Bitcoin’s Newest Use Case
One of the narratives around cryptocurrencies last year was that institutional investors were on the verge of getting into the asset class in a big way and that wave of new investment would fuel a run up in price. While some institutional investors have moved into this space, most notably Paul Tudor Jones, that narrative is yet to be fully realized.
What I think is interesting now is we are in market conditions that might create a similar influx of investment into crypto but from a completely different group of investors; corporations.
If you haven’t heard by now, MicroStrategy, a public company with a market cap of over $1 billion, converted $250m of cash from their balance sheet into Bitcoin to hold as a primary treasure reserve asset. Then, less than a month later, the company announced it had purchased an additional $175m of Bitcoin to add to its treasury.
What is so interesting is that this was not a publicity stunt. This was a company that had a stockpile of cash and made a strategic decision that the best thing it could do with that cash was to use it to buy back its stock and hold the remainder in Bitcoin. This was a well-researched, well thought through and prudent financial decision made by a very successful, long time public CEO who has been ahead of numerous technology transformations.
According the CEO Michael Saylor:
“MicroStrategy has recognized Bitcoin as a legitimate investment asset that can be superior to cash and accordingly has made Bitcoin the principal holding in its treasury reserve strategy. MicroStrategy spent months deliberating to determine our capital allocation strategy. Our decision to invest in Bitcoin at this time was driven in part by a confluence of macro factors affecting the economic and business landscape that we believe is creating long-term risks for our corporate treasury program ― risks that should be addressed proactively. Those macro factors include, among other things, the economic and public health crisis precipitated by COVID-19, unprecedented government financial stimulus measures including quantitative easing adopted around the world, and global political and economic uncertainty. We believe that, together, these and other factors may well have a significant depreciating effect on the long-term real value of fiat currencies and many other conventional asset types, including many of the assets traditionally held as part of corporate treasury operations.”
If you are not familiar with Michael Sayer and want to learn more about him and his rationale, I highly recommend listening to him on The Pomp Podcast as he does a great job of articulating why he decided to make this move and the amount of thought that went into the execution of it.
For me, there are two major takeaways from this announcement. The first is that while Bitcoin has been used mainly for speculation or storing wealth by early adopters, this is a new use case for Bitcoin and one that could prove to be far more mainstream. It turns out holding Bitcoin on a corporate balance sheet actually solves a number of problems for corporate treasury. First, it acts as inflation hedge especially in a time when the fed is printing record amounts of money. Second, it offers the potential to simplify the transfer of money on a global basis for a corporation. Corporations with lots of cash and international operations have to deal with a complex global financial system that includes managing exchange rates, numerous bank accounts with banks that operate at different hours, and onerous wire fees which take a significant amount of time to clear. Bitcoin can reduce a company’s reliance on third parties, lower transaction costs and increase payment flexibility.
Second, even if executives at a large corporation had come to the same realization as MicroStrategy, there was always significant career risk in making such a move because it was unclear how the market would react. No CFO would want to be the first to add Bitcoin to their balance sheet if there was any risk that it could cost them their job.
However, not only did the market not react negatively to the news, it appears to have embraced it. MSTR stock jumped 20% following the announcement and as I am writing this, continued to increase another 5% while the majority of the stock market continues to fall. I don’t believe Michael made the decision based on the belief it would increase his stock price, but I suspect that isn’t going unnoticed by every CEO and CFO of every major corporation.
I am not making the argument that companies should or should not be valued more because they convert some or all of their cash position to Bitcoin. What is potentially so momentous about this move is that because a public company was bold enough to make this move and its stock price increased, other executives now have a data point to discuss with their boards. The warm reception from the market further reduces the barrier to entry, maybe will even motivate, many other corporations to adopt a similar strategy.
If this does happen, the MicroStrategy announcement could prove to be a watershed moment and the next bull run in crypto might be fueled by a surge in demand from corporations, not just financial institutions, buying and holding Bitcoin on their balance sheets.
