Readers keep asking how they should play the boom in cryptocurrencies and blockchain.
One answer is obvious: If you truly believe that bitcoin, ether or some other new form of digital cash is going to rule the world, then, my friend, you should go to an exchange such as Coinbase and buy a truckload of your favourite crypto. You'll do very well if your assumptions prove to be right – which is only fair, since you'll lose big if your thesis doesn't pan out.
But judging from readers' e-mails, that's not really what people want to hear. They're searching for companies – ideally Canadian – that will benefit if cryptocurrencies and blockchain become potent forces in global commerce.
This is a far trickier matter. Let's skip over all the uncertainties involved in predicting whether cryptocurrencies and blockchain will ever become more than passing fads. Let's ignore all the glaring risks that could wipe out your investment. Let's simply assume that, for whatever reason, you're dead certain that cryptos and blockchain are going to be red hot for the foreseeable future. How do you, as an investor, play this area?
The smart answer begins by turning the question inside out and looking at how not to invest in bitcoin and its brethren.
One thing you should nearly certainly avoid is investing in the growing number of small companies on the TSX Venture Exchange that have suddenly decided to rejig themselves as bitcoin miners. Typically, these businesses are former junior gold miners and oil drillers that have decided to take advantage of the recent frenzy and lurch into the entirely unrelated area of cryptocurrencies.
The immediate problem with this strategy is that most of these companies are entirely unproven. They have yet to demonstrate they can make a profit (crypto or otherwise) by mining bitcoin. Add in the uncertain long-term economics of bitcoin mining itself – so much depends on bitcoin's price, access to low-cost electricity and how mining pools evolve – and you have every reason to be skeptical.
A better bet might be already established companies that supply vital products to the bitcoin miners. Many people will tell you to look at makers of specialized computer chips, such as Advanced Micro Devices Inc. and Nvidia Corp., or companies like Digital Power Corp. that make high-end power supply products.
The problem there is that other investors are way ahead of you. They have driven up the prices of these stocks in recent months. The same thing is true about companies such as Overstock.com Inc. or Riot Blockchain Inc. that claim to be incubating exciting new applications for the blockchain. These companies would have to go a long way to justify their current valuations.
If you cross all these possibilities off your list, what's left?
One idea, which I've mentioned before, is to look at computer consultants. They stand to benefit from a flood of new work if clients jump to build blockchain applications in a big way. The key Canadian name here is CGI Group Inc., the Montreal-based systems integrator. It trades for around 20 times trailing earnings and has a solid business regardless of blockchain's fate.
A more direct way to bet on cryptocurrencies is SBI Holdings Inc., a Japanese venture capital business that is invested in Ripple, one of the leading cryptos, as well as a number of other projects related to digital money. Its future is unpredictable but at least it trades for only about 16 times earnings.
Then there's Square Inc., the mobile payments company based in San Francisco. It is experimenting with bitcoin payments and its CEO, Jack Dorsey, is a vocal fan of blockchain. The drawback? Square's stock price has surged over the past year. A good deal of tech-related enthusiasm is already built into its lofty valuation.
A confession: I find this small list of possible blockchain beneficiaries just as uninspiring as you do. But that hasn't stopped U.S.-based promoters from stepping up to offer exchange-traded funds focused on the latest trends.
The Reality Shares Nasdaq NexGen Economy ETF (BLCN-Q) and the Amplify Transformational Data Sharing ETF (BLOK-N) both avoid explicit mention of blockchains or cryptocurrencies – apparently the Securities and Exchange Commission doesn't like that – but both leave potential investors in no doubt about their focus on these areas.
The problem is that, for now, these recently launched ETFs are not offering much that's special. They hold most of the companies mentioned above, along with a laundry list of other tech businesses, such as IBM, Cisco and Intel. My interpretation? They, too, are scrambling for ideas.
Your best strategy at this point may be to remember what happened during the dot-com boom. Many of the big winners – players such as Facebook and Google – turned out to be companies that did not exist in the early years of the internet.
If history repeats itself, the best opportunities from any potential crypto or blockchain revolution are still to emerge. For now, smart investors may want to bide their time. If the revolution actually does become reality, there will be ample time to pick winners.