Starting in early October 2020, after having watched several YouTube videos regarding digital (crypto) assets, including several with Michael Saylor, I began to implement a relatively conservative digital assets investment strategy. This initial strategy did not include buying actual Bitcoin (BTC-USD) or any of the other crypto assets, but instead gaining exposure to Bitcoin via assets that have a more familiar investment wrapper. Specifically, I have utilized a three pronged approach, namely investments in Grayscale Bitcoin Trust (GBTC), MicroStrategy Inc. (MSTR) and the Amplify Transformational Data Sharing ETF (BLOK). Each of these investments is discussed below.
First, GBTC provides an investor with direct access to Bitcoin as the Trust is one of the largest holders of Bitcoin in the world. Other than cash for administrative and overhead expenses, GBTC’s only asset is Bitcoin. This is very convenient way to have exposure to Bitcoin, particularly if you already have a brokerage account and do not have the time to learn how the digital assets ecosystem works.
A downside to owning GBTC is that the Trust trades like a close-end fund and, as such, it can trade at a wide discount or premium. In the case of GBTC, it is known to trade at a large premium. A summary of recent premium data from Y-Charts is found below:
|November 24, 2020||24.26%|
|November 23, 2020||26.04%|
|November 20, 2020||21.65%|
|November 19, 2020||18.37%|
|November 18, 2020||15.49%|
|November 17, 2020||22.78%|
|November 16, 2020||20.77%|
|November 13, 2020||15.88%|
|November 12, 2020||20.38%|
|November 10, 2020||13.15%|
As you can see, GBTC’s premium as of a recent date was a frothy 25%. This makes GBTC particularly susceptible to a large drawdown should the SEC ever approve a Bitcoin ETF [to date, the SEC has denied all applications]. Moreover, the 2.00% management fee is quite hefty, particularly when GBTC has more than $6 billion in assets. That said, the performance of GBTC since its inception has been unparalleled; consequently, my guess is no investors are complaining about the fees at this time. Notwithstanding this performance, if a Bitcoin ETF is approved by the SEC with a much lower management fee, you can be sure that investors will migrate to the lower fee offering over time, if not rapidly (too, you could see GBTC start to trade at a discount if a low-cost alternative is available).
In short, GBTC is a reasonable investment offering for the novice in the Bitcoin space, but it comes with embedded risks (high premium and high management fees) beyond those normally bandied about concerning crypto in the popular press. Because of these risks, I have used large up days in GBTC (usually days of gains of more than 6 or 7%, which are surprisingly common) to sell GBTC and funnel the proceeds into MicroStrategy, a software company which began purchasing Bitcoin in August of this year, and which now trades in many respects as a Bitcoin proxy.
MicroStrategy’s CEO, Michael Saylor, is the person that convinced me of the necessity of investing in digital assets and, Bitcoin in particular. A technologist with degrees in engineering and the history of science from MIT, Saylor’s long form YouTube interviews are critical to understanding the monetary network that is Bitcoin.
Bitcoin is, according to Saylor’s popular Twitter account (@michael_saylor):
“The Monetary Network”, a juggernaut critical to billions of people & a better Store of Value for $300 trillion currently trapped & rapidly depreciating in Bonds, Stocks, Real Estate, Cash, & Gold.
#Bitcoin is a swarm of cyber hornets serving the goddess of wisdom, feeding on the fire of truth, exponentially growing ever smarter, faster, and stronger behind a wall of encrypted energy.
Money is energy. Bitcoin is the first crypto monetary energy network, capable of collecting all the world’s liquid energy, storing it over time without power loss, and channeling it across space with negligible impedance.
[Source: Twitter Account of Michael Saylor – @michael_saylor]
I’m not going to rehash his arguments in favor of Bitcoin here (check out his videos on YouTube); that’s not the purpose of this article.
From an investment standpoint, in early October, MicroStrategy was a roughly $1.6 billion dollar company with 38,250 Bitcoins trading at roughly $10,500 per Bitcoin, or to put it another way, the digital assets were valued at $400 million (25% of the company’s valuation) and the software company $1.2 billion. Early October was very good time to be putting money into MicroStrategy (in the $140s, $150s and $160s) as it was not running up nearly as fast as GBTC, and the company’s software business was also starting to grow. So, as noted above, I was funneling proceeds from GBTC sales into MicroStrategy but also buying the stock outright because it was a conservative way to get exposure to Bitcoin given the growing software business. And the investment was working very well, with steady price increases, although not necessarily the rocket ship that was GBTC. This strategy started to get more complicated, however, when on November 24 Citron Research released an investment report concerning MicroStrategy entitled “The Best Way to Own Bitcoin in the Stock Market.” From the Citron report:
In this interview from last month, Saylor explains why buying bitcoin today is like buying early in Apple, Facebook, Google, or Amazon.
