Bitcoin is blasting off and looks poised to retest its previous high of $20,089 set in December 2017. However, there are some key differences between this bitcoin bull market and the previous one that increases the chances that bitcoin has more upside in the short and long-term.
(source: Yahoo Finance)
One of the biggest differences is that institutional money is heavily participating in this bitcoin move. This increases the likelihood that this rally will not roll over and give up the bulk of its gains like it did in 2018.
Institutions tend to buy assets for fundamental reasons and hold for the long-term. Compared to 2017, there are now many vehicles for institutional investors who want to invest in cryptocurrencies, including CME futures and an ETF.
Another recent development helping to fuel the demand for cryptocurrencies is the acceptance of Bitcoin by fintech juggernauts, Square (SQ), and PayPal (PYPL). Hedge fund Pantera estimates that in the past 2 years, Square users accounted for 40% of bitcoin that entered the market, and in just the past 3 weeks since Paypal launched its crypto feature, their clients have purchased about 70% of the new supply of bitcoin.
Reasons to be Bullish Long-Term
While the demand for bitcoin is surging, the supply is relatively fixed. This makes bitcoin an attractive option, especially as we are in a period when the monetary base is exploding.
Typically, investors buy gold when they are concerned about the inflationary effects of the dovish monetary policy. However, gold’s traditional role as a monetary safeguard may be better served by bitcoin, especially since bitcoin is much more convenient, transferable, and divisible.
Countries all over the world are experimenting with a combination of low-interest rates and massive deficits. This combination of fiscal and monetary stimulus will likely lead to inflation. Therefore, bitcoin demand will rise as people will look for an asset that can’t be diluted to store wealth. US-based investors haven’t dealt with significant bouts of inflation in decades, however, the story is different in countries with a history of inflation like Argentina, Venezuela, or Turkey. In these countries, bitcoin has already become an integral part of their financial lives.
As crypto becomes increasingly mainstream, it could also become an asset class with a weighting in portfolios. We can see evidence of the institutional involvement in bitcoin through open interest and volume on CME futures.
Short-Term Reasons to be Bullish
While these are longer-term factors, in the short-term, conditions are ripe for a significant squeeze in bitcoin prices. New highs attract interest from fast-money traders who are always looking to buy breakouts. Additionally, money is rapidly moving into Grayscale Bitcoin Trust (GBTC), a bitcoin ETF.
At the beginning of August, about 400 million shares were outstanding of GBTC. Today, 555 million shares are outstanding. This means over the last four months, GBTC has bought an additional 147,000 bitcoins. This is a significant amount given that there is an estimated 7 million bitcoin with about 1 million “freely floating”.
The most obvious way for investors to take advantage of this unique situation is by buying GBTC. However, investors may also want to consider stocks with crypto exposure like Paypal (PYPL), Square (SQ), and Silvergate Capital (SI).
Bitcoin is up more than 40% since Paypal’s announcement in late-October that it would allow its users to buy crypto from their Paypal accounts. This instantly created another 300 million potential buyers into the fold.
Early indications are that Paypal users are getting involved, as volume from Paypal’s crypto broker-dealer (itBit) has spiked significantly. PYPL makes a commission from each crypto transaction. The move is also a way to attract users to its platform.
PYPL’s stock is about 10% from its all-time highs. Over the last four months, it’s traded between $180 and $210. While many tech stocks have lagged over the past few weeks, fintech stocks have performed well.
Paypal’s business is synonymous with digital payments, wallets, and eCommerce. These are three of the fastest-growing parts of the economy. Now, PYPL is adding crypto.
The POWR Ratings are also bullish on PYPL’s prospects as it has a Buy rating. The stock is an “A” for Buy & Hold Grade with a “B” for Trade Grade and Industry Rank. Among Consumer Financial Services stocks, it’s ranked #8 out of 46.
SQ’s CEO and founder, Jack Dorsey is a major bitcoin bull and has said that it is the “native currency” of the Internet. SQ was a pioneer in offering its users the ability to buy bitcoin and other cryptocurrencies through the Cash app in 2017. In the last quarter, crypto transaction revenue was $1.63 billion which is a 1,100% increase over the previous year.
SQ has also been investing in bitcoin on its balance sheet. This is consistent with its vision that “cryptocurrency is an instrument of economic empowerment and provides a way for the world to participate in a global monetary system.” SQ is building out the infrastructure that will increase bitcoin’s use as a means of transaction rather than solely a speculative vehicle.
SQ is a rare, tech stock that has been making new highs over the past couple of weeks, while most tech stocks have been ensnared in the rotation from growth to value. Its POWR Ratings are also very strong with a Strong Buy rating. It has an “A” for Trade Grade, Buy & Hold Grade, and Peer Grade with a “B” for Industry Rank. Among Financial Services (Enterprise) stocks, it’s ranked #23 out of 236.
Silvergate Capital (SI)
SI is the holding company for Silvergate Bank, which provides solutions for the digital currency industry. One challenge for crypto companies is that financial institutions have been uneasy about getting involved in the industry due to the complications and lack of regulatory infrastructure.
SI recognized this as an opportunity and started the Silvergate Exchange Network (SEN) which is a network of digital currency exchanges. In essence, it handles the back-office operations for many exchanges and gives them access to financing to ensure that operations can run as smoothly as possible.
Given its leading position and market share, SI is poised to continue growing bigger as the crypto-economy keeps expanding. The stock is rated a Strong Buy by the POWR Ratings. It has an “A” for Trade Grade, Buy & Hold Grade, and Peer Rank. Among Pacific Regional Banks, it’s ranked #12 out of 52.
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SQ shares were trading at $201.46 per share on Tuesday afternoon, down $6.32 (-3.04%). Year-to-date, SQ has gained 222.03%, versus a 14.46% rise in the benchmark S&P 500 index during the same period.
About the Author: Jaimini Desai
Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...
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