October is a time for surprises. On Oct. 8, right on cue, mobile payments giant Square, which boasts a market cap of $86.6 billion, announced that it had invested $50 million in Bitcoin (BTC). Five days later, asset manager Stone Ridge Holdings, which manages over $10 billion in assets, disclosed that it had purchased more than 10,000 BTC, worth around $114 million, as part of its treasury reserve strategy.
They both followed MicroStrategy, a Nasdaq-listed asset manager, which made known last month that it had accumulated $425 million in Bitcoin, making BTC the principal holding in its treasury reserve strategy.
Three publicly owned companies, three big BTC purchases — it may be mere coincidence. On the other hand, the Federal Reserve’s balance sheet has ballooned by $3 trillion since the beginning of 2019, while the U.S. dollar has depreciated 70% against BTC — as Stone Ridge founder Ross Stevens noted in the firm’s Oct. 13 press release.
BTC: The new reserve asset?
How do the cognoscenti explain it? The U.S. dollar is falling; bond yields are almost non-existent; and gold is underperforming. Liquidity-flush firms have fewer places to put their cash — so they are turning to cryptocurrency. “We are seeing a new trend emerge where corporations are using Bitcoin as a reserve asset for part or majority of their treasury,” pronounced Anthony Pompliano in his Oct. 15 newsletter. Saifedean Ammous, economist and author of The Bitcoin Standard: The Decentralized Alternative to Central Banking, told Cointelegraph:
“While I would have expected to see such firms take small positions more as a hedge, it speaks volume to the growing credibility of Bitcoin that as soon as they became intrigued by the value proposition, they chose to go with a large allocation.”
“Scrambling for alternative investments”
Edward Moya, a senior market analyst at Oanda — a forex trading company — told Cointelegraph that the COVID-19 pandemic has changed the macro backdrop for fiat currencies, adding: “The Fed, in particular, has clearly signaled an ultra-accommodative monetary stance will remain in place for a few years, and that is making many institutional investors scramble for alternative investments.”
Gold, the traditional safe haven in crisis times, has disappointed recently, and as a result, “Bitcoin has emerged as a favorite diversification play away from bonds and will likely steadily attract new institutional investors,” said Moya. Ammous further added: “There is the short-term concern about devaluation of the dollar in light of the increased amount of government spending and stimulus in response to the corona panic crisis.”
Paul Cappelli, a portfolio manager at Galaxy Fund Management, told Cointelegraph that “a more sophisticated investor base has come to understand its [BTC’s] value as a non-sovereign, fixed supply, deflationary asset.” Meanwhile, Lennard Neo, head of research at Stack Funds, commented to Cointelegraph:
“These firms probably see Bitcoin as a hedge or insurance against current market conditions. [...] With these companies entering the markets, it opens the floodgates and establishes some form of confidence for the rest to follow.”
A longer-term worry
But COVID-19 distress may soon abate, or so one fervently hopes. This leaves “the longer-term critical problem faced by many companies with the diminishing yield they can get on their cash reserves by holding them in banks or treasury bonds,” according to Ammous. In the past, companies could hold their reserves in government bonds and be reasonably sure of outperforming the consumer price index (CPI) — i.e., inflation. But today, “there seems to be a growing segment of companies that no longer reasonably expect that into the future,” said Ammous.
Indeed, buried within Stone Ridge’s announcement was a call to banks and philanthropies to likewise make Bitcoin a principal component of their treasury reserve strategies. To that end, Stone Ridge was offering up the services of its New York Digital Investment Group unit, which holds a license from New York State to convert dollars into crypto and back again, along with core custody, financing, and Anti-Money Laundering and Know Your Customer capabilities.
Moya cautioned that BTC remains a risky asset, though that could soon change: “Both Europe and America are struggling with the coronavirus, and investors are widely expecting governments and central banks to continue providing massive amounts of stimulus into the economy. BTC for now remains a risky asset and primarily increases in value when risk appetite is strong. Eventually, once the dollar resumes a steady downward trend, Bitcoin and other cryptos will attract some safe-haven flows alongside gold.”
Will Square lead the way?
Apart from what may or not happen with corporate treasuries, the Square Inc. investment could have reverberations. A $50-million investment in BTC may seem modest for a firm whose market capitalization now surpasses Goldman Sachs’, but most analysts expect that crypto investment will grow.
Square has been bullish on Bitcoin for some years now. Its Cash App service enables users to buy and sell Bitcoin, and some analysts believe other payment firms will now have to facilitate crypto investment in some form — or risk being left behind. It hasn’t escaped notice, either, that the younger generation, the Millennials, are especially keen on cryptocurrencies such as Bitcoin.
But apart from payment firms, could institutional investors and/or Fortune 500 companies follow Square’s lead as well? “Yes. This trend has moved from an ‘if’ scenario to a ‘when’ scenario,” according to Cappelli. Institutional investors, too, will have to find new ways to diversify their portfolios and maximize balance sheet returns. Meanwhile, BTC has risen 50% since the beginning of the year.
But only 18.4 million BTC are now in circulation, and supply could be a problem. “With only roughly 2.5 million Bitcoin left to be mined, many institutional investors will look at other cryptocurrencies for better upside potential,” added Moya.
Ease of access and options that meet diligence and compliance standards are also critical, said Cappelli, adding: “Institutions mainly want their digital asset investments to look and feel like other more traditional investments in their portfolio with everything from service providers to reporting.” It’s helped that over the past three years, many traditional players have entered the space “like Fidelity, NYSE, Bloomberg, the CME, Deloitte, KPMG, etc. They’ve all expanded their offerings to include digital assets and this trend is growing,” Cappelli told Cointelegraph.
This transformation won’t fail for lack of infrastructure, added Neo, who applauded the institutional-grade platforms that have been built by Fidelity and others. “We view education and regulations as among the most significant barriers” that large firms must overcome if they are to adopt crypto into their core businesses.
What is a significant investment size?
What could be considered a significant crypto investment for a large hedge fund or institutional investor? “Given the volatility and where the asset class stands today, we have consistently recommended a 50 BP (basis point)-to-2% allocation for suitable investors,” answered Cappelli. As Bitcoin and the overall asset class matures, that allocation could grow further.
Moya told Cointelegraph that hedge funds and institutional investors will be more likely to have around 1% exposure to cryptocurrencies. Publicly held corporations, for their part, “will be more interested in creating their own cryptocurrencies, but the regulatory battle that hit Facebook’s Libra project has demotivated many companies.” He added: “Eventually, a large company will take a decent-sized investment, and that should be enough to force other firms to follow suit.”
A strictly limited supply
Reflecting on the recent public-firm announcements, Ammous told Cointelegraph: “What was most interesting for me about the MicroStrategy and Stone Ridge purchases is that these are not companies that deal with Bitcoin as part of their core business, and yet they chose to place the majority of their corporate reserves in Bitcoin, not just a small fraction.”
“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.”
It was Satoshi Nakomoto’s vision that in times of crisis, governments would never resist the temptation to print more money — even at the risk of debasing their currency — so Bitcoin’s founder wrote into the cryptocurrency’s code a 21-million BTC limit. No more than that could ever be minted, and that appears to have served Bitcoin well in the time of COVID-19. As Ammous told Cointelegraph, “There seems to be a growing recognition that the strictly limited supply of Bitcoin gives it a good chance at maintaining its value well into the future.”