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Market News and Short-Term Predictions

Bitcoin cracked $70k this week, and I can't help but want to talk about it. I'm essentially the guy in the meme above...

I saw people on Twitter (X) arguing this week on how bitcoin mining stocks would outperform a stock like MicroStrategy (MSTR), whose entire corporate strategy seems to be buying bitcoin, using leverage, and buying more bitcoin. MSTR is up 691% over the past year while Bitcoin is only up 200%. 

This got me thinking about all the ways to get exposure to Bitcoin and the pros and cons of each. So I figured we could talk about it in today's newsletter!

1. The OG method 

Buying Bitcoin directly from an exchange like Coinbase. Crazy I know!

Pros: 

• You have can take your bitcoin off the exchange and store it in a cold wallet and have full custody over your crypto. 

• You can spend your bitcoin on goods and services instead of having to convert it back to USD if you don't want to.

• You don't get charged for holding your Bitcoin or don't have to pay a premium for someone else to hold onto the Bitcoin for you.

Cons:

• Every time you spend bitcoin to get goods and services, it is a taxable event where you'll have to calculate how much in gains/losses you have and report it to the IRS (well at least you are supposed to).

• You have full custody, so if you lose your passphrase to a cold wallet you can't call up customer service and complain to get access to your bitcoin.

• Fees to buy and sell on an exchange can add up as they are anywhere from 0.5%-2% of the total transaction value.

2. Bitcoin Mining Stocks

These are stocks like CLSK or RIOT which essentially run bitcoin miners (spending money on electricity and hardware) to generate profits. When the cost of mining is a lot lower than the price of bitcoin, these stocks tend to skyrocket due to their sensitivity to pricing.

Pros:

• Bitcoin could go down in price and theoretically the company could still be making money.

• They tend to be more volatile in price than bitcoin itself which can lead to larger gains.

Cons:

• You are exposing yourself to management and execution risk related to a company instead of just the commodity itself (Bitcoin).

• The stock can be trading at a massive premium when crypto is in favor.

3. Bitcoin ETFs

These are the investment vehicles that got approved this year by the SEC and allow individuals to get exposure to bitcoin via ETFs in normal brokerage accounts. Below are some of the ETFs that are out there with their expense ratios.

Pros:

• Able to buy Bitcoin in tax-advantaged accounts.

• Computing your taxes is much simpler than if you own and use Bitcoin for purchases.

Cons:

• You have to pay an expense ratio for access to the ETF.

• Can't spend the bitcoin directly if you want to.

4. Bitcoin Proxy Stocks (MSTR)

A stock like MSTR doesn't trade on its underlying business. It trades on the fact the company owns a ton of Bitcoin on its balance sheet. The company has also used debt to buy some of its position, so it acts as a leveraged position on the price of Bitcoin.

Pros:

• You have a position that is leveraged, so if the Bitcoin price goes up MSTR should go up more.

• There is no expense ratio for buying and holding MSTR vs. a Bitcoin ETF.

• If you sell options, MSTR volatility is extremely high meaning premiums will be larger.

Cons:

• You have a position that is leveraged, so if the Bitcoin price goes down MSTR should go down more.

• MSTR currently holds around $14.8 billion in Bitcoin while the market cap of the stock trades at $30 billion, so there is a massive premium over the Bitcoin they hold on the balance sheet.

There you have it, there are 4 different ways you can get exposure to bitcoin that have varying degrees of sensitivity to the price of bitcoin. I am in camp #1 and own Bitcoin directly.

In other news not related to crypto, we had CPI data for February come out yesterday.

The headline is nothing changed too much from last month and the Fed will continue to monitor before dropping rates :)

The consumer price index climbed 3.2% year over year last month, according to data released Tuesday by the Bureau of Labor Statistics. That’s faster than the 3.1% pace set in January. Economists surveyed by FactSet expected last month’s price growth to hold steady.

The chart for the S&P 500 on the weekly still blows my mind. How the weekly RSI continues to casually trade close to 80 without any ability for a sell-off tells me how much money is on the sidelines waiting to get in there still is because any 1-2% sell-off is being bought in a few days afterward. I'll admit, I thought with a higher CPI print than expected we would get a small sell-off and the market did the exact opposite!

Lessons to Be Learned

For today's lesson, I wanted to talk about the term tangible book value. I'm bringing it up because it relates to the stock we discussed above (MSTR) especially because the value of the company isn't based on operations and more so what it owns on its balance sheet.

Tangible value in the context of stocks refers to the physical, measurable assets that a company owns. This concept is rooted in the financial valuation of a company, focusing on assets that can be seen, touched, or quantified. Here’s how it relates to stocks:

Breaking Down Tangible Value

1. Physical Assets: The core of tangible value includes things like company buildings, machinery, equipment, inventory, and cash. These are assets that have a clear and definite value and can be sold off if necessary.

2. Financial Statements: Tangible value is reflected in a company’s balance sheet. It’s calculated by subtracting intangible assets (like patents, trademarks, and goodwill) and liabilities from the total assets. What remains is what the company physically owns, free of debts and intangible elements.

3. Investor Insight: When investors look at tangible value, they get a sense of the company’s real-world worth. This value is particularly looked at in times of financial uncertainty or when assessing the risk of an investment. If a company’s stock price falls below its tangible book value, it might be considered undervalued, indicating a potential investment opportunity.

4. Sector Differences: Tangible value varies greatly across different sectors. Manufacturing firms, for example, tend to have high tangible values due to heavy machinery and inventory. In contrast, tech companies might have lower tangible assets but could still have high market valuations due to their intangible assets.

Importance in Investment

• Risk Assessment: Tangible value helps investors assess the safety of their investment. Companies with high tangible assets are often seen as more secure and less risky since they have physical assets to back up their market value.

• Valuation Metrics: It serves as a critical metric in valuing a company. It strips down the company to its most essential, physical worth, providing a baseline for what the company is worth on a purely material basis.

Limitations

While tangible value is a solid indicator of a company’s material worth, it doesn’t capture the whole picture. Intangible assets like brand value, intellectual property, and human capital can be crucial to a company’s success but are not accounted for in tangible value. Therefore, while tangible value is a useful metric, it should be considered alongside other valuation measures to get a complete picture of a company’s worth. So if a company is generating solid profits and has large growth prospects, it's not going to trade close to its tangible value.

Portfolio Update

Stock Watchlist

Stocks: TSLA, LLY, ADSK, SBUX, NOW, CELH

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