IS BITCOIN NOW A MUST-HAVE ASSET FOR PUBLIC COMPANIES?

 

There’s no denying it: support for bitcoin among publicly-listed companies is growing. As of June this year, more than 34 public companies collectively held over 213,000 bitcoin on their balance sheet, roughly equating to 1.14% of the asset’s circulating supply. From vehicle manufacturers (Tesla) and business intelligence firms (MicroStrategy) to crypto-native companies (Coinbase, Riot Blockchain, Inc) and fintech platforms (Square, Inc), forward-looking organizations are increasingly backing “digital gold” to provide a handsome rate of return amidst rising inflation.

WHY PUBLIC FIRMS ARE BUYING BITCOIN

This influx is a relatively recent phenomenon. Indeed, it’s been little over a year since Nasdaq-listed MicroStrategy became the first publicly-traded firm to buy bitcoin as part of a capital allocation strategy. At the time, CEO Michael Saylor called bitcoin “a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash.”

Six months later, automaker Tesla made a similar remark in a filing with the SEC, claiming its $1.5 billion bitcoin purchase provided “more flexibility to further diversify and maximize returns on our cash.”

In truth, few would bet against this trend continuing. After all, bitcoin’s performance over the past year has helped net a tidy profit for the companies who added it to their corporate treasuries. Or more accurately, for those who held firm amid choppy market conditions, such as when the cryptocurrency plunged 30% back in May – before recovering to end the day down 12%.

While price volatility will remain a major impediment for those with low risk tolerance, a recent report by asset management firm Pantera Capital suggests such swings are becoming less severe, largely due to the market becoming “broader, more valuable, and more institutional.” If this assessment holds true over the coming months and years, more public firms will start seriously considering devoting a percentage of their holdings to BTC, particularly if it continues breaking out to new all-time highs.

Such an eventuality is hardly out of the question. Fidelity Investments Director of Global/Macro Jurrien Timmer thinks bitcoin will hit $100,000 by 2023 while other strategists see the six-figure milestone reached by 2021’s end. In any case, bitcoin’s short-term value mightn’t be as big a driver of acceptance as general cultural sentiment. Sentiment that owes much to events such as the recent launch of the first U.S. exchange-traded bitcoin fund, which attracted a record-setting $1 billion of investor cash.

The appearance of a bitcoin ETF on the world’s biggest equities market is, of course, a major milestone as it effectively represents a seal of approval for bitcoin legitimacy and acceptance by traditional financial institutions. That doesn’t mean that an ETF is the same as individuals physically holding bitcoin, though. Futures ETFs have no bitcoin backing them and are instead better viewed as a “bet” on a potential inflation hedge. Which is why Grayscale’s global head of ETFs, Dave LaValle, says investors “should have a choice between ETFs that are futures and physical bitcoin based.”

Aside from the ETF launch and recent price action, bitcoin has benefited reputationally from the rhetoric and actions of big banks, who have either softened their stance on the asset or established their own bitcoin trading divisions. Last month, for example, U.S. Bank – the country’s fifth-largest retail bank – announced that it would offer bitcoin custody services to fund managers. Bank of New York Mellon, Northern Trust and State Street are also getting into the crypto custody business, while Goldman Sachs has started supplying its institutional trading clients with research reports from cryptocurrency data board The Block.

THREAT OF HYPERINFLATION STRENGTHENS CASE FOR BITCOIN

The consumer price index shows that prices increased 5.4% year over year in September, a near 30-year high. Forget inflation, rumors of impending hyperinflation are starting to circulate – particularly on crypto Twitter. One person that has drawn attention to the threat is Square/Twitter CEO Jack Dorsey, who tweeted “Hyperinflation is going to change everything. It’s happening.” on October 23.

Inflation fears, which have undoubtedly been exacerbated by the Federal Reserve Board’s attempts to manage the post-COVID 19 economy via eye-watering stimulus measures, generally strengthen bitcoin’s digital gold narrative. As a provably scarce asset with a fixed monetary supply, the cryptocurrency has long been touted as an inflation hedge. Last year, none other than billionaire hedge fund manager Paul Tudor Jones said bitcoin “reminds me of gold when I first got into the business in 1976.”

In June, Jones elaborated on this earlier remark, commenting: “I like bitcoin as a portfolio diversifier… The only thing that I know for certain is, I want to have 5% in gold, 5% in bitcoin, 5% in cash, 5% in commodities.”

Whether or not the inflationary chickens come home to roost is anyone’s guess. But as bitcoin continues to attain legitimacy, an institutional buyer’s market might well be upon us. Which public company will be next to follow Tesla down the rabbit hole?