Despite a tumultuous 2020, the stock market ended the year substantially higher. The benchmark S&P 500 finished up by 16%, which is nearly double the index’s average annual return over the past 40 years. But this gain pales in comparison to what bitcoin has been able to deliver for its investors.
Last year, the world’s largest cryptocurrency by market cap more than quadrupled. Meanwhile, over the trailing five-year period, it’s gained better than 8,200%. Investors would struggle to find a public company with more robust returns over the past half-decade.
There are smart ways to play the bitcoin craze
Investors’ love for bitcoin has also spilled over into equities. There are more than a dozen publicly traded stocks that are in some way affiliated with bitcoin — and some of these businesses look downright intriguing.
For example, payments platform Square (NYSE:SQ) has received a healthy revenue boost thanks to bitcoin exchange and investment via Cash App. This peer-to-peer payment platform has seen its monthly active user count more than quadruple since the end of 2017, and it’s proven especially popular with millennials and Generation Z. Square has placed about 1% of its total assets ($50 million, at the time) into bitcoin tokens.
Tech stock NVIDIA (NASDAQ:NVDA) has also been a clear winner from bitcoin euphoria. Among its many products, NVIDIA sells graphics processing units used by cryptocurrency miners. These miners use high-powered computers to solve complex mathematical equations that validate the accuracy of transactions on bitcoin’s blockchain network.
The most dangerous bitcoin stocks
But there are also more than a handful of bitcoin stocks that look downright dangerous. Investors would be wise to avoid these cryptocurrency stocks like the plague.
Grayscale Bitcoin Trust
The fact is that not everyone who wants to buy bitcoin feels comfortable doing so from a cryptocurrency exchange. Further, the Securities and Exchange Commission hasn’t given the green light for the creation of bitcoin exchange-traded funds. Thus, one of the few ways to gain bitcoin exposure without directly buying bitcoin is with the Grayscale Bitcoin Trust (OTC:GBTC).
In easy-to-understand terms, the Grayscale Bitcoin Trust purchases and holds bitcoin tokens. It updates its token count pretty regularly, making it easy for current and prospective investors to calculate an accurate net asset value (NAV) for what’s on the books, so to speak. Unfortunately, the Grayscale Bitcoin Trust has two key drawbacks.
First of all, it typically trades at a substantial premium to its NAV. As of Jan. 26, it held 647,288 bitcoin tokens. Based on a valuation of $32,175 per bitcoin, this is a NAV of $20.83 billion. However, the Grayscale Bitcoin Trust closed on Jan. 26 with a value of $21.48 billion. Believe it or not, this is actually one of the smallest premiums I’ve seen in the years…