Kay Takeaways

• 1 in every 127 Bitcoins are owned by MicroStrategy
• The stock price tracks the price of Bitcoin remarkably well
• Despite price correlation, there are additional risks to the stock, while it violates the “not your keys, not your coins” mantra
• For investors unable to purchase Bitcoin directly, however, it does provide an alternative means of Bitcoin exposure
• With 0.79% of the circulating supply owned by the company, it also throws up concern about a centralisation of wealth

Google “MicroStrategy” and Wikipedia will tell you that it is “an American company that provides business intelligence, mobile software, and cloud-based services”.That may technically be true, but in reality it has become a Bitcoin investment vehicle. 

MicroStrategy, under the borderline-religious leadership of Michael Saylor, currently owns 152,800 Bitcoin. That is 0.79% of the circulating supply; in other words, 1 in every 127 Bitcoin is now owned by MicroStrategy. When omitting the portion of the Bitcoin supply which is lost (for which estimates generally come in at about 1.5 million), the company owns 1 in every 118 coins.

What’s more, since MicroStrategy’s first Bitcoin purchase on August 8th, 2020, there have been just over one million coins created. This means MicroStrategy’s stash equates to 15.3% of the total coins created since they started buying. 

Clearly, no matter what way you swing it, MicroStrategy own an enormous stash of Bitcoin. Here, we will assess how it affects their stock price.

https://twitter.com/saylor/status/1686468084574412800

Performance vs Bitcoin

The place to start is, unsurprisingly, MicroStrategy’s correlation with the Bitcoin price. On the next chart, we can see that the correlation has picked up markedly since the company began buying up the supply. Bar a brief dip in August last year, the relationship has been extremely strong since late 2021. 

This is not surprising when one looks at the numbers. MicroStrategy has averaged $497 million of revenue over the last three years, with an average EBITDA of $50 million. And yet these numbers are dwarfed by its Bitcoin supplies – it owns approximately $4 billion worth of Bitcoin at the time of writing, purchased for $4.53 billion.

The market cap of the company is only marginally more than the value of its Bitcoin, coming in at $4.7 billion. 

If we plot the performance of the company against the performance of Bitcoin since the first purchase in August 2020, both assets have trodden an extremely similar path.

There are currently 11.834 million shares of MicroStrategy outstanding. With the company holding 152,800 Bitcoin, that implies that each share equates to owning 0.0129 Bitcoin. With the current share price of $329, this means that a $1000 investment in MicroStrategy nets you 0.0392 Bitcoin. 

In contrast, a $1000 investment in Bitcoin directly at the market price of $26,100 would net you 0.0383 Bitcoin.

Obviously, this is simplistic and looks beyond a whole host of variables on the MicroStrategy side (not to mention the extreme volatility of both assets). Bitcoin enthusiasts will also decry the fact that purchasing MicroStrategy stock is nowhere near the same thing as buying and holding your own Bitcoin – “not your keys, not your coins”.  

And they would be absolutely correct. These are completely different investment vehicles. However, with no spot Bitcoin ETF currently approved in the US, many institutions and other large entities have difficulty investing in the cryptocurrency for regulatory and compliance reasons. If an institution seeks exposure to Bitcoin, therefore, it is often required to pursue alternative options.

MicroStrategy may not be the real thing, and carries plenty of risks which direct purchases of Bitcoin do not. However, in terms of price exposure alone, it is a viable backup option.

Companies that are locked out of purchasing Bitcoin for the aforementioned reasons, but gained exposure through MicroStrategy, have benefitted well. The next chart plots its performance against the Nasdaq – it displays similar outperformance to what we have seen from Bitcoin over the time period. 

Centralisation

While this is all well and good, it would be remiss not to mention the fact that there do exist downsides here for the Bitcoin ecosystem. Sure, offering exposure to investors who, at least over the last couple of years, have not been in a position to purchase Bitcoin directly is a good thing. 

