A number of public companies have made portfolio investments into Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH-USD). I wanted to discuss seven of these stocks in order to help investors consider making an indirect investment in digital currencies. One way you can directly track companies that make their own cryptocurrency investments is on the site bitcointreasuries.org.
The SEC (Securities and Exchange Commission), for some stubborn reason, has refused to allow any ETF (exchange-traded fund) related to cryptocurrency to be formed and listed. This is not likely to last, though. For example, on Feb. 18, Canada allowed its first cryptocurrency ETF, the Purpose Investment Bitcoin ETF (TSE:BTCC.B) and it has been inundated with money.
This does not mean that the SEC does not prevent closed-end funds. In fact, there are now two publicly traded closed-end cryptocurrency funds, that report to the SEC. These are on the list of securities I will discuss.
The idea that the SEC knows best for the rest of America and is actively preventing ETFs from being dedicated to any cryptocurrency seems to be outdated. It seems to be based on the theory that cryptocurrency is not regulated and too volatile. That explanation does not fly. There are already all kinds of ETFs related to central bank-issued currencies, which are volatile in nature. The real reason seems to be related to the core purpose of cryptocurrency — they are not issued by any government and therefore cannot be managed.
For an investor who wants to own cryptos indirectly, this leaves investing in public companies that have Bitcoin or Ethereum as a portfolio investment. Here are 7 companies that have cryptocurrency investments:
- Tesla (NASDAQ:TSLA)
- Square (NYSE:SQ)
- MicroStrategy (NASDAQ:MSTR)
- Marathon Digital Holdings (NASDAQ:MARA)
- Galaxy Digital Holdings (OTCMKTS:BRPHF) (TSE:GLXY)
- Grayscale Bitcoin Trust / Grayscale Ethereum Trust (OTCMKTS:GBTC) (OTCMKTS:ETHE)
- Coinbase Global (NASDAQ:COIN)
Let’s dive in and look at these.
Stocks With Large Cryptocurrency Investments: Tesla (TSLA)
Market Capitalization: $649.8 billion
Tesla started buying Bitcoin for its balance sheet and filed with the SEC its 10-K indicating it had bought $1.5 billion in January 2021. It also said that it “may acquire and hold digital assets from time to time or long-term.” It said it would also begin accepting Bitcoin as a form of payment in the near future. That happened on March 23 when Tesla started explaining procedures of how to pay with Bitcoin.
This is not a small investment, even for Tesla. For example, the company had $19.384 in cash and equivalents in the bank at the end of the year. So this $1.5 billion in Bitcoin, which has now risen at least 55% since mid-January, is likely worth about $2.35 billion. However, as The Motley Fool points out, Tesla can only recognize those gains when it sells Bitcoin. But it must account for unrealized losses in its net income.
Therefore it represents about 12% of its $19.384 billion in cash and equivalents.
Moreover, it is possible the company has bought even more Bitcoin or Ethereum. Look for the company to update this investment when it reports earnings on April 26.
If Tesla decides to keep on purchasing cryptocurrencies as a part of its strategy, this could become a large part of the company’s cash stockpile. Stay tuned to these developments.
Obviously Elon Musk, the CEO, is the driving force behind these moves. When announcing the acceptance of Bitcoin as payment he said they are not relying on a third-party network or digital wallet. They use their own software. In addition, whatever sales they make in Bitcoin will be added to their digital currency pile. It will be interesting to see how big their investment in Bitcoin from the sale of electric vehicles.
Square (SQ)
Market Cap: $118.9 billion
Square is a payments company for both Sellers and Cash App customers who want to purchase Bitcoin. In addition, the company bought 4,709 Bitcoin in October 2020 for $50 million, and recently bought 3,318 Bitcoin for $170 million.
So it now owns at least 8,027 Bitcoin for its asset. As of April 9, with Bitcoin at $58,360, those assets are worth $468.46 million. That represents over double (112% gain) on its original $220 million investment. As of Dec. 31, the company said on page 25 of its shareholder letter it had $3.158 billion in cash. So this Bitcoin investment already represents about 15% of its liquid investments.
