Cryptocurrencies, Overstock and ARK ETFs
02/27/2018 5:00 am EST
Unless you've been living in a cave for the past year you will be aware of the cryptocurrency craze that has been sweeping through financial markets around the world. Bitcoin is the best-known of these cryptocurrencies but there are many more that have been launched recently, notes Glenn Rogers, contributing editor Internet Wealth Builder.
Bitcoin was created in 2009 by an anonymous person using the Japanese alias Satoshi Nakamoto. Essentially, it and others like it are alternative currencies that operate outside the existing financial systems, which means there are no banks or governments involved.
The value of a bitcoin is mostly generated by scarcity and speculation. It is sometimes compared to gold as a hedge against fiat currencies and, like gold, it is meant to have an implied value as a hedge against currency fluctuations.
A number of exchanges have sprung up that allow traders to buy bitcoin and other cryptocurrencies. Coinbase, bitstamp, and bitinex are three of the larger ones.
Associated with bitcoin and other cryptocurrencies is something called blockchain, which is essentially the Internet of money. Blockchain is a large electronic platform on which you can build many application, of which cryptocurrencies are just one.
If you are confused by all this, don't feel badly. It's a complicated and very new development and it will take several years to fully understand the impact these new technologies will have.
That said, there are elements of this new trend that I'm sure are speculative bubbles and some that are very real and have tremendous profit potential. Think back to the late 1990s when investors had to decide whether to invest in Myspace or Facebook, or Netscape or Internet Explorer. Those are the kind of dilemmas we now face as the new blockchain universe unfolds.
This past month bitcoin lost over 50% of its value. Fears of government regulation around the world, new less-expensive currencies, and speculative excesses led to more recent buyers losing a lot of money. But early bitcoin buyers have done very well. So yes, you can get rich by speculating in cryptocurrencies, but it seems to me to be extraordinarily risky.
However, investing in blockchain may be like buying Google at its IPO. We have a couple of ways for you to get exposure to this emerging technology without experiencing sleepless nights, or at least not too many of them.
One of the most popular proxies for cryptocurrencies and blockchain has been an e-commerce company called Overstock.com (OSTK). Overstock has been around a long time and competes as a discount online retailer — think of it as a poor man's Amazon.
The company went public in 2002 and basically traded sideways for the last five years, but it has endured and its site generates 40 million visitors a month. Three-quarter of those are women.
The business lost money for some time and is now only modestly profitable but the overall quarterly trend has been very positive. Revenue has been growing slowly and last year reached $1.8 billion. However, all that reflects the legacy business and does not reveal the business Overstock is in the process of becoming.
The company is transforming itself into the blockchain currency leader by investing in a number of the early crypto adopters. As a result, the stock was driven up from $13.75 a to a high of $89.80 before the recent correction.
Overstock is considering a selling off its traditional retail business (the rumor is Kroger is looking at it) and moving completely into the blockchain and crypto area.
Traders like using Overstock as a proxy because of it generates real revenue and has proven management experience along with a strong understanding of technology, which is baked into the business.
As I write, this stock is 36% below its high but is rapidly regaining the momentum it had before the recent market retreat. It is a speculative choice and is not for conservative investors, but as a small part of your portfolio this could be a way for you to participate in a complicated but dynamic area.
There are two far less risky ways to get some exposure to bitcoin but of course the rewards may not be as dramatic either. Ark Innovation ETF (ARKK) and Ark Web X.0 ETF (ARKW) are new funds that each have 10% bitcoin exposure and a lot of high tech content as well.
ARKW has the majority of its holdings in stocks like Amazon, Twitter, and Nvidia, while ARKK gives you some of the same coverage but with high-tech healthcare added in.
Both funds were up 89% last year and didn't pull back much even with the recent market retreat and the decline in bitcoin. They are the safest way I know to get some exposure to cryptocurrencies without risking very much.
Action now: Speculation investors may buy OSTK, with a price target of $70. It closed Friday at $64.15. For less risk, buy either ARKK or ARKW.