How to buy the Bitcoin dip without buying Bitcoin

Research finds that companies that do business in the cryptocurrency space can be reliable proxies for digital currency exposure. For those who might have been waiting for an entry point, the case could be made that now is a good time to buy.

With the price of Bitcoin falling another 6% following a Friday morning tweet by Elon Musk, financial advisers and investors might be rethinking their commitment to the highly volatile cryptocurrency, which is now down more than 42% from the all-time high reached on April 14.

But for those who might have been waiting for an entry point, the case could be made that now is a good time to buy.

With that in mind, a CFRA analysis of the cryptocurrency shows that there are some more user-friendly ways to gain exposure to the digital currency that might also avoid the same level of stomach-churning volatility.

CFRA vice president of equity research Chris Kuiper turned to the traditional equity markets for correlated crypto exposure based primarily on how publicly traded companies support or invest in the currency.

Kuiper identified 20 companies, divided into eight categories, that have a correlation to cryptocurrencies ranging from 0.31 for hardware provider Advanced Micro Devices (AMD) to 0.97 for crypto mining companies Marathon Digital Holdings (MARA), Hive Blockchain Technologies (HIVE), and Bitfarms (BITS).

As expected, the higher the correlation to crypto currencies, the closer each company’s stock performance tracks that of Bitcoin. Marathon Digital, for example, is down more than 43% from the April 14 Bitcoin peak, while Advanced Micro Devices, which has a third of the correlation as Marathon, is up 3.9% over the same period.

Of course, looked at another way, Kuiper found that higher correlation adds a kind of leverage factor to those stocks.

For example, while Bitcoin rallied by 116% from the start of the year to the April 14 peak, Marathon Digital’s stock price was up 290% over the same period. Meanwhile, shares of Advanced Micro Devices declined by 15% during that same period.

“Being highly leveraged to the price of Bitcoin does go both ways, but some companies will do better relative to the price of Bitcoin if the price of the crypto goes up,” Kuiper said.

Specifically, he found that crypto miners and crypto exchanges are most likely to ride high when the currency is rallying.

The previously mentioned Marathon, Hive and Bitfarms are crypto miners.

Examples of crypto exchanges include Voyager Digital (VYGR.CN), which has a 0.95 correlation to Bitcoin, and Coinbase Global (COIN), which has a correlation of 0.86.

Voyager’s stock price is down 20% from the April 14 Bitcoin peak but gained 459% from the start of the year up to April 14.

Coinbase shares are down 30% from the April 14 peak, which was also the day its shares were listed on an exchange, so there is no earlier performance history to report.

Volatility aside, Kuiper is relatively bullish on the price of Bitcoin, explaining that each time in its short history that the price has declined sharply, “it has gone on to make successive new highs.”

Kuiper said Bitcoin has a preprogrammed monetary policy in its code that dictates that the amount of newly issued Bitcoin gets cut in half roughly every four years, leading to four-year cycles of the currency’s price action repeating itself.

“The number of Bitcoin minted started out at 50 coins every 10 minutes,” he explained. “Roughly four years later, that was cut in half to only 25 coins every 10 minutes, then four years later 12.5. The most recent halving event occurred in May 2020, with the amount now at 6.25 coins created approximately every 10 minutes.”

That ongoing cycle of “halvings” drives price appreciation through supply and demand.

“If we compare each cycle based on performance by the number of days since the halving event, we can see the current cycle started out in-between the past two cycles in terms of performance, but with the recent drop, it is now at the performance level of the second halving in the 2016-2017 time period,” Kuiper explained. “What is also interesting to note is that both previous cycles had approximately 40% corrections in the middle of the larger bull market cycle.”