Moreover, the company is going headlong into promoting purchasing Bitcoin on its popular Cash App. In late February the company announced in its Q4 shareholder letter that over 1 million people had bought Bitcoin for the first time on their Cash App.
More than 3 million people bought and sold Bitcoin in the past year on their App. Its Bitcoin revenue was up 9.7 times in 2020 to over $4.5 billion. Square makes what it calls a “small margin” on this revenue as a transaction fee. That small margin worked out to about 2.3% in Q4 or $41 million in fees on $1.74 billion in Bitcoin revenue.
MicroStrategy (MSTR)
Market Cap: $6.8 billion
On April 5, this software company announced it had bought 253 Bitcoin for $15 million in cash. That means it paid $59,288 per BTC. In total, over the past year, it has bought 91,579 Bitcoin. Its average cost is $2.226 billion, or $24,311 per Bitcoin.
This means that as of April 9, with Bitcoin at $58,360, its portfolio is now worth $5.3445 billion. That represents an astounding unrealized gain of over $3.08 billion in that past year. Compare this to the company’s operating revenue and profits. It produced just $480.7 million in revenue during 2020 and made $389 in gross profits and negative $19.9 million in operating losses.
However, its cash flow from operations was positive $53 million during 2020 and free cash flow was $50 million. But this is not enough to pay for its Bitcoin purchases, which at the end of the year were worth $1.054 billion at cost. So it has begun issuing convertible debt to pay for the purchases. At the end of 2020, it had issued $650 million in convertible debt and after discounts, it was accounted for as $454 million in debt. Since then the company has probably issued another $2 billion or a bit more to pay for the Bitcoin it has bought.
As you can tell MicroStrategy is deeply serious about its “digital asset” purchase strategy. In its earnings report the company said it gets two benefits. First, the company is seen as a “thought leader” and second the investments have “generated great interest in MicroStrategy as a corporation.”
Given that MSTR stock has a market capitalization of just $6.8 billion, its $5.3445 billion in Bitcoin now represents 78% of its market value. In other words, BTC represents $553.92 of its $711 stock price.
However, we have to subtract the debt. Therefore, assuming the company now has $2.6 billion in debt, the net digital asset is worth $2.73 billion. That still represents 40% of its stock price or $283.41 per share of its $711 market price.
Moreover, this implies that the MicroStrategy business is worth just $4.11 billion. That means it is trading for just 9.4 times expected sales of $437 million this year. This implies that MSTR stock is too cheap, especially if the stock should be value at 10 to 12 times revenue.
Marathon Digital Holdings (MARA)
Market Cap: $4.8 billion
On April 5, this bitcoin mining company released its preliminary earnings for Q1. It said that it had produced 196 Bitcoins during the quarter. In addition to Bitcoins that it has already mined and purchased, Marathon now as 5,134.2 Bitcoin in its treasury. At a price of $58,360, the company now has Bitcoin worth $299.4 million.
But the important figure was that the company said it had mined 196 Bitcoin during the quarter. As it expects to continuously receive more ASIC (application-specific integrated circuits) miners each month over the next year, this production rate will continue. Expect to see its production of Bitcoin (no other cryptocurrency) will continue to increase each quarter as result.
For example, right now the company has 6,800 ASIC miners. In Q2 it will receive 9,200 miners, and 16,900 in Q3, as well as 49,700 in Q4. In Jan. 2022 it receives 15,200 more miners. That is a total of 91,00 miners. This is 13 times the number of miners it has right now. By March 2022 it will have 103,120 miners in service.
Given these numbers, I believe you can expect to see the total value of Marathon Digital’s Bitcoin holdings simply explode. For example, its 103,120 miners by March 2022 is 15 times its existing number. Given that hash rate difficulty will likely rise, let’s assume that it will there be producing 80% of that number times its existing mining production.
Here are the rough numbers. 15.1 times 196 Bitcoin per quarter x 4 x 80% = 2,367.7 Bitcoin mined per quarter in one year or 9,470.7 BTC per year. Let’s assume the price stays the same (which it won’t). That is worth $138.1 million per quarter. The annual run rate will be $552.3 million.
To put that in perspective, MARA stock has a market cap of just $4.84 billion. This means that it will have close to $700 million to $800 million in Bitcoin, or 15.5% of its total market capitalization. Each year its Bitcoin holdings value will rise as the price rises, so expect to see MARA stock do quite well.
