What happened
Alternative-energy company Tesla (TSLA -1.92%) released its annual report on Monday, and it contained potentially game-changing news for popular cryptocurrency bitcoin (BTC 0.70%). The company has started buying bitcoin tokens, and this revelation sent the price of bitcoin to a new all-time high of $44,801.87, according to CoinDesk.
With bitcoin suddenly spiking higher, so-called bitcoin stocks (companies with varying degrees of bitcoin exposure) are trading sharply higher as well today. Here are just a few moves as of 1 p.m. EST:
- Shares of MicroStrategy (MSTR -2.82%) were up 19%.
- Shares of Grayscale Bitcoin Trust (GBTC 1.29%) were up 16%.
- Shares of Marathon Patent Group (MARA 9.78%) were up 34%.
- Shares of Bit Digital (BTBT 2.59%) were up 22%.
- Shares of Riot Blockchain (RIOT 10.13%) were up 32%.
Here's exactly why each of these bitcoin stocks are spiking higher and why Tesla's bitcoin investment is a consequential development.
Image source: Getty Images.
So what
Under its new corporate policy disclosed in the annual report, Tesla is authorized to hold alternative assets like cryptocurrency as a reserve currency. In January, it used $1.5 billion to purchase bitcoin tokens, although it didn't disclose what day(s) it bought or how much it paid.
As soon as Tesla CEO Elon Musk alerted social media of the corporate policy change today, the price of bitcoin suddenly spiked. Remember that cryptocurrencies are always available for trading, so there's no need to wait for markets to open. Therefore, Musk created an instant spike in demand. According to CoinDesk, the price of bitcoin is up 14% over the past 24 hours.
Tesla stock is only trading marginally higher on today's news. But keep in mind that $1.5 billion is peanuts compared to its market capitalization of over $800 billion. Going forward, as the price of bitcoin fluctuates, it's unlikely to have much of an effect on Tesla's stock price. But that's not true of other companies that hold bitcoin on the balance sheet.
Image source: Getty Images.
MicroStrategy is a pioneer for holding bitcoin. As of its latest count on Feb. 2, the company had over 71,000 bitcoin tokens at an average price of $16,109 per token. It's therefore spent over $1.1 billion acquiring bitcoin, which is big deal considering it's a mid-cap stock. Likewise, Marathon recently decided to own bitcoin tokens in addition to mining them. The company spent $150 million in January acquiring tokens -- an enormous amount for a small-cap stock. Expect these stocks to trade with as much volatility as bitcoin itself.
Today, Riot Blockchain announced that longtime board of directors member Jason Les has been given the CEO job, with former CEO Jeff McGonegal returning to focus on CFO responsibilities. But that's likely not the reason for the stock's outsized gains this morning. Rather, all bitcoin-mining stocks are getting a pronounced boost today, as they have for the past several months.
Three-month returns for bitcoin miners, bitcoin, and the S&P 500. MARA data by YCharts
Not too long ago, Marathon, Riot Blockchain, and Bit Digital were all just penny stocks. But many investors believed these companies were good ways to play the rising price of bitcoin -- all three generate revenue by mining bitcoin. Since these stocks were so small, it's been easy for retail investors to bid these higher each time bitcoin generates interest by hitting new all-time highs. That holds true today as well.
Now what
Tesla's move could create a major ripple effect in the cryptocurrency space. Holding bitcoin on the balance sheet isn't an unprecedented move as we've seen with MicroStrategy and Marathon. But it is unprecedented for a company Tesla's size -- it's among the top 10 largest companies by market cap and a member of the S&P 500. Thinking in terms of the technology adoption cycle, Tesla's decision could spark a wave of corporate and institutional ownership in bitcoin.
And if demand for bitcoin continues spiking in 2021, it won't be met with increased supply since the supply of bitcoin is fixed. This suggests that the price of bitcoin could continue rising.
Image source: Getty Images.
This isn't a toothless theory on my part. First, consider the evidence that demand from institutional investors is increasing. For example, the Miller Opportunity Trust, run by renowned investor Bill Miller, is considering buying shares of Grayscale Bitcoin Trust as a way to gain exposure to the cryptocurrency, according to a filing with the Securities and Exchange Commission (SEC) on Friday.
Finally, consider the potential demand for bitcoin from corporations. Beyond Tesla's move today, MicroStrategy just held a conference called Bitcoin for Corporations, in which the company explained everything it had to do as a publicly traded company to start holding bitcoin. MicroStrategy's CEO Michael Saylor says many companies are getting interested in adopting a similar policy.
While the future of cryptocurrency is hard to predict, Tesla's move is certainly pointing toward an interesting year in 2021.
