Bitcoin has recently risen to record highs, causing many investors to reconsider cryptocurrencies as an investment vehicle. Although the long-term outlook for cryptocurrencies remains uncertain, it looks like they are here to stay in some form. One of the challenges of investing in this area is that there are so many varieties available. Should you invest in cryptocurrencies themselves, in companies involved in cryptocurrencies, or both? Two obvious choices are Bitcoin and cryptocurrency exchange Coinbase. Let's see which is the better choice.
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Since the two are in different asset classes, it is difficult to compare them directly. Bitcoin is a digital asset and, in theory, a currency, but data shows that very few people are still using it as such. Coinbase is a cryptocurrency-centric business with a primary focus on operating exchanges where market participants can buy and sell Bitcoin and other cryptocurrencies.
Sell a shovel during the gold rush
The difference between Bitcoin as an asset and Coinbase as a business is critical to understanding which is a better investment. During the California Gold Rush, it was usually not the miners who got rich, but the merchants and bankers who sold them equipment and bought gold.
The problem with physical assets like gold or digital assets like Bitcoin is that they are unproductive and just sit there. A portfolio may have other purposes, such as acting as a hedge against inflation, but it cannot create value. This means that you can only make money from your Bitcoin investment if the price of Bitcoin increases, but that is not certain.
Coinbase, on the other hand, operates more like gold rush merchants and bankers. As an exchange, they make money from business activities surrounding cryptocurrencies. Their performance is not dependent on the performance of any particular cryptocurrency. If Bitcoin goes up and people start buying, that's good for Coinbase. If Bitcoin drops and people start selling, that could be good for Coinbase as well. It also has the ability to expand into other business segments or innovate new business segments.
Winner: Coinbase
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If you want to include cryptocurrencies in your portfolio, a wise choice is to invest in businesses that can generate real profits, rather than unproductive assets that can never generate cash flow. No one remembers the miners who tried to mine gold in the hills of Northern California, but the companies born of the gold rush, such as Levi Strauss and Bank of America, continued to grow for decades. The company has made investors rich and continues to do well today.
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This article originally appeared on GOBankingRates.com: Coinbase Stock vs. Bitcoin: Which one should you invest in?
