Investing in stocks in bitcoin
STRATEGY: TESLA,MICROSTRATEGY, SQUARE OFFER INDIRECT EXPOSURE TO CRYPTOCURRENCIES
Investment firms are now realising they can no longer ignore the outsize returns generated in this new asset class.
Some investment mandates specifically preclude a direct investment in cryptocurrencies, but there are ways to invest in stocks that provide an indirect exposure to bitcoin.
Perhaps the most high profile of these is Tesla, which recently announced a $1.5 billion (about R23 billion) investment in bitcoin, equivalent to nearly 10% of its treasury assets.
“Having some Bitcoin, which is simply a less dumb form of liquidity than cash, is adventurous enough for an S&P 500 company,” tweeted Tesla CEO Elon Musk recently.
Musk was persuaded of the benefits of bitcoin as a store of value by MicroStrategy CEO Michael Saylor, who challenged Musk to convert the Tesla balance sheet from US dollars to bitcoin.
Musk later clarified his interest in bitcoin in a second tweet saying, “To be clear, I am *not* an investor, I am an engineer. I don’t even own any publicly traded stock besides Tesla. However, when fiat currency has negative real interest, only a fool wouldn’t look elsewhere. Bitcoin is almost as fiat money. The key word is ‘almost’.”
That news sent bitcoin, and Tesla’s share price, on a rampage, before both gave back some of their gains. The strong move into bitcoin, though massively beneficial to the share price over the last month, adds risk and volatility to the company outside of its involvement in the production of electric vehicles.
Saylor has become a bitcoin cheerleader, recently hosting a bitcoin corporate strategy conference for thousands of senior executives to explain how, and why, they should adopt this new form of money. His reasoning: the inevitability of the US dollar’s further decline as fiat money issuance has gone into overdrive.
MicroStrategy last week announced that it had spent another $1.03 billion on bitcoin at an average price of $52 765 per coin (the price has since dropped to about $43 600).
The company provides business intelligence, mobile software, and cloud-based services, but has recently attracted attention for its embrace of bitcoin as a treasury reserve asset, based on expectations of further US dollar weakness, declining returns from cash, and macroeconomic instability.
“The company now holds over 90 000 bitcoins, reaffirming our belief that bitcoin, as the world’s most widely-adopted cryptocurrency, can serve as a dependable store of value,” said Saylor in a statement last week.
“We will continue to pursue our strategy of acquiring bitcoin with excess cash and we may from time to time, subject to market conditions, issue debt or equity securities in capital raising transactions with the objective of using the proceeds to purchase additional bitcoin.”
The company spent over $1 billion in 2020 acquiring bitcoin at an average price of about $16 000. The 175% surge in bitcoin since then powered MicroStrategy’s share price briefly above $1 000, before retreating to $752. The stock is now widely regarded as a
Bitcoin can serve as a dependable store of value
proxy for bitcoin.
Grayscale Bitcoin Trust has become the default entry point for companies and firms to gain exposure to bitcoin where their investment mandates specifically preclude them from directly investing in cryptos.
This is a dilemma that is facing many investment firms now realising they can no longer ignore the outsize returns generated in this new asset class. Grayscale takes care of issues such as bitcoin custody. Though the stock price tends to mimic bitcoin, this is an imperfect correlation. Investors are often paying a hefty premium for entry, and the swings in the stock price can be more exaggerated than bitcoin itself.
Another evangelist for bitcoin is Jack Dorsey, CEO of Twitter and founder of electronic payments firm Square, which has about 3% of the $150 billion digital advertising market.
Square owns more than 8 000 bitcoin, acquired in the last six months, equivalent to about 5% of its total assets at the end of 2020.
“The investment is part of Square’s ongoing commitment to bitcoin, and the company plans to assess its aggregate investment in bitcoin relative to its other investments on an ongoing basis,” the company said in its earnings statement.
Silvergate Capital is a digital asset bank with nearly $5 billion in crypto-backed deposits, and only went public in 2019. It allows customers to switch between fiat and crypto through its Silvergate Exchange Network. Clients include Square and Coinbase, a crypto exchange that launched in 2012 and recently announced that it intends to list on the Nasdaq exchange.
Silvergate is a new type of banking enterprise, fully enabled for the crypto revolution underway, targeting the largest fintech and digital currency companies and investors around the world.
Other stocks with exposure to bitcoin and blockchain include:
Hut 8 Mining Corporation (a bitcoin miner, whose stock price has gone up from C$1.47 to C$10 since December 2020);
Bitfarms (also a bitcoin miner; share price up from C$0.6 to C$5.90 since December);
Voyager Digital, which offers the ability to buy and sell more than 50 cryptocurrencies and earn interest on 22 of them (its stock price went up nearly 10-fold to C$19.63 since December); and
Hive Blockchain Technologies (stock price up from C$1.20 to nearly C$5 since December). Hive is a crypto mining firm. The company last week announced the purchase of 3 000 next generation “miners” to generate additional cash flow from its crypto mining activities. Cash and coin assets are currently worth $65 million.