For investors seeking to benefit from the rising price of Bitcoin, cryptocurrency stocks Silvergate Capital (SI) and Marathon Digital Holdings (MARA) may be just the ticket. The two stocks have crushed the broader markets and we think have the potential to gain momentum if the bull run continues this year. Let’s discuss. Read on.
Cryptocurrencies have been on a tear since March 2020. Over the last 14 months, the prices of several digital currencies, including Bitcoin, Ethereum, and Dogecoin, have been on a stellar ascent. The total crypto market is worth more than $2 trillion today and has attracted institutional investment, driving widespread adoption in the process.
For investors seeking to gain exposure to this highly disruptive and volatile space, buying and holding digital tokens via a crypto exchange may be a convenient way. Alternatively, investors can invest in companies that are associated with cryptocurrencies. Here, we look at two such companies that have gained popularity due to the crypto boom.
Silvergate Capital (SI) a financial institution that has partnered with crypto trading exchange houses. Marathon Digital Holdings (MARA) is a bitcoin mining company.
So, let’s see which of these two names is a better stock buy and hold for long-term investors.
Silvergate Capital is up 550% since IPO
Silvergate Capital is a banking company that can be considered a digital-asset specialist. It basically facilitates retail and institutional investors access to the cryptocurrency market. The Silvergate Exchange Network, also known as SEN, allows crypto traders and investors to buy and sell digital currencies by partnering with multiple exchanges.
SEN is a global payments platform that enables the real-time transfer of U.S. dollars between the exchange and Silvergate customers. Silvergate does not have to pay its customers interest on these deposits, which will benefit its bottom-line if interest rates increase in the future.
In the first quarter, the average deposits from digital currency customers stood at $6.4 billion, up from less than $4 billion in Q4 of 2020.
SI already has an enviable 33% profit margin. It has a strong balance sheet and ended Q1 with close to $4 billion in cash. SI is relatively small, with a market cap of just over $2 billion. Because its deposits have accelerated over the last year, it has a loan-to- deposit ratio of just 23%, which is among the lowest in the industry, giving it ample opportunity to increase its lending going ahead.
Currently SI is trading at a 13x forward price to sales multiple, which may look steep. However, Wall Street expects the company to increase its sales by 68% year-over-year in 2021, and by 40% in 2022. Its 32.6x price-to-earnings multiple is also attractive because analysts expect its EPS to rise by 82% in 2021 and 40% in 2022.
Silvergate stock is currently trading 54% below its record high. Despite the pullback, its shares have gained more than 550% since its IPO and might double again in the next year given consensus estimates.
Marathon Digital Holdings
In the first quarter, Marathon Digital Holdings reported $9.2 million of revenue, representing a 1,445% increase year over year. Comparatively, its net income stood at $83 million. The accounting rules for Bitcoin mining companies can be tricky because they process related blockchain transactions and are rewarded by digital currencies for their efforts.
Marathon confirmed that it recognizes revenue based on the prices at which it receives Bitcoin. Because it had to update the prices of Bitcoin on its balance sheet, the company reported an unrealized $137 million gain in Q1 due to the digital asset’s rising prices. It also reported a $47 million operating loss in the quarter ending March 31.
Mining companies such as Marathon Digital need to keep improving their hash rate to allow them to mine Bitcoins at an incremental rate. Further, any increase in the price of Bitcoin will also push up the value of these assets held on the company’s balance sheet.
Due to the rapid rise of Bitcoin, shares of Marathon Digital have risen by 3,300% in the last year. But investors should also realize that the stock will grossly underperform the broader markets if/when the crypto market experiences a sell-off.
Marathon Digital is valued at a market cap of $2.42 billion, and analysts expect its sales to rise by a whopping 6,400% to $286 million in 2021, indicating a forward price to sales multiple of less than 10x.
The final takeaway
Both stocks discussed here can be part of an investor’s portfolio if the investor is bullish on Bitcoin and cryptocurrencies over the long term. But for those with a lower risk appetite, Silvergate seems a better buy given that it is a banking company with diversified streams of revenue. In a crypto bear market, Silvergate will also lose revenue as account holders will not trade as much. However, it has other verticals to offset these losses.
SI shares were trading at $88.35 per share on Friday afternoon, down $3.57 (-3.88%). Year-to-date, SI has gained 18.89%, versus a 11.62% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditya Raghunath
Aditya Raghunath is a financial journalist who writes about business, public equities, and personal finance. His work has been published on several digital platforms in the U.S. and Canada, including The Motley Fool, Finscreener, and Market Realist.
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