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Tesla Buys $1.5 Billion worth of Bitcoin
On February 8, 2021, Tesla disclosed in an SEC filing that it bought $1.5 billion worth of bitcoin. In the filing, they explain the purchase, "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. Thereafter, we invested an aggregate $1.50 billion in bitcoin under this policy and may acquire and hold digital assets from time to time or long-term."
So, what is the impact on the equity side of things?
Simon Erickson, 7investing: “Beginning last summer MicroStrategy first put $425 million into buying bitcoin (BTC) and its balance sheet went from cash to a long term investment – [it] increased quite a bit in value over those next eight months versus where it is today. So that created a lot of value for shareholders. MicroStrategy was trading at $118 a share at the time of purchase and now it’s now over $1,000 a share. Other people are saying, “Hey, what an innovative move. What a creative way for somebody get out ahead of this.”
In the case of MicroStrategy, in which they have converted nearly all their available cash plus taken on debt to purchase BTC (including another round of $900 million in convertible notes announced this week), their BTC position cannot be ignored. Their BTC holdings have become so large that because of Bitcoin’s recent 9-month price surge it now rivals the entire value of the 30-year company. You simply cannot evaluate MicroStrategy’s value as a business and stock without also taking into account BTC’s trajectory. However, because MicroStrategy has seemingly timed their BTC purchases correctly, the trade has catapulted the stock and provided incredible returns for MSTR holders, as mentioned by Simon.
For other companies that have purchased BTC, like Square and now Tesla, because their BTC positions are more modest when compared to the overall company treasury (~1% and 7%, respectively), the BTC price volatility distorts the underlying stock value to a lesser extent. It remains a new wrinkle when considering the value of the stock and a trend to keep an eye on as potentially more and more companies follow suit.
How does the Tesla news affect the crypto markets?
Spencer Randall, CryptoEQ: “So I think of this as a new kind of chapter that we’re seeing in Bitcoin adoption...there’s a new arc of persona that’s adopting Bitcoin. The reason Bitcoin makes sense for Elon (Tesla) and Saylor (MicroStrategy) and many other CEOs is a similar reason to why it made sense for a lot of early adopters. So when you think about why (early adopters) allocate cash to Bitcoin, it’s a similar thought process on a much, much bigger scale. So, I think we’re looking at another arc of adoption, as we continue to charge ahead to mass adoption of cryptocurrencies.”
Tesla's move to put some of its corporate reserves into BTC is a signal that it expects the cryptocurrency to serve as another store of long-term value alongside the dollar. Companies/boardrooms are very careful when it comes to protecting their reserves so this move appears to be more of a fundamental change in treasury allocation than a flash in the pan speculative bet. One by one, other corporations will take note of what MicroStrategy, Square, and Tesla have done and how it profitably affected their stock price and purchasing power. We expect more companies in the following months and years to add BTC to their balance sheets. This creates a whole new BTC buyer's market that the industry has never seen before. However, it is also very likely to expedite new regulations around how and how much BTC a public company can purchase with corporate money.
Coinbase plans IPO, direct listing in 2021
US exchange Coinbase has chosen Nasdaq as the venue for its direct listing to the public markets in 2021. Shortly after the news, the Nasdaq Private Market launched a secondary market for Coinbase stock allowing shareholders with vested equity to sell shares. According to inside sources, shares on Nasdaq Private Market were matched at a price of $200, implying a valuation of approximately $50 billion.
Coinbase potential stock price and size relative to traditional brokerages
Steve Symington, 7investing: “They’ve (Coinbase) got some impressive numbers backing them. Yeah, I think last I checked, it was a little over $90 billion in assets on the platform and 43 million active verified users. So I mean, impressive to that end. But also, we shouldn’t fail to appreciate the relative scale of brokerages like Schwab. Their market cap is around 108 billion. And I think they had $4.1 trillion in assets on their platform. And the interesting thing is, when you look at a business like Schwab, they also only had 14.1 million brokerage accounts active last time I checked. So, the average size of those brokerage accounts is obviously significantly larger."
Coinbase represents one of the first unicorns in the crypto-ecosystem to go public. The combination of being the first coupled with their clean track record, quality brand name, and a booming crypto market means their listing is well-positioned to beat the $50 billion valuation number thrown around in headlines.
Coinbase’s position within the cryptocurrency exchange market
Michael Thoma, CryptoEQ: “[Coinbase] is the front door to crypto for a lot of people...it’s still a lot of people’s first introduction into the market. Coinbase makes buying cryptocurrency super easy and they’re very compliant. They work closely with US regulators….They’ve never been hacked. So when you’re looking for security and a trusted name, when you don’t really know where else to go, you turn to Coinbase. So that’s kind of the niche they’ve carved out for themselves. Now we’re in a bull market, prices are much higher, their users are flooding in and it’s doing wonders for that valuation. So I think they might be going public at the right time. And basically, everything that goes public in this stock market environment is gold. So why would Coinbase be any different?”
While Coinbase is the biggest US exchange, it is nowhere near the biggest on the global stage. Binance is the big, big leader in terms of volume (45%), followed by OKEx, Huobi, and then Coinbase. For valuing exchanges, it’s all about the number of customers, trading volumes, fees, and reputation. Binance dominates with a 60% share of the spot market while Coinbase has ceded market down to 10-15% market share of spot. However, Coinbase is a trusted name and bundles retail trading and custody in a “one-click buy” interface. All exchanges are competing in a developing market and evolving regulatory market. Binance, while leading in volume, plays fast and loose with regulatory arbitrage. Coinbase, on the other hand, has done well to ensure they find themselves compliant with all current US laws and regulations.
Image credit: CoinGecko
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