Bitcoin (BTC -2.91%) has been on a remarkable run to start the year, up 65.93% year to date. But, as any crypto investor knows, investing in Bitcoin always comes with tremendous volatility and risk. Even the faintest hint of future Federal Reserve rate hikes can send the price of Bitcoin tumbling, and many investors are still hesitant about putting their funds in a crypto that collapsed by 65% last year.
So with that in mind, the goal is to find stocks that are correlated with the price of Bitcoin, but that may provide more safety and less risk than investing in crypto directly. These stocks are typically held by exchange-traded funds (ETFs) specializing in blockchain and crypto and thus are fairly easy to find and analyze.
With that in mind, here are three stocks that could benefit from the recent Bitcoin rally.
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1. MicroStrategyWhat makes MicroStrategy (MSTR -3.25%) unique is the sheer amount of Bitcoin that it holds on its balance sheet. According to CoinGecko, MicroStrategy currently holds nearly 130,000 Bitcoins, worth an estimated $3.6 billion at today's prices.
That figure is significant, because it represents more than the entire market capitalization of MicroStrategy, which is $3 billion. Shares of MicroStrategy are up nearly 74% for the year, so investors clearly see MicroStrategy as a highly leveraged bet on the future price of Bitcoin.
But by investing in MicroStrategy, you get the extra margin of safety from investing in a publicly traded software company. In other words, there's more to MicroStrategy than just Bitcoin, and you get the peace of mind of knowing that you're getting audited financial statements every quarter.
The latest twist from MicroStrategy is the creation of a new business unit that will attempt to leverage some of the growth from Bitcoin being used as a payment option. The unit will focus on tech deployments related to the Lightning Network, a Layer 2 payment protocol for Bitcoin. This could help to assuage the concerns of some investors that MicroStrategy is not optimally deploying its capital.
2. Coinbase GlobalCoinbase Global (COIN 1.58%) also holds a significant amount of Bitcoin. According to CoinGecko, Coinbase holds 9,000 Bitcoins worth $248 million at today's price.
That's because Coinbase, as the world's second-largest cryptocurrency exchange, has a core business activity that is highly leveraged to the price of Bitcoin. Trading volume spikes up when Bitcoin is in a bull market but trends down when Bitcoin is in a bear market. Thanks to the recent Bitcoin rally, Coinbase is now up more than 117% year to date.
So the core investment thesis for putting your money in Coinbase right now is the return of the retail investor to the crypto market. As long as Bitcoin retains its upward trajectory, investors should be willing to move their money over to Coinbase, and that will continue to boost Coinbase's stock price.
From a risk/reward perspective, Coinbase also gives you additional diversification beyond just Bitcoin. While Bitcoin represents 41.25% of all trading volume on Coinbase, the platform does offer trading access to nearly 250 different cryptos and digital assets such as non-fungible tokens (NFTs). Moreover, Coinbase is now active in over 100 nations, so there's geographical diversification as well.
3. PayPalPayPal (PYPL 1.50%) is increasingly focusing its attention on the world of crypto and digital currency transactions. In October 2020, the company began enabling users to buy, hold, and sell a handful of cryptos (including Bitcoin) directly via the PayPal platform. As of year-end 2022, PayPal held more than $600 million of customers' crypto, of which $291 million was in Bitcoin.
With PayPal, however, you are not getting nearly the same correlation with Bitcoin as you would with Coinbase or MicroStrategy. Bitcoin represents just a tiny fraction of PayPal's current business model, even if PayPal's holdings of Bitcoin are surprisingly massive.
So you really need to take a long-term approach here and understand that PayPal is much more interested in the future of payments. PayPal has been working on a number of interesting payment projects, such as the development of its own stablecoin.
And PayPal continues to invest in blockchain-related start-ups that focus on payments. According to PayPal, a lot of its future Bitcoin strategy will depend on the official regulatory stance on crypto.
As with any financial services stock, there is always the risk that PayPal could get caught up in the current banking mess. While PayPal has a proven track record as a fintech (or financial tech) innovator, it is also starting to look more and more like a traditional bank.
So are these stocks a buy?There's a good reason why I didn't include a single Bitcoin mining stock on this list -- all signs point to Bitcoin mining becoming an increasingly bad business, due to all the new rules and tax changes related to energy consumption and electricity usage. The government is making it very difficult for Bitcoin miners to be profitable. Yet, if you take a look at some popular Bitcoin ETFs, you'll see that they're filled with mining stocks.
For now, I'm watching companies that stand to benefit the most from the current Bitcoin rally. I'm particularly bullish on Coinbase right now, simply due to all the clever ways the company is finding to generate revenue and diversify internationally during a time of market uncertainty. That's exactly the type of company that can provide indirect access to the upside potential of Bitcoin, without all the risk of investing in Bitcoin directly.