Video

Why are companies buying Bitcoin? | Tesla, MicroStrategy

General, Investing - February 11, 2021

Video Overview

In the past few months, several companies have bought Bitcoin. From Microstrategy, Square to Tesla. But why are so many companies buying Bitcoin with cash and putting it in their treasury. In this video, we break down why this is happening, and why more companies are likely to follow Elon Musk’s example.

This massive buying started in mid-2020, with Michael Saylor of Microstrategy. In August, the technology company announced it would buy over 21,400 Bitcoins for a quarter of a billion dollars. A month later, Square, the company behind Twitter and the CashApp said it would buy over 4,700 BTC for $50 million. This week, Tesla purchased $1.5 billion worth of Bitcoin. These companies are buying Bitcoin for cash i.e. US dollars and putting it on their balance sheet.

Why are they doing this? In March when the economy reached a standstill due to the outbreak of the virus, governments reacted by printing more dollars. This monetary and fiscal policy reduced the value of the dollars currently in the economy. This left companies that had a lot of cash on their balance sheets with a currency risk. They were essentially holding an asset that would devalue over time. So, they decided to hedge against it.

Companies hedge against all sorts of risks. For this they use financial tools called derivatives. They allow companies to lock-in the price of raw materials in the future. Airline companies do this with oil. Similarly, an agriculture company would do this with corn or wheat. What these companies are doing is hedging future risks by buying Bitcoin.

In the past, this risk was hedged by purchasing dollars. But dollars now have currency risk attached to them. Other assets like gold have a liquidity risk, in that it is difficult to easily sell the gold for liquid currency. Bitcoin, on the other hand, has technology risk.

This is the risk that comes with understanding the complex nature of Bitcoin and blockchain technology. This is why companies are buying Bitcoin. They are replacing the currency risk for the technology risk. And the dollars for cryptocurrency.

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