ZZ25017 Bitcoin Treasury Companies V01 230825

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‘‘ What is big in the United States usually becomes big here, often with mixed results.

McDonald’s, Black Friday and pumpkin spice lattes: we have our American cousins to thank for all of them.

So it is on the stock market. Bitcoin treasury companies, a recent sensation in US markets, have arrived here and are likely to get bigger.

Whether they become part of the mainstream or just another burst bubble remains to be seen, but they are certainly worth getting your head around.

Those already familiar with the crypto world will be up to speed with BTCs, as they are now known. Many, though, will not have come across them before. A good place to start is the biggest and best known, Strategy.

For most of its life MicroStrategy (as it used to be called) was an ordinary US tech company. It was set up in Delaware in 1989 by Michael Saylor, who is still executive chairman, and provided business analytics and software services to corporate clients. It hardly shot the lights out: the shares bimbled along under $10 for the first decade of the century and scrambled up to $15 by the start of 2020.

Then came the big change. The company said it would buy bitcoin as a way of diversifying its normal treasury operations, the division of a company that manages cash and typically invests in low-risk assets such as government bonds or term deposits. It did not just dip its toe in the water, though; Strategy bought bitcoin in a big way, selling shares and issuing loans to raise the funds. It now holds (as of Friday) just under 630,000 bitcoin, making it by some distance the biggest corporate owner.

A big company pivoting to bitcoin is interesting enough, but here comes the crazy bit. Strategy’s shares took off. They were on course to close this week above $330, a rise of 2,000 per cent in the past five years. It now has a market cap of $95 billion but the bitcoin holding is worth only $71 billion. Saylor, it appeared, had hit on the stock market equivalent of selling £5 notes for a tenner.

Investors were willing to pay more for shares in a company that owned bitcoin than they were for the bitcoin itself and, crucially, this seemed only to work for his style of company, one that had another operating business alongside. Regulated investment funds that only bought bitcoin, or just tracked its price, did not attract the same higher valuation.

This premium, or lack of it, has become the key metric for valuing BTCs, of which there are now plenty.

The metric has a name: mNav, the ratio of the stock market value to the value of the bitcoin held.

An mNav of more than one is good.

It shows that investors think the company is smart at managing crypto assets and has a plan to use them.

One or less puts you in the dunce’s corner. Strategy has an mNav of 1.55, according to its website, which sounds OK but is actually a bit of a slump. It has in the past year come close to four; ie, investors believed that the company was worth four times the market value of its main asset. That seems completely bizarre but then if I had bought Strategy shares in 2020 on the back of Saylor’s masterplan I might well believe that it was the obvious and logical development.

Why should investors think the shares are worth more than the bitcoin? The British investment bank Peel Hunt issued its first research note on BTCs this week, a sign, perhaps, that they are about to become a bigger thing on this side of the Atlantic.

The analysts Gautam Pillai and Barun Singh gave a long list of reasons: you can buy the shares through an ordinary stock market account rather than faffing around with electronic wallets, they are liquid (easy to trade) and there might be tax advantages. Others have advanced different reasons. These companies do have another side to their business and its value might be enhanced by the higher visibility and valuation provided by the bitcoin. There are also more esoteric motivations: hedge funds that make money from volatility, for example, might want to own the shares or bonds these companies issue just because they could be volatile. I would add one more factor: the meme-stock phenomenon. These shares have gone up in part because they are fun and fashionable.

There are now about 140 BTCs around the world. Britain’s biggest player is The Smarter Web Company, which listed in April on the Aquis market, which specialises in small and start-up companies. The list price was 2½p. In June it hit 500p, but has since fallen back to 162p. Even with that tumble, SWC still has market capitalisation of £438 million, enough to make it a possible candidate for a move to the main market. Satsuma Technology, another British company, is already there. Smarter Web is number 25 on the top 100 list maintained by BitcoinTreasuries.net; Satsuma is at 38. Two other Brits make the list: Phoenix Digital Assets (66) and Vaultz Capital (81). Trump Media & Technology is at number 8.

Smarter Web has an interesting back story. Its founder, Andrew Webley, was head of online at Hargreaves Lansdown in its go-go years before leaving to set up his own web-services outfit. He saw what was happening with Strategy and looked in vain for a British equivalent before deciding to do it himself.

Its website says it wants to be one of the largest public companies in the UK and will get there by making acquisitions fuelled by its bitcoinpowered shares. Some seasoned investors think this is all nonsense.

Jim Chanos, one of the US’s best known short-sellers, argues that there is no reason for any premium valuation and has shorted Strategy.

There are, however, big institutional investors looking seriously at these companies, persuaded that there is in fact extra value to be derived by the combination of bitcoin and conventional company.

They are probably also motivated by a conviction that we are entering an era of financial repression, where governments who want to get rid of their overwhelming debts will let inflation run and eat up the value of their currencies.

That would make alternative assets all the more attractive. The difficult part will be working out which of the rash of new BTCs are the real deal, and which are just chancers hoping to cash in on a fad.