Will MercadoLibre’s Crypto Bet Pay Off?

The cryptocurrency market has crashed after the massive rise last year. Like the stock market, investor sentiment changed and investors began to prefer stable, reliable companies to speculative investments.

Crypto is arguably the most speculative investment you can make right now, so all cryptocurrencies were crushed. Even the most remarkable coins like Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO: ETH) is down over 50% so far this year.

Now, MercadoLibre (MELI -4.50%) — one of Latin America’s leading e-commerce and fintech companies — has built its own form of cryptocurrency. With crypto in the dumps, can MercadoLibre’s speculative efforts pay off?

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What can MercadoCoin do for MercadoLibre?

MercadoCoin will become a loyalty rewards program for MercadoLibre’s e-commerce users. With increasing competition in the e-commerce space from companies such as Sea Limited (NYSE: SE) in Latin America, MercadoLibre appears to be looking for a way to increase brand loyalty and convince consumers to continue using MercadoLibre’s e-commerce platform.

The solution: Consumers will receive MercadoCoin, which can be seen as a form of cashback, for purchases made on MercadoLibre’s e-commerce platform. Then consumers can either use it to buy more products or sell it for traditional money.

An important detail about this is that consumers can only trade MercadoCoin on Mercado Pago, the company’s fintech platform. In theory, this should increase stickiness between the two platforms and help bring consumers deeper into MercadoLibre’s entire product ecosystem.

MercadoLibre plans to roll this out to 500,000 Brazilian consumers in the initial phase of this launch. This may sound like a lot, but it’s just a drop in the bucket compared to the company’s total of 84 million active users as of Q2.

MercadoLibre’s larger businesses look a lot sweeter

Even with this announcement, MercadoLibre only has a small exposure to crypto. Prior to this, the company’s primary exposure was allowing consumers to buy and sell crypto on its fintech platform. MercadoLibre had approximately $7.8 million in Bitcoin on its balance sheet as of May 2021. But even that is peanuts compared to its total balance sheet: MercadoLibre had nearly $3.9 billion in cash, restricted cash and short-term investments, along with $456 million in long-term investments at the end of the second quarter of 2022.

If MercadoCoin succeeds, the company’s crypto vulnerability will increase. That said, it would have to explode in popularity to reach the scale of the mainstream companies. The e-commerce platform, for example, has enormous scale across Latin America: In Q2, it sold 275 million items for nearly $8.9 billion in gross merchandise value.

In addition, the fintech business is seeing rapid adoption and increasing scale. In Q2, Pago saw total payment volume jump 84% year-over-year on a currency-neutral basis to $30.2 billion. The active fintech users also jumped by 26.5% in the same period to 38.2 million. It also wouldn’t be a shock to see the number of active users increase steadily if MercadoCoin brings more e-commerce users into the fintech ecosystem.

MercadoCoin is a feature, not necessarily a product in itself. Therefore, given the scale of MercadoLibre’s other platforms and the amount of revenue the company generates from them, MercadoCoin will have to reach an impossibly high scale to have a significant impact on the business.

MercadoLibre is a long-term play

While this venture into crypto and building its own cryptocurrency is risky, MercadoLibre is a company willing to take risks for long-term rewards. The entire business model is built on capturing a long-term opportunity: the growing use of fintech and e-commerce in Latin America. Therefore, it is not surprising that the company takes a small bet on crypto.

That said, this is still a small fish in a big pond. It’s unlikely that it will significantly affect MercadoLibre’s actual business if it crashes and burns, given the size of its revenue-generating platforms. It also has the potential to increase product stickiness and help it beat tough competition in the space.

Additionally, shares of MercadoLibre look very appealing right now. The company trades at 5.1 times sales, and shares have only traded at a lower value twice in their life as a public company. With stocks so cheap and core businesses continuing to flourish, it might make sense to buy stocks now.