Investors looking to get into crypto have a few options. The simplest is to go out and buy some from an exchange like Coinbase or Binance. This method is fast, cheap and easy and lets you hold Bitcoin or Ethereum (or various other coins) directly. Another option is more of a bank shot approach: Buy stock in a publicly-traded company that is putting crypto on its balance sheet and hope that stock goes up.
Surprisingly, this second approach is one of the hottest trades in crypto right now and dozens of firms are clamoring to get in on the action. According to a site called Bitcoin Treasuries, there are now 160 firms around the world with Bitcoin on to their balance sheet, including 90 in the U.S. Alone. Those include familiar names like GameStop, Block and Tesla as well as the Trump Media and Technology Group, which is controlled by the family of the President.
In theory, this trade doesn’t make a lot of sense. Sure, the value of a company’s assets help inform its share price but any change in the price of those assets should correlate directly.
If Nike for some reason decided to use its spare cash to buy a million bushels of corn, and the price of corn went up, its share price might increase to the same degree. But this wouldn’t mean an investor bullish on corn should buy Nike stock rather than corn—and, if anything, Nike shareholders would likely punish the firm for using its capital on something totally unrelated to its business.
For some reason, crypto is different. Firms that have piled crypto on to their balance sheets have seen a jump in their share price far out of proportion to the value of the crypto they added.
The most famous example is Strategy, formerly known as MicroStrategy, a once-obscure cybersecurity firm based in Virginia. Several years ago, the firm’s charismatic founder Michael Saylor turned away from Strategy’s core business to focus on acquiring Bitcoin, and today it owns an eye-popping stash worth around $74 billion. This pivot proved wildly successful and, as of late July, the firm’s market cap stood at $112 billion even though it’s dropped its cyber business altogether.
Little wonder that more CEOs are glomming on to the same tactic. After all, if you can achieve a huge spike in your firm’s share price simply by swapping one currency on your balance sheet for another, why not? To get a sense of how popular the tactic has become, here is a screenshot from Bitcoin Treasuries’ list of publicly-traded firms with the most Bitcoins (one Bitcoin is currently worth around $118,000):
A “meme effect”
While some of these firms were set up solely to invest in Bitcoin, many of them are operating firms whose core business involves something else. Mitchell Petersen, a finance professor at Northwestern University, likens the phenomenon to the internet stock bubble of the year 2000 when firms discovered they could boost their share price simply by adding “dotcom” to their name.
Petersen, however, is skeptical of the current trend of firms putting their spare cash into crypto. He points out that big companies like Apple and Microsoft do invest their cash as part of corporate finance operations, but that they do so as part of a broader liquidity strategy. That strategy involves earning a little extra yield by holding short-term assets like money market funds or corporate bonds, while also maintaining a rainy day fund for emergencies or opportunistic acquisitions.
Petersen added that reporting rules do not require firms to disclose the specifics of the “cash equivalents” in their financial statements, but that these almost always consist of safe, liquid assets. The only exception he can recall is mining firms that have occasionally used their cash to put gold on their balance sheet, and justified the move by claiming a special expertise in the direction of gold prices.
This same reasoning can be found in some of the firms above. Specifically, the firms that are engaged in Bitcoin mining and that are well-versed in the cyclical patterns of the crypto industry. Some investors may view it as worth it to pay a premium for their share price.
In the case of other publicly traded firms, though, it is hard to see a compelling reason to believe their Bitcoin purchases are based on any particular expertise. At the same time, the volatile nature of crypto markets means many of these firms could find themselves in a tough spot during an inevitable downturn.
This raises the question of whether the current trend of public firms buying crypto is sustainable. According to another expert on corporate finance, the answer is simple: It’s not sustainable.
“It’s a meme effect that has nothing to do with investment prowess or good corporate strategy,” says Darrell Duffie, a finance professor at Stanford University.
Duffie holds the view that firms should use their capital to invest in their core competencies rather than try to compete with hedge funds on speculative plays. He acknowledges that, in the case of Michael Saylor’s Strategy, the share price of the firm has performed extremely well—but says that, as more and more firms try a copycat approach, the market will eventually come to its senses.
“It’s a fad and it will go away and one day some other fad will take its place,” said Duffie.
