Bitcoin recently climbed to a record high, and many investors are taking another look at cryptocurrency as an investment vehicle. While the long-term outlook for crypto remains unclear, it appears to be here to stay in some form or another. One challenge when investing in this space is the sheer variety available — should you invest in cryptocurrency itself, companies involved in crypt, or both? Two obvious choices are Bitcoin and the crypto exchange Coinbase. Here’s a look at which is the better choice.
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Apples and Oranges
It’s hard to directly compare the two, because they are in different asset classes. Bitcoin is a digital asset — in theory a currency, although data has shown that very few people are still using it that way. Coinbase is a business centered around crypto whose main focus is operating an exchange where market participants can buy and sell Bitcoin and other cryptocurrencies.
During a Gold Rush, Sell Shovels
The distinction between the asset Bitcoin and the business Coinbase is crucial to understanding which is the better investment. During the California Gold Rush, it usually wasn’t the miners who got rich, it was the merchants and bankers that sold them equipment and bought their gold.
The problem with a physical asset like gold, or a digital one like Bitcoin, is that it is unproductive — it just sits there. It can’t create any value, although it may have other purposes in a portfolio, like serving as a hedge against inflation. That means that you can only make a return on your investment in Bitcoin if the price of Bitcoin goes up, and that’s far from certain.
Coinbase, on the other hand, operates more like the merchants and bankers of the Gold Rush. As an exchange, they make money on the business activity surrounding crypto. Their business results don’t depend on the performance of any one cryptocurrency. If Bitcoin goes up and people start buying, that’s good for Coinbase. If Bitcoin goes down and people start selling, that can also be good for Coinbase. They also have the ability to expand into other business segments or even innovate new ones.
The Winner: Coinbase
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If you want exposure to cryptocurrency in your portfolio, the smart choice is to invest in a business that can generate real returns, rather than an unproductive asset that will never be able to create a cash flow. No one remembers the miners who tried to strike gold in the hills of Northern California, but companies that came out of the Gold Rush, like Levi Strauss and Bank of America, have made investors rich over the decades and are still going strong today.
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This article originally appeared on GOBankingRates.com: Coinbase Stock vs. Bitcoin: Which Should You Invest In?
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