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All Contents © 2019The Kiplinger Washington Editors
By James Brumley, Contributing Writer
| February 13, 2018
Bitcoin, for better or worse, has been all the rage of late. Its breakneck 1,850% run in 2017 put the cryptocurrency on the map. In 2018, however, Bitcoin prices have been all over that map – dishing out anguish for anyone who’s not been on the right side of the wild swings.
Most long-term-minded investors have avoided the cryptocurrency altogether, partially because digital currencies feel philosophically flawed, and partially because they wanted to steer clear of all the volatility. But there’s still something compelling about the technology, even if a newcomer to cryptocurrencies can’t quite articulate why they see a future for them.
The key to navigating the volatility and looking past the noise? First and foremost, understand that Bitcoin (and other cryptocurrencies) isn’t the same thing as blockchain. Blockchain is the underlying digital record system that makes Bitcoin “work.” It powers other digital currencies, too, and is being increasingly used in other ways, such as improving cloud storage or keeping track of legal documents. As such, blockchain should be around in the future even if Bitcoin itself falls off the radar.
Here’s a run-down of some of the top ways to invest in blockchain without directly exposing your portfolio to less predictable instruments like Bitcoin itself. These stocks and funds all have a stake in the future of blockchain, to varying degrees.
Data is as of Feb. 12, 2018. Click on ticker-symbol links in each slide for current share prices and more.
Many people know Overstock.com (OSTK, $55.65) as an online retailer that got its start selling surplus inventory, but has expanded to new merchandise. What they might not know is that over the past few years, it has become a surprising blockchain play.
The average investor still may not fully understand exactly what Overstock.com CEO Patrick Byrne is trying to accomplish with the creation of tZERO. It will be an SEC-regulated alternative trading system, with the ultimate goal of becoming a blockchain-based global property registry that becomes (among other things) a universally accepted means of supplying collateral to lenders.
With the exception of being regulated, the vision still doesn’t explain why Byrne’s take on the whole cryptocurrency craze will stand out. But it’s the less obvious aspect of Byrne’s effort that’s likely to matter. As D.A. Davidson equity analyst Tom Forte put it: “Our research increased our conviction that, today and likely in the near-term, Overstock stands head and shoulders above the others, when it comes to having developed a portfolio of companies with significant efforts to exploit blockchain technology.”
Veteran short seller Marc Cohodes believes a successful execution of Byrne’s plan could make Overstock shares worth between $200 and $400 apiece.
It should come as no surprise that credit card middleman MasterCard (MA, $168.19) is in the cryptocurrency loop. In many regards, MasterCard and blockchain accomplish the same thing. If blockchain is a better way of exchanging money for goods and services – without borders or currency exchange walls getting in the way – then MasterCard has good reason to be interested. That’s why in October, the company began to facilitate payments using blockchain-based technologies, even if Bitcoin itself wasn’t part of the ecosystem.
In light of the company’s unique position as one of the world’s most recognizable intermediaries between spenders and vendors, it doesn’t appear MasterCard is doing much on this front. But don’t be fooled. MasterCard is merely proceeding cautiously, waiting to see what gels on the cryptocurrency front.
In the meantime, the credit card icon is tied for second in terms of the number of U.S. patents held on blockchain technologies, and recently has requested one that facilitates instant blockchain payment processing. Such a patent theoretically could allow MasterCard to offer consumer-held, blockchain-based credit and debit cards.
If you’re a believer in the notion that paper money is a relic and will soon be displaced by legitimate blockchain money, think about International Business Machines (IBM, $150.58).
Yes, this is the same IBM that has been floundering for years now, mostly missing out on the advent of cloud computing by leaning on its legacy hardware and software business for too long. It has seen the light, however. Tapping its deep pockets and talent pool, it has come up with several 21st century products. In fact, a recent report from Juniper Research indicated that IBM was viewed as the most reliable name in the nascent blockchain business.
That’s going to mean a lot to regulators and government agencies, as well as large organizations that can’t afford for their foray into the world of cryptocurrency to be anything less than perfect. In fact, the relatively small launch of its blockchain platform is already showing tremendous promise. UBS says that for customers IBM already is serving in its global financing unit, the utilization of blockchain “has reduced dispute resolution time from over 50 to fewer than 10 days and reduced administrative costs.”
International Business Machines also employs blockchain technologies that allow for more efficient tracking of shipments, improve food safety and more. The use of the underlying technologies is limited only to IBM’s imagination.
The Eastman Kodak (KODK, $5.85) that became a household name by making now-obsolete camera film is still around. It found refuge in video film and printing, as well as retooling for more specialized industrial applications. In terms of revenue, it’s still nowhere near what it once was during its heyday in the 1980s and ‘90s, but the advent of blockchain may breathe new life into this old company yet.
The knee-jerk response to the recently unveiled KodakCoin may be concern that yet another wannabe is jumping on the cryptocurrency bandwagon with no clear picture of what it hopes to accomplish. But there’s a method to the madness. Kodak aims to cultivate a digital currency that not only facilitates the payments for photographers’ images that should drive royalty revenue for them, but also uses blockchain to ensure those photographs aren’t being used without the owner’s permission.
