Why are companies buying Bitcoin? No, they aren’t shorting it.
It seems like everyone’s buying Bitcoin. Since May, Bitcoin is up by over 350%, and financial companies have purchased over $1 billion in the cryptocurrency. You must be thinking, why are so many companies buying Bitcoin, and should I? Keep reading to find out the answers to both of your questions.
Bitcoin as a macro hedge
You may remember MicroStrategy from the dot com bubble. The business intelligence company’s stock (NASDAQ: MSTR) rose by over 2,000% between August 1999 to March 2000. At its peak, it was over $3,000.
In August 2020, MicroStrategy, trading below $150, announced it would buy over 21,400 Bitcoin for $250 million. This was part of its “new capital allocation strategy” said Michael Saylor, CEO of the company. A month later, it bought over 16,700 additional Bitcoin for $175 million. Then in December, Microstrategy bought a further 29,600 Bitcoin for $650 million.
The publicly-traded company bought over 70,400 BTC for $1.2 billion (an average of $15,900 per coin). At the time of writing, the investment is worth $2.5 billion, and its stock is trading over $500.
But why did MicroStrategy make this bet? It all started in July when MicroStrategy told stockholders that it would change its capital allocation strategy in line with “maximizing value for its stockholders.”
Since the pandemic began, the economic cycle came to a standstill. In order to stimulate the economy, the US government and its central bank, the Federal Reserve, began to print more US dollars. These extra dollars were pushed into the economy either via banks (through a process called quantitative easing), by making loans cheaper and decreasing the incentive to put money in a bank account (cutting interest rates), and directly giving people money (stimulus checks). Because more dollars were supplied into the economy, the value of each dollar decreased.
To put into perspective how many dollars were printed consider this – 22% of all dollars ever printed were printed in 2020. So, with that much new currency in circulation, the only inevitable result could be inflation. Saylor himself said Bitcoin is “not only a reasonable hedge against inflation but also the prospect of earning a higher return than other investments.”
Why did MicroStrategy buy so much Bitcoin? Because it had a ton of cash. In July, MicroStrategy was sitting on $500 million in cash. It didn’t want its dollars to devalue due to inflation, and that’s why it invested in an asset that could retain its value. This is the first reason why companies buy Bitcoin – as a store of value.
Bitcoin as an individual hedge
It isn’t just companies that are buying up BTC as a hedge against inflation, billionaire investors are also going long on the cryprocurrency, and short on the US dollar.
In May 2020, two months after Bitcoin’s worst crash in seven years, Paul Tudor Jones, the billionaire hedge fund manager said he was bullish on Bitcoin. His hedge fund Tudor Investment Corp’s global fund Tudor BVI Global, with close to $20 billion in assets under management (AUM), allocated a fraction to the cryptocurrency. His thesis for this multi-million dollar Bitcoin purchase,
“The best profit-maximizing strategy is to own the fastest horse. If I am forced to forecast, my bet is it will be Bitcoin.”
Jones’ fund bought BTC as it hovered over $9,000. His investment as a hedge against the dollar is already up by 270%.
Stanley Druckenmiller, another hedge fund manager bought Bitcoin last year as the supply of US dollars increased. Like Jones and Saylor’s MicroStrategy, Druckenmiller put his weight behind Bitcoin’s store of value claim. He added that the Bitcoin bet against inflation is stronger than the gold bet. Druckenmiller said,
“If the gold bet works, the bitcoin bet will probably work better because it’s thinner, more illiquid, and has a lot more beta to it.”
The liquidity Druckenmiller refers to here is the ability to store Bitcoin on a digital wallet, sell it quicker and with less hassle than gold. He also touches on Bitcoin’s volatility in reference to the larger financial market. Even though the cryptocurrency is highly volatile, its market (measured by the market capitalization) is less than 10% gold’s market.
Even value investors see the cryptocurrency trading below its intrinsic value. Bill Miller of Miller Value Funds, who got into the crypto market as early as 2014, said the cryptocurrency will benefit from the actions of the Federal Reserve. The central bank’s policy will decrease the value of cash in real terms, and assets retaining their value will rise. In this cycle, Bitcoin will benefit more than gold as a hedge against inflation.
