By John Drachman
Bitcoin’s recent surge past $20,000 for the first time has rekindled investor excitement for all things digital.
Fueled by COVID-19, technology-at-a-distance looked attractive anyway entering 2021. As Microsoft CEO Satya Nadella put it recently, “We’ve seen two years’ worth of digital transformation in two months.”
Accordingly, as investors large and small study the price fluctuations of cryptocurrencies, they are also viewing with growing interest the blockchain technology that provides the authentication capabilities that underlie all cryptocurrencies.
While cryptocurrencies and blockchain go together they’re distinctly different. Blockchain is necessary for a crypto currency to exist; but the reverse isn’t true.
- Cryptocurrency is any form of digital asset that uses a decentralized system – a blockchain – to record transactions and issue new units.
- Blockchain itself is a block of computer code that can be used to keep track of a chain of custody involving any type of financial record – including those for cryptocurrencies.
Companies utilizing blockchain include firms hoping to optimize their business operations as well as firms looking to launch or maintain their own cryptocurrencies.
The volatility surrounding cryptocurrencies is well-documented: Anonymous “whales” holding most assets, a highly fickle marketplace, and the demand-only nature of digital assets magnify the ups and downs of digital assets. “Cryptocurrency investing today is a bit like living in the early days of the 1850s gold rush, which involved more speculating than investing,” says John LaForge, Head of Real Asset Strategy at Wells Fargo Investment Institute.
For the prudent investor who wants to sample cryptocurrencies and temper the after-taste of plunging prices, several blockchain-centric stocks may offer the right blend of digital exposure and more moderate fluctuations in 2021:
- PayPal Holdings (PYPL) will allow users to hold Bitcoin, as well as the Ethereum, Bitcoin Cash and Litecoin cryptocurrencies. Allowing users to buy and sell Bitcoin on its platform naturally opens up a new source of revenue for the company. Their business model of collecting a small “toll” for every financial transaction processed should help the company expand its bottom line when it begins to apply its fees to crypto transactions in 2021.
- During Bitcoin’s huge 2017 surge, JPMorgan Chase (JPM) CEO Jamie Dimon called the asset class a “fraud.” That was then. He now supports digital assets, recently spearheading the creation of the bank’s own cryptocurrency: JPM Coin.
- One “picks and shovels” idea in the quest for digital gold is Advanced Micro Devices (AMD) which enjoyed a roaring 2020 as it more than doubled through mid-December. AMD develops high-performance processors used in a wide array of products, but primarily computers and servers that can benefit from any gains in cryptocurrency demand.
For the prudent investor who has a sense of adventure a diversified allocation that includes both digital assets and blockchain-centric exposure might be most desirable. Meanwhile, many financial advisors have become expert in cryptocurrency investing. According to a study by Bitwise Asset Management, twice as many financial advisors will be allocating clients assets to cryptocurrency this year as compared to last. For investors curious about learning more about blockchain and digital assets, speaking with a financial advisor is always a good place to start.
John Drachman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. John is an IABC award-winning writer, who applies his 30 years of financial marketing experience toward advancing the dialog between investors and investment professionals.
