Why Are Large Public Companies Buying Bitcoin?

It seems that bitcoin has dominated the headlines month after month. a large part of this is due to the fact that some businesses are now using bitcoin. and some larger companies are even buying the cryptocurrency.

This was unthinkable just a year ago. even if an executive had wanted to make such a move, fear of public scrutiny would likely have stopped him in his tracks. So why have companies changed their minds?

Reading: Why are companies buying bitcoin

Is this time different? contextualizing the increase in the price of bitcoin

Bitcoin price growth between 2020 and 2021 has been incredible, starting 2020 at around $7,000 per btc. The cryptocurrency saw a stratospheric rise throughout the year despite a global pandemic, global economic chaos, and increased scrutiny since its last surge (Bitcoin previously peaked in 2019 at nearly $12.00 and slowly dipped). bitcoin ended 2020 as one of the best performing assets in the world. it closed the year at around $30,000 per bitcoin.

Despite considerable obstacles standing in its way, bitcoin has thrived. Many reasons have been given to justify the price range, but there are three main ones:

  • resonance with younger investors: young investors with a high appetite for risk and US equities. stimulus checks decided to replace his drive to gamble in casinos with a speculative instrument that resonated most with his generation.
  • Based on monetary policy: some investors are riding the wave of unprecedented changes to central bank monetary policy, combined with the high probability of a biden-led infrastructure package. Because bitcoin has a fixed supply of currency, these investors view cryptocurrency as an asset that could protect them against inflation and currency debasement.
  • corporations and crypto: major companies announced that they were either buying bitcoins for their own balances or would allow their products/services to be transacted using the cryptocurrency. hedge funds also started to hold bitcoin, and grayscale launched a closed-end fund that holds bitcoin.

While all of the above reasons may be true to some degree, and even feed off each other, we’ll focus on the last one. we believe that corporate acceptance of cryptocurrencies has had the biggest impact. and may have paved the way for future large-scale adoption; the other two may be temporary phenomena.

why would companies buy bitcoin?

At first glance, a large company with shareholders taking a portion of its cash reserves (which it must hold to meet short-term obligations) and moving it into a volatile asset seems crazy.

However, the dream of many bitcoin evangelists came true in August 2020 when michael saylor, CEO of microstrategy, did exactly that. Saylor has become a public defender of bitcoin and has openly discussed the corporate decision on it. microstrategy now owns approximately 108,992 bitcoin.

the main factor driving saylor’s decision was fear of currency devaluation through central bank policies. the micro strategy needs to have cash on hand; Although it may be inefficient, cash is still a stable and safe investment. But according to Michael Saylor’s estimates, central banks could potentially cause your company’s dollars to lose 15% of their value per year. Saylor posited that his money was not only doing nothing thanks to near-zero interest rates, it was actually rapidly depreciating.

saylor’s solution was bitcoin. The contrast was stark: While the Federal Reserve printed more money in one year than in every year since the Great Recession, Bitcoin has a fixed supply of 21 million. microstrategy became a pioneer when it bought bitcoin and announced that it would become company policy to keep a portion of its cash reserves in the cryptocurrency.

the push towards cryptocurrencies

There is no doubt that there are many companies that face the same problem that the micro strategy faced. There is an obligation to hold cash at interest rates close to 0%, as fears of inflation become rampant. this pushes companies into a catch-22 situation.

another major corporation investing in bitcoin is fintech darling square. Square’s purchase of the cryptocurrency makes sense given its role as a broker for bitcoin through its cash app service. But CEO Jack Dorsey has openly stated that Square is also buying Bitcoin for its treasury reserves, echoing Saylor’s views. It has been made clear that bitcoin will become a central part of square’s business model in the future.

These two big names may have paved the way for more public adoption or at least removed some of the stigma for corporations. In fact, a Twitter conversation between Elon Musk and Michael Saylor may have directly led to Tesla’s large purchase of Bitcoin for its treasury reserve.

hold and transact bitcoin

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There are two approaches that businesses take when it comes to bitcoin adoption. some companies are buying and holding bitcoin, while others are incorporating it for payments. companies like square are doing both.

This is an important distinction. While both add credibility to bitcoin, investing company money in bitcoin carries much more risk and can be open to shareholder opposition. however, facilitating bitcoin payments may be a more acceptable approach for some businesses. square, for example, enjoys high margins on its bitcoin brokerage services.

That’s not to say that this strategy is risk-free. Many are skeptical that bitcoin has any use as a medium of exchange due to its price volatility. tesla can attest to this; the company briefly allowed its cars to be purchased with cryptocurrency, only to reverse its decision amid environmental concerns over bitcoin mining. others believe they ran into payment reconciliation issues with the constantly fluctuating price of bitcoin.

while tesla has pulled out of its bitcoin offering, companies like paypal have begun facilitating payments via crypto. companies like visa are also showing their interest in space.

acceptance of the financial system

The opening of the financial system to vitcoins is possibly the biggest driver of the previous increase in the price of cryptocurrencies. and it may be a major reason for the bitcoin price to remain high.

