Big name bets were made. As cash inflates, Bitcoin entices.
In the summer of 2020, NASDAQ-listed business intelligence company Microstrategy purchased 21,454 bitcoins for $250 million, spread over 78,388 transactions. They have since added 16,796 bitcoins, for a total investment of $425 million.
These moves are milestones in a growing list of public and private companies that are adding Bitcoin into their capital allocation strategies, many for the first time in 2020. Square’s $50 million Bitcoin announcement in October is just the latest high-profile company to join.
The emerging trend in corporate Bitcoin investment begs the questions, why Bitcoin and why now?
Microstrategy’s announcement cites macro economic factors as the reason for the move. The economic and health crises due to COVID-19, the massive government stimulus and money printing, and the political and economic uncertainties led Microstrategy to conclude that there is “significant depreciating effect on the long-term real value of fiat currencies and many other conventional asset types”. Now, Bitcoin is their principal treasury reserve.
For business leaders looking at the cash on their balance sheets, the news that central banks are printing money at unprecedented rates should be seen as a risk.
Nominal value of cash can stay constant while its real value evaporates.
Despite Bitcoin being commonly referred to as a cryptocurrency, Microstrategy’s CEO Michael Saylor has suggested it may be better to view it as a crypto asset. Bitcoin has properties that warrant comparison to other assets like gold, foreign currencies or tech stocks, but you would be remiss to categorize it in only one such legacy term. It functions as a store of value, it benefits from network effects, it has no central authority, it is perfectly scarce and it has the potential to disrupt established industries from payments to banking to remittances.
When looking at options for capital allocation, Bitcoin offers a novel alternative to holding cash or gold. It’s an entirely new asset class.
After making his initial $250 million corporate bet, Michael Saylor articulated:
“We find the global acceptance, brand recognition, ecosystem vitality, network dominance, architectural resilience, technical utility, and community ethos of Bitcoin to be persuasive evidence of its superiority as an asset class for those seeking a long-term store of value. Bitcoin is digital gold — harder, stronger, faster, and smarter than any money that has preceded it. We expect its value to accrete with advances in technology, expanding adoption, and the network effect that has fueled the rise of so many category killers in the modern era.”
For companies looking to make a similar move, switching to Bitcoin is not so quick and easy.
Unlike for private individuals, buying Bitcoin for companies requires special considerations. Saylor has outlined his process, which included meetings with his board, finance, legal and compliance teams. In addition to conducting the necessary due diligence, there was still work to arrange custody, create a purchasing plan, and disclose to shareholders before executing the thousands of small transactions needed to avoid spiking the market.
Saylor estimates that switching cash reserves to Bitcoin could take 12–18 weeks for private companies, 6 months for nimble public companies and 9–12 months for most other companies.
Institutional money moving to Bitcoin is big, slow and just getting started.
In essence, Bitcoin adoption announcements are lagging indicators of board room consensuses concerning market conditions from months ago. Business leaders looking at their balance sheets today are still a long way away from being able to execute.
In that time, what macro economic factors could affect the real value of assets on a balance sheet?
The convergence of multiple factors could precipitate a rapid growth of companies copying Microstrategy’s move, resulting in a significant price increase in Bitcoin:
- Central banks and governments have delivered staggering amounts of newly created money and fiscal stimulus to combat ongoing economic difficulties, in large part due to COVID-19.
- Tech companies have amassed vast cash reserves that are more than enough to cover all short term liabilities. These companies may be well positioned from both a technical and financial perspective to adopt Bitcoin as a reserve asset, and motivated to do so given their large exposures to inflation.
- The scheduled Bitcoin halving event occurred in May 2020, resulting in the block mining reward being reduced from 12.5 down to 6.25 Bitcoin per block mined. This reduction in new supply entering the market has historically been followed by an increase in price, which could entice more people to enter the market.
Bitcoin’s market cap remains a small fraction of the other assets it stands to compete with. The growth potential for an emerging reserve asset is large, especially considering that both companies and governments maintain cash reserve policies.
The US dollar is the world’s primary reserve currency, accounting for more than 60% of all foreign exchange reserves. Finance ministers and treasurers around the world looking at their stockpiles of US dollars and hearing news about unlimited QE have a growing incentive to reevaluate the risk profile of their holdings.
As time passes, board members and treasurers will increasingly have reason to discuss Bitcoin as a possible complement or alternative to holding cash. Following Microstrategy and Square, they now have big names to point to as references for why and how to switch their reserve policies.
Each additional company that adopts Bitcoin as a reserve asset, or central bank that announces more quantitative easing will be another affirmation of the Microstrategy move. The institutional move into Bitcoin could instigate a massive rise in demand for Bitcoin.
It is no longer far fetched to bring up Bitcoin in a board meeting. The question posed by excess cash is no longer share buybacks vs. acquisitions, but also Bitcoin. Those who don’t recognize it will dismiss it and carry on. But for those who do, early action could have outsized benefits.
How does unlimited money printing affect your balance sheet and what are you doing about it?
The clock is ticking.