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Will MercadoLibre’s Crypto bet pay off?

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Will MercadoLibre’s Crypto bet pay off?

The cryptocurrency The market collapsed after its massive rise last year. As with the stock market, investor sentiment changed and investors began to favor stable and reliable companies over speculative investments.

Crypto is arguably the most speculative investment you could do now, so all cryptocurrencies have been crushed. Even the most remarkable pieces like Bitcoin (CRYPTO: BTC) and Ethereum (CRYPTO:ETH) are down more than 50% since the start of the year.

Now, MercadoLibre (MELI -4.50%) — one of the leaders in e-commerce in Latin America and fintech companies – has built its own type of cryptocurrency. With crypto in the dumps, could MercadoLibre’s speculative gamble pay off?

A pile of gold coins with zeros and ones on them.

Image source: Getty Images.

What could MercadoCoin do for MercadoLibre?

MercadoCoin will become a loyalty rewards program for MercadoLibre e-commerce users. With increasing competition in the e-commerce space of companies like Sea Limited (NYSE:SE) in Latin America, MercadoLibre appears to be looking for a way to increase brand loyalty and convince consumers to continue using MercadoLibre’s e-commerce platform.

The solution: Consumers will receive MercadoCoin, which can be considered a form of cashback, for purchases made on MercadoLibre’s e-commerce platform. Then consumers can either use it to buy more products or sell it for traditional money.

An important detail about this is that consumers can only trade MercadoCoin on Mercado Pago, the company’s fintech platform. In theory, this should increase cohesion between the two platforms and help bring consumers deeper into MercadoLibre’s entire product ecosystem.

MercadoLibre plans to roll it out to 500,000 Brazilian consumers in the initial phase of this launch. That may seem like a lot, but it’s only a drop in the bucket compared to the company’s total of 84 million active users in the second quarter.

MercadoLibre’s big companies look a lot softer

Even with this announcement, MercadoLibre only has minor exposure to crypto. Prior to this, the company’s main exposure was that it allowed consumers to buy and sell crypto on its fintech platform. MercadoLibre had about $7.8 billion in Bitcoin on its balance sheet in May 2021. But even that is only peanuts compared to its overall balance sheet: MercadoLibre had nearly $3.9 billion in cash, liquid restricted and short-term investments, as well as $456 million in long-term investments at the end of the second quarter of 2022.

If MercadoCoin succeeds, the company’s cryptographic vulnerability would worsen. That said, it would need to explode in popularity to reach the scale of its core business. Its e-commerce platform, for example, has immense reach in Latin America: in the second quarter, it sold 275 million items for a total of nearly $8.9 billion in gross merchandise value.

Additionally, its fintech business is seeing rapid adoption and growing momentum. In the second quarter, Pago saw its total payments volume jump 84% year-over-year on a currency-neutral basis to $30.2 billion. Its active fintech users also jumped 26.5% over the same period to 38.2 million. It also wouldn’t be a shock to see the number of active users steadily increase if MercadoCoin brings more e-commerce users into the fintech ecosystem.

MercadoCoin is a feature, not necessarily a product in itself. Therefore, given the scale of MercadoLibre’s other platforms and the amount of revenue the business derives from them, MercadoCoin would need to reach an incredibly large scale to have a significant impact on the business.

MercadoLibre is a long game

Although this bet on crypto and building your own cryptocurrency is risky, MercadoLibre is a company willing to take risks for long-term rewards. Its entire business model is based on seizing a long-term opportunity: the growing adoption of fintech and e-commerce in Latin America. Therefore, it is no wonder that the company is making a small bet on crypto.

That said, it’s still a small fish in a big tank. It is unlikely to significantly affect MercadoLibre’s tangible business if it crashes and burns, given the size of its revenue-generating platforms. It also has the potential to increase product stickiness and help it beat tough competition in the space.

Also, MercadoLibre shares look very attractive right now. The company trades at 5.1 times sales and shares have only traded at a lower valuation twice in its lifetime as a public company. With stocks so cheap and its core businesses continuing to thrive, it might make sense to buy stocks now.

Jamie Louko has positions in Ethereum, MercadoLibre and Sea Limited. The Motley Fool has positions and recommends Bitcoin, Ethereum, MercadoLibre and Sea Limited. The Motley Fool has a disclosure policy.

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