Bloomberg's Chief Financial Writer: Are Crypto-Involved US Stocks Overpriced? What Can Retail Investors Do?

Original article "Put the Crypto in the Index Funds", compiled by Odaily Planet Daily jk.

Original author: Matt Levine is a Bloomberg Opinion columnist responsible for financial reporting, with readership consistently ranking first in Bloomberg's financial opinions. He was previously the editor of Dealbreaker, worked in Goldman Sachs' investment banking division, served as a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz, and was a law clerk for the U.S. Court of Appeals for the Third Circuit.

What strategy has Vanguard adopted?

A basic fact today is that the U.S. stock market is willing to pay $2 in stock valuation for $1 in cryptocurrency. If a small publicly traded company holds $100 million in crypto assets like Bitcoin, Ethereum, or TrumpCoin, its market value will at least double to $200 million. This kind of transaction seems both confusing and magical. The pioneer of this approach was MicroStrategy (now simply named "Strategy", holding about $70 billion in Bitcoin with a market cap of approximately $138 billion), and now, various small companies are imitating it, seemingly quite successfully.

I often joke about this, but it's worth seriously asking: Why is the stock market willing to pay $2 for $1 worth of cryptocurrency? This question can generally be divided into three explanations:

• Bitcoin held by companies is more valuable than what you hold yourself. Because companies can do things with these crypto assets that you can't, such as educating investors, borrowing, leveraging, staking, tokenizing, and various other "operations". From a business perspective, this premium is justified.

• There is a large amount of institutional capital wanting to buy Bitcoin, but they can't, neither directly holding it nor through more conventional (lower premium) methods like futures or ETFs. So they are willing to pay a premium to invest indirectly through these "crypto vault companies". This premium comes from a market structure imbalance: these companies provide institutional investors with a "legitimate and compliant" form of investment.

• Retail investors are lazy and confused, following the trend to buy these stocks labeled as "crypto vaults", without realizing they are buying a bunch of overvalued crypto assets. Simply put, it's the "meme stock effect".

Every company engaging in this operation will verbally present the first reason —— "We're not just hoarding coins; we're doing a lot of things", but I've always found this unconvincing. The third explanation —— "Haha, retail investors" —— sounds quite reasonable, and I've written similar views myself ("For many small U.S. stock companies, the most direct appeal of the crypto vault strategy is: no one pays attention to our small company, but if we announce buying a bunch of cryptocurrency, retail investors will get excited and rush in to buy our stocks at high prices.")

But what's really interesting is the second point. If this logic holds: "Large asset management institutions want cryptocurrency exposure, and Strategy is the only convenient channel they can buy, so they are willing to pay a 100% premium for its stock", then... this sounds super weird, but maybe it's true? I checked Strategy's shareholder list on Bloomberg, and the second-largest shareholder is Capital Group —— a traditional fund management company focused on active investment, holding 6.99%. Is this a good investment? Over the past 12 months, Strategy's stock price has risen by about 175%, while the S&P 500 has only risen by 13%. So... yes?

Why doesn't Capital just buy Bitcoin instead of paying double for Strategy? (As short-seller Jim Chanos questioned) Maybe they want to but can't: Capital's holdings come from its Growth Fund of America, which "primarily invests in common stocks" and "may invest in other types of equity securities", but clearly does not include Bitcoin or Bitcoin ETFs. If you're a long-term stock fund manager wanting to buy Bitcoin, over the past year, (1) you were right, (2) you couldn't buy. So, buying Strategy might be the only practical choice you had.

(Should you be able to do this? Should the fund's investment mandate be revised? Are your clients paying you to buy Bitcoin for them? Is this your job? I don't know, but one thing is certain: what you're buying isn't Bitcoin, but Strategy's stock.)

So, Strategy's high stock premium may reflect an expectation: "Institutional investors want 'Bitcoin in stock form', and the market supply can't keep up." Another related but slightly different view is: "Index funds will passively buy Strategy, no matter how high the premium." Capital is the second-largest shareholder, but according to Bloomberg's Vildana Hajric, the largest shareholder is actually Vanguard:

"Bitcoin is not suitable for long-term investors. Digital assets are more about speculation than investment. They are an 'immature asset class' with no clear history or 'intrinsic economic value', and could cause 'serious disruption' to investment portfolios."

Vanguard's executives have steadfastly adhered to founder Jack Bogle's logic, criticizing crypto assets. Ironically, according to the "cold logic" of passive index fund investing, this $10 trillion asset management giant has now become Strategy's largest shareholder —— a software company that has turned itself into a "Bitcoin shadow company".

Vanguard owns over 20 million shares of Strategy, nearly 8% of its Class A common stock, likely surpassing Capital Group in the fourth quarter of last year. According to Bloomberg data, these holdings are spread across dozens of Vanguard funds, covering small-cap, mid-cap, momentum, value, and growth index products.

And Strategy isn't even in the S&P 500 index yet! ("Vanguard's largest holding is in its Total Stock Market Index Fund VITSX, with about 5.7 million shares worth approximately $2.6 billion.") But Strategy is striving to be included. Imagine the uproar if it actually makes it into the index.

And: Is there anything wrong with this? Although I often joke about these things, what do I know? Just yesterday, I mocked a newly launched "crypto vault company" whose asset reserve is HYPE tokens. I wrote: "The name is too straightforward." But I also often mock some ordinary publicly traded companies, and their stock prices sometimes still rise. This article is not investment advice; most of my money is in index funds. I've learned one lesson: the financial phenomena I want to mock have no correlation with whether they will rise. I have no predictive ability, so I try to be a price taker —— buying the market portfolio and accepting market returns. Many investors should do the same or are already doing so.

In 2005, the "market portfolio" mostly consisted of stocks and bonds; by 2025, it will undoubtedly include cryptocurrencies. There are now many ways to access crypto assets (you can buy Bitcoin directly, buy Bitcoin ETFs, etc.), and there will surely be people emailing me about their startup projects that can conveniently provide you with crypto index exposure (for example, give them $100, and they'll allocate a basket of crypto assets for you using market-cap weighting).

But the simplest, laziest way is to buy the entire U.S. stock market index. Because the stock market is increasingly absorbing more "crypto vault companies". You might not want crypto assets in your stock index fund —— Vanguard doesn't either —— but the essence of index funds is not to buy what you want, but what the market wants. (Nor what the fund manager wants.)

You don't trust yourself (or fund managers) to pick the right things, so you choose to trust the market. And now, what the market wants is cryptocurrency.