On the flipside, however, this is an asset built upon the principles of decentralisation. We are now in a position where one company owns an enormous chink of the supply, and does not seem as if it will curtail its buying anytime soon, as its stash creeps close and closer to 1%. 

Speaking of 1%, most of the world’s wealth is already in the hands of the top 1%. While Bitcoin often paints a romantic image of a democratisation of wealth, and a means of pulling oneself out of financial tyranny, the reality is that there will also be a 1% who own a massive slice of the pie. It will be no different to any other asset in this regard. 

We put out a piece in March assessing the wealth breakdown of Bitcoin, mentioning a study by the National Bureau of Economic Research outlining that the top 10,000 Bitcoin investors control one-third of the total supply. 

The anonymous Satoshi Nakamoto owns an estimated 1 million coins alone (or as a group, depending on what you believe regarding his/her/their identity), equivalent to over 5% of the supply. Nakamoto’s large holdings were even mentioned in Coinbase’s S-1 filing when it went public in 2021 as a source of risk to the business. 

“The identification of Satoshi Nakamoto, the pseudonymous person or persons who developed Bitcoin, or the transfer of Satoshi’s Bitcoins” was outlined as a risk to Bitcoin and, by extension, Coinbase’s business. 

While speculating on Nakamoto’s identity is a fool’s game, and these coins could easily be lost forever, it is easy to see how Coinbase listed this as a risk in its filing. The fact is that one entity or person holds 5.2% of the supply, and nobody has any idea who. 

We know who MicroStrategy are, and Michael Saylor is often lauded in the space for being a visionary (not to mention the fact the tidal wave of buying pressure serves to help boost the price now and again). But for an asset built upon the concept of decentralisation, it does provide pause for thought. 

Having said that, Bitcoin does remain the closest thing to decentralisation that the world has right now in the monetary sphere, even if it is not perfect. There will always be a 1%, because that is how life works – and Bitcoin is no different in this regard. 

Key Takeaways

• Bitcoin’s recent surge has drawn surprise as banking sector has pulled stock market down
• Declaring this a break in the correlation trend is a mistake, writes our Data Analyst Dan Ashmore, who says Bitcoin remains risk-on
• Both the stock market and Bitcoin continue to trade off interest rate expectations, aside from isolated episodes of systemic risk to Bitcoin, the numbers show
• Recent week shows a slightly softer relationship than normal, amounting to a less dramatic a less dramatic version of the price action around the FTX and Celsius collapses in 2022
• Normal correlation bound to be resumed soon, our data shows

One of the dominant storylines over the last year or two so has been the incredibly tight relationship between Bitcoin and the stock market. 

We will get into the numbers shortly, but the mantra is that when the stock market jumps, Bitcoin jumps more. When the stock market falls, Bitcoin falls more. That is the bottom line. But is it true still true?

Some market participants are starting to think that this relationship is shifting, especially given events of the past week. The word “uncorrelated” is thrown around a lot in markets, and now some are saying Bitcoin is making progress towards that status. I’m not so sure that is correct. 

Correlation has been high since 2022 started 

Let us first look back over the price action from the start of 2022, which more or less marked the stock market peak. 

I’ll get deeper in the next section, but the best way to kick off an assessment of correlation is by the old-fashioned eye test. Let’s begin by charting Bitcoin’s returns against the Nasdaq since the start of 2022:

It is immediately clear that there is a strong pattern here. 

Before looking at correlation coefficients, by looking at the respective price action we can see that the assets have been in lockstep aside from two (visually notable) periods. The first is August 2022, when Bitcoin lagged behind the Nasdaq’s gains. It still gained, but it was outperformed by the Nasdaq – uncommon for periods of expansion. This was shortly after the contagion crisis sparked by Celsius (it filed for bankruptcy in mid-July). 

The second period of divergence that jumps out is a much more noticeable one – November 2022. As the Nasdaq surged off softer inflation readings and optimism on interest rate policy, Bitcoin fell. Not only that, but it fell dramatically, down from $20,000 to $15,000. Of course, this was thanks to Sam Bankman-Fried and the FTX collapse, a bearish shock specific to crypto, much like Celsius was. 

