MicroStrategy, a Nasdaq-listed business intelligence company, made headlines this summer as the first publicly-traded company to buy Bitcoin as part of its capital allocation strategy. In an effort to avoid inflation and maximize value for shareholders, the company believes that this investment in Bitcoin will perform better over the dollar long-term. After an initial investment of $250M, the company decided to purchase more Bitcoin in the weeks that followed, leading to a cumulative total of 38,250 BTC or $425M.
This wasn’t a decision that came quickly for the company. Determining their capital allocation strategy took “months,” according to a mid-August press release. MicroStrategy’s decision was influenced by a myriad of factors affecting the global economy, many due to the COVID-19 pandemic: economic uncertainty, unprecedented levels of financial assistance from governments, and quantitative easing around the world.
Other companies shortly followed suit. In October, Square, Inc. purchased more than 4,700 bitcoins at an aggregate purchase price of $50 million. Later in the month, Mode Global Holdings PLC, a U.K-listed company, announced plans to convert around 10% of its cash reserves to Bitcoin as part of a long-term strategy to "protect investors' assets from currency debasement."
A Changing Economic Landscape
On March 15, 2020, the Federal Reserve announced the intention to carry out quantitative easing to increase the liquidity of U.S. banks. As of October 2020, the balance sheet had ballooned to 7.18 trillion U.S. dollars. While this was done to increase money supply and stimulate economic growth in light of the COVID-19 pandemic, many believe that this will ultimately make the dollar weaker and destabilize the economy.
Considering the potential for the long-term real value of fiat currencies and conventional assets to depreciate, more enterprises are seeing investment in cryptocurrency as a way to manage long-term risks to their corporate treasury program.
In the past, a lot of companies would choose to hedge against stock volatility with gold, which was traditionally thought of as a “safe haven” asset due to some of its properties. It is useful for manufacturing certain goods, and is relatively scarce; its supply can’t simply be increased in the same way a federal bank prints money.
Since 1971, when President Nixon cut ties between USD and gold as a base, it has been fairly uncorrelated to assets like currencies and stock indices. It can provide a good hedge when the stock market declines, and as more investors offload stocks and invest in gold, the price has a tendency to rise.
Bitcoin as Digital Gold
You may have heard Bitcoin referred to as “digital gold.” In reality, this is more than just a catchphrase. Bitcoin and gold share important features that undoubtedly appealed to these companies as they weighed various asset classes for potential investment.
Having been used as a currency for 2000+ years, gold has a relatively established method for trading, weighing, and tracking. Compared to other assets, it can be difficult to make fake gold or corrupt the metal. Although Bitcoin is digital, cryptography is used to secure transactions, which are public, traceable, and permanently recorded on the network.
There isn’t a clear answer as to when all the world's gold will be mined, but it is relatively rare. Similar to gold, Bitcoin is a finite resource; as of August 2020, 17 million has already been mined out of a total of 21 million.
Finally, neither gold or Bitcoin are issued by a central bank or government. This is different from fiat currencies, where central banks have the power to add or remove money from circulation and can exert economic influence via monetary policy.
Where Bitcoin Wins Over Gold
In most commodity markets, greater demand leads to higher prices, which in turn leads to greater production of the commodity and price stabilization. Bitcoin enforces a fixed supply, using Proof-of-Work (PoW) and other rules to create something that is digitally scarce. In order to avoid the market being flooded, the protocol stipulates that the amount of newly minted Bitcoin halves every four years.
Another advantage is the ability to trustlessly verify your Bitcoin. In July 2020, the gold industry was rocked after discovering that fake gold was used as collateral for loans worth 20 billion yuan. With a Bitcoin node, transactions can be verified by the user themselves or through multiple third parties.
Lastly, there is the cost of transportation. Bitcoin can be easily transferred to someone across the world in an hour for a nominal transaction fee. Transporting gold is also riskier considering that it relies on trusting multiple third-parties.
While these may stand out as the fundamental advantages of Bitcoin over gold, MicroStrategy’s CEO, Michael J. Saylor referenced numerous other factors driving their decision—Bitcoin’s global acceptance, brand recognition, network dominance, architectural resilience, and community ethos. In a recent whitepaper, Square mentioned more altruistic advantages, describing Bitcoin as “an instrument of global economic empowerment...a way for individuals around the world to participate in a global monetary system and secure their own financial future.”
Over the long term, Bitcoin could potentially have the opportunity to earn better returns and preserve the value of capital over time, much better than cash, and potentially better than gold.
While traditional companies have been slow to dive into the world of cryptocurrency, Saylor stands behind Bitcoin as a dependable store of value and an attractive investment asset. “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.” (Source)
While these enterprises are clearly confident in their strategy, it will be interesting to see if they clear the path to more widespread adoption, and whether Bitcoin will continue to rival its shiny, yellow counterpart.