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Whether Bitcoin goes to $1 or $1 million, it’s already made an indelible impact on the financial markets. The word of the day here is “Blockchain.” We’ve seen the mania surrounding cryptocurrencies but on the equity side it’s bordered on insanity. There have been some very famous cases of companies simply adding the word “Blockchain” to their names and then rallying 500% the next trading day.
This sort of insanity has created a huge buzz in the investment community, sparking debate on both sides of the view. Unfortunately, plenty of investors intrigued by the prospects of the blockchain could be sucked into scam stocks. In this article, I’m going to make sure you don’t get hurt chasing these fake blockchain companies and instead, steer you towards investment ideas that are still fundamentally sound and built around real, sustainable businesses.
When looking at the cryptocurrency ecosystem, you find that there are plenty of ways to invest in the blockchain. We can break down these stocks into a number of different categories.
1) The “Picks and Axes” and Miners
During the gold rush, the ones who really got rich were the ones selling the picks and axes. That is, the companies which provided the tools for the speculators to go out and try to find their fortunes. In the cryptocurrency world, this refers to the companies that make the chips and hardware used for mining operations. Examples would include a host of semiconductor companies.
Then there are the miners themselves. Miners confirm transactions from node to node by solving the cryptographic problem and are then rewarded in units of the cryptocurrency. Already we are seeing publicly traded companies that “mine” cryptocurrency. These companies mine the currency then immediately sell them on the open market and pass through the gains to shareholders. Think of them as you would a pipeline company in the energy sector. These companies are small now, but could become much larger in time.
2) Cloud Infrastructure
No other industry has been as dependent on the cloud for its development as blockchain has. The need to distribute a ledger across the world, with no centralized ownership or authority overseeing transactions plays into the strengths of the cloud. However, the cloud is still at risk here, as blockchain technology can distribute storage across the globe, fighting the centralized nature of traditional cloud services. Still, this industry can adapt the technology to benefit.
3) Payment Processing and Lending
Among the most disruptive industries for blockchain is payment processing. Rather than your traditional financial intermediary, blockchain technology allows for a distributed, open, public ledger where transactions are confirmed by other nodes in the chain for a fee that’s much smaller than your typical fees coming from more traditional processors.
Blockchain tech is also perfect for lending, allowing a lender to spread their risk across thousands of loans in an instant, no matter the size of the lender. We are just at the tip of the iceberg in this arena.
4) Investors, Business Development Companies and Consulting
There will be a wave of companies looking for ways to incorporate blockchain technology into their existing businesses. Already, large consulting companies are beginning to offer services helping companies to integrate the new tech. Gartner has even developed a site dedicated to this purpose.
Some publicly traded companies are acting as incubators for other budding cryptocurrencies. There are currently over 1,300 other cryptocurrencies in the world. These investors and business development companies invest in promising crypto companies before they hit the mainstream.
5) Futures and ETFs
The legitimization of Bitcoin continues as futures contracts have started trading on two large exchanges in the US. Soon there will also be officially regulated ETFs for Bitcoin and Ethereum. In the meantime, investors have been using GBTC as proxy.
It’s too early in the game to understand what the impact of cryptocurrency will be on the global economy. Some think it’s a flash in the pan, others believe it will revolutionize the world. I suspect that the truth lies somewhere in between.
David Bartosiak is Zacks’ resident technical and momentum expert. He selects stocks and delivers exclusive commentary for two private Zacks Ultimate portfolios.