Investors are probably aware of the “Everything rally” that took place a few days after the United States presidential election results were out, a message from the markets to show the world how bullish the implications are for the coming years of the administration. However, some asset classes, including cryptocurrencies, have started to cool off after this significant rally.
After hitting an all-time high of just over $90,000, Bitcoin has now retraced enough to return most of its post-election games to the market. This is where some investors might start getting excited to deploy their idle cash, hoping for a potential rebound back to the recent highs, if not higher. However, there are a few fundamental reasons why investors should wait.
Before considering stocks like MicroStrategy Inc. (NASDAQ: MSTR) as an avid Bitcoin holder, Coinbase Global Inc. (NASDAQ: COIN) as the technology stock middleman exchange allowing for investors and traders to get a piece of the cryptocurrency action and volatility in the coming weeks, and even a diversified ETF like the iShares Bitcoin Trust (NASDAQ: IBIT), there needs to be one clear signal first.
Buying the Dip on Crypto Stocks: What to Watch For Before Investing
Gold's Intermarket Alert: The Key Signal Investors Are Watching For
A few days before Bitcoin gave up some of its gains, the price of gold started to deviate, and that should have been taken as a warning for cryptocurrency investors. While Bitcoin is a relatively new asset, gold has been the historical choice for investors to express their inflation or weaker dollar views.
In this sense, investors looking to buy the cryptocurrency stocks dip would have to wait until gold consolidates at the bottom and then pull the trigger if and only if gold decides to take charge once more.
Can MicroStrategy Stock Achieve Another Double-Digit Rally?
According to MicroStrategy’s latest financial updates, the company holds up to 279,420 Bitcoin on its balance sheet. This means that, as Bitcoin potentially recovers to all-time highs, the company’s book value will rise significantly along with it.
That’s why broader markets are willing to pay a premium for the company’s balance sheet, as seen in the current 18.3x price-to-book (P/B) valuation for the stock, compared to the computer sector’s average 6.8x P/B valuation today.
While some may call this expensive, investors need to realize that markets willing to overpay for a particular stock typically have a good reason for doing so, and the company’s balance sheet is that justification today. Some institutional investors get the idea, which is why those at Geode Capital Management saw it fit to boost their MicroStrategy holdings by 990% in the last quarter.
This new addition brought the group’s net investment up to $465.6 million, or 1.3% ownership in the company.
Why Short Sellers Think There is a Coinbase Comeback
As Bitcoin and other cryptocurrencies start to heat up and become more popular for the rest of the market, short sellers are not convinced to keep their short positions in the stock anymore. At least, this is the logical explanation after the company’s short interest declined by 10.3% in the past month alone.
The same buyers of MicroStrategy stock, Geode Capital Management, also decided that their money could benefit from some exposure to Coinbase stock. As of November 2024, the group boosted their holdings in Coinbase by 10.1% to net their investment at a high of $609.8 million today, replacing some of the retreated short sellers.
Wall Street analysts think that the underlying business growth is there. They currently project up to $0.94 in earnings per share (EPS) for Coinbase in the next 12 months, calling for a net upside of 235% from today’s $.28.
Leverage Gold’s Signal with This Diversified Bitcoin ETF
When and if gold prices signal that investors should start buying Bitcoin again, as gold is a proxy for all the fundamental factors that make it a buy-and-sell along with Bitcoin, investors could use a more diversified approach to entering the cryptocurrency market.
This is where the iShares Bitcoin ETF comes into play, as it offers less volatility than the spot price of Bitcoin and all the benefits of the equity markets, such as options for hedging out a position in the ETF in case markets get rocky again. Like in Coinbase’s case, short sellers see no reason to stick with their short positions in the sector.
This trend can be seen by the 22.6% decline in short interest for this ETF over the past month, which shows signs of bear capitulation. The ETF also reports up to $1.7 billion in institutional capital inflows during the past 12 months, which shows that willing bulls are coming in to replace the running bears.
