Bitcoin's Booming 'Infinite Money' Hack

Dear subscriber,

Wall Street loves finding ways to make a stock price go up.

The traditional way has always been for a business to grow its earnings. Build a company that makes money... and its stock price will climb higher.

But that's boring. And difficult.

Others have sought more creative ways to make share prices rise without really building a business at all...

In 1999, for instance, you could add ".com" to your company's name and watch your stock balloon practically overnight.

In 2017, just mentioning that your company was investing in the "blockchain" was enough to send shares higher.

And in 2020, you could launch a special purpose acquisition company ("SPAC") – a business with no operations whatsoever – and watch as individual investors clamored for shares.

Today, there's a new trend... bitcoin treasury companies.

These are businesses that hold some or all of their corporate cash in bitcoin. Whereas most companies hold their cash in U.S. Treasury securities and other safe assets and earn a few percentage points of interest, these companies benefit from the rising price of bitcoin. (So long as it is rising, of course.)

That makes these companies an effective bet on the crypto itself.

As I'll explain, bitcoin treasury companies have turned into infinite money machines... regularly raising funds to buy more bitcoin, which sends their shares even higher.

The problem, of course, is leverage. Many of these companies are relying on debt to fund their bitcoin purchases. And while adding leverage to assets is nothing new, it can be a risky game...

Borrowed cash may feel great on the way up, but it can be a terrible burden on the way down. And you don't want to be left holding the bag.

Take Strategy (MSTR), for example... formerly known as MicroStrategy.

Strategy has a software business. It was profitable. Back in 2019, the company booked nearly $500 million in revenue, had about $30 million in income, and sported a market cap of around $1.5 billion.

But its co-founder, Michael Saylor, was (and still is) a true bitcoin believer. And in August 2020, he announced that the company had invested $250 million in bitcoin.

His bitcoin thesis was pretty standard... Saylor thought monetary stimulus would lead to a decline in the value of the U.S. dollar, and he believed bitcoin would be a good inflation hedge.

Through wisdom or luck, Saylor caught the wave. Bitcoin started rising rapidly, from around $10,000 to nearly $60,000 over the next six months. And Strategy became one of the best-performing stocks in the market...

Then, Saylor came up with a true stroke of genius – at least, as far as making shares climb is concerned.

Saylor didn't just put the company's earnings into bitcoin... He started selling the company's stock and borrowing money to fund its bitcoin purchases.

Let's talk about that for a second...

Companies can do what's called a "follow-on offering" with their stocks. That's when they create new stock, sell it at the prevailing price, and receive the proceeds to fund their business.

This isn't a bad thing for a growing business to do every once in a while. But selling new stock makes each existing share a little less valuable. And done repeatedly, it pushes a stock's price down.

However, Strategy found out something strange... It trades at a premium to its pile of bitcoin.

That means it could sell, say, $2 billion worth of stock, use that to buy $2 billion worth of bitcoin... and then the value of its stock would go up by $4 billion.

Right now, the company holds roughly $70 billion in bitcoin. And it has a market cap of around $120 billion. There's a little value in there for the software business, but it's a rounding error. The company trades at a premium of 1.7 times...

After a good run of selling shares, Strategy turned to debt. Between convertible bonds and preferred shares, the company has borrowed more than $11 billion to buy more bitcoin.

And why not? It's like a free money machine. Take $1 from investors. Buy $1 worth of bitcoin. The stock goes up $2.

When Strategy started borrowing, it turned into a leveraged bitcoin play – and that's when the stock started outperforming the crypto itself...

But there's another wrinkle here... because when Strategy started buying up so much bitcoin, it likely drove the price of bitcoin up.

You can't tie it perfectly, but Strategy's purchases match up with the rise in bitcoin to more than $100,000...

Again, Strategy owns roughly $70 billion worth of bitcoin – or about 600,000 bitcoins. That's about 3% of all existing bitcoins and second only to the iShares Bitcoin Trust (IBIT), the largest bitcoin exchange-traded fund.

The company has all but forgotten its original software business... and changed its name to reflect its new focus as a bitcoin treasury company. (Its new logo is even a stylized "B" for bitcoin.)

