11 Feb A way to play the Bitcoin rally using Stocks
Bitcoin is on a tear again, rising above US$48,000. Investors are scrambling to get exposure to this and we have uncovered an interesting way to do it.
Bitcoin got going along with all other assets last year but exploded higher when Tesla (TSLA) announced it had purchased $1.5billion worth and will begin accepting it as payment for their cars.
The interesting thing in this inflationary environment for Bitcoin is that it has a limited supply. Unlike the US dollar or even our Aussie dollar. By design, only 21 million Bitcoins will ever be created. By comparison, there is no limit on how many AUD or USD, or GBP or EUR or CAD can be produced.
That scarcity of availability of Bitcoin will keep a natural upward pressure on prices.
That isn’t to say it won’t be volatile. In December 2019 the value of Bitcoin plummeted from $19,650 all the way down to $3,185. It was a dark time for Bitcoin fanatics.
The Covid crisis, and associated monetary printing in response, is exactly the kind of scenario for which Bitcoin was invented. An asset class with limited supply that holds its value in times of inflation.
Bitcoin was born in the shadow of the 2008 financial crisis. It was a response to the worldwide failure of governments and central bankers to protect the value of money. By design, the powers-that-be have no governing authority over Bitcoin.
In December, Bloomberg reported that Massachusettes Mutual, the giant life insurance company, put $100 million into bitcoin. That is a tiny amount of their available assets but it shows large, regulated business is getting on board now.
The attraction of Bitcoin for financial firms is protection against low returns on bonds and treasuries, fear of devaluation, and the shocking reality that cryptocurrency has a low correlation to other financial assets.
Other corporations caught on early. MicroStrategy (MSTR) Square (SQ) and PayPal (PYPL) have all made sizeable investments.
How do we play this as a stock?
Enter the Special Purpose Acquisition Vehicle – VIH
A SPAC is an empty company that raises funds and uses those funds to buy another company. In Australia we would call it a reverse listing and it happens all the time in mining companies.
VIH will soon merge with a company called Bakkt.
Yes, strange name. We agree.
Bakkt operates a digital wallet for cryptocurrencies and digital rewards points.
Apart from its funny name, Bakkt is the creator of the first federally regulated cryptocurrency futures exchange. This occurred in September when managers were developing a framework for institutions to trade bitcoin on the Intercontinental Stock Exchange (ICE), the holding company that owns the New York Stock Exchange.
It’s also noteworthy that Bakkt is a spinout from ICE, and a pet project of its founder Jeffrey Sprecher, a prolific wealth creator.
Sprecher is positioning Bakkt as a 24-7 digital marketplace where account holders can transform all of their digital currencies, including merchant rewards from vendors like Starbucks (SBUX), into real-world things. That bit is important. Bakkt is an exchange. Longer-term investors should look past Bakkt as a digital wallet and focus on the company as a facilitator for financial institutions to safely trade and accumulate bitcoin. This is likely to be a huge business
VIH closed at $17.90 yesterday, which gives it a market cap of only $463million and a lot of upside.