Back to top
Read MoreHide Full Article

Digital currencies received a massive jolt on Monday when China’s authorities issued a notice declaring that initial coin offerings (ICOs) were illegal. Following this announcement, the price of bitcoin declined from $4,584 to nearly $4,350 per bitcoin. By Tuesday morning, the virtual currency was hovering just above the $4000 mark, nearly 20% lower than the record level of $5,000 it had hit over the weekend.

Bitcoin’s fall has prompted some commentators to state that the virtual currency is entering a new phase of price discovery. However, most market watchers are characterizing this three day slide as a short term phenomenon. Bitcoin is likely to emerge stronger after such systemic cleansing, which makes it a good idea to invest in stocks gaining from the virtual currency.   

China Bans ICOs

On Sep 4, seven of China’s government agencies, including the People’s Bank of China and the China Securities Regulatory Commission issued a statement which declared that ICOs were illegal. According to this notice, the use of ICOs as a fundraising tool stands effectively suspended, since this could lead to financial irregularities.

Additionally, the document mandates that funds already raised using ICOs should be returned. Further, illegal financial activity emanating from this mechanism would be investigated. Digital fundraising platforms are also likely to be required to have enhanced oversight mechanisms in the future. 

Curbs Difficult to Implement

China’s ban on ICOs led to a substantial fall in the value of bitcoin and another popular cryptocurrency, ethereum. ICOs are utilized by start-up companies to raised funds via the sale of cryptographic tokens to prospective investors. In return, the start-up receives more widely accepted digital currencies such as bitcoin or ethereum.

At first glance, restrictions on ICOs should not directly impact the likes of bitcoin. However, this development has had a negative impact on the virtual currency category as a whole. But curbs may be difficult to implement in practice since putting an end to cryptocurrency would mean fighting evolving technologies.

Bitcoin’s Decline Only Temporary

Of course this hasn’t stopped several governments from seeking to place restrictions on the category. Developments in china closely mirror the actions of the SEC two months ago. At that point, the SEC had declared that ICOs were also investments and hence subject to the same regulations as stocks.

Market watchers feel that ultimately the category will emerge stronger from purges of this nature. Analysts have gone on record to state that stricter regulation will lead to a “new gold standard of ICOs." Others think that this short-term dip is likely only profit taking after bitcoin hit a record high of $5,000 recently.

Our Choices

Despite China’s latest restrictions on ICOs and bitcoin’s subsequent decline, long term prospects of the cryptocurrency remain undiminished. In fact, market watchers think that bitcoin will emerge stronger from such regulatory action.

Investing in stocks from the bitcoin phenomenon continues to be a smart option. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

NVIDIA Corporation’s (NVDA - Free Report) GPU sales have gained substantially from the Bitcoin phenomenon. Increased demand for cryptocurrencies owing to increased adoption of bitcoin and newer technologies like ethereum has helped in lifting GPU demand, thereby contributing to the company’s GPU sales growth. This is also true for its smaller rival Advanced Micro Devices (AMD - Free Report) .

NVIDIA has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 40.1% for the current year. Its earnings estimate for the current year has improved by 16.8% over the last 30 days.

Micron Technology, Inc. (MU - Free Report) is the largest manufacturer of memory chips in the United States. Memory chips are among the key components of a mining rig, the hardware setup utilized to extract cryptocurrency tokens from a blockchain, which is why Micron stands to benefit from the popularity of bitcoin.

Micron’s earnings estimate for the current year has improved by 4.1% over the last 30 days. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 5.45. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Zynga Inc. (ZNGA - Free Report) was among the first companies to accept bitcoin transactions. It will likely continue to incentivize the use of blockchain related transactions, thus benefiting from the bitcoin phenomenon.

Zynga has a Zacks Rank #2 (Buy). The company has expected earnings growth of more than 100% for the current year. Its earnings estimate for the current year has improved by 12.5% over the last 60 days.

Zacks' 10-Minute Stock-Picking Secret

Since 1988, the Zacks system has more than doubled the S&P 500 with an average gain of +25% per year. With compounding, rebalancing, and exclusive of fees, it can turn thousands into millions of dollars.

But here's something even more remarkable: You can master this proven system without going to a single class or seminar. And then you can apply it to your portfolio in as little as 10 minutes a month.

Learn the secret >>



More from Zacks Analyst Blog

You May Like