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These Companies Have Collectively Bought $3.9 Billion Worth of Bitcoin

By Sean Williams - Mar 5, 2021 at 5:51AM

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It's not just retail investors who have taken notice of the world's largest cryptocurrency.

Despite the stock market's record-breaking volatility in 2020, investors have been treated well since the bear-market bottom on March 23, 2020. The tech-heavy Nasdaq Composite has nearly doubled, while the benchmark S&P 500 has gained 74%. These are huge moves that have handsomely rewarded patient equity investors.

However, neither of these moves holds a candle to what the world's largest cryptocurrency Bitcoin (BTC 1.39%) has accomplished since the bear-market bottom and over a trailing five-year basis. Bitcoin has more than sextupled the gains of the Nasdaq Composite since the March 23 low and is up a cool 11,510% over the trailing five-year basis (through March 1, 2021). That's over 100 times better than the total return (i.e., including dividends) of the S&P 500 since March 1, 2016.

But it's not just investors who've taken note of the most popular cryptocurrency on the planet. Three publicly traded companies have collectively scooped up $3.9 billion worth of Bitcoin since this past summer.

A physical gold Bitcoin standing on its side.

Image source: Getty Images.

Tesla Motors: $1.5 billion

On Feb. 8, electric-vehicle kingpin Tesla Motors (TSLA -6.42%) announced in a filing with the Securities and Exchange Commission (SEC) that it had purchased $1.5 billion worth of Bitcoin for its balance sheet, and that it would soon be accepting Bitcoin as a form of payment, where applicable by law. The company may also choose to hang onto the Bitcoin that it receives as payment, rather than selling it.

Tesla ended 2020 with close to $19.4 billion in cash and cash equivalents, meaning it invested less than 8% of its available capital in Bitcoin. As the SEC filing put it, "In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity." In other words, this $1.5 billion won't make or break Tesla.

The move isn't a complete shock, considering how open CEO Elon Musk has been about his support for Bitcoin. He briefly added the Bitcoin hashtag to his Twitter profile and has tweeted support for Bitcoin and Dogecoin in recent weeks.

Perhaps the most interesting thing to note about Tesla's Bitcoin stake is how it's recognized under accounting rules. Digital assets are considered to be "indefinite-lived intangible assets." In plain English, this means Tesla won't recognize any appreciation in its Bitcoin position unless it actually sells some or all of its stake.

However -- and this is a big "however" -- Tesla will be required under accounting rules to recognize impairment charges if the value of their Bitcoin declines, even if the company chooses not to sell it. With Tesla intending to hold its Bitcoin long term, the company cautioned in its SEC filing that this could negatively impact its profitability. 

A physical gold Bitcoin lying atop a messy pile of one hundred dollar bills.

Image source: Getty Images.

MicroStrategy: $2.19 billion

Although Tesla is the biggest Bitcoin buyer in 2021 among public companies, the largest aggregate buyer since this past summer is business-intelligence software company MicroStrategy (MSTR -3.81%).

According to an SEC filing from the company on Monday, March 1, MicroStrategy had spent approximately $2.186 billion to acquire 90,859 Bitcoin. The value of these Bitcoin now tops $4.4 billion, which means CEO Michael Saylor and his company have doubled their investment in less than a year. Similar to Tesla, MicroStrategy is expected to hold its Bitcoin for a long period of time. 

The thesis behind MicroStrategy's multiple purchases revolves around Bitcoin's fixed 21 million token limit. As the U.S. and global money supply increases, Bitcoin should be insulated from rampant fiat devaluation. Saylor views Bitcoin as the logical store of value over the long run.

While I don't share the same view on Bitcoin as Saylor, what really concerns me about these purchases is that MicroStrategy has used more than $1.6 billion in convertible debt to finance them. It's one thing for Tesla to invest less than 8% of its available cash into Bitcoin, and an entirely different ballgame when a CEO is taking out debt to buy an unproven asset.

Furthermore, MicroStrategy's software business -- which has seemingly been forgotten about during the Bitcoin frenzy -- has yielded six consecutive years of revenue declines. Saylor's lack of focus on his core business is concerning.

A person looking at a skyrocketing green chart on a smartphone.

Image source: Getty Images.

Square: $220 million

A third company that's been gobbling up Bitcoin is payments-facilitator Square (SQ -4.25%).

During the third quarter of 2020, Square spent $50 million to acquire 4,709 Bitcoin. Within the past couple of weeks, Jack Dorsey's company bought another 3,318 Bitcoin, totaling $170 million. This recent purchase is about $3,000 underwater at the time of this writing. However, the October purchase has more than quadrupled in value. In total, 5% of Square's $4.4 billion in assets are now held as Bitcoin.

Most folks are familiar with Square for its seller ecosystem. If you've ever purchased goods from a small retailer or a local business, there's a chance you've used the point-of-sale devices supplied by Square to facilitate transactions. During the worst economic downturn in decades, the gross payment volume traversing Square's network rose modestly to $112.3 billion in 2020.

But the real reason Square seems to be deepening its ties to Bitcoin is the company's fast-growing peer-to-peer payment platform Cash App. Since the end of 2017, Cash App's monthly active user count has skyrocketed from 7 million to 36 million. Though Cash App allows Square to generate revenue via merchant fees, transfer fees, and investment fees, it's Bitcoin exchange that's been particularly popular. Bitcoin was responsible for $4.57 billion in Cash App revenue in full-year 2020. That's nine times higher than the previous year. 

As a Square shareholder, I'm not too concerned with 5% of the company's assets being tied up in Bitcoin. The seller ecosystem is generating plenty of positive cash flow, and Cash App's other services are bringing in much juicier margins than what the company is generating from Bitcoin exchange. In short, even if Bitcoin were to perform poorly, ancillary cryptocurrency stocks like Square would be just fine.

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Stocks Mentioned

Block, Inc. Stock Quote
Block, Inc.
SQ
$83.44 (-4.25%) $-3.70
Tesla, Inc. Stock Quote
Tesla, Inc.
TSLA
$663.90 (-6.42%) $-45.52
MicroStrategy Incorporated Stock Quote
MicroStrategy Incorporated
MSTR
$202.75 (-3.81%) $-8.02
Bitcoin Stock Quote
Bitcoin
BTC
$30,175.31 (1.39%) $413.60

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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