Let’s now graph the correlation itself. I won’t get too deep on the math, but I have used the 60-Day Pearson indicator and rolled it back to the start of 2022.  

The results more or less back up what we discussed above. For the uninitiated, a correlation of 1 means a perfect relationship (the word count of this article and the number of words I have written this month, for example) while a correlation of 0 means no relationship (such as my word count per month and the number of T-Rexs spotted in New York City). 

Celsius and FTX collapses are clear below, while the other dip occurs around the time of LUNA (the stock market also fell around this time as we transitioned to high interest rate policy).

Correlation can be misleading

This shows correlation, but not necessarily causation. My old maths teacher had a great way of explaining this difference. Shark bites and ice cream purchases may be correlated, but nobody would argue that digging into Ben and Jerries makes you more likely to be hunted by a great white shark.

Instead, there is a lurking variable. In this case, on sunnier days, people are more likely to both swim at the beach and buy ice cream, and it is the swimming rather than the ice cream that makes a shark bite more likely. Swimming is the lurking variable. 

While that example is exaggerated (shark bites are extremely rare, in case I’m arising a phobia of yours!), the point is a good one. In financial markets, we have another lurking variable. In truth, we have lots of them – there are an imaginable amount of variables that affect the stock market – but the big one this past year has been the Federal Reserve and its interest rate policy. 

It is not the stock market that is causing Bitcoin to move, it is interest rate policy causing both the stock market and Bitcoin to move. And in turn, expectations about inflation have been the key factor feeding into interest rate expectations. This is why we have seen repeatedly big movements around CPI announcements and Fed meetings. 

There is a saying, “correlations of risk assets go to 1 in times of crisis”. And when we transitioned into a new interest rate paradigm in April 2022, when it became clear inflation was rampant, that is exactly what happened. 

All risk assets sold off, including both stocks and equities. Bitcoin, being more volatile, of course sold off more. And since then, bar the aforementioned episodes, the correlation has held. 

Is the correlation falling?

The big question is whether this correlation is falling. Indeed, that is the ultimate vision for Bitcoin. An uncorrelated store of value, akin to a digital form of gold.

Some have looked at the price action of the past week or two and declared that this means we are seeing a lower correlation. But I think this is simply a smaller version of what we saw during the Celsius and FTX “decouplings”. A short-term dip in correlation in response to a specific event. 

Bitcoin sold off drastically in the wake of the Silicon Valley Bank (SVB) troubles, before rebounding sharply once the US administration announced it was stepping in to guarantee deposits. 

The stock market, on the other hand, also sold off but to a far lesser degree. And then with the banking turmoil striking Europe yesterday, Bitcoin held firm while markets wobbled. The declaration was that this must mean the famous decoupling is taking place. 

I believe this is a fallacy and I think the numbers agree. 

Bitcoin first sold off aggressively because SVB had the potential to be a crisis on the scale of Celsius and FTX, as Circle, the issuer of the world’s second-biggest stablecoin, USDC, holds $3.3 billion of reserves in the bank (and the original fear was that it may hold more, before the number was clarified). 

USDC hence depegged, falling to below 90 cents on many exchanges. Obviously, a USDC collapse would have been harrowing for the industry and hence Bitcoin plummeted, falling to around $20,000. 

While SVB presented an ominous threat to financial markets as a whole, the danger within cryptocurrency was elevated because of the importance of USDC to the industry, especially following the shutdown of BUSD last month.

With 25% of Circle’s reserves in cash, there was fear of insolvency until it was clarified that only 8.25% of reserves were held in SVB, before the US administration stepped in to guarantee deposits in any case. 

Once this fear was over, Bitcoin rallied back, reversing the fall when the crisis came to light. But stocks didn’t jump to the same extent. This makes sense.  

Besides, the price action was not all that dramatic and the supposed “decoupling” was hardly drastic. European banks were hit Wednesday, but Thursday has largely seen a rebound, while on a whole, the stock market is doing just fine, showing moderate gains. 

