Something strange is going on in the bitcoin market. A new type of investor is soaking up supply. They’re not even investors, as such. But people wanting to own bitcoin as a reserve asset. Actually, they’re not people at all…
Imagine you have hundreds of millions of dollars… of your employer’s funds to manage.
You’re the CFO, CIO, treasurer or whatever you want to put on your business card.
The problem you face is too much cash. Where do you put it?
It has to be somewhere you can quickly sell out of, in case the CEO needs the money.
Somewhere that is safe… safer than the bank.
Somewhere that earns a little interest, just to make you look good in board room meetings.
The answer used to be the government bond market, or similar assets. These are loans to the government. Why keep the company money there? Because bonds are investments that can be instantly sold without having to worry much about a huge transaction making the price swing. They also offered some interest. And the comfort of convention. Nobody would criticise you for doing it.
Trouble is, bonds don’t pay much interest any more. Neither do the similar alternatives. And money is being printed like mad by governments’ central bankers. Which means the government bonds – promises to pay money in the future – are looking rather risky.
More and more companies are wondering if there’s an alternative. And some have found one in the cryptocurrency market.
A corporate reserve asset?
You might think companies are mad to put their hard-earned cash and reserves into an asset that is spiking and plunging all over the place. As bitcoin is.
And you may well be right. But that doesn’t change the fact that it’s happening…
Last year, the payment processing firm Square made the move and explained why on its website:
Square, Inc. (NYSE: SQ) announced today that it has purchased approximately 4,709 bitcoins at an aggregate purchase price of $50 million. Square believes that cryptocurrency is an instrument of economic empowerment and provides a way for the world to participate in a global monetary system, which aligns with the company’s purpose. The investment represents approximately one percent of Square’s total assets as of the end of the second quarter of 2020.
“We believe that bitcoin has the potential to be a more ubiquitous currency in the future,” said Square’s Chief Financial Officer, Amrita Ahuja. “As it grows in adoption, we intend to learn and participate in a disciplined way. For a company that is building products based on a more inclusive future, this investment is a step on that journey.”
Software company MicroStrategy is another example, as summarised by Bizjournals:
MicroStrategy Inc. CEO Michael Saylor has made a high-profile bid to buy up hundreds of millions of dollars of bitcoins in recent months — and that strategy has made him a billionaire, at least on paper.
The Tysons business intelligence software firm began buying up Bitcoin in August, using both spare cash and ultimately by raising debt, as part of Saylor’s bid to hedge against what he believes is a devaluing dollar. On Jan. 22, the company said it had purchased another 314 bitcoins for $10 million.
There are also many bitcoin-related firms making the shift into bitcoin as their reserve asset. Nasdaq-listed bitcoin miner Marathon Patent Group, for example. But that’s hardly a surprise. They’re bitcoin companies, after all. But the practice is growing amongst other firms.
MicroStrategy is the best example for a long list of reasons. The first is what the strategy has done to the stock price, as Bizjournals highlighted:
MicroStrategy’s bitcoins are now worth more than double what the company originally paid for them — about $2.29 billion in all. And the company’s stock has more than tripled since its first Bitcoin purchase Aug. 11, when the share price was $135 each. It is now hovering at around $548 per share.
That has caused MicroStrategy’s market capitalization to also skyrocket, from about $1.71 billion as of Nov. 9 to more than $5 billion now.
In other words, the allocation to bitcoin ended up affecting the software company’s entire share price.
But the far more intriguing aspect of MicroStrategy’s move is this. It has catapulted the CEO into all sorts of drama. He has been downright hounded, if you ask me. And his own commentary has a huge influence on the bitcoin price itself. He has become a major international figure as a result of his decision.
One particular interview with Saylor, which you can find on YouTube, was fascinating enough for me to bother transcribing a bit of it for you. Because I think it reveals what’s really going on here. And what’ll happen next to bitcoin.
The CNBC interview begins with the host’s look of incredulity and dismissiveness as she says, “We have you on because you’re the CEO of a software company who decided to invest your cash into bitcoin.” And she ponders with an exasperated laugh, “What was your thought process!?”
Saylor sighs and explains what he no doubt has explained many times before. Money printing and interest rate cuts have combined to make financial assets and cash downright dangerous for a company to hold too much of. So his company needed to find something to put its $500 million of cash and the next $500 million into. Bitcoin fit the bill better than gold.
Then things got interesting in the interview.
He pointed out that many people understand bitcoin as a speculative asset. “It’s up 100% annually each year for the past decade, more or less.” But what people don’t yet understand is that bitcoin is a monetary network.
Network, not asset.
“And as a monetary network it is capable of storing and channelling energy over time without power loss.” I do realise this sounds like he has lost the plot a little. Energy? But this is no tai chi claim.
Think about the nature of money. You earn it by expending effort. And you spend it effortlessly, depending on who you go shopping with. In that sense, money is pent-up effort, just waiting to be released. And bitcoin, as a monetary network, is similar. At least, it can be. And in some ways, it could be better than the money we currently use.
Back to the interview. The CNBC host schools Saylor in the schoolboy basics, arguing he is speculating, not preserving the value of his company’s cash.
She asks him, “Are you a software company, or are you a bitcoin hedge fund, at this point? I mean why bother with the software part of the business if your belief truly is that bitcoin is going to go up 100% every year going forward?”
This is rather snarky. But it’s in response to the fact that MicroStrategy’s share price seems to reflect the bitcoin price, not the software business these days.
But Saylor stays calm in response to the challenge. And he says something that makes bitcoin relevant to each and every saver and investor.
He explains that the software business he runs generates so much cash that, if it kept its money in cash, it would lose so much value by doing so that it would negate the profits of the software business itself.
In other words, as Saylor sees it, the company is being forced into bitcoin by the central banks’ money printing. “We don’t want to allow our treasury to be debased by 10% or 20% a year. We had to do something.”
This is an extraordinary hypothesis because it could apply to any and every institution and person with savings and wealth. Every investor.
If Saylor is right, the current economic policies are forcing such people out of cash to avoid losing the value of their wealth. He calls this “decapitalisation”. But what do they turn to instead?
Many turn to gold. Or stockmarkets. Or property.
But, bitcoin, as a financial system, fits the bill uniquely well. It’s cash without the risk of decapitalisation. At least, not by money printing…
He makes this explicit: “It actually looks like [bitcoin] is emerging as the primary treasury reserve asset for people that are looking for some way to avoid the great monetary inflation.”
After the testy exchange, the CNBC host asks Saylor again whether his firm is “a software company or a bitcoin fund”. But he just sums up the above. It’s a software company that keeps its cash in bitcoin.
The CNBC host simply doesn’t get it. And neither do the pundits who follow the interview with shaking heads and criticism.
German finance journalist Holger Zschaepitz gets it. As central banks print money, bitcoin gains traction:
Do you get it?
Editor, Fortune & Freedom