A few competitors have been around for a while.

But now, we're getting multiple announcements per week of companies adding bitcoin to their reserves. And a lot of them aren't even companies that fully focus on bitcoin, like Strategy. Many are just adding a little to their balance sheets.

Some of them are a little wild... like a Spanish coffee chain and a Norwegian deep-sea mining company that each plan to spend about $1.2 billion on bitcoin.

Overall, there are currently 147 companies listed on BitcoinTreasuries.net – a crowdsourced database of publicly traded bitcoin treasury companies. Collectively, they hold more than $100 billion in bitcoin.

Now, this infinite money machine really only works because of the premium that the market assigns these companies over the value of the bitcoin they hold.

And why do they have that premium?

It's a bit of a mystery... There's no way to prove why people will pay more for these companies than they're worth. But the most likely reason is that they're a simpler way to get exposure to bitcoin, as these stocks trade on regular exchanges.

Some individuals find outright investing in the cryptocurrency to be too difficult, while some financial institutions just don't allow it. So investors may pay a little extra to be able to invest in bitcoin this way.

That said, as the number of bitcoin treasury companies increases, each one becomes less special...

It's not as cool to be the 50th or 100th company to start buying bitcoin. And we've seen much more muted reactions to bitcoin treasury announcements as time has gone on.

Plus, while Strategy has a premium of about 1.7 times, other companies don't have nearly as much.

For instance, clinical-technology company Semler Scientific (SMLR) holds about $545 million worth of bitcoin and trades at a market cap of around $625 million – barely any premium at all.

Now, some companies are even branching out into holding other cryptos, like Ethereum, Solana, Ripple, and others.

As I mentioned earlier, the big issue here is that the leverage that fuels these companies may lead to their downfall.

For instance, Saylor has repeatedly said that he never wants to sell his bitcoins... He's even gone as far as to say he'll burn his private bitcoin keys when he dies.
 
But remember all that debt the company took on to buy more bitcoin? Well, Strategy disclosed to investors in April that if it doesn't have enough cash to make its interest payments, it may have to sell some bitcoin to raise capital.

The risks are adding up here...

The premium these companies earn is correlated with the price of bitcoin. The higher the price, the higher the premium.

If bitcoin falls, that premium declines. And if these companies are short on cash and need to pay their debts, they'll have to sell their bitcoin. But if bitcoin is worth less, they'll have to sell more. That selling pushes the price of bitcoin lower... and the cycle continues.

So not only are these bitcoin treasury companies leveraged bets on the price of bitcoin, they have the potential to create a downward spiral in the price of bitcoin.

If you've been around financial markets for a while, you know that this is what leverage does. It drives things higher on the way up... and creates havoc on the way down.

If you want to invest in bitcoin treasury companies, you need to look for the following things...

First, the company needs to be primarily focused on owning digital assets. Buying a little bitcoin as a side project is a marketing stunt. And it's not going to lead to a real premium.

Second, the frenzy here is bringing out lots of folks looking to make a quick buck. You need to find a management team you can trust.

Third, the stock needs to show a premium to assets. If it doesn't, there's no extra value in borrowing to buy more. The infinite money machine comes from the premium.

And fourth, you need to be majorly bullish on the underlying crypto, especially if you're looking at some of the assets outside of bitcoin.

In short, you want a reputable company, trading at a premium, and working with a crypto that can rise, in part, because of the company's buying. That's the perfect, self-fulfilling, infinite money machine.

But even if you do find that company, tread very carefully. Keep your position size small. These companies are not for the rent money.

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As my colleague Bill McGilton writes in this week's Stansberry Investor Suite research, if Iran chose to close the vital waterway, it could decimate the global economy by sending oil prices soaring.

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That's why we use our Global Oil Value Monitor to keep an eye on the oil and gas companies powering the globe. This monitor looks at a company's profitability, leverage, shareholder returns, valuation, and more. And it gives it an overall score, so you know how each company stacks up against its peers.

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Stansberry Investor Suite subscribers can read the entire report here.

If you don't already subscribe to The Stansberry Investor Suite – and want to learn more about our special package of research – click here.

Until next week,

Matt Weinschenk
Director of Research

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