Can Bitcoin be Treated as a Growth Stock?

Ever since Bitcoin traded above $1,000, pundits have proclaimed it a bubble. This week, it hit $11,400, which means it’s risen 1,000 percent while simultaneously remaining in said bubble. This leaves many wondering how to view the phenomenon. One way to make sense of it is to compare it to the shares of a growth company.

When we look back at the early years of companies like Amazon, Netflix, and Apple we see many of the same characteristics. Of course, we are using the benefit of hindsight. There are many examples of growth companies that didn’t work out the way those three did. But it’s still a good exercise.

All three of those companies had huge price swings along the way. Amazon was down 94% from its high at one point. Netflix fell more than 60% on three separate occasions, and Apple fell over 75% on two occasions.

Those three companies all traded at very high multiples, they were all declared to be in a bubble at one time or another, and many market pundits declared that they would ultimately go out of business. But in all three cases, what most people didn’t appreciate was that they were operating in an ‘economy of tomorrow.’ They all sold products in markets that were small at the time but ultimately grew into some of the biggest markets of today’s economy.

The other interesting feature of successful growth stocks is that the price action doesn’t necessarily correspond to the underlying business. The dot-com crash didn’t happen because dotcom revenues fell, it happened because prices were too high and the market ran out of buyers. In fact, the companies that actually had revenues managed to grow those revenues all the way through the crash.

For a company to succeed it needs to offer a product that is actually useful. The three examples are all companies that have become a part of the daily life hundreds of millions of people. This will be the real test for Bitcoin too. When we get past the speculation, how much is Bitcoin actually being used on a day to day basis?

Several large companies, including Overstock, Expedia, and Subway do accept payment in Bitcoin. But far more don’t. No banks, supermarkets, or airlines accept Bitcoin. Amazon doesn’t either, though you can buy Amazon vouchers from third parties using Bitcoin. And, no government entities accept Bitcoin for taxes or rates.

However, there are some niche industries that do accept Bitcoin. Online casinos were one of the first industries to adopt Bitcoin and some exclusively accept the currency now. This niche within the gambling industry has really taken off – enthusiasts and major outlets like Vegas Casino even blog vegas bitcoin gambling experiences.

Another area where Bitcoin is taking off is payments and international remittances in countries with undeveloped banking systems. African payments company, Bitpesa, is filling a void on a continent that has left millions of people without access to basic banking services.

The next wave of use cases may come from the ‘Internet of Things’ where connected devices eventually trade information with one another. Bitcoin would presumably be the currency of this economy inhabited entirely by machines.

Like a growth company, if Bitcoin is to succeed in the long term, it will need to keep proving that it is being adopted in new markets. And, even if that does happen, investors will need to accept that 70 to 80 percent drawdowns may be part of the journey. Big declines in stock prices are a feature of successful growth companies, rather than proof the company is failing. This may be a factor Bitcoin investors will need to deal with in the coming years too.