- Big share price rally in companies stockpiling bitcoin
- Some stocks have gone up by more 500% in just a few weeks
- They’re using the label ‘bitcoin treasury company’
- There is a danger that investors are getting carried away and companies are trading on excessive valuations
- Is this the next bubble in financial markets?
Dan Coatsworth, investment analyst at AJ Bell, comments:
“Ten companies on the UK stock market have announced a change in strategy in the past month that involves buying bitcoin, with a further three UK-listed companies having already started this journey since last November. The trend is also in play in the US.
“In many cases, share prices have soared on the news as investors speculate these companies could be ‘the next MicroStrategy’. This is a US-listed data analytics company that has continuously raised money over the past few years to buy bitcoin, with its holding now worth $63.2 billion. Its share price has gone bananas, up 1,081% since June 2023.
“UK investors are not permitted to hold bitcoin directly in an ISA or SIPP (self-invested personal pension), so they’ve looked at alternative ways to get exposure, hence why MicroStrategy – or Strategy as it is now known – has come onto their radar.
“A web design agency called The Smarter Web Company saw its valuation jump from £3.7 million in April to more than £1 billion two months later, fuelled by hype around its bitcoin investments.
“Shares in Vaultz Capital are trading 643% higher since it announced four weeks ago that it would change its name from Helium Ventures and establish a bitcoin treasury. That share price movement includes a big pullback in recent days. If you take the point at which it made the strategy announcement to the peak on 23 June, the shares went up 1,414%.
“The UK-quoted companies jumping on the bandwagon over the past month are all small cap stocks, many listed on the Aquis Exchange. Several of them are mining exploration companies and it feels as if they are latching onto the trend as a way to get their share price higher.
“One company, Panther Metals, was looking for zinc deposits in Canada and now it has bought a single bitcoin and declared it is ‘redefining what a modern resource company can be’. Another company, metals explorer Bluebird Mining Ventures, has arranged a new debt facility so it can borrow money to buy bitcoin, saying it is now a physical gold and digital gold investor.”
Why are they buying bitcoin?
“In most cases, these types of companies argue that owning bitcoin is a way to diversify their cash reserves and hold them in a different form.
“They have adopted a ‘bitcoin treasury policy’, believing the cryptocurrency is a way to preserve value and mitigate against inflation and geopolitical risks.
“Smarter Web Company even has a policy of accepting payment for its web design services in cash or bitcoin, saying the cryptocurrency ‘forms a core part of the future of the global financial system’.
“The reality is that many small cap companies are typically cash-poor, constantly raising new funds on the market to keep the lights on. They rarely have cash lying around for a rainy day and anything in the bank is needed to support the business.”
Meme craze 2.0?
“The share price response to companies deviating from their day job and loading up on bitcoin has the hallmarks of the meme craze.
“During the pandemic, investors co-ordinated their efforts on social media forums to bid up certain shares, paying no regard to the sales and profits of these companies. Names like GameStop raced ahead before crashing back down. We also saw similar movements when the artificial intelligence boom happened, with certain stocks rising in price and then rapidly falling.
“Investors need to take care in these situations. Prices can often move fast – both up and down – and valuations have moved out of kilter with the underlying fundamentals of the company. Smarter Web Company is currently valued at £623 million yet it would only get £42 million from selling its entire stash of bitcoin at the current market price.
“It’s important to judge a potential investment on specific factors, including an understanding of what the company does, the value of its underlying assets, and its future prospects. It can be a mistake to choose an investment simply because its share price is racing ahead or there is a lot of hype on social media.”
