Still not ready to buy Bitcoin? Invest in these stocks instead

Bitcoin (BTC -2.43%) has been on a remarkable run to start the year, up 65.93% year to date. But as any crypto investor knows, investing in Bitcoin always comes with enormous volatility and risk. Even the slightest hint of future rate hikes by the Federal Reserve can send the price of Bitcoin plummeting, and many investors remain hesitant to put their money into a crypto that collapsed by 65% ​​last year.

So with that in mind, the goal is to find stocks that are correlated to the price of Bitcoin, but can provide more security and less risk than investing in crypto directly. These stocks are usually held by exchange-traded funds (ETFs) that specialize in blockchain and crypto and are therefore fairly easy to find and analyze.

With that in mind, here are three stocks that could benefit from the recent Bitcoin rally.

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1. Micro strategy

What does Micro strategy (MSTR -1.51%) unique is the large amount of Bitcoin that it has on the balance sheet. According to CoinGecko, MicroStrategy currently holds nearly 130,000 Bitcoins, worth an estimated $3.6 billion at today’s prices.

This figure is significant, because it represents more than the entire market capitalization of MicroStrategy, which is $3 billion. Shares of MicroStrategy are up almost 74% for the year, so investors clearly see MicroStrategy as a highly leveraged bet on the future price of Bitcoin.

But investing in MicroStrategy gives you the added margin of safety of investing in a publicly traded software company. In other words, there’s more to MicroStrategy than just Bitcoin, and you get peace of mind knowing you’ll get audited financial statements every quarter.

The latest twist from MicroStrategy is the creation of a new business unit that will attempt to capitalize on some of the growth from Bitcoin being used as a payment option. The entity will focus on technological deployment related to the Lightning Network, a Layer 2 payment protocol for Bitcoin. This may help to mitigate the concerns of some investors that MicroStrategy is not using its capital optimally.

2. Coinbase Global

Coinbase Global (COIN 1.27%) also has a significant amount of Bitcoin. According to CoinGecko, Coinbase has 9,000 Bitcoins worth $248 million at today’s price.

That’s because Coinbase, as the world’s second largest cryptocurrency exchange, has a core business that is heavily leveraged to the price of Bitcoin. Trading volume increases when Bitcoin is in a bull market, but trends down when Bitcoin is in a bear market. Thanks to the recent Bitcoin rally, Coinbase is now up more than 117% year-to-date.

So the core investment case for putting your money in Coinbase right now is the return of the retail investor to the crypto market. As long as Bitcoin maintains its upward trajectory, investors should be willing to move their money over to Coinbase, and that will continue to boost Coinbase’s stock price.

From a risk/reward perspective, Coinbase also gives you additional diversification beyond just Bitcoin. While Bitcoin represents 41.25% of all trading volume on Coinbase, the platform offers trading access to nearly 250 different cryptos and digital assets such as non-fungible tokens (NFTs). Also, Coinbase is now active in over 100 nations, so there is geographic diversification as well.

3. PayPal

PayPal (PYPL 0.37%) is increasingly focusing on the world of crypto and digital currency transactions. In October 2020, the company began enabling users to buy, hold, and sell a handful of cryptos (including Bitcoin) directly through the PayPal platform. By the end of 2022, PayPal held more than $600 million of its customers’ crypto, of which $291 million was in Bitcoin.

However, with PayPal you don’t get nearly the same correlation with Bitcoin as you would with Coinbase or MicroStrategy. Bitcoin represents only a small fraction of PayPal’s current business model, although PayPal’s holdings of Bitcoin are surprisingly massive.

So you really have to take a long-term approach here and understand that PayPal is much more interested in the future of payments. PayPal has been working on a number of interesting payment projects, such as the development of its own stablecoin.

And PayPal continues to invest in blockchain-related startups focused on payments. According to PayPal, much of its future Bitcoin strategy will depend on the official regulatory stance on crypto.

As with all financial services stocks, there is always a risk that PayPal could be caught up in the current bankruptcy. While PayPal has a proven track record as a fintech (or financial technology) innovator, it’s also starting to look more and more like a traditional bank.

So are these stocks a buy?

There’s a good reason why I didn’t include a single Bitcoin mining stock on this list — all signs point to Bitcoin mining becoming an increasingly poor business, due to all the new rules and fee changes related to energy consumption and power usage. The government makes it very difficult for Bitcoin miners to be profitable. Nevertheless, if you take a look at some popular Bitcoin ETFs, you will see that they are filled with mining stocks.

For now, I’m looking at companies that could benefit the most from the current Bitcoin rally. I’m particularly bullish on Coinbase right now, simply because of all the smart ways the company is finding to generate revenue and diversify internationally in a time of market uncertainty. It’s exactly the kind of company that can provide indirect access to the upside potential of Bitcoin, without all the risk of investing in Bitcoin directly.