Should You Invest in Bitcoin via the Stock Market?

Bitcoin has been in the news in the past week on several different fronts. El Salvador, which doesn’t have its own currency, became the first country to make bitcoin legal tender for all debts. MicroStrategy Inc., a provider of analytics software and services — the public company that owns the most bitcoins and whose CEO, Michael Saylor, is encouraging other firms to hold bitcoins within their treasury departments — doubled-down by issuing $500 million in debt in order to buy more bitcoins. And bitcoin prices got a boost from a tweet by (who else?) Elon Musk, who indicated that Tesla would again accept bitcoin payments for Tesla vehicles once more renewable energy was used in the mining of bitcoins. As bitcoin makes more inroads as an established currency, expect to see more public companies holding it. But what are the rewards and risks to owning stocks that in turn own bitcoin? Let’s take a close look at the nine U.S. listed firms that own bitcoin — I call them crypto stocks. We’ll see a story of high risk, but (year-to-date) not necessarily high returns.

Who Owns Bitcoins?

According to BitcoinTreasuries.org, countries, funds, and firms own more than 1.4 million bitcoins, worth over $57 billion. Here’s a breakdown by category:

Exchange traded funds (ETFs) own just under $33 billion (at a recent bitcoin price of $40,105); countries own over $10 billion; public companies (listed on organized exchanges predominately in the U.S., Canada, as well as traded on over-the-counter markets) own almost $8 billion; and private companies own over $6 billion. Collectively, these funds, countries, and companies own almost 7 percent of the 21 million bitcoins that will eventually be in circulation (there are 18.7 million now). It’s no surprise that ETFs are the largest category as this is one of the easiest ways for investors to get bitcoin exposure without having to own bitcoins directly.

9 U.S.-Listed Companies that Own Bitcoin

According to BitcoinTreasuries.org, there are currently nine U.S. listed firms that own bitcoin. Some are more directly involved in bitcoin mining or trading, while others aren’t. Here’s a quick overview of the companies (descriptions are from S&P Capital IQ), from largest to smallest bitcoin presence:

• MicroStrategy Inc. (MSTR): provides enterprise analytics software and services worldwide;
• Tesla, Inc. (TSLA): designs, develops, manufactures, leases, and sells electric vehicles;
• Square Inc. (SQ): creates tools that enables sellers to accept card payments;
• Marathon Digital Holdings Inc. (MARA): operates as a digital asset technology company that mines cryptocurrencies with a focus on the blockchain ecosystem;
• Coinbase Global, Inc. (COIN): provides financial infrastructure and technology for the cryptoeconomy;
• Riot Blockchain, Inc. (RIOT): focuses on cryptocurrency mining operation;
• Bit Digital, Inc. (BTBT): engages in the bitcoin mining business;
• CleanSpark Inc. (CLSK): provides energy software and control technology solutions; and
• Phunware, Inc. (PHUN): provides integrated software platform that equips companies with the products, solutions, and services to engage, manage, and monetize their mobile application portfolios.

Here’s the current value of the bitcoins each company owns:

MicroStrategy has by far the largest number of bitcoins, over 92,000, and almost 60 percent of the total owned by the nine firms. Tesla is next with almost 43,000 bitcoins, and then it drops off considerably. The four companies shown in the red bars are directly involved in either mining bitcoins (MARA, RIOT, and BTBT) or providing a trading exchange platform (COIN).

We can also look at the value of bitcoins held by each firm as a percent of the market capitalization of each company’s equity:

Again, we see that MSTR is literally off-the-charts, with bitcoins representing over 63 percent of its market cap. While TSLA gets a lot of attention, its bitcoin holdings are only 0.3 percent of its market cap. Not surprisingly, the three bitcoin mining firms have relatively higher percentages. So, the key take-away is that MSTR — a firm not directly related to the cryptocurrency industry — is the stock in which investors can have the biggest play on the price of bitcoin.

Owning Bitcoin Versus Owning Crypto Stocks

Let’s take a look at how these stocks have performed year-to-date. To put things in perspective, bitcoin’s price is up 40 percent, and the broad stock market as measured by the S&P 500 index is up 13 percent. Here’s what a dollar invested at the start of the year is worth now (note that COIN just had its IPO in April):

Three stocks have performed better than the price change in bitcoin itself: MARA (up 187 percent), RIOT (up 108 percent), and MSTR (up 54 percent). Relative to the S&P 500 index, the only other stock to outperform is PHUN (up 17 percent). While SQ has a small gain (up 6 percent), all the others have lost value (TSLA down 12 percent, COIN down 27 percent, CLSK down 32 percent, and BTBT down 59 percent).

