Why companies should consider investing in Bitcoin
Three arguments why investing in Bitcoin is the right choice for companies and why they should follow MicroStaretgy’s example.
Last week MicroStrategy, the world’s largest business intelligence company worth over $1.2 billion, announced that it had bought 21,454 Bitcoins worth approximately $250 million. This purchase was symbolic on multiple levels. First, MicroStrategy’s decision to keep its reserve in Bitcoin rather than in fiat is a clear vote of confidence in the digital currency. Second, the maximum supply of Bitcoin is 21 million which makes MicroStrategy holding 0.1% of all Bitcoins ever in existence. The percentage is even higher as based on different estimates approximately 1–2 million Bitcoins are lost so that the total number of “usable” Bitcoins is around 18 million.
After MicroStaregy’s decision the Canadian based restaurant chain Tahini followed its example and converted its fiat reserves into Bitcoin too. It is very likely that in the future more and more companies will follow MicroStrategy’s example and buy Bitcoin to hedge against the current economic situation.
I believe MicroStrategy’s decision to purchase Bitcoin was the right choice as companies now have the perfect circumstances to invest in Bitcoin. In my opinion, there are 3 factors why companies should consider investing in Bitcoin now and in the future.
1. Bitcoin emerged from a crisis
The reaction of governments and central banks in times of crisis is always the same no matter if it is a financial collapse, a war, or a pandemic. They print more money to stimulate the economy. While quantitative easing is helpful to prevent economies from collapse, infinitive quantitative easing can make the value of fiat holdings depreciate massively. This especially hits companies that hold millions in fiat as a reserve.
Usually, companies would increase their gold reserves but MicroStrategy chose to buy Bitcoin. One may ask why? The answer is very simple diversification. Although often compared to gold, Bitcoin is a completely new asset class even if both supplies are finite.
As mentioned the maximum supply of Bitcoin is 21 million, which is its main value proposition namely digital scarcity. There will be never more Bitcoins, even if its creator wanted to he could not change this number.
Bitcoin’s scarcity is contrary to fiat’s inflationary nature which makes Bitcoin a great store of value and hedge against the current inflation.
While we do not know who exactly created Bitcoin we know for sure that it was an answer to the financial crisis in 2008 as there are multiple references by its creator Satoshi Nakamoto (such as the text in the genesis block of Bitcoin). Therefore Satoshi designed Bitcoin as an asset that would not have the shortcomings of traditional ones which is beneficial in the current crisis. What better investment in an asset that was created out of a crisis in times of a crisis?
2. Bitcoin has become institutional & regulated
Times change fast in the crypto space. While some years ago there were no institutional solutions on the market this has changed drastically. There is nearly no area of Bitcoin where there is not a product or service available that meets institutional standards for companies entering the space.
Buying Bitcoins in 2010 would have requested to meet in a cafe to exchange your coins against fiat. This would not be a solution for a company wanting to invest millions into Bitcoin.
Imagine the representatives of MicroStrategy going into a Starbucks with briefcases full of money. Unimaginable.
Today there are hundreds of professional exchanges and OTC desks that specialize in large volumes brokerage ideal for companies who are interested in switching their fiat into Bitcoin. There are also plenty of institutional custody solutions on the market audited in some cases by Big 4 companies with military-grade security levels. It is unlikely that MicroStrategy stores its 21,000 Bitcoins on a single Nano Ledger (even though this would be possible). Most likely they partnered up with institutional-grade custody providers that keep the Bitcoins in cold storage and in the best case even insured them.
While the areas of purchasing and storing Bitcoin were barriers in the past for companies to invest, the landscape has changed as the market is full of providers that meet institutional standards and provide professional services on the same level as in traditional finance.
The increased institutionalization is also a result of the increase in regulation. The once completely unregulated crypto space is more and more becoming regulated with nearly every jurisdiction globally creating new laws regarding crypto. Especially, Lichtenstein and Switzerland are leading in this regard. Switzerland’s financial authority FINMA granted Swiss banking licenses to two crypto banks last year, closing the gap from crypto to the traditional financial world.
This makes Bitcoin more attractive for companies to invest in as regulation increases investor security and makes participants liable under the law. While keeping bad actors out of the space that gave Bitcoin a bad reputation in the past. The regulation will increase more and more as demand for it increases globally. Further, this calms company shareholders who may have a biased view of Bitcoin.
3. It is still cheap to buy Bitcoin
Compared to fiat and gold Bitcoin is a very young asset. It only exists a little more than 10 years which is nothing compared to gold that is being used since 700 B.C. Still, Bitcoin had a remarkable track record. Despite being opensource no hacker managed to hack the Bitcoin blockchain and steal any coins. The number of nodes rosed to 100,000 and its value went from $0 in 2009 to currently 11,200 in 2020.
While its volatility is often criticized, Bitcoins yearly lows increase every year supporting a long term strategy. Compared to gold it has also the benefit that it is digital making storage and transfers very convenient 24/7. Due to these facts, I believe that Bitcoin’s demand will increase the longer the more.
As mentioned in the first point Bitcoin’s main value proposition is its digital scarcity. The price of an asset is determined by supply and demand. In Bitcoin’s case, the supply is fixed (21 million) but the demand is increasing.
One must not be John Maynard Keynes to see that Bitcoin will increase in value if its demand increases.
In the case that more and more companies would follow MicroStrategy’s example and purchase large amounts of Bitcoin, its price will skyrocket. Not even considering other large players such as pension funds that have not touched the digital currency yet. But the current situation is so unusual that it would not be very surprising anymore if pension funds too would start investing in Bitcoin as a hedge against inflation. I am sure that in the future purchasing 0.1% of all Bitcoins would cost a company a lot more than for MicroStrategy which was early with its Bitcoin investment.
To conclude we have seen that Bitcoin by its design and history was created for situations such as the current as its hard cap is a defense against inflation and endless money printing. The space has become and will even more become regulated and institutional which will make interactions with this revolutionary asset easier than before for companies. Lastly, Bitcoin’s demand is likely to increase which makes it a good investment when having a long term horizon. I am sure that not even a year from now the number of companies that invest in Bitcoin will be a lot higher.
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