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Investors who wish to add an exposure to Bitcoin in a traditional investment account, such as a retirement plan or a cash account, may do so indirectly by buying publicly listed stocks of companies involved in Bitcoin. Institutional players and money managers who cannot hold Bitcoin directly on behalf of their clients, may also value such type of exposure. While they could retain an enterprise grade custodian for holding bitcoin, trading equities can be smoother in terms of compliance and operational requirements but also faster and more economical.
Hut 8 Mining, HUT (TSE) and Bitfarms, BITF (CVE) are examples of publicly listed companies directly involved in Bitcoin. Both are mining farms and investors looking to evaluate these companies must dive into their energy contract, hardware renewal policy, residual bitcoin exposure (after operating expenses), and the strength of their management team. It is possible that the mining farm may not have Bitcoin on its balance sheet if everything they mine is sold right away.
Some closed end funds, such as GBTC or QBTC offer a long-only exposure to bitcoin. However, because of their closed structure they cannot be increased or reduced to reflect change in offer and demand, like ETFs would. Closed end structures generally trade at a discount to net asset value (NAV). In the case of the two products mentioned before, they trade at a premium because there is limited competition. Regulation has created a situation where wealthy investors can buy in at NAV (initial offering) and the small investor is forced to pay a premium in the secondary market. This can make sense in a tax-free savings account, but beyond that small investors enrich the wealthy ones by paying the premium.
Another option is now available to retail and institutional investors who wish to gain exposure to bitcoin in a traditional setting. MicroStrategy, MSTR on the Nasdaq is now using Bitcoin as a primary reserve asset. This means the company is managing its capital allocation beyond the tools traditionally used by corporate treasuries.
Treasury managers are facing difficult choices in the current traditional financial markets. Unprecedented monetary interventions by central bankers around the world have pushed treasuries instruments into negative real rates territory. Nominal rates do not offset inflation. Therefore, corporate treasurers are faced with two uninteresting options to manage their capital account. One, they can sit on cash or cash equivalents and will lose purchasing power or two, they invest in securities such as stocks and bonds at a heightened risk and valuations level. They now have access to a third option. The opportunity cost of holding a scarce asset that pays no yield is eliminated when there is no yield in traditional treasury management tools.
Bitcoin can act both as a hedge against the erosion of the purchasing power and carries a superior appreciation potential compared to other instruments. While its unique characteristics are not fully appreciated by most corporate treasurers, I think MicroStrategy’s move will influence other treasurer or money managers facing similar issues.
In time, the management of MicroStrategy will be seen as visionaries and trailblazers.
Investors who value bitcoin more than cash or short-term money market instruments, will appreciate this proactive treasury management strategy and the potential it offers for long term shareholder’s value maximization. Furthermore, they will also appreciate that MSTR is trading roughly at the same price as before the abrupt Covid-crash of March 2020. The difference between now and then, other than the massive liquidity injection by the central banks, is the company now has 21,454 bitcoins on its balance sheet at an asset cost base of 250M USD.
To fully appreciate the use of Bitcoin by a corporate treasury as its principal reserve asset requires a special skill set. It is a two for one: an investment in the largest independent publicly-traded business intelligence company and in Bitcoin. Traditional money managers may be able to value the company’s traditional operations but they may struggle to understand the Bitcoin angle. There are still today very few traditional financial analysts with the necessary background to fully appreciate the value of Bitcoin and to evaluate service providers, such as the custodian, the company has retained.
As opposed to mining farms, MicroStrategy is not a natural seller of Bitcoin. It is rather a net long holder. As opposed to a closed ended investment fund investing in Bitcoin, which typically trades at a premium to NAV on the secondary market, MicroStrategy offers two for the price of one: an equity and a Bitcoin play. Both the volatility in the equity and bitcoin markets will create buying opportunities. Interesting times ahead.
Disclosure:
The author, Elisabeth Préfontaine is a seasoned finance professional with over 25 years of experience. She is a Chartered Financial Analyst (CFA) and a Chartered Alternative Investment Analyst (CAIA). She discloses having a position in both MSTR and BTC within a well-diversified investment portfolio.
