3 Stocks That Are Better Than Bitcoin To Make Money

Hello fellow compounders! In my last video someone asked how to invest in Bitcoin?

Well, I believe that there's a better way to make money from the Bitcoin phenomenon than to buy Bitcoin itself. In this video, I'll suggest three stocks that are better investments than buying Bitcoin.

Welcome to the Always Be Compounding Club, where we share ideas on how to build, grow and enjoy wealth. I'm your host, Dennis Chen. I'm a full time investor, entrepreneur, financial book author, Wharton MBA and CFA charter holder. Welcome aboard.

Let's get started. I'll be reviewing PayPal, Block and Silvergate Capital. These are profitable companies that make money from providing the infrastructure and services for trading Bitcoin and other cryptocurrencies.

But before we do that, let me be clear, I agree that you can make money in Bitcoin as a speculator, but not as an investor. Why do I say that? Bitcoin is a speculative asset, it's because Bitcoin doesn't have any intrinsic value. It doesn't generate any tangible value.

Let's take, for example, a stock of Coke. Coke is a business that generates profits and pays out dividends. While Bitcoin doesn't generate anything, and it doesn't pay out any dividends. So the price of Coke is determined by the discounted value of the future earnings of Coke. While, since Bitcoin doesn't have any future earnings, the price of Bitcoin really depends on what someone else is willing to pay for it. So this is what we call the greater fools theory. So instead of speculating, let's look for businesses or stocks that can profit from Bitcoin without taking the exposure similar to the 1849 Gold Rush.

In the 1849, California Gold Rush, the gold prospectors really didn't make much money. The ones that really made the money were the intrapreneurs that provided the shovels and the wheel barrels, and the dry goods to the gold prospectors. For example, take Levi Strauss. Levi Strauss emigrated, went to California, to San Francisco, and opened a wholesale business and sold dry goods to the gold prospectors. And eventually, he patented blue jeans and sold blue jeans in that business. Levi Strauss still exists today, you know, after 170 years, and is traded on the New York Stock Exchange, and it has a market capitalization of $7 billion. So we want to be able to make money by providing the shovels, the blue jeans and the wheel barrels to the people that want to speculate in Bitcoin.

So let's review the three stocks we're suggesting. First off, we'll review PayPal, many of you should know it. It's been around for a long time. One of its founders was Elon Musk. It was spun off from eBay in 2015, it’s the premier payment solution provider for E-commerce businesses. It has a market cap of $100 billion, and it has a net income of around $4.2 billion. Recently in 2021, it had 426 million active users, they had $25.4 billion in revenue, and $5.4 billion in free cash flow in 2021. PayPal processed $1.25 trillion in payments in 2021. It owns Sue and Venmo and its return on equity averaged around 17% over the last three years. Its earnings are expected to grow around 14% per year over the next five years, and Morningstar estimates its fair value at around $139 per share. Currently, today, May 31 2022, it's selling for around $83 per share, which is around 60% of the fair value estimate. Paypal and Venmo can be used to transact Bitcoin, Ethereum. Litecoin and Bitcoin Cash. Current PayPal charges a commission for doing these transactions. Currently it isn't a large piece of the revenue base of the $25 billion of revenue that PayPal does, but I think it's a real business. It's been around for a long time. It's solid, it makes money and it's a much better investment than Bitcoin at this point.

Our second stock is Block (symbol SQ). It's formerly known as Square, you might know it. Its CEO is Jack Dorsey who used to be CEO of Twitter. Also, Block is a holding company that owns Square Cash App and recently bought Afterpay. Square is an online payment technology provider for small businesses. Cash App is a payment app for person to person transfers, similar to PayPa and Venmo. Block has a market cap of around $50 billion, excluding Bitcoin revenue. The revenue growth is high, scores year over year revenue growth was at 35%. And Cash Apps, year over year growth was at 26%.

In the first quarter of 2022, Cash App had $1.73 billion dollars worth of Bitcoin transactions, which generated a gross profit of $43 million. Bitcoin transactions represent 44% of the first quarter revenue of Block, well, last year and 2021. In first quarter of 2021, it represented 69% of the revenue, because Bitcoin is falling, revenues from the Bitcoin transactions have gone down. However, since its profit that it generates is fairly low, it’s a small commission that they charge for those transactions. It doesn't impact that much the overall profitability of the business to business right now. It’s barely profitable, or it's barely making a profit. However, profits should increase as they gain more scale, and they consolidate afterpay in all their businesses that they're integrating. Once all the investments in gross normalizes, this business should be able to make a profit or more profits. Morningstar bases a fair value estimated for Block at $124. Currently, today, May 31, it’s trading at around $88 per share, which is 71% of the fair value estimated.

What I like about this business is that it makes commissions off of the transactions of processing Bitcoin, it doesn't take a position in Bitcoin itself. So even if Bitcoin disappears, the business will survive and make money from electronic payments.

The third business that we'll review that is better than Bitcoin is Silvergate Capital. It's a Federal Reserve member bank based in California that provides the infrastructure to trade cryptocurrencies for commercial and institutional clients. It has a market cap of $2.5 billion price to book ratio of 1.62. And its annual net income growth rate for the last three years is around 52%. They have 1500 clients, and they provide a silvergate exchange network, which allows the clients to send and receive US Dollars and Euros 24 hours a day, seven days a week, which is necessary to be able to transact Bitcoin and other cryptocurrencies. They have been profitable for over 20 years, they have $14.7 billion in deposits from these clients, which they pay zero interest rate for. So basically, they are very levered to interest rates, because what they do is that they take these deposits, $14.7 billion, that’s where they pay no interest to their depositors, and they go and invest it and make loans against it. And so that's where they make their money.

Recently, Silvergate purchased Diem from Meta or Facebook, which is a stable coin that they're developing. They'll be able to collect fees from the blockchain technology of the stable coins. The fair value estimate of Silvergate is at around $127, on May 31. It's selling at around $80, which is 62% or 63% of the fair value estimated. This is a small bank, $2.5 billion, but it is profitable. It's been profitable for over 20 years, it's set up to make money from the growth of cryptocurrency. But if for any reason, cryptocurrency flops, it still has value as a bank, and it's regulated by the Federal Reserve.

So there you have it. Three businesses that are profitable, and are better than owning any Bitcoin or any other cryptocurrencies, because they provide services and infrastructure for the cryptocurrency trading and they are profitable. Personally, I already own PayPal, I'm probably going to be adding blocks to my portfolio in the near future. If you have any questions or comments, please place them in the comments below.

Thank you for watching and remember to always be compounding. Take care.