Kodak CEO Jeff Clarke explained: “For many in the tech industry, ‘blockchain’ and ‘cryptocurrency’ are hot buzzwords, but for photographers who’ve long struggled to assert control over their work and how it’s used, these buzzwords are the keys to solving what felt like an unsolvable problem. Kodak has always sought to democratize photography and make licensing fair to artists. These technologies give the photography community an innovative and easy way to do just that.”
The digital photography market could be worth more than $100 billion per year by 2021, yet still is akin to the Wild West when it comes to collecting payments for use of those images.
One curious nuance of Bitcoin and other cryptocurrencies is that they have to be digitally “mined.” A particular Bitcoin is just a collection of unique codes, but the blockchain-based programming that makes Bitcoin work as described means there are only 21 million possible variants. So, at most, there will only be 21 million Bitcoins in existence.
The oddity: Only a fraction of those 21 million possibilities had been calculated at the onset of Bitcoin. Computers all over the world have been crunching the numbers, so to speak, to discover the remainder. The lucrative part for folks who went to the trouble of mining them is, if they find any Bitcoin, they get to keep it as their own.
Enter Nvidia (NVDA, $228.03), maker of computer chips and graphics cards. As it turns out, graphic cards are ideally suited to perform the computations required in Bitcoin mining, which are incredibly resource-intensive. Regular computer processors can do the work too, but graphics processors are far more effective, hence the surge in demand for GPUs last year. Rival Advanced Micro Devices (AMD) rode the same wave.
It remains to be seen what kind of a role Nvidia will play in the future of blockchain. The “discovery” model that has powered most of the major cryptocurrency mining done thus far, though, is likely to apply in the future. The math has to be done somehow, and Nvidia remains best-positioned to provide the solution.
Although Bitcoin and several other cryptocurrencies have been around for years, it has taken a long while for the ETF industry to get on board. But it’s finally in the game – sort of.
The Reality Shares Nasdaq NexGen Economy ETF (BLCN, $22.79), which launched just a few days ago, holds stocks such as the aforementioned Overstock and IBM, as well as Intel (INTC) and Cisco Systems (CSCO). None are dedicated cryptocurrency plays, but all of them will benefit from the advent of blockchain as the preferred method of digitally doing business.
The fund was initially intended to include “blockchain” in its moniker, but the Securities and Exchange Commission asked Reality Shares to remove the word to keep the mania to a minimum.
Eric Ervin, CEO of Reality Shares, says about the potential of the newly minted ETF, “Blockchain is still in its infancy, and we are confident it will have far-reaching, disruptive effects in nearly every industry.”
Ervin acknowledges the fund’s holdings don’t derive most of their revenue from cryptocurrencies right now, but also feels the “blockchain ecosystem potentially presents one of the most profound, long-term investment opportunities many of us have or will ever see in our lifetime.”
BLCN charges 0.68% in expenses, or $68 annually on a $10,000 investment.
Reality Shares’ new ETF surfaced right around the same time the Amplify Transformational Data Sharing ETF (BLOK, $18.90) did. For the same reason Reality Shares couldn’t use the word “blockchain” in the name of the recently-launched fund, Amplify can’t either. However, BLOK also is a play on the companies best-positioned to benefit from the new-era currency, and similarly priced at 0.7% in annual fees. Holdings include Overstock, Square (SQ) and Taiwan Semiconductor (TSM), just to name a few.
Don’t be surprised if the top holdings change rather quickly, though.
A wide swath of Amplify’s ETFs are index funds and their underlying positions don’t shift much, but BLOK is a different breed. It’s going to be an actively managed fund. Amplify CEO Christian Magoon explains, “Our key differentiator is that we believe you have to be active when you engage in this space. In order to capture the upside and manage downside risk, you have to be, on a daily basis, looking at this and adjusting your portfolio.”
That’s not a bad strategy, considering the blockchain movement has only just begun and remains a moving target.
While the list of potential cryptocurrency stock picks has thus far focused more on blockchain and less on Bitcoin itself, it would be amiss to not make mention of the Grayscale Bitcoin Investment Trust (GBTC, $14.87).
This trust is as close to investing in Bitcoin as you can get right now without actually directly buying the cryptocurrency, which involves creating a complicated account with a Bitcoin exchange. Investors can buy GBTC with an everyday brokerage account.
Many in the media refer to the GBTC as an exchange-traded fund, but that’s not quite accurate. It in fact does not trade on a major exchange, and instead “over-the-counter.” Still, it functions similarly to an ETF in that it somewhat replicates Bitcoin’s movement. Every unit of the trust represents 0.0919 Bitcoin, and is just as volatile as the cryptocurrency itself is.
It’s a double-edged sword, of course. Fans of Bitcoin were cheering the near-600% runup the cryptocurrency doled out between September’s low and December’s high. They’ve lamented the 62% pullback in the meantime, though. It’s just the nature of the beast.
Moreover, the GBTC doesn’t track Bitcoin particularly well, and has at times traded for enormous premiums, including in December, when it traded at more than double the worth of the underlying Bitcoin. Whenever that imbalance corrects, it can lead to much worse declines than in the cryptocurrency itself.
Long-term buy-and-hold investors shouldn’t bother with this fund, which charges a whopping 2% in annual fees. However, for experienced, agile traders who have an itch to roll the dice, it’s an option.