What happened
Popular cryptocurrency Bitcoin (BTC 0.25%) briefly touched a new all-time high of $48,226.25 on Tuesday around 2 a.m. EST. And with each move higher, investors celebrate by bidding Bitcoin stocks higher also. This includes technology company MicroStrategy (MSTR -2.00%), which recently converted all cash not needed for daily operations into Bitcoin tokens. As of 2:30 p.m. EST, MicroStrategy stock was up 23%.
Bitcoin-mining stocks were also higher on Tuesday. Marathon Patent Group (MARA -0.42%) was up 22%, and Riot Blockchain (RIOT 1.94%) was up 26%. For its part, Bit Digital (BTBT -0.45%) was only up 4%, but had traded 17% higher earlier in the session.
Image source: Getty Images.
So what
The latest leg of Bitcoin's journey to higher highs was sparked by news that Tesla took $1.5 billion from its balance sheet to buy and hold Bitcoin tokens. CEO Elon Musk is an icon among retail investors, so his move into the cryptocurrency space sparked immediate demand for Bitcoin as an investment. And considering that Tesla is an S&P 500 company now, its move could create a ripple effect, with more prominent businesses converting at least a portion of their balance sheets into Bitcoin tokens.
Tesla stock was barely changed on the news. But this makes sense since Bitcoin is proportionately such a small part of the company's overall value. The same can't be said of MicroStrategy. The stock is up over 500% in just the past three months, but these outsize gains make sense. The company has, on paper at least, increased the value on its balance sheet by billions, unbelievable for a mid-cap stock.
As of Feb. 2, MicroStrategy held 71,079 Bitcoin tokens for an average price of $16,109 each. The company has spent over $1.1 billion, which is a lot. However, now at $48,000 per Bitcoin token, the value of these assets has risen to over $3.4 billion -- a $2.3 billion gain. For perspective, consider that prior to buying Bitcoin, the company didn't even have $1 billion in total assets. So far, its move to own Bitcoin might be the best financial decision management has ever made.
Three-month returns for these Bitcoin stocks, the price of Bitcoin, and the S&P 500. MSTR data by YCharts.
Marathon, Riot Blockchain, and Bit Digital all mine Bitcoin. Investors in these companies must keep up with the particular computing power (known as the hash rate) of each. Furthermore, each company has a slightly different break-even price when it comes to mining new tokens. But should Bitcoin keep rising as it has, 2021 could bring record profits for these companies.
The chance at higher revenue and higher profits as Bitcoin's price increases is why investors are so excited for these stocks in general and why these companies are up today. While all three appear to have pricey valuations to me (even with an optimistic outlook), that hasn't stopped them from handsomely rewarding investors in recent months.
Image source: Getty Images.
Now what
As is often the case these days, the price of Bitcoin greatly affects stocks like MicroStrategy, Marathon, Riot Blockchain, and Bit Digital, among others. This trading volatility goes both ways. In February, the trend has been mostly up. But when Bitcoin drops, so do these stocks.
So is Bitcoin going higher or lower? I won't venture a definitive answer because I don't know the future. But I do believe the price of Bitcoin can continue rising if demand keeps increasing. I don't believe demand will be created from people using it as a currency, but it's possible to envision greater demand coming from corporate players using it as an investment.
As we've seen with Tesla and MicroStrategy, companies can provide enough demand to move the price of Bitcoin. And it's interesting to consider why these companies could be motivated to hold Bitcoin tokens in the first place. Consider that real yields for bonds (accounting for inflation) are negative. And with all the stimulus the U.S. government has pumped and is pumping into the economy, there's a case to be made for inflation in the future.
If you're a corporation with cash just sitting there, what can you do to protect yourself from inflation? Cryptocurrency could be seen as an anti-inflationary hedge by more and more companies. It's unreasonable to assume many will choose to do what MicroStrategy has done and convert all cash into Bitcoin tokens. But perhaps more will follow down Tesla's road and own a little as a hedge.
Or maybe not. In the end, things like this are hard to predict. Therefore, it's always good to keep a healthy measure of skepticism. And it's important to keep opinions unemotional in order to see things from an opposing viewpoint.
