Tech investors don't typically find themselves dabbling in currency or alternative asset classes, but there's a lot of buzz building around bitcoin. Some notable investors and tech CEOs are dipping their toes into cryptocurrency. We're seeing the asset class emerge as a part of the recommended allocation strategy for some institutional investors and investment banks.
There's no denying that bitcoin is a hot currency these days. Bitcoin has nearly quadrupled this year, and that was after almost doubling in 2019. The risks are high. We've seen rallies fizzle out in scary fashion before. Bitcoin plummeted 74% in 2018 after a couple of monster years. However, like others, I have decided to make bitcoin a small part of my portfolio. And as a tech investor there are ways that you can participate in the crypto revolution without trading in the actual currency.
A bit of bitcoin
Over the past couple of months bitcoin-related investments have grown to account for 2% of my portfolio. It may not seem like a lot, but it's enough to afford me the potential for strong gains for the digital currency revolution without the threat of busting my portfolio if the bubble pops.
I currently own three investments marching to the beat of crypto. The first is Grayscale Bitcoin Trust (OTC:GBTC), the first publicly traded security investing solely in bitcoin. There's a downside to Grayscale Bitcoin Trust -- and I'll get to that shortly -- but it's my largest position. My second largest position is MicroStrategy (NASDAQ:MSTR), a sleepy provider of enterprise analytics with a not-so-sleepy approach to capital allocation. Spoiler alert: MicroStrategy owns a lot of bitcoin.
My third and smallest position is bitcoin itself.
Let's start with Grayscale Bitcoin Trust. The trust has become a way for investors to buy and sell an investment that rises and falls in step with bitcoin. The problem with the trust is that it trades at a healthy premium to the bitcoin it owns. It ended last week at a 24% premium to the $22 a share it owned in bitcoin. The premium has been much higher in the past given the scarcity of the product, but that gap should narrow as more vehicles hit the market. It also may or may not help that it's never been easier to buy cryptocurrency than it is right now.
Fintech darlings Square (NYSE:SQ) and more recently PayPal (NASDAQ:PYPL) make it seamless to trade as little as $1 in bitcoin. Square's Cash app and now PayPal have been actively promoting access to the digital currency. Easy access to bitcoin at cost will eat into Grayscale Bitcoin Trust's heady premium to the currency it owns, but the bullish counter here is that easier access will boost crypto's exposure, ownership, and ultimately prices.
MicroStrategy is wrapping up what should be its sixth consecutive year with a single-digit decline in revenue. The interesting wrinkle here is that CEO Michael Saylor has been buying bitcoin with MicroStrategy's liquidity, and it now owns a lot of crypto.
MicroStrategy has purchased an additional 29,646 bitcoins for $650 million at an average price of $21,925 per #bitcoin and now #hodl an aggregate of 70,470 bitcoins purchased for $1.125 billion at an average price of $15,964 per bitcoin.https://t.co/j6wVLXIzoa— Michael Saylor (@michael_saylor) December 21, 2020
We're talking about $1.125 billion in bitcoin purchases that have appreciated to $1.9 billion in value with the digital currency topping $27,000 on Sunday night. This would be a big position for a tech titan, but in this case it's a huge deal for a meandering tech company with a market cap of roughly $3 billion.
Some tech investors will prefer to own more than just the investments that have become proxies for bitcoin. Square and PayPal offer strong upside as leading payment platforms that just happen to have a bitcoin kicker. There are also pick-and-shovel plays in the form of bitcoin mining companies and blockchain stocks that should thrive if the platform continues to climb as it gains wider acceptance.
More ways to have some skin in the bitcoin game will come. The market never ignores a booming trend for too long. Corrections will be inevitable, but volatility can also be an ally for risk-tolerant investors. Buckle up, bitcoin investors. It's a bumpy road ahead in 2021, but investors keep showing up in 2020.