Galaxy Digital Holdings Ltd (BRPHF)
Market Cap: $7.69 Billion
Although based in NYC, Galaxy Digital Holdings Ltd stock trades on the Toronto Stock Exchange (TSE) but also over-the-counter in the U.S. as well. It is partly an asset management firm as well as a merchant bank that makes its own investments in Bitcoin and other digital currencies. In addition, it provides trading, consultancy services, and fund investment products for institutional investors.
The company is run by a hedge fund manager named Michael Novogratz. He was recently quoted in an interview at Bloomberg is saying that Bitcoin won’t be used as a digital currency in the next five years. Ethereum will more likely be the digital currency.
According to bitcointreasuries.org, GLXY owns 4,000 Bitcoin, which, at today’s price of $58.320 equals $233.28 million. This represents about 3% of its market capitalization or so. The company also invests in numerous other digital currency companies, as discussed in their shareholder letters.
Grayscale Bitcoin Trust (GBTC) and other Grayscale Cryptocurrency Funds
Market Cap: $14.36 billion
Grayscale Bitcoin Trust is the largest institutional fund invested in Bitcoin, and one of only two funds that are reporting SEC funds (the other is its ETHE fund). The company manages over $34 billion in Bitcoin, Ethereum, and other digital cryptocurrency investments. It is controlled and owned by Digital Currency Group.
Recently the company made an interesting statement on its site at medium.com where it declared “Grayscale’s Intentions for a Bitcoin ETF.” The company declared its intention to become an ETF once that is possible. This would include a lowering of its management fee.
Right now GBTC trades at a discount to its NAV, which can be seen here at Y Charts.
Keep that in mind if you are looking to buy a cheap way into a Bitcoin investment fund.
Coinbase Global (COIN) – Digital Cryptocurrency Exchange
Market Cap: $100 billion (est.) at $871 per share, or $114.85 billion at $1,000 per share
Coinbase, the digital cryptocurrency exchange company, is slated to go public on the Nasdaq in a direct listing on April 14. It provides for the storage, spending, earning, and use of more than 40 crypto assets. The direct listing means it will not raise additional capital in the process of its listing.
Last year it generated $1.3 billion in revenue, up from $534 million in 2019. It also made $322m in net income in 2020 after $30m in net losses in 2019. It has 43 million verified users and 3 million monthly transacting users (MTU) with $90 billion in assets. Transaction fees make up 96% of its revenue, mostly from Bitcoin and Ethereum buys and sales.
As a result, investors expect Coinbase will have a market cap of around $100 billion, based on its April 6 Q1 earnings release. It said that the company had 56 million verified users (+30% over Dec.) and 6.1 million MTUs (+103% over the December quarter). In addition, its assets on the platform now equal $233 billion, representing an 11.3% cryptocurrency market share.
Moreover, Coinbase says cryptocurrency revenue will be $1.8 billion. This will be 208% (3.08x) higher than its Q4 revenue of $585 million. This is also significantly higher than estimates of $1.2 billion. The company also said it will make $730 million to $800 million in net income and adj. EBITDA (earnings before interest, taxes, depreciation, and amortization) of $1.1 billion.
Moreover, it provided some ranges for 2021 MTUs between 4 million and 7 million. This seems excessively conservative given that it already has 6.1 million MTUs. Moreover, annual run rate revenue at $1.8 billion is at least $7.2 billion for 2021. If this were to rise by 20% the annual rate would be $8.64 billion.
I believe these numbers will force the stock price higher than previously anticipated. For example, since there are going to be 114.85 million shares registered, a $100 billion market value will put COIN stock at $871 per share. This would give the stock a price-to-sales ratio of 11.6 times at $8.64. At $1,000 per share (i.e. $114.85 billion market cap), the price-to-sales ratio will be 13.3 times.
Therefore, I project a price of at least $1,000 per share. Watch out for COIN stock to do extremely well. It will be the premier public cryptocurrency exchange for a long time.
On the date of publication, Mark R. Hake held a long position in Tesla, Square, and Marathon Digital Holdings.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.
