May 21, 2024
Crypto’s quiet global domination
Dear Reader,
Crypto has long since escaped a quiet corner of the internet, visited only by drug dealers, money launderers and unscrupulous speculators.
Between the original decentralized currency’s arrival in 2009 and today, Bitcoin and the constellation of other blockchains and tokens it has spawned has spread further and deeper into the world than many would have expected.
Today, the crypto industry (if you want to call it that — an interesting debate in itself) and the ‘tradfi’ or ‘legacy’ systems of finance, business and government are more interconnected than they’ve ever been.
For investors — whether pro or anti-crypto — that means many things.
Like, for instance, that it’s more plausible than ever before that one might own, or at least have exposure to, crypto without realizing it.
This edition of The Benchmark reveals the extent to which crypto, for good or ill, is now ensconced in pretty much every branch of the economy.
The stock market’s ‘stealth’ crypto stash
If you own stocks — particularly U.S.-listed tech stocks — there’s a fair chance you’re exposed, albeit indirectly, to crypto.
According to Bitcoin Treasuries data, about 12% of all Bitcoin in circulation belongs to publicly traded companies (and exchange traded funds), private firms, and nation states.
Some of the NASDAQ’s giant companies hold gargantuan Bitcoin stashes on their balance sheets:
- MicroStrategy Inc (NASDAQ:MSTR): 205,000 BTC.
- Marathon Digital Holdings Inc (NASDAQ:MARA): 16,930 BTC.
- Tesla Inc (NASDAQ:TSLA): 9,720 BTC.
- Hut 8 Corp (NASDAQ:HUT): 9,110 BTC.
- Coinbase Global Inc (NASDAQ:COIN): 9,000 BTC.
A decade ago, the idea that some of the biggest companies in the world would include Bitcoin miners (Hut 8), crypto exchanges (Coinbase), a software and consulting firm that’s transitioning into ‘the world’s first Bitcoin development company‘ (MicroStrategy), and electric car markers whose CEOs can move crypto markets with a single social media post (see Elon Musk’s Dogecoin proclamations), would have seemed unlikely — maybe even unhinged.
Today, this is the new status quo.
Of course, it’s not just individual companies becoming increasingly involved with crypto.
ETFs that invest in the NASDAQ, or U.S. technology, for example, hold shares in these companies. And these companies hold crypto.
So, say a self-proclaimed ‘crypto sceptic’ owns some of these stocks, or a fund with these stocks in it, they’re indirectly investing in an asset they perhaps don’t have conviction in.
These holdings aren’t really ‘stealth’, of course. Statements and filings reveal exactly which companies and funds hold exactly how much crypto. Hence the phrase, do your own research.
Institutional money floodgates open
The crypto/tradfi collision has only accelerated with the U.S. Securities and Exchange Commission’s (SEC) approval for Bitcoin ETFs in January 2024.
In just a few months, these funds have stacked up about 4% of all of the Bitcoin in the world.
Among them, you have massive investment firms like BlackRock, Fidelity, ARK and VanEck.
These firms are gargantuan players in the institutional investing world, capable of influencing vast sums of capital (BlackRock alone is the world’s largest asset manager, with about $10 trillion in funds under management).
In Q1, alone, net $12B flowed into these newly available funds, allowing institutional investors exposure to Bitcoin without having to buy directly.
The Bitcoin ETFs were a long time coming. But it’s not just the money flowing into them that’s bringing the crypto and traditional finance worlds closer together — it’s the precedent they set for further possible fund launches.
Many in the crypto industry are arguing — and lobbying — for Ethereum ETFs next. Some expect these could become a reality within the next 12 months.
Added to the fact you have institutional money (legally) flooding into Bitcoin now, and multiple listed companies holding significant sums and trading on major exchanges, it’s worth noting that governments, too, now hold serious crypto stashes.
The U.S. Government, having started seizing crypto in the course of prosecuting cybercriminals and illegal ‘dark’ markets, currently has about 200,000 Bitcoin tucked away — roughly the same stash as MicroStrategy.
As of 2021, El Salvador has used Bitcoin as legal tender. While not a major player in the world economy, this is of course a significant development in crypto going mainstream.
Which brings us to a central crypto question — one which becomes more and more difficult to answer the more intertwined crypto and fiat currencies become.
The end of the ‘inflation hedge’ story?
A central tenet of cryptocurrency’s promise is the inflation hedge narrative.
With a fixed supply of 21 million, Bitcoin maximalists tout the original crypto as an antidote to rampant inflation — created courtesy of rampant central bank money printing.
This scarcity narrative underpins the argument that Bitcoin could serve as a safeguard against inflation’s progressive erosion of your buying power.
But, with the crypto and traditional markets increasingly colliding and integrating, thanks to the reasons outlined above, this narrative is under threat.
As more crypto holdings flow into the companies trading on the stock market, and more institutional money flows into crypto courtesy of the newly-launched (with more possibly to come) ETFs, crypto and stocks start might behaving more similarly — which presents problems for those trying to hedge against dollars with crypto.
According to Investopedia:
‘Bitcoin has come a long way from its meagre beginnings as a payment method. Regulatory and classification debates between regulators, fans, and investors continue — but the cryptocurrency keeps demonstrating it is an investment asset, a currency, and a novelty all at the same time.
‘Its price loosely correlates to stock market prices, likely because traders and investors treat it the same way they would any other asset — as a way to store value, protect capital, generate income from small trades, speculate on price actions, and more.
‘The longer it survives in the market, the more investors will use it in their strategies.’
Know what you own (and what they own)
While it’s convenient to think of the stock market and cryptocurrency world as two separate things, the reality is that they’re becoming more intertwined.
One of Peter Lynch’s most memorable quotes is: ‘Know what you own and why you own it‘.
Given the evolution of the crypto/tradfi relationship, investors might want to dig even deeper, to understand what the stocks they invest in hold on their own balance sheets.
And, of course, why.
That’s it for this week’s The Benchmark email.
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Thom
Editor, The Benchmark
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