Here is Why MercadoLibre Purchased Bitcoin – Motley Idiot

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Latin America’s leading e-commerce platform Free market (NASDAQ: MELI) had a terrific first quarter of 2021. Total sales rose 111% year over year (or 158% excluding exchange rates) as online shopping reached developed markets in countries like Brazil, Argentina and Mexico.

But the results announcement mentioned that the company had started purchasing Bitcoin (CRYPTO: BTC) in the first few months of the year – worth $ 7.8 million to be precise. No word on whether or not MercadoLibre will continue to buy the top cryptocurrency, but it was said that the acquisition was part of its “treasury strategy”. What does this mean?

Emerging countries harbor additional risks

One argument in favor of owning Bitcoin and other cryptocurrencies is that they are a store of value – meaning they hold their value better than a fiat currency issued and backed by a government. This has a number of advantages for a company operating in Latin America. Due to the convergence of economic factors, currencies such as the Argentine peso and the Brazilian real (pronounced “hey-ow” in Portuguese) have historically been volatile.

Someone in a coffee shop is holding a tablet that is showing the message

Image source: Getty Images.

In fact, as early as 2018, MercadoLibre had to switch its activities in Argentina to a “highly inflationary status” in accordance with US accounting standards. High inflation undermines a currency’s purchasing power and over time makes it less valuable. To illustrate this problem, five years ago $ 1 was the equivalent of just under 14 Argentine pesos. As of this writing, $ 1 is the equivalent of almost 95 Argentine pesos. Basically, the same pesos don’t go as far when you buy as they did a few years ago.

We have all experienced this here in the USA, but not nearly to the same extent. Do you remember when you could get a candy bar for less than a dollar? Not so easy to find anymore. This also has real consequences for companies. The big difference that MercadoLibre usually reports between actual sales and currency-neutral sales is the bottom line of this inflationary effect – like how currency-neutral sales increased 158% in the first quarter, but actual reported sales only increased 111% in the first quarter 2021.

So back to that talk of a “treasury strategy”. Essentially, this refers to the steps a company will take to ensure it has the money it needs to operate and any future expansion. Since inflation is a very real long-term risk in Latin America, a company like MercadoLibre needs to protect its assets. Since Bitcoin has a cap on total supply, increasing demand could push the price up further, which could offset the effects of inflation. Conversely, if MercadoLibre held its assets in cash in an economy of rampant cost increases, its balance sheet would be less valuable over time.

However, the recent Bitcoin purchase was very modest. At the end of March 2021, MercadoLibre had USD 863 million in cash, plus another 326 million items under which Bitcoin is stored). The grand total: $ 2.37 billion in liquidity offset by $ 2.18 billion in debt.

Put simply, a $ 7.8 million Bitcoin purchase equates to just 0.3% of MercadoLibre’s total liquidity. Perhaps it will buy more in the following quarters as part of its strategy, but for now the crypto asset plays a tiny role here.

Decentralized financing to the rescue?

While it starts small compared to others square (who owns hundreds of millions in Bitcoin), cryptocurrency could play a much bigger role at MercadoLibre in the future. It has been reported that consumers in countries like Argentina flocked to cryptos to protect their assets from uncontrolled increases in the cost of living. And given the rising price of Bitcoin in recent years, the strategy has worked. MercadoLibre also accepts Bitcoin as a form of payment in Brazil and Argentina. It only recently started accepting cryptocurrency in Argentina for real estate listings on its website. If currencies like the real or the peso don’t stabilize, then perhaps truly decentralized financial instruments (not controlled by a central bank) in markets like Latin America will be the future.

Take away investor

At this point, don’t buy MercadoLibre stock just for Bitcoin exposure. It’s a tiny part of the company’s overall strategy that won’t move the needle – at least not yet. However, it is certainly of interest for shareholders to keep an eye on whether cryptos become a more important part of the e-commerce giant’s risk management strategy.

This article represents the opinion of the author who may disagree with the “official” referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.

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