The surge in the value of Bitcoin has dragged other cryptocurrencies higher, which in turn attracted many investors looking for some quick and easy ways to make a lot of money. Unfortunately, the popularity of cryptocurrencies have attracted a lot of what is commonly known as “dumb money” people who don’t really have the expertise to invest and who commit their own capital, often registering huge losses. Earlier this year, several big banks and credit card companies have halted purchases of Bitcoin and other cryptocurrencies on their cards because they don’t want to deal with the credit risk associated with these transactions.
The risks associated with investing in cryptocurrencies are known, yet it doesn’t stop people from speculating on them, despite many warnings from experts that the cryptocurrency market is a bubble. However, there still is a pretty sizable crowd that argues that cryptocurrencies are, if not an alternative to fiat currencies, then at least an emerging asset class. We should see who is right in the end.
However, the reality is that many companies nowadays are trying to ride the cryptocurrency wave. Some companies announce changes in their business models that would focus them on cryptocurrencies and the underlying blockchain technology, which is the case of Eastman Kodak, or Long Blockchain Corp, which changed its name from Long Island Iced Tea. Both companies saw their stock prices soar following the announcement that they would focus on cryptocurrencies. Other companies launch their own blockchain-based projects and release their own cryptocurrencies, which they sell to the public via Initial Coin Offerings.
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The availability of platforms like Ethereum allow to easier launch new applications based on blockchain technology and create tokens using a template that generate their value based on their usage within a ecosystem. The interest in cryptocurrencies has led to creation of over a thousand various tokens, which collectively gathered hundreds of millions of dollars through ICOs, but the sustainability of many of them is questionable at best. Because cryptocurrencies are unregulated, investors are acting at their own risk and should conduct due diligence before investing in an unknown cryptocurrency. It’s better to purchase cryptocurrencies that have some underlying value, such as Ethereum or Ripple (take a look at five easiest ways to buy Ripple), which at least enjoy some level of support from big corporations due to the benefits provided by their respective blockchain ecosystems.
There is a less risky way to get some returns from the popularity of cryptocurrencies, which is to invest in big companies that have some indirect exposure to cryptocurrencies or blockchain technologies. Because these are well-established companies, they offer little downside risk in case the cryptocurrency market tumbles.
With this in mind, we have selected five companies that have exposure to cryptocurrencies and blockchain technologies and took into account the hedge fund sentiment towards them. We assess the hedge fund sentiment based on the number of funds we track at Insider Monkey as part of our small-cap strategy that are holding shares of a company. On the next page, we will take a look at the companies we have selected and see how the hedge fund sentiment towards them changed during the fourth quarter, taking into account that one of the reasons for the changes in sentiment is these companies’ exposure to cryptocurrencies.
Let’s start with the smallest company on our list: Overstock.com Inc (NASDAQ:OSTK). Overstock.com Inc (NASDAQ:OSTK) is an online retailer that started accepting payments in Bitcoin back in 2014. In addition, the company has a subsidiary that is focused on developing blockchain technology and it has recently launched a joint venture for a global property registry. Overstock.com Inc (NASDAQ:OSTK) saw 16 funds in our database holding nearly 15% of its stock at the end of 2017, compared to nine funds a quarter earlier. At the end of 2016, there were 12 funds in our database long Overstock. One of the top shareholders of Overstock.com Inc (NASDAQ:OSTK) is billionaire George Soros‘ Soros Fund Management, which initiated a stake containing 2.47 million shares during the fourth quarter.
The cryptocurrency boom had a particular effect on semiconductor companies, which sell hardware that is used in cryptocurrency mining. While semiconductor companies have at first shrugged off the impact of mining on their sales, they have started to mention it in their earnings calls and even announced new products designed specifically to address the needs of the cryptocurrency industry. Advanced Micro Devices, Inc. (NASDAQ:AMD) and NVIDIA Corporation (NASDAQ:NVDA), whose GPUs are used for mining altcoins (cryptocurrencies other than Bitcoin), have noticed a significant growth in quarterly revenue since the beginning of 2016. For example, Advanced Micro Devices, Inc. (NASDAQ:AMD)’s quarterly revenue declined by double digits in year-on-year terms between the fourth quarter of 2015 and the first quarter of 2016, the following quarters saw robust double-digit growth. NVIDIA Corporation (NASDAQ:NVDA)’s revenue has been increasing by an average of 40% on the year in the last eight quarters.
Advanced Micro Devices, Inc. (NASDAQ:AMD) saw the number of funds long its stock decline by six to 30 during the fourth quarter of 2017. Similarly, during the fourth quarter of the previous year, the number of bullish investors among those we track also slid to 32 from 47. In the meantime, Advanced Micro Devices, Inc. (NASDAQ:AMD)’s stock lost over 11% last year.
NVIDIA Corporation (NASDAQ:NVDA) saw similar trends. At the end of the fourth quarter, there were 48 funds in our database holding shares of the company, down by nine over the quarter. However, heading into 2017, there were just 35 funds long NVIDIA Corporation (NASDAQ:NVDA).
Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) is the largest semiconductor foundry in the world. Among its many clients is Bitmain, a company that manufactures ASICs, dedicated machines that are used by professionals for mining bitcoins. Bitmain is the largest seller of ASICs and during the third-quarter earnings call, the company said that it had generated between $350 million to $400 million in revenue from crypto miners, which equated to roughly 4%-5% of its total revenues for the quarter.
Among the funds in our database, Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) saw an increase in popularity during the fourth quarter, as the number of investors long the stock increased by five to 33.
Then there’s International Business Machines Corp. (NYSE:IBM), which might be the best bet on the cryptocurrency boom and not just because it is the most popular stock among the five we selected, with 56 funds long its stock heading into 2018. The reason why International Business Machines Corp. (NYSE:IBM) is a reliable play on the cryptocurrency industry is because it doesn’t have any exposure to cryptocurrencies. Instead, International Business Machines Corp. (NYSE:IBM) is shaping itself to be a leader in blockchain technology, which powers Bitcoin and other cryptocurrencies. Blockchain has a lot of advantages in the corporate world and is expected to be a major disruptor to many industries and International Business Machines Corp. (NYSE:IBM) is at the forefront, having teamed up with companies from the food industry like Nestle and Walmart Inc (NYSE:WMT), as well as banks, such as UBS Group AG (USA) (NYSE:UBS) and shipping giant Maersk, to develop blockchain-based applications for the respective industries.
Disclosure: none
