You have seen bitcoin prices soaring recently, surpassing $100,000. Speculators are buying bitcoin and even companies that own bitcoin, like MicroStrategy. The Wall Street Journal editorial board says speculators are “buying on a bet.” They write:
Our friends in the financial press are chalking up the Bitcoin rally as a bet on a more crypto-friendly Trump Administration. No doubt the prospect of friendlier regulators contributed to the cryptocurrency’s 124% surge this year. But asset prices are high across the board—gold, junk bonds, stocks—often fueled by speculative and leveraged bets.
One of the biggest momentum trades is MicroStrategy’s stock, which has gained 464% this year. Despite generating little revenue, the 35-year-old small software firm is valued at $91 billion. How so? It has amassed a huge Bitcoin reserve, now worth roughly $41 billion. Investors have piled into its stock as a way to make a bullish bet on Bitcoin.
MicroStrategy in October announced plans to purchase more than $40 billion in Bitcoin, which drove more buying of its stock and Bitcoin. How does MicroStrategy fund its Bitcoin purchases? With convertible notes that can be exchanged for equity at a later time. Investors buy the notes on the bet that MicroStrategy’s stock price will keep climbing.
As with the meme stock rally in early 2021, everything is swell as long as the music keeps playing. But if Bitcoin prices drop and leveraged trades start to unwind, the descent in MicroStrategy shares and Bitcoin may be as sharp as the ascent.
In other words, don’t bet your retirement on Bitcoin or MicroStrategy. Bitcoin prices have long been volatile. They tend to rise and fall with broader markets even though the cryptocurrency’s supporters tout it as a hedge. Prices crashed some 75% as the Fed tightened in 2022. Bitcoin is soaring now on as monetary conditions ease.
Action Line: Perhaps the rise of bitcoin says more about the dollar than it does about the intrinsic value of cryptocurrency. A dollar diversifier you can hold in your hand and see in the vault is gold. A return to the gold standard could stem the need for currency alternatives. On my chart below, look at gold’s performance since it was decoupled from the dollar in the 1970s. When you want to talk about gold in your portfolio, email me at ejsmith@yoursurvivalguy.com. Click here to subscribe to my free monthly Survive & Thrive letter.
