Buy the builders of the blockchain – the future of financial technology

(Image credit: getty images)

published 6 July 2023

Blockchain is a relatively new financial technology (fintech) industry that has grown to be worth more than $1trn since the launch of the original cryptocurrency, Bitcoin, in 2009. “Crypto” refers to a type of mathematics called cryptography, which allows people to send and receive this digital-only cash in a very secure way.

The world’s largest banks and asset managers such JPMorgan and BlackRock are now building products using blockchain, essentially a digital ledger, to speed up activities such as issuing bonds, or to settle financial transactions more quickly and efficiently.

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Bitcoin mining takes place in large data centres, often with thousands of computers running simultaneously, just like the warehouses that power Google or Microsoft’s cloud-computing services. The reward for bitcoin mining is very high, and there are many companies competing for limited space, which is why renting out parts of a data centre (which is known as “hosting”) to smaller bitcoin-mining businesses has become so lucrative in recent years.

Former Twitter boss Jack Dorsey’s other company is payments firm Block (Nasdaq: SQ), formerly known as Square. The name change represents the company’s shift towards greater support of bitcoin infrastructure, including developing the Lightning Network to speed up settlements. Block is well placed to profit from Intel’s 2023 exit of the bitcoin-mining sector and has invested heavily in research and development (R&D) to produce power-efficient five-nanometre semiconductors. Block comprises four divisions: CashApp, a mobile payment service; music-streaming service Tidal; payments processor Square; and bitcoin R&D firm Spiral.

Block’s biggest profit generator is CashApp, which has 51 million users and produced $2.95bn in gross profit in 2022, its highest to date. In the first quarter of 2023, CashApp reported $2.16bn in sales from users buying and selling bitcoin. Analysts forecast earnings-per-share growth of 175% and $1.05bn in net profit for Block in 2023, which would give the company an attractive price-to-earnings growth ratio of 0.5.

MicroStrategy follows the equivalent of a dollar cost-averaging investment strategy, converting a portion of its free cash flow for purchases as well as issuing debt to buy bitcoin. The software side of the business remains in rude health. The stock jumped recently following a multiyear deal to integrate its AI-based analytics into Microsoft 365 and Azure, the second-largest cloud platform behind Amazon Web Services.

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Nic studied for a BA in journalism at Cardiff University, and has an MA in magazine journalism from City University. She has previously worked for MoneyWeek.