Digital Money: Bitcoin Vs. PayPal Holdings, Which One Should You Buy

Summary

• Bitcoin and PayPal have risen dramatically over many years and may be due for a prolonged breather.
• Bitcoin appears to be in a bubble, which could be popping during 2021.
• PayPal's income generation is incredibly overvalued, especially against rising CPI inflation rates.
• Perhaps the prudent long-term investor/speculator should step aside until better prices/valuations are the new reality.

24K-Production/iStock Editorial via Getty Images

My short and quick answer for the title's question: NEITHER is in a position worthy of short-term consideration for new capital. I would not buy either Bitcoin (BTC-USD) or PayPal Holdings (NASDAQ:PYPL) in the middle of August 2021. Both are richly priced/valued, and technical trading issues have appeared the last few weeks arguing to stay away for the time being. Can you hold one or the other, or both? Sure, if so inclined, as long as you understand the sharp gains since 2016 are likely not going to be repeated. My suggestion for smart, patient participants is to wait for lower prices before committing any new money to either. Here's why.

Trading History

There's no question, a hot money, fad investing crowd has piled into Bitcoin and cryptocurrencies since the Federal Reserve instituted "unlimited QE" last March to fight the COVID-19 pandemic. And, the crypto frenzy was in high gear before the coronavirus showed up. So, we have witnessed an easy and free money boom in America pump cryptos into the stratosphere for price and popularity. I know some people feel cryptos are the New Age computer answer to centralized money controlled by governments. But, such an invention has already existed for thousands of years. It's called gold. Gold has value outside of government control; it's easy to understand; and, you can put the monetary metal in your pocket - no computer or software or token keys or electricity is required. Gold is universally accepted in exchange for local currency at any jeweler in the world.

Below are charts of the meteoric rise in Bitcoin, and the well above-normal returns outlined by PayPal (the leading digital money, currency conversion and storage company) vs. an alternative investment in American business growth through the S&P 500 index. I am charting total returns, including dividends paid by the main U.S. stock index, from the three investment choices over 3-month to 5-year spans.

PayPal's Absurd Valuation vs. Inflation

For PayPal specifically, its operations are highly profitable and growing. Yet, do current earnings (and will future income generation) support today's lofty stock quote? My answer is NO, PayPal's valuation is not very rational. It does not match well with the underlying math.

Below is a graph of the sky-high valuation for the business, selling at records of price to trailing earnings, sales, cash flow, and book value (in combination). Looking back, we can say unequivocally PayPal was a smarter buy five years ago during 2016. After spinning off from eBay (EBAY) in 2015, the company's "average" valuation on these four fundamental metrics would be nearly 40% lower in price from August 2021!

Data by YCharts

But here's the really bad news for new PayPal investors paying $275 a share: a total valuation disconnect vs. rising CPI inflation exists today. The 1.49% trailing earnings yield is far away from the 5.37% YoY inflation rate. That's right. PayPal investors are thumbing their nose and pocketbooks at the NEGATIVE -3.88% hole for earnings generation vs. the cost-of-living gains outlined in America during the previous 12 months. If the stock fails to increase in price, your purchasing power losses will be LARGE in the future, if inflation remains high like 2021. The company pays no cash dividend, and if you owned the whole company outright, you are pocketing a substantial value-adjusted income loss on the debased currency translation. On the contrary, rational investors should be focused on buying/holding companies with earnings and dividend yields closer to (above) the rate of inflation. That's how the Wall Street wealth game has worked for centuries.

Data by YCharts

In fact, given robust estimated EPS growth rates of 20% annually are achieved and 5% U.S. inflation becomes the new reality to prevent actual Treasury default (we will get a soft default scenario instead, repaying old debts with debased currency), it will still take FIVE YEARS for PayPal to just match earnings (and free cash flow) with prevailing cost-of-living increases on your investment today! What if something goes wrong in the meantime from unforeseen competition or poor management execution or rotten decisions to diversify the business?

Image Source: Seeking Alpha

Technical Charts

For Bitcoin, a massive sell-off of better than 50% just ended a month ago. Priced in dollars, the cryptocurrency fell from $65,000 to under $30,000 rather swiftly in April-May. This was followed by the July-August rebound back to its 200-day moving average around $46,000 (close to a standard Fibonacci ratio retracement 50% level for the mathematicians). If the crypto bubble has already burst, the next logical move would be another big sell wave into the fall, dropping price well under $30,000.

I am no crypto expert, but it's anyone's guess how this bubble will deflate. Bulls have been buying and screaming at others with targets of $100,000 or more into year's end. However, what if the greater-fool's game is already over? Institutions, banks and hedge funds have finally jumped into the fray during 2021. What if their actions pinpoint the gig is up? Full acceptance by Wall Street and Main Street alike could be a bad thing if you are contrarian-minded, like myself (the same as tulips, beanie babies or early dotcom companies). Maybe $10,000 is the next stop into early 2022. Anyway, just avoiding Bitcoin for the time being may be the cautious approach to save you from huge losses.

PayPal's price chart has stagnated after the NASDAQ stock momentum peak in February. Below you can review the slack performance in the Negative Volume Index and On Balance Volume measurements, especially in July-August. Price has slipped under its 50-day moving average and relative strength vs. the overall market has been increasingly negative since the spring. Again, if valuations snap back to just a normal zone vs. the past five years, PayPal could easily be headed under $200 the next 3-6 months.

Final Thoughts

Don't get me wrong, I am fascinated by blockchain technologies and NFTs. I wrote a story last week here on a microcap stock, Tapinator (OTCPK:TAPM). It's essentially a hobby software company, with 500 million in mobile game downloads, that's come up with a unique angle on broadcasting digital NFT art to homes/businesses for a subscription fee, due for launch in September. Tapinator's idea could revolutionize the supply/demand of NFT art, and turn digital art creation and ownership into a booming sector of the economy in future years.

However, the trains for both Bitcoin and PayPal left the station long ago. They are to a large degree, old investment ideas in the rapidly changing world of internet technology. My opinion is waiting for some sort of sell-off this autumn in the two (it could be 20% or as much as 50%) would open a much better risk/reward buy setup.

Could they continue to rise the next couple of months? Anything is possible, but rumors are widely circulating the Fed will announce its plan in September to taper bond purchases, winding down the QE push for now. If this happens, the go-go crypto asset class and whole boom in Big Tech prices/valuations may falter for a spell. I rate both Bitcoin and PayPal as Neutral to Avoid selections until we pass through the seasonally bearish autumn months for Wall Street.

Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is recommended before making any trade.

Disclosure: I/we have a beneficial long position in the shares of TAPM either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.