Stocks slide before FOMC minutes and cryptos hit by China ban

Morning Note

Crypto prices shot lower with BTCUSD tumbling to a 3-month at $38.5k in early trade this morning, now looking to test the long-term trend line from the ramp at the tail end of last year. There is a major bleed across the entire crypto space today, and both Bitcoin and Ether are 30% lower across the last 7 days, and Bitcoin has now given back all the gains made since Tesla announced in early February that it invested $1.5bn in the asset. Spurring the move lower today is news that Chinese financial regulators have instructed financial and payment institutions not to accept cryptocurrencies as payment nor offer related services or products. Cryptos are “seriously infringing on the safety of people’s property and disrupting the normal economic and financial order,” three industry bodies said in a joint statement on the PBOC WeChat account. China has for some time been putting pressure on the crypto space, but this marks an intensification – other countries might follow now as central banks make strides towards their own digital currencies. Until now western regulators have been pretty relaxed about Bitcoin, but this might change soon.

 

The crypto bros have had a hard time lately. First, they got down on their knees to the saviour Elon Musk as he pumped up Bitcoin and Doge. Then they got mad because he called one a hustle and signalled that he wasn’t all that keen on the other after all. Musk clearly gets all the spotlight, but it’s also worth looking at Michael Saylor, founder of MicroStrategy. The company is doubling down on Bitcoin, with Saylor saying yesterday it had purchased an additional 229 Bitcoins for $10.0 million in cash at an average price of about $43,663. “As of 5/18/2021, we #hodl ~92,079 bitcoins acquired for ~$2.251 billion at an average price of ~24,450 per bitcoin,” he tweeted. YOLO.  Binance CEO Changpeng Zhao tweeted  “Legend,” in response. 

 

Shares in MSTR are down about 60% since the Feb peak when Tesla announced its investment in Bitcoin. Saylor has been a longer-term Bitcoin bull than many and last year led a major pivot in terms of corporate acceptance of crypto assets that helped fuel the rally through to the recent all-time highs. If you recall in February MicroStrategy said it had sold $1bn in convertible debt to buy more Bitcoin. 

 

So now you have a situation where a publicly listed stock with a market cap of almost $5bn is seemingly entirely dependent on the price of Bitcoin remaining above $24k. This seems entirely odd. I can barely remember what the actually does. Not a lot is apparently the answer: just $122.9m in revenue in Q1, with a net loss of $110m. As of March 31st, the company had cash and cash equivalents of $82.5 million. If Bitcoin tanks, there does not appear to much wiggle room. No wonder short interest remains at 16%. Saylor might be right, he might be wrong, but rather like we have discussed before with Tesla: are corporate balance sheets the place for Bitcoin speculation, given that people are not using it to transact? 

 

So now we come to the options market and what it’s telling us about Bitcoin, which is that investors feel there is further to pull back from here, or least there was before prices dropped under a huge wedge of puts at $40k. Even long-term hodlers think it can drop further. Which makes you question what kind of mark to market losses MSTR will have to report. Which comes back to the point as to why a company which is not in the business of making investment decisions, like say Berkshire Hathaway or Baillie Gifford, is busy making bold investment decisions in an asset that is at best understood by a few, and at worst a complete scam.  Moreover, the company’s investments are entirely concentrated in a single asset – like Berkshire only owning Apple, and becoming a proxy to the stock itself. This is not like a company that needs to buy 10m Deutsche marks because it’s opening a factory in Stuttgart. It’s not an airline purchasing oil futs as a hedge against its jet fuel costs. It is not even like investing in a stock like Apple, with a call on their future cash flows, dividends etc. 

 

Meanwhile, stocks in Europe opened weaker, with the main bourses tracking ~1% lower at the start of the session following a soft day on Wall Street as investors continue show signs of indecision as inflationary pressures, reopening uncertainty and toppy valuations just give them cause for a breather. Bund yields are at their highest in two years, close to flipping positive. US benchmark 10-year yields are hovering around 1.65% ahead of the FOMC minutes tonight. Gold is holding the 50% retracement around $1,870. WTI takes a $64 handle again after touching a high at $67 on Monday, as the API reported US crude stockpiles rose by 620k barrels last week – EIA figs due today f/c +1.5m. The annual rate of inflation in the UK rose to 1.5% in April, doubling from the +0.7% printed in March and in line with expectations. It does not signal runaway inflation just yet.

 

On the FTSE, Ferguson rose to the top of the blue chips as it rallied 4% as it raised its full-year guidance as Q3 numbers came in ahead of expectations, with revenues +24.5% and profits +65.4%. John Laing rose 11% on an offer of 403p a share from KKR, whilst Dunelm rose 7% as it said sales were up 59% from the same period two years ago.