• Investor demand for bitcoin exposure means that companies putting digital assets on their balance sheet are seeing staggering gains
  • However, this trend does have its share of critics who see a decoupling of fundamentals and pricing

As Tesla’s announcement that it had purchased $1.5 billion in bitcoin rallied the digital asset markets this week, stocks that have exposure to bitcoin continued to surge as investors looked for alternative ways to get access to the sector. 

The basket of stocks with bitcoin exposure are limited, albeit growing.  The list includes MicroStrategy, Tesla, and Silvergate Bank, Voyager, and Galaxy Digital, PayPal, Square, and most recently Tesla. 

Some companies contribute infrastructure and distribution for digital assets like PayPal, whereas some provide exposure by simply owning a significant amount of bitcoin like Microstrategy.  Investors are piling into these stocks, either because their mandate does not allow them to purchase bitcoin directly or the frictions of owning crypto are still too great.

“There are a number of equities that have recently been serving as precursors to crypto trading,” said Sam Bankman-Fried, CEO of the digital assets exchange FTX. “A number of people went from trading GameStop stock to Dogecoin to bitcoin, and in general we’ve seen increasing crossover between Wall Street Bets-style stocks and crypto trading.”

Bankman-Fried thinks that the lack of a bitcoin ETF (though that may soon change in Canada) has created a market vacuum and these stocks are the next best thing. 

Investor interest leads to outperformance

The data corroborates Bankman-Fried’s statements.  In fact, many of these stocks have begun to outperform bitcoin itself, highlighting just how hungry investors are for exposure.

Microstrategy, a publicly-traded business intelligence firm, first announced a $250 million purchase of bitcoin back in August of 2020.  Over the past six months, the firm has continued to add to their appreciation, which sits at over $3.1 billion in today’s prices. Over that time period, Microstrategy’s stock has surged 729 percent, outperforming bitcoin which is up 414 percent. 

Other stocks with exposure to bitcoin have performed similarly.  Silvergate and Voyager have had breathtaking rallies in recent months, soaring approximately 900 percent and 1,765 percent respectively.

Tesla is a much larger company than any of these companies, so the impact of its bitcoin buy is less clear for now.  “The supply of bitcoin is very limited and demand is increasing,” Mike McGlone, a Bloomberg commodity strategist told Blockworks in an interview. “Tesla’s shares are rapidly increasing in supply with the number of shares outstanding.”

McGlone pointed out that Tesla’s market is about to become much more competitive with a number of electric vehicles soon to be rolled out by the big auto manufacturers which will certainly lead to more volatility. 

“It’s a standoff between the potential for an independent, organically adopted, global digital form of gold versus a company facing plenty of competition,” he wrote in a note to clients in mid-January. 

In this note, McGlone argued that basic math indicates that if prices stay the same, the market cap of Tesla should advance at a faster pace than Bitcoin and may reach $1 trillion sooner, due to the more rapidly rising supply of the equity.

“The near certainty of declining Bitcoin supply versus. the rising amount of Tesla shares outstanding tilts favor toward an outperforming crypto price, if the rules of economics are a guide,” he wrote. 

Infrastructure that’s price resilient

While companies like Microstrategy offer investors a compliant wrapper to gain direct exposure to bitcoin, companies like Silvergate provide a different kind of exposure to the growing digital assets ecosystem.

Silvergate bank is one of the few companies that offers banking services to the digital asset and blockchain services industry.   

In a recent earnings report, the bank announced that its customers — some of the largest crypto exchanges — had placed $2.9 billion in new deposits during the last quarter of the year. 

Silvergate also operates the Silvergate Exchange Network, a crypto-fiat on-ramp, and SEN Leverage, which allows its customers to access credit using their bitcoin as collateral.

Morningstar’s assessment that Silvergate is set to “outperform” in 2021 is selling its performance short. The stock is up almost 900 percent as investors stake their place in a company that enables the fiat-crypto ramps so essential for liquidity. 

Source: TradingView

Michael Del Grosso, an analyst with Compass Point that covers Silvergate, points to the utility of the Silvergate Exchange Network in providing liquidity to traders to the tune of $240 billion a year as a reason for the stock’s spike. 

“It was really a seminal quarter for them. You saw massive deposit growth,” he said pointing to investors and institutions looking for cross-exchange liquidity utilizing Silvergate’s network.  

Although Tesla hasn’t disclosed the partners used in purchasing its bitcoin, Del Grosso believes that most large buys of digital currency by companies the size of a Tesla or MicroStrategy are going to be touching the Silvergate network in some way and impacting SEN volumes. 

In theory, the type of exposure that Silvergate offers investors should have less of a direct correlation with the price of bitcoin.

“Empirically the stock has a very high correlation with bitcoin’s movements. Fundamentally there is not that high of a correlation between the absolute price of bitcoin and their revenue generation,” Del Grosso explained. 

Silvergate generates revenue when more customers adopt bitcoin and allocate capital to it as an asset class. This is something, Del Grosso said, that can happen in both a bull and bear market — and especially in a volatile market which is a favorite of traders. 

“A large cohort of Silvergate’s customers are crypto hedge funds. These funds thrive on volatility,” Del Grosso said.

What are the risks for investors?

Investors are looking at bitcoin macro proxies in two ways: exposure to the asset, and exposure to the industry. While all boats have risen in this rising tide, it is still unclear which type of exposure bears the greater risk.

Companies like Silvergate that have fundamentals tied to infrastructure could prove to be more resilient in the face of bitcoin’s infamous volatility, but it remains an open question how the Microstrageys of the world will fair in down turns.

“It’s too early to tell what the SEC will do with public companies investing in cryptocurrency, but traditionally, the regulators lag in rulemaking and policy in novel areas of innovation,” Braden Perry, a former Commodity Futures Trading Commission trial attorney, told Blockworks. “Still, such a public move with relatively notorious companies will undoubtedly affect the market, as seen in the price fluctuations recently.”

Perry flags Tesla using a 10K filing, a formal annual comprehensive filing, to disclose its bitcoin holdings as a potential issue. MicroStrategy used an 8K, a specialized announcement for updates on material events. But the jury is still out. 

“Most of these companies are doing an excellent job of disclosing the risks of buying bitcoin,” John Stark, a former SEC enforcement attorney said to Blockworks in an interview. “Investors aren’t being duped here insofar that they are being fraudulently misled.

Stark, who has written extensively about why companies shouldn’t turn their treasury departments into profit centers via bitcoin buys, is concerned about the relationship between Saylor and Musk’s evangelism of bitcoin and their respective holdings.

There’s nothing illegal about it, Stark stressed, but he’s concerned that it’s going to divorce the companies from their fundamentals and see them devolve into objects for momentum trading and nothing more. 

Sidharth Sogani, founder of Singapore-based research firm Crebaco, said that at the end of the day this is simply a good investment for these companies. 

“These are visionary entrepreneurs and they all have clearly understood the value of Bitcoin,” he told Blockworks. “MicroStrategy made a great move, they have already made good money on their investment, now even if the prices drop, they have enough time to exit.”

  • Blockworks
    Reporter
    Sam Reynolds is a Taipei-based reporter, covering digital assets and regulation throughout Asia. Before joining Blockworks he was an editor at Forkast News and an analyst with IDC.