Cryptocurrency is an emerging asset class that's been rising in popularity during the past several years. I see a couple of valid reasons to consider investing in crypto.
First, I think some investors are intrigued by the idea of digital currencies replacing fiat money in the future -- hence, buying crypto becomes an appealing decision. Second, I think crypto represents an alternative investment akin to art or collectibles. Allocating a small percentage of your portfolio to assets besides stocks, bonds, and cash can make sense for the right investor.
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But choosing which cryptocurrency to buy can be like throwing a dart at a wall. While Bitcoin and Ethereum are two of the most mainstream options, could Dogecoin or Shiba Inu actually create some real-world utility down the road?
Rather than trying to predict which digital currencies will be the most valuable, I'd encourage investors to think about ways to gain exposure to cryptocurrency without actually buying specific tokens or coins.
Below, I'll explore how billionaire investor Jeff Yass of hedge fund Susquehanna International Group (SIG) is investing in crypto.
1. Coinbase
According to SIG's latest 13F filing, it has been steadily building a position in Coinbase Global(NASDAQ: COIN). During the past year, the fund has increased its stake in Coinbase 17-fold, from roughly 51,330 shares to 877,400.
At its core, Coinbase is an exchange where investors buy and sell cryptocurrency. In some ways, it's similar to brokerage firms like Robinhood or Charles Schwab, but with an intense focus on crypto. In the same vein as a traditional brokerage house, Coinbase generates most of its revenue from transaction fees.
While buying and selling trends in the crypto world can ebb and flow like equities do, I like the idea of investing in Coinbase for a couple of reasons.
Although crypto is still somewhat of a niche industry, I think Coinbase's brand is a valuable intangible that is hard to compete against from the perspective of legacy incumbent brokers.
Moreover, investing in Coinbase provides exposure to the crypto industry in a broad way. Instead of speculating over which individual cryptocurrencies will rise in value, Coinbase presents a diversified platform inclusive of many different digital currencies.
To me, this is a subtle benefit because Coinbase stock will likely not experience the same level of volatility that a specific cryptocurrency could on any given day. Furthermore, since Coinbase makes money from transaction fees, the company stands to benefit when cryptos are experiencing heavy buying or selling activity.
2. MicroStrategy
Another way SIG is investing in crypto is through MicroStrategy(NASDAQ: MSTR). During the past year, SIG's position in MicroStrategy has increased from about 2.2 million shares to 3.8 million shares.
MicroStrategy is a very unique way to invest in crypto. The company is actually an enterprise software business specializing in artificial intelligence (AI)-powered data analytics. However, MicroStrategy's balance sheet contains one really important line item in particular.
In the quarter ended June 30, MicroStrategy boasted $5.7 billion of digital assets on its balance sheet. This is, by far, the company's largest line item on the asset side of the balance sheet. According to the footnotes in its quarterly filings, MicroStrategy's digital assets are "comprised solely of bitcoin."
While owning Bitcoin on the balance sheet may seem out of left field, this type of diversification among assets isn't as uncommon as you might think.
Many times, large public companies will actually invest in other businesses when they are still private. However, the corporation may choose to hold on to its shares even after the company it invested in pursues a liquidity event such as an initial public offering (IPO).
Eventually, companies may choose to sell their shares or reduce positions in companies they invested in -- hopefully for a profit. This style of portfolio management can help companies bolster their cash and strengthen liquidity in ways beyond growing revenue and expanding cash flow.
Image source: Getty Images.
Crypto and the election
New 13F filings for the third quarter should be available in the next couple of weeks. I am curious to see how Yass and his billionaire hedge fund cohorts have been investing in crypto during the past few months.
In particular, Bitcoin and other mainstream cryptos have witnessed some outsized activity after a series of bullish remarks on the industry from presidential candidates Kamala Harris and Donald Trump, and from Robert F. Kennedy Jr. before he ended his campaign.
Even though rhetoric at the intersection of politics and crypto has likely influenced the price of different coins the past several months, I see opportunities such as Coinbase or MicroStrategy as solid options right now.
Coinbase is more of an agnostic and insulated approach to investing in crypto, and I think the company is a compelling option for those interested in digital currency.
Bitcoin Price Chart
Furthermore, if you believe in the long-run notion of cryptocurrency becoming more widely adopted in the future, then MicroStrategy's choice to hold Bitcoin on the balance sheet makes a lot of sense, as the company stands to benefit from gains in its position.
The main difference I think investors should be aware of is that the price of Bitcoin is quite volatile -- certainly more so than many stocks or short-term investment vehicles such as bonds or money market instruments.
For these reasons, MicroStrategy's financial flexibility may be seen as riskier compared to other companies that primarily hold more liquid assets on the balance sheet.
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Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Adam Spatacco has positions in Coinbase Global. The Motley Fool has positions in and recommends Bitcoin, Coinbase Global, and Ethereum. The Motley Fool recommends Charles Schwab and recommends the following options: short December 2024 $67.50 calls on Charles Schwab. The Motley Fool has a disclosure policy.
