- Goldman Sachs maintains a basket of cryptocurrency- and blockchain-exposed large-cap stocks.
- The basket has crushed the S&P 500 by 34 percentage points on average with returns of 46% this year.
- We explain the strategy for selecting the stocks and list the 19 cypto-exposed companies.
- See more stories on Insider’s business page.
Investing in cryptocurrencies isn’t always easy. Over the years, the process has improved as more cryptocurrency exchanges and wallets, such as Coinbase and Exodus, have targeted mainstream users, but there are still plenty of challenges to overcome.
Most portfolio managers and financial advisors don’t manage cryptocurrencies yet, which leaves many investors to take the lead in setting up their own wallets, understanding how to safely store private keys, and researching the merits, as well as risks, of a variety of cryptocurrencies.
Even once an investor overcomes those hurdles, they then have to come to terms with the volatility of owning cryptocurrencies. As an example, bitcoin’s price dropped 22% from a record high of $63,770 on April 15 to a close of $49,078 on April 25. The price is now sitting around $54,800.
In addition to the volatility, investors have to get a grip on the quirks of an industry that is relatively unregulated and constantly evolving. That’s not to everyone’s taste.
For some investors, it’s too much risk. So what are the opportunities for investors who want to gain exposure to crypto without taking on significant amounts of risk?
For the lucky few who are accredited and institutional investors, they can buy in to crypto-market investment trusts from providers like Grayscale that handle some of these risks.
Some countries offer investors, both institutional and retail, exposure to cryptocurrency through a simple exchange-traded fund.
Another option, which is perhaps the most straightforward, is to invest in companies that have exposure to cryptocurrencies and blockchain technology.
Most investors are probably already familiar with a subset of companies that own or trade crypto, such as Tesla, MicroStrategy, and Square.
Goldman Sachs released a research note on April 26 that listed 19 large-cap stocks with exposure to the cryptocurrency and blockchain space.
“Our screen yields 19 stocks with market caps greater than $1 billion,” Ben Snider, a Goldman Sachs analyst, said. “On average, these stocks have outperformed the S&P 500 by 34 percentage points year to date (+46% vs. +12%) alongside an 86% rise in the price of bitcoin and a 156% rally in the Bloomberg Galaxy Crypto Index.”
Investors can easily incorporate a holding in these large-cap stocks into their existing strategy, thereby gaining exposure to the world of crypto.
The basket of stocks appear to follow the price of bitcoin. These stocks lagged the broader equities market by 10 percentage points when cryptocurrency prices dipped over the past two weeks.
Goldman Sachs
Finding crypto-exposed stocks
The analysts at Goldman Sachs leveraged a three-pronged strategy to find US stocks with blockchain and cryptocurrency exposure. They focused on those with a market value over $1 billion.
The strategy involved:
1) Text search
They looked for keywords such as “blockchain” and “cryptocurrency” in company filings, earnings calls, presentations, and news articles over the past 12 months.
They also leveraged company descriptions on FactSet and Bloomberg.
“Any relevant finding warrants 1 point; 10 or more findings warrant 3 points; explicit mention in Bloomberg or FactSet company description warrants 3 points,” Snider said.
2) Regression beta analysis
The team ran analysis to test for regression beta of these company share prices relative to bitcoin – or, in other words, how much the shares moved if bitcoin moved. They did the same analysis to check the relationship between bitcoin and the broader stock market, as a control.
The beta represents the relationship. The higher the beta, the more the change in the value of bitcoin will affect the value of the company’s stock.
“A beta ranking in the top 25% of stocks warrants 1 point; a beta ranking in the top 10% of stocks warrants 3 points,” Snider said.
3) Inclusion in 3rd-party blockchain indexes and ETFs
The team looked for stocks in six third-party blockchain indexes and exchange-traded funds.
“Membership in any index warrants 1 point; membership in two or more indices warrants 3 points,” Snider said.
Goldman Sachs
Crypto-exposed stocks
Once a company achieves a score for all three areas, these are then added together and the company receives an overall exposure score.
“We include in the screen any stocks in the universe with six or more points,” Snider said. “Effectively, this means that each constituent must screen as highly exposed in at least two of the three approaches.”
This analysis resulted in a list of 19 large-cap crypto- and blockchain-exposed stocks.
“On average, these stocks have dramatically outperformed the S&P 500 during the last several months alongside the surge in the price of bitcoin,” Snider said. “An equal-weighted portfolio of the stocks has demonstrated roughly 60% correlations with bitcoin and the Bloomberg Galaxy Crypto Index during the last several months, compared with 20% correlations for the S&P 500.”
We broke down the list of the 19 stocks. As a comparison point, the average stock within the list has the following qualities:
Market capitalization: $208 billion
Year-to-date return: 43%
Forward price-to-earnings ratio: 23X
Beta to bitcoin (BTC) exposure: 0.39
Total exposure score: 7
A median US stock with a market capitalization of over $1 billion will have the following qualities:
Market capitalization: $5 billion
Year-to-date return: 16%
Forward price-to-earnings ratio: 22x
Beta to BTC exposure: 0.03
Total exposure score: 0