Looking at the correlation metric, it has barely moved over a longer time frame such as 60-day, and is already bouncing back. The 30-day metric shows more movement, but as with any smaller sample size, is always more volatile and less indicative. Both metrics already appear to be bouncing back in any case.

Whatever way you swing it, a simple glance at the previously mentioned chart comparing the Nasdaq to Bitcoin is all you need to know. Bitcoin is trading like an extreme-risk asset, and that much is quite clear.

The trillion dollar question is whether this will change in the future. Can Bitcoin finally decouple from risk assets and establish itself as an uncorrelated store of value? Can it become a true hedge asset?

That may happen one day. But it hasn’t happened yet.

In a recent tweet, Cardano founder Charles Hoskinson took at Gemini, a popular cryptocurrency exchange founded by the Winklevoss twins, for refusing to add the ADA cryptocurrency. 

Hoskinson argues that not listing ADA is “pretty tightly correlated” with bankruptcy risk. 

On Saturday, the Financial Times reported that Gemini was attempting to recover as much as $900 million from troubled crypto lender Genesis. 

Genesis is currently facing potential bankruptcy after its lending arm unexpectedly halted withdrawals on Nov. 16. 

FTX, the second-largest cryptocurrency exchange that went bankrupt last month, didn’t have any spot ADA pair. As reported by U.Today, founder Sam Bankman-Fried tweeted that adding the token was on the exchange’s roadmap just a few weeks prior to its collapse. Notably, ADA was the only major cryptocurrency without a spot listing on FTX. 

Now, Cardano enthusiasts have taken Gemini to task for refusing to add support for ADA despite listing the native tokens of other popular proof-of-stake protocols.

In 2020, Gemini also feuded with the XRP community after refusing to list the popular cryptocurrency. However, it then felt vindicated after Ripple got sued by the U.S. Securities and Exchange Commission.  

Crypto analyst Justin Bennett says he sees a close correlation between Cardano (ADA) and one under-the-radar altcoin.

The closely followed analyst tells his 65,000 followers that for some time now, moves in Cardano are usually followed by similar price action in enterprise blockchain platform VeChain (VET).

“Nothing against $ADA, but sometime soon, we’re going to see capital flow out of ADA and into $VET.

That’s how it’s worked from day one. No reason to think otherwise.”

At time of writing, VET is up about 11.8% since Bennett tweeted the above chart, and 58% in the last 30 days according to CoinGecko. Bennett says crypto investors can expect VeChain to stay strong relative to Cardano in the coming weeks.

“And just like that, $VET is curling up, and $ADA is curling down like clockwork.

Expect VET to outperform over the next few weeks.”

Aside from VET, the analyst is also eyeing up leading meme crypto Dogecoin (DOGE). Bennett offers four main reasons why he remains optimistic about DOGE.

“Why am I bullish on $DOGE?

• Higher highs/lows since July
• Terminal pattern to work with
• Clear invalidation point
• Extremely favorable risk/reward

This doesn’t mean the trade WILL work, but these are the kind of technicals I look for.”

The technical analyst says DOGE appears to have broken out of a small downtrend and is poised to continue higher, potentially to $0.40, or about a 40% rally.

“$DOGE breakout from the smaller trend line confirmed on the 4-hour chart.

Still long from yesterday. Looking for a close above 0.30 for a move to 0.35 and potentially 0.40.”

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Disclaimer: Opinions expressed at The Daily Hodl are not investment advice. Investors should do their due diligence before making any high-risk investments in Bitcoin, cryptocurrency or digital assets. Please be advised that your transfers and trades are at your own risk, and any loses you may incur are your responsibility. The Daily Hodl does not recommend the buying or selling of any cryptocurrencies or digital assets, nor is The Daily Hodl an investment advisor. Please note that The Daily Hodl participates in affiliate marketing.

Featured Image: Shutterstock/Mia Stendal