Rebutting the famous “rat poison” statement of legendary value investor Warren Buffett, Miller said, “Bitcoin could be rat poison, and the rat could be cash.”
Medium of exchange
In February 2020, Twitter added the BTC emoji. But that’s nothing compared to Twitter CEO Jack Dorsey’s love affair with the cryptocurrency. He’s long been a Bitcoin bull, stating publicly that he buys $10,000 of Bitcoin every week, maxing out the limit on Cash App.
In October, a month after MicroStrategy’s second purchase, Square (NASDAQ: SQ) bought 4,709 BTC, for $50 million. This was 1% of the company’s total assets at the end of the second quarter of 2020. Both Twitter (NASDAQ: TWTR) and Cash App are owned by Square.
However, Square’s reasoning was different from MicroStrategy’s. It went down the “currency” route. Square is the camp of Bitcoin as the ubiquitous currency of the future. Dorsey has been an advocate of ‘Bitcoin as currency’ for years. In 2018, he said that the cryptocurrency has the potential to be the native currency of the internet. He predicted that Bitcoin would achieve this within a decade.
Square’s approach, driven by Jack Dorsey, is based on use. This is unlike MicroStrategy’s approach, which is a hedge based on investment, not use. Square wants to use it as a currency, specifically for payments, within the CashApp. This is the second reason why companies buy Bitcoin – as a medium of exchange.
Store of value
Bitcoin is seen as two things – either as a store of value or as a medium of exchange. Very few see it as a pure investment. One such company is Grayscale, the company behind the Grayscale Bitcoin Trust (GBTC), the world’s largest crypto fund. The Financial Industry Regulatory Authority (FINRA) approved Grayscale’s prime fund – the GBTC is publicly traded on an over-the-counter (OTC) basis. Its price is directly correlated to Bitcoin’s but trades at a premium to the crypto because of the buying pressure by institutions.
The asset management company (AMC) manages 10 cryptocurrency funds, including individual coin based funds for – BCH, Ethereum, Ethereum Classic, Litecoin, Stellar Lumens, XRP, Zcash, Horizen, and a large-cap fund. However, GBTC accounts for over 80% of its AUM.
At the end of 2019, all of Grayscale’s funds had a total AUM of $2.6 billion. Its AUM at the end of 2020 was $19 billion. This 7x growth wasn’t only because Bitcoin’s price rose, but also its prospect as an investment. In 2020, Grayscale bought, on average, over 2,500 Bitcoins per week. The average BTC purchases increased during two periods – after the halving (in May 2020) and when it broke the all-time high price of $20,000 (December 2020).
Source: The Block
In December, Grayscale announced it would temporarily stop accepting deposits in all of its funds. Due to the price rally, GBTC, in addition to the other crypto funds, was oversubscribed. This means that Grayscale received more bids than they had Bitcoins. Each GBTC share is roughly equal to 0.001 BTC. So, if Grayscale has an insufficient amount of Bitcoin, they can’t give out new shares.
In order to keep up with the inflows of dollars for Bitcoin, Grayscale purchased over 14,000 Bitcoin worth over $280 million. This puts their total Bitcoin holdings at over 570,000 BTC. Grayscale holds 3% of all Bitcoin that will ever be mined. This is the third reason why companies buy Bitcoin – as an investment.
Bitcoin as all three
Some see it as a hedge against inflation and economic uncertainty and are adopting it as a store of value. Some see it as a currency to be used natively on the internet, adopting it as a medium of exchange. Others see it as a valuable investment in and of itself, either to use as a hedge or as a currency. None of these three categories have a collective agreeable thesis on why they hodl Bitcoin. But they have one thing in common, they aren’t shorting it.
That’s why companies are buying Bitcoin, and by the looks of it their bet is paying off. But should you buy Bitcoin? That’s something only you can answer. But first, you may want to know why Bitcoin has value in the first place, or are you too late to the Bitcoin bull run?