Today’s global financial system is highly interconnected; finance plays a key role in the daily functioning of all nations and affects virtually everyone. If bitcoin is going to become a true asset class, it needs the support of the international financial system.

This support is likely to expand the number of bitcoin users, beyond speculative individuals to large public institutions, and provide stability to the currency. Like most technologies, bitcoin is based on a network effect, which means that the value of bitcoin increases with the number of users. Facebook is the classic example of this.

Ultimately, an asset class can only survive and thrive if it is used in some way by wealthy financial institutions. Think of the economics of the gold industry for investment purposes. There is a deep chain of interconnected financial intermediaries that work together to create a stable and efficient market for gold. from central banks to investment banks, to funds and metals traders. bitcoin needs this kind of stable institutional infrastructure if it wants to continue to prosper.

Fortunately, it seems that we are at the cusp of that institutional advance.

bitcoin advances

Perhaps one of the biggest obstacles to large-scale adoption of bitcoin is that, for most people, buying bitcoin seems like a hassle. Due to the collapse of some of the major brokers, it can also seem like a dangerous undertaking.

In the past, bitcoin could not be bought or sold through a broker like most assets. instead, users needed to go to specialized brokers and obtain a bitcoin wallet. they then need to route and manage their orders through that broker.

That all changed in 2017 when Chicago Mercantile Exchange (CME), the world’s largest futures broker, began offering Bitcoin futures. Because these futures were cash-settled (when settled, investors receive cash instead of the underlying commodity), no bitcoin wallets were needed to gain exposure to bitcoin.

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Bitcoin not only gained the support of one of the world’s most respected financial institutions (cme handles 3 billion contract transactions per year), but also removed a major hurdle for many institutions.

how companies can invest in bitcoin without buying the cryptocurrency

Imagine you are the director of a university endowment fund that wants to invest a small percentage of its assets in bitcoin to diversify. this small property can be worth hundreds of millions of dollars.

First, from a legal and governance perspective, it may not be clear how such an institution can set up a separate account with a cryptocurrency exchange, keep risk managers updated in real time, send consolidated reports to auditors and generally adhere to the many rules and regulations.

As a director of this endowment, you may also be concerned about the broker’s stability and whether it can handle an institutional-sized client. this is an unnecessary risk not found with other traditional assets.

Bitcoin futures solved all of these headaches, as was seen when legendary hedge fund manager Paul Tudor Jones announced that his fund held bitcoin futures.

Following these developments, in quick succession, the Grayscale Bitcoin Trust, a closed-end fund that would give investors passive exposure to Bitcoin, was approved by Sec. the approval of the sec was a decisive moment for institutional acceptance. It probably served as a beacon that public market regulators were ready to integrate bitcoin.

In conjunction with these announcements, bny mellon, one of the world’s largest investment banks, began offering bitcoin custody services. this would solve many of the logistical and regulatory issues that large funds and institutions faced when trying to hold bitcoin.

public markets embrace bitcoin

While the internal issues of bitcoin-holding financial institutions were being ironed out, we saw an increase in public market enthusiasm for bitcoin-related listings. This includes companies like Galaxy Digital, which focuses on building institutional infrastructure to support Bitcoin. There is also the riot blockchain, which focuses on bitcoin mining and allows retail investors to share in the profits from crypto mining without the hassle of doing it themselves. Riot Blockchain is also listed on the Nasdaq, giving more credence to its listing.

Finally, perhaps the largest public market participant in the bitcoin space is Coinbase. coinbase is one of the largest cryptocurrency brokerage services. it is also the first major cryptocurrency broker to have a public listing. Demonstrating the public markets’ enthusiasm for all things bitcoin, Coinbase’s IPO was given a reference price of $250 per share and, upon opening, shot up to $381. Coinbase’s market cap at IPO was of $86 billion, a number unthinkable just a few years ago.

what does this mean in the future?

The institutional adoption of bitcoin creates a virtuous circle that leads to greater overall adoption and thus greater stability of the entire network. what we’re seeing is still in the early innings. while some big names openly support bitcoin, they still represent a fraction of all financial institutions.

however, deeper ramifications remain. Consider Tesla, which makes up a large part of the S&P Index with Bitcoin on its balance sheet. Passive index investors who invest in the S&P 500 are now indirect holders of Bitcoin. This may seem like a stretch, but keep in mind that Tesla over the last year has seen a high correlation with the price of Bitcoin, and in turn, Tesla has an impact on the price of the S&P 500.

Many questions remain regarding the rate of adoption. In a Gartner report that asked 50 CFOs if they planned to own bitcoin, only 5% said yes. Similarly, we have yet to see whether shareholders can rebel against such policy moves by companies.

Either way, bitcoin has crossed the institutional hurdle, which has probably given it much more staying power than ever before.

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