World Views | Bitcoin stocks are possibly the dumbest Bitcoin play

Tim Culpan, Bloomberg

If you believe in Bitcoin, you buy Bitcoin. And if you’re wary, you stay away. That’s about the simplest way of calculating your investment options when it comes to the world’s most infamous speculative bet.
Of course, you can join the hoards of Telegram and Reddit groups claiming to understand and predict the twists and turns in the cryptocurrency’s price, making you just that much smarter than everyone else. Well done.
But there is another option: invest in stocks of Bitcoin-related companies, including those that supply the “miners” —  the computers that solve the complex algorithms which underpin the cryptocurrency network. That is, buy shovels in a gold rush.
That could be the dumbest bet of all, though.
Take Canaan Inc. the largest member of the Elwood Blockchain Global Equity Index. The Hangzhou-based company makes chips and equipment used in miners. You’d think that since Bitcoin price, and ergo demand, keeps rising then people would be clamoring to buy more rigs. The major incentive to do so is that if you run such a machine you can yourself get Bitcoin as a reward, and as the price rises the value of such a prize also climbs.
It’s not working out that way. Canaan’s sales in the June and September quarters dropped and it posted four straight quarters of losses. That’s over a period in which Bitcoin’s price rose a sedate 30%. According to Bloomberg data, there’s no sell-side analysts left to even guess at its revenue outlook or share price target.
Such equity investments are not about the bottom line, though, they’re about share returns. In that regard, Canaan has done well by rising 200% over the past year. Tesla Inc.’s announcement earlier this month that it had got into Bitcoin, followed by Canaan telling investors it had secured long-term orders, accounted for almost all of that gain.
This huge return over the past year is minuscule compared to the rise in Bitcoin itself — which is five times higher than a year ago. In fact, on aggregate, betting on related equites — as tracked by the Elwood Blockchain index — would make you a laggard.
There are a few exceptions. MicroStrategy Inc. is a provider of business-analytics software. But now it’s gone all-in on Bitcoin and this past week raised around $1 billion through a convertible-bond sale for the sole purpose of buying more. That big bet drove the stock to outperform even the cryptocurrency itself in the past few weeks.
Unfortunately, as my Bloomberg News colleagues Crystal Kim and Tom Contiliano pointed out, its shares trade at about a 50% premium to the price of Bitcoin — and that was after a 25% plunge in the stock from its Feb. 9 high. It would be akin to buying Bitcoin at $75,019 apiece when it was trading at $49,000, they wrote. Clearly, that’s not the smartest of investments.
And that’s the problem. Without a doubt there’ll be times when individual stocks, or even a collection of them, will be a solid investment strategy. But over the long term, if you truly think Bitcoin is a winner, then there’s really just one clear way to bet on it. Tim Culpan, MDT/Bloomberg