME also has a history of generating incremental growth through the introduction of new futures contracts, like the micro E-mini S&P 500 contract and Bitcoin futures,” argues Miller, who puts the stock’s fair value at US$220, and projects CME's revenue will grow at around 5.5% annually from 2021 to 2026.