Today, MSTR owns more bitcoin than any other publicly traded company. In Q3 2020, MSTR invested $425 million to purchase 38,250 bitcoins, which have a current market value of over $700 million. Therefore, MSTR is trading at just 2.5x sales.
Saylor has stated that MSTR will use bitcoin as its primary treasury reserve asset and will purchase additional bitcoins with excess cash flow going forward. In other words, MSTR’s bitcoin treasure chest will continue to grow. In addition, MSTR is looking to build a suite of bitcoin data services. On last week’s investor call, Saylor noted that he is eager to “leverage” his company’s business intelligence experience in the bitcoin data space.
After the Citron Report was released, MicroStrategy soared from $220 to $270 in two days, and as of the time of this writing (right before Thanksgiving), MicroStrategy had a $2.3 billion market valuation, with those Bitcoins now valued at roughly $725 million (using a $19,000 Bitcoin price).
Significantly, however, the Citron Report also spoke very highly of MicroStrategy’s software business:
MSTR’s leading business intelligence software company is not only ranked best in class by Gartner as recently as March 2020 but also just reported its best earnings in a decade. With a new product cycle, MSTR is finally pointed in the right direction and setup for continued growth. We expect MSTR’s valuation multiple will soon inflect higher to reflect this. MSTR’s underlying business is currently trading at a massive discount to peers today at just 2.5x sales. In other words, if bitcoin goes to $0, MSTR’s core business alone is still worth more than its current market price BUT if bitcoin trades to $50K, MSTR could be worth $700 [per share].
With MicroStrategy and GBTC both soaring, from a psychological perspective, I am finding it difficult to add more to these positions, absent a material pullback (which is likely to come!), even though adding to them may very well be the smart thing to do in the long run. In executing my digital assets investment strategy, however, this is where BLOK, the Amplify Transformational Data Sharing ETF, comes into play.
The Amplify ETFs website describes BLOK as “an actively managed ETF that seeks to provide total return by investing at least 80% of its net assets in the equity securities of companies actively involved in the development and utilization of blockchain technologies.”
As of November 25th, MicroStrategy and GBTC made up 3.47% and 1.98% of the ETF, respectively. The top ten holdings of BLOK include Square (SQ), 5.16%; PayPal (PYPL), 4.17%; Silvergate Capital Corp (SI), 5.00%; Galaxy Digital Holdings, 3.77%; and Digital Garage, 3.29%; as well as MicroStrategy. Holdings information is updated each day on the Amplify ETF website.
BLOK provides more diversified exposure to digital assets and blockchain technologies. Moreover, the fund includes some technology powerhouses, including Alphabet (GOOGL), JD.com (JD), Amazon (AMZN), Alibaba (BABA) and Taiwan Semiconductor (TSM). The overall broad diversity to the blockchain space afforded by BLOK, and the inclusion of some of these more mature technology companies tends to reduce the volatility of this investment relative to investing solely in GBTC and/or MicroStrategy.
With GBTC and MicroStrategy soaring over 55% and 34% in a month, respectively, over the period ending on 11/25/2020, BLOK (up over 14% in the same period) is a more conservative way to maintain or increase exposure to Bitcoin and other blockchain/digital assets. For me then, as GBTC and MicroStrategy soar, I find it easier to add to my BLOK position (whether directly or as I trim positions in GBTC and MicroStrategy), which, at least according to another Seeking Alpha article, has a positive correlation to the price of Bitcoin.
Utilizing GBTC, MicroStrategy and BLOK has been my initial strategy for gaining exposure to Bitcoin and the blockchain technologies. I am not an expert in the space, but hope this article helps those thinking about gaining digital assets exposure via traditional stock exchange traded investments.
As of this writing, I have opened up a Block-Fi account in order to gain some direct exposure to Bitcoin, as well as Ethereum (ETH-USD). We shall see how that goes; I am still waiting for my ACH transfer to clear and otherwise trying to understand the platform. In the meantime, while a big pullback would not surprise me, I am LONG-TERM bullish on Bitcoin (BTC-USD) and thus bullish on GBTC, MicroStrategy (OTCPK:MSRT) and BLOK, respectively.
Disclosure: I am/we are long GBTC, BLOK, MSTR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The digital assets/blockchain space is very volatile. Between the time of writing and the time of publication, large swings in some of the prices referenced in this article are likely to occur.