Bitcoin-buying companies

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Metaplanet and Bitcoin 

Why would you buy a company that buys bitcoin, rather than just buying bitcoin itself? Some people, including some people who write this newsletter, wouldn’t buy either. But let us assume that buying bitcoin is a good idea. Why do it through a corporate wrapper?  

One obvious (if unsatisfying and mildly circular) answer is that some of the companies that buy bitcoin outperform bitcoin itself. Here is a chart comparing the performance of bitcoin, a leveraged bitcoin ETF, GameStop (which announced it would start buying bitcoin this spring) and Strategy, the largest corporate bitcoin buyer: 

Strategy (formerly MicroStrategy, back when it was a software business) absolutely dominates here. But it is not the most amazing example of this phenomenon. That honour goes to Metaplanet, a Japanese hotel developer that announced on Monday that it would raise about $5.4bn to buy bitcoin — an asset it had been buying at a much smaller scale for a year or so:

So where is the magic here? ETFs that own gold track the gold price. ETFs that own bitcoin track the bitcoin price. Why should a company that owns bitcoin do better than bitcoin? Strategy provides an explanation of sorts. It currently trades at a 70 per cent premium to its net asset value, which is made up overwhelmingly of its bitcoin holdings. So when it sells equity and uses the proceeds to buy bitcoin, the transaction is instantly accretive. The company can buy more than a dollar of bitcoin by selling a dollar of equity. Here is Strategy’s executive chair, Michael Saylor, speaking in April:

How do we generate gain? How do we generate shareholder value? So if we were to sell $100mn of [our] equity at a multiple to net asset value of two, then generally, what happens is we capture a . . . gain of half of that. The spread is 50 per cent. We capture $50mn of that as the gain. That is the accretive component to the existing common stock shareholders. 

Astute readers will have noticed that this is not an explanation of why Strategy trades at a premium to NAV. It is an explanation of what Strategy can do because it trades at a premium to NAV. So the premium still needs explaining. Saylor argues that the premium exists in part because the stock is both very volatile and very liquid, which makes it attractive to shareholders who can sell at-the-market call options against it and generate a high yield. Now, most companies don’t think of extraordinary volatility as an asset, but Saylor thinks Strategy’s volatility is special: 

You might get massive volatility either for a good reason or a bad reason. But the management team [in a high-volatility company] normally doesn’t have credibility and durability. How are you going to keep it for a decade? And so you see what we have done is we have created a volatility engine. When you take volatility . . . if you’re smart, you make it a reactor and it becomes a power plant.

Readers can make their own assessment of this approach to corporate finance. But I will note that financial strategies involving selling volatility tend to work until they don’t.

One more sustainable source of bitcoin-holding companies’ premium valuation is that they are a particularly easy way to gain bitcoin exposure. In the UK, for example, getting bitcoin exposure can be fiddly. Buying bitcoin itself leaves you with the problem of storing it. The ban on buying bitcoin-linked exchange traded notes was only just lifted; buying US bitcoin ETF shares, for both retail and institutional investors, involves annoying paperwork. Buying Strategy shares is easy. And a similar pattern may hold, to greater or lesser degrees, in various other jurisdictions.

Indeed, David Bailey, a Metaplanet board member, recently told my colleague Philip Stafford that “Michael Saylor pioneered something with one insight: if you want to sell someone bitcoin you have to meet the buyer where they are.” He went on: “The liquidity’s there everywhere, globally, but it’s trapped. We’re packaging bitcoin into various forms to meet them where they are.”

If that’s right, there is an irony here. If the bitcoin-owning companies are ultimately selling bitcoin liquidity, their companies will only add value so long as the bitcoin market remains inefficient and cumbersome. If Bitcoin, as we are promised, becomes a universal and practical alternative to fiat currency, or even just a freely traded store of value like gold, the companies’ premiums to NAV should disappear.

China and US solar

We recently wrote about the outlook for US solar companies under the Trump administration. China, however, is the world centre for the solar industry — in particular solar panel production. And China’s domestic solar market is huge; two months ago, China’s solar and wind energy capacity overtook fossil fuels for the first time, according to the country’s energy regulator.

But that does not mean that Chinese solar panel producers are good investments. Over the past six months, First Solar — the biggest western solar panel manufacturer — has outperformed many of its Chinese competitors:

The Chinese solar market is brutally competitive. Solar panels are now essentially commodities. Margins are slim and volatile. Recently, leading Chinese manufacturers have struggled. JinkoSolar posted a loss in its first quarter; Trina Solar reported a big loss for all of fiscal 2024. First Solar’s earnings last quarter were not particularly strong, but it made money.

Cheng Wang at Morningstar explains:

While global oversupply has rendered many solar markets unprofitable, the US market remains highly profitable due to trade barriers that restrict supply. Since most US solar firms are domestically focused, they continue to generate healthy profits. This may explain the valuation difference.

Joe Osha of Guggenheim notes that US has had solar import controls for a while. “The price divergence [between the US and elsewhere] is dramatic; in the US [panels cost] more than twice what they cost in other markets.” According to Osha, the possibility of even higher tariffs on China actually presents an opportunity for First Solar and other US producers.

Solar equipment tariffs are controversial. They might make sense if having a domestic solar panel industry is a legitimate national security priority, or if the Chinese government is engaged in predatory dumping. But the price Americans pay is more expensive solar power. Having the tariffs in place may or may not be worth it. Domestic solar producers profit either way.

(Reiter)

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Money versus power.

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