Some of these results shouldn’t be too surprising. Since most of these crypto stocks aren’t directly involved with the cryptocurrency industry, their stocks should trade based on the fundamentals of their business — for example, in the case of TSLA, based on the outlook for its electric vehicles. But it’s important to understand the impact that the change in the price of bitcoin may have on the stock price of firms that own bitcoin.

Different Ways to Look at Risk

Let’s look at how risky these firms are, starting with the traditional measure of the standard deviation of daily returns (annualized):

As a benchmark, we see that the volatility of the overall stock market is quite low at 14 percent, which is below its typical range of around 16–20 percent. Historically, individual stock standard deviations tend to be in the 30–40 percent range. Interestingly, all of the crypto stocks are much more volatile, with standard deviations ranging from 58 percent (SQ) to 177 percent (RIOT). For comparison, the volatility of bitcoin’s price is 92 percent (in recent blogs I addressed bitcoin’s historical risk, and the recent selloff). Six of the nine stocks are even more volatile than bitcoin.

It’s important to be very careful in interpreting these results. Just because many of these crypto stocks are very risk, it doesn’t necessarily mean that owing bitcoin has caused these stocks to become riskier. It’s possible that these companies like TSLA are inherently riskier and happen to own bitcoin, or as in the case of MSTR have chosen to make bitcoin investments part of their business model.

Here’s another way to think about risk: on a relative basis. With stocks, we can measure riskiness relative to the overall market like the S&P 500. Developed by Nobel Prize winning economist, Bill Sharpe, it’s called beta. It measures the extent to which a stock will go up or down given a one percent increase or decrease in the overall market. By definition, the market has a beta of one and that’s also the average beta across all stocks. Let’s look at this S&P 500 beta for these crypto stocks (green bars):

With the exception of COIN (where we only have less than two months of data), all the other crypto stocks have much higher betas, ranging from 1.5 (PHUN) to 4.9 (MARA), and averaging 3.2. What this means is that adding these stocks to a well-diversified portfolio will add to the riskiness of that portfolio.

I also created a new riskiness measure that I call a bitcoin beta (orange bars). Instead of measuring riskiness relative to the overall market, I measure the crypto stock returns against bitcoin price changes (technically beta is the covariance of returns relative to bitcoin’s returns divided by the variance of bitcoin’s returns). Unlike with the market beta, the average across stocks doesn’t need to be 1.0. Across the crypto stocks the average is 0.6. What this means is that for every one percent increase (decrease) in bitcoin’s price, these stocks should increase (decrease) by 0.6 percent. The range is from 0.2 (TSLA) to 1.2 (RIOT). Interestingly, the S&P 500’s bitcoin beta is 0.0, which suggests no relationship — that’s actually a good thing and is why bitcoin can be considered a portfolio diversifier.

Lessons for Crypto Stock Investors

What can we take-away from this analysis?

• If you’re looking to get in on the bitcoin action, then owning bitcoin directly, or more conveniently through ETFs, is probably the way to go.
• Crypto stocks that mine bitcoin as their business model can be even riskier than owing bitcoin directly, and may not even provide the same returns. The analogy here is like the difference between owning gold directly versus owning shares in a gold mining company. Take a look at the bitcoin beta.
• It’s quite likely that the number of public firms owning bitcoin will increase, particularly if and when bitcoin’s price becomes less volatile. What that means is that if you happen to own a stock that starts investing in bitcoin, keep a close eye on how large the stake is. It’s fair to say that MicroStrategy’s stock performance is closely tied to bitcoin’s performance, unlike Tesla. With current accounting rules, as the price of bitcoin fluctuates from quarter to quarter, companies may be posting gains or losses unrelated to the core business.
• If the stake isn’t large, there’s a business case to be made for some firms to own some bitcoins. It may be a way to signal that a firm is cutting-edge and perhaps prepared to take some additional risks, which in turn may be attractive to certain investors.

Source: https://sfoerster-5338.medium.com/should-you-invest-in-bitcoin-via-the-stock-market-9e002eab678f?source=rss——-8—————–cryptocurrency