Editors’ Note: MarketMinder does not make individual security recommendations. The below simply represent a broader theme we wish to highlight.
Coins coins coins! That is how we would sum up Monday’s big financial headlines. If people weren’t marveling at the massive spike in a meme-based cryptocurrency designed as a joke, they were obsessing over a certain automaker’s announcement that, in addition to purchasing $1.5 billion worth of bitcoins, it would begin accepting payment in bitcoin. The first was allegedly a sign crypto markets have officially entered bubble territory, while the second, supposedly, signals bitcoin’s increasing legitimacy as a currency. In our view, that is an exercise in trying to have it both ways, and we think it is worth investigating what all of this says about investor sentiment today.
As with most entertaining things in financial news these days, both stories have one thing in common: Tesla impresario Elon Musk. In addition to Tesla’s bitcoin adventures, he has spent the past few days tweeting humorously about Dogecoin—a cryptocurrency based on an old Internet meme about shiba inus (a Japanese dog breed). It has always been mostly a joke, the comic relief of the cryptocurrency world, launched to great amusement and fanfare during the first bitcoin boom in 2013. There are now well over 100 billion Dogecoins in circulation, each is worth a few pennies on the dollar, and total future supply has no cap. People in its thriving online community use it primarily to tip folks who post content they like. They have also held fundraisers in Dogecoin, which sent the Jamaican bobsled to the 2014 Olympics and sponsored a Nascar racer at Talladega.[i] Aside from a boom and bust alongside bitcoin in 2017 and 2018, it has mostly traded flat versus the dollar. Until late January, that is, when the Reddit WallStreetBets crowd adopted it as a fun meme trade. Musk’s tweets added fuel to the fire, the price doubled in mere days, and now a Dogecoin that was worth less than a penny a year ago will fetch you nearly eight cents.[ii]
In an interview on Clubhouse, Musk stressed that his tweets were jokes, not outright endorsements of Dogecoin. Our joke-measuring algorithm registered heavy irony, and the pile-on tweets from rapper Snoop Dogg and Kiss singer Gene Simmons seemed equally comedic in intent.[iii] So we guess Dogecoin’s spike has a few potential explanations. One, people didn’t get the joke. Two, they did and bought it anyway for fun. Three, they got the joke, engaged in some serious game theory and figured they could sell later to someone who thought the whole thing was for real. Four, many cryptocurrencies have spiked lately, those worth pennies on the dollar have had some of the biggest booms, and Dogecoin naturally went along for the ride.[iv] Regardless of the boom’s explanation, we will entertain any and all arguments that this is evidence of euphoria in Cryptocurrency Land, and we will probably agree with many of them.
If you are a diversified long-term stock investor, then the above is a curiosity as long as there is no transmission mechanism to stocks. Back in 2017, when bitcoin boomed and busted spectacularly, there was no such link, and stocks overall sailed through fine. But Tesla’s big bitcoin buy sheds light on one very nascent, very distant potential way for a cryptobust to spill over into stocks. Tesla isn’t the first publicly traded company to amass a big bitcoin holding, and people are starting to notice. MicroStrategy, a software company, has about $3.3 billion worth of bitcoin (and a $9.6 billion market capitalization), and its stock has basically paralleled bitcoin in recent months.[v] It also just held a conference for businesses in swapping their cash stockpiles for bitcoins, arguing cryptos are a superior corporate treasury asset. Payment processor Square owns about $218 million worth of bitcoins, but its market cap tops $100 billion, making its bitcoin holdings rather insignificant to its total balance sheet.[vi] But the Internet hoards don’t much seem to mind that technicality, as we have seen plenty of MicroStrategy, Square, Tesla—Bitcoin to the moon! chatter today.
We aren’t here to weigh in on whether these companies are wise to plow small or large chunks of their balance sheet into cryptocurrencies. Nor are we going to opine on whether it makes good business sense to accept payment for a car in bitcoin, knowing purchasing goods with bitcoin is potentially a major taxable event for the customer. Our interest here is with the general trend: What happens if companies pile onto this bandwagon en masse? We can envision a scenario where they do and, as a result, get caught up in the speculative mania on the upside and get burned by a crash. That, in theory, could hammer corporate balance sheets, taking stocks with it.
Note, we aren’t saying this is likely. It is far from close at hand. Holdings in the single-digit billions of dollars pack little punch to the world stock market, which weighs in at $53.4 trillion in market capitalization.[vii] But bear markets generally emerge where no one is looking, which requires monitoring even far-fetched risks. So “what if bitcoin bubbles spilled into stock markets?” is one thing we think about, and this is one realistic way it could happen, should a considerable number of additional companies plow treasury cash in.
That isn’t reason to flee stocks now, of course, or to base your stock decisions on whether the company has a stake in bitcoin. Markets move on probabilities, not possibilities. But as sentiment keeps heating up and euphoria eventually spreads from niche assets like cryptocurrencies to the stock market mainstream, it will be increasingly critical to assess what creeping negatives the masses are overlooking. In our view, corporate bitcoin holdings might be one thing to add to your potentially ignored risk checklist.
[i] So many potential Cool Runnings and Talladega Nights jokes, so little time. Shake and bake!
[ii] Source: Coinmarketcap.com, as of 2/8/2021 at 4:57 PST.
[iii] Come on, we have no such algorithm. Also, DISCLOSURE: Humor is not a market function, and this is merely our opinion. MarketMinder does not guarantee others’ jokes and recommends all readers do their own due diligence.
[iv] With its head out the car window, enjoying the breeze.
[v] Source: FactSet and bitcointreasuries.org, as of 2/8/2021.
[vii] Source: FactSet, as of 2/8/2021. MSCI World Index market capitalization in USD, as of 2/5/2021.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.