After the 2008 financial crisis, money printing by central banks (in the form of quantitative easing) went from being an unthinkable emergency intervention to a bog-standard policy tool. So when the coronavirus outbreak went global in spring, the authorities simply turned on the taps again, flooding markets with money. As much as a quarter of all US dollars in existence today were printed in 2020. As a result share prices are rocketing, real estate prices are rocketing, and commodities prices are rocketing. It’s the stuff of what Austrian school economists call a “crack-up boom” – where the price of most assets soars due to the devaluation of the currency.
Michael Saylor, chief executive of US-listed Microstrategy (Nasdaq: MSTR) looked long and hard at the reaction of the Federal Reserve, the US central bank, to the crisis. He looked at his company’s balance sheet: $500m in cash. “I have a mega, mega, mega problem,” he thought. Consumer price inflation might be low. However, as Saylor puts it, “consumer goods hide the true inflation rate. Asset price inflation is through the roof. You aren’t getting inflation on YouTube and Netflix streaming videos, and candy bars manufactured by robots in factories – but on an Ivy League education, an apartment in New York, a beachfront house. If I want a bond that yields $50,000, it used to cost $1m. Now it costs $10m… My costs are going up and my cash is yielding zero. If I have $500m in cash and it’s losing 10% [a year], and I have $50m in operating income each year, we are running just to stand still.” In short, “the mega problem is this: I have a lot of cash and I’m watching it melt away.” Saylor had “a fiduciary obligation” to his shareholders to do something about it. But what?
Buying back the company’s own shares would have taken too long – four years, he reckoned, based on its trading volumes. He couldn’t find $500m of commercial property to buy at what he felt to be a fair price, given Covid-19. A basket of shares wasn’t compelling either. “Tech stocks are not the opportunity they were in 2012.” Nor is he a fan of the traditional hedges, gold and silver – “Gold peaked in the 19th century.” He wanted something that “might be cut in half, but could go up by a factor of ten”.
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Solving the asset price inflation problem
So, after getting the necessary regulatory permissions in place, Saylor bought $425m-worth of bitcoin. For 15 years, Microstrategy’s share price had traded in a range between $100 and $150. It slowly began to break higher. Then, in early December, Saylor raised another $650m via a convertible senior note (a form of debt). He put the lot into bitcoin, at an average of $22,000 per coin. In total, he spent $1.125bn buying 70,470 bitcoins, at an average of $16,000 per bitcoin. Issuing debt to buy bitcoin is a bold move. But Microstrategy’s share price went north of $600.
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Then, a fortnight ago, bitcoin had one of its vicious sell-offs. It lost $10,000 in a day – a record – sliding from $42,000 to $32,000. It rallied, then had another sharp sell-off as rumours of a “double spend” circulated. If a coin can be spent twice, the whole system breaks down – bitcoin’s technological breakthrough is that it solved the so-called problem of “double-spending”. The rumour, as so often the case with bitcoin, turned out to be false. Many were shaken by the sell-off, however. Another US company, NexTech AR Solutions, sold its entire bitcoin holding. But Microstrategy just kept buying – Saylor bought another $10m worth at $32,000.
Plenty of CEOs have large cash piles and face the same issue as Saylor. A few, such as Twitter’s Jack Dorsey, via his payments technology firm Square, have already taken the plunge into bitcoin. Many more will look at the success of Saylor’s move and the erosion of the purchasing power of their own corporate treasuries, and feel the urge to follow. Others will come under pressure from their shareholders to do so. Corporate money is steadily making its way into bitcoin, and as it does so, bitcoin’s volatility will dampen.
Saylor himself, unsurprisingly, has become the most extraordinary bitcoin cheerleader. He has set up “bitcoin for corporations”, an accelerated course aiming to teach corporate managers how to do what he did. He even piqued the interest of Tesla CEO, Elon Musk, telling him via Twitter: “If you want to do your shareholders a $100bn favour, convert the Tesla balance sheet from dollars into bitcoin. Other firms on the S&P 500 would follow your lead and in time it would grow to become a $1trn favour.” “Are such large transactions even possible?” Musk replied. “Yes. I would be happy to share my playbook with you offline – from one rocket scientist to another.” (Saylor graduated from MIT in aeronautics and astronautics.)
And it’s not just CEOs sitting on huge cash piles. UK fund management group Ruffer invested in bitcoin in November, with total exposure worth around 3% of its portfolios, reports Citywire. In the latest update from its investment trust, the Ruffer Investment Company (LSE: RICA), the group noted that: “Due to zero interest rates, the investment world is desperate for new safe havens and uncorrelated assets. We think we are... at the foothills of a long trend of institutional adoption and financialisation of bitcoin.”
It’s not too late to buy
This story is a roundabout way of making my first point. It is not too late to buy bitcoin. I looked back at my old emails and saw that I first heard about bitcoin in December 2010 – a newsletter cited an article in, of all places, PC World. It was trading for around $0.20 at that point. I didn’t pay nearly enough attention. When I then first started looking at it properly around 2011, it was doubling from a dollar to two dollars to four dollars, and my discipline would not allow me to buy something that had doubled so rapidly. It went all the way to $32, at which point it crashed back to $2.
I thought it was game over then, so I still didn’t buy. But at that point, people were trying to get me involved so I had a few that people had just given to me. (People used to give it away back then – who gives away a $35,000 asset?). I ended up writing a book about it as a form of “catch-up” trade. Yet I also remember the Winklevoss brothers (previously most famous for having a dispute with Mark Zuckerberg over the founding of Facebook) buying at $100 and thinking they were stupid. They’re multibillionaires now. I’ve been told countless stories about missing out on bitcoin, and by far the most common reason people didn’t buy is that they thought it had gone up too much. So don’t fall into the trap of thinking “it’s too late” now. It isn’t. Saylor was buying at $32,000. In so doing, he paves the way for more corporate money.
The normal phase of an investment cycle is that the experts and the well-connected big guns get in first, then the institutions. The ordinary retail investor – your proverbial shoeshine boy – is last to the party, and is the one who gets burned. Bitcoin, as an open-source project, reversed that. The riff-raff got in first. The institutional money is just coming into the sector now. As it does, bitcoin will become that bit more established. There are around 3,500 publicly-traded companies in the US alone, with more than $5trn in their treasuries. They are all suffering the bleed of zero interest rates, money printing and runaway asset price inflation. It is opening up a scenario known as “hyper bitcoin-isation”.
Demonetisation occurs when people stop using something such as money. Hyperinflation occurs when so much money is printed that the currency loses its purchasing power. It can lead to demonetisation. Hyper bitcoin-isation involves “the rapid, mass adoption of bitcoin in order to secure monetary stability and liquidity”, says researcher Daniel Krawisz from the Satoshi Nakamoto Institute. “A voluntary transition from an inferior currency to a superior one, a series of individual acts of entrepreneurship rather than a single monopolist that games the system.” In other words, more and more individuals, corporations and governments start using bitcoin as a store of wealth, rather than their national currencies. You may think such a scenario – governments using bitcoin – is absurd, but already both the Iranian and Venezuelan governments, whose national currencies are weak, have set up extensive bitcoin mining rigs.
Money for the internet
I want you to think for a moment about three things: the idea of digital, rather than physical assets; the scalability of the digital economy; and the value of networks. Over the last generation, there has been a colossal shift in our economies from tangible to intangible assets. The tangible economy has experienced growth, but it has been nothing like the growth of the intangible economy. In 1990, the three biggest companies in Silicon Valley had a total market cap of $36bn. Today, the three biggest – Facebook, Google and Apple – have a combined market cap more than 100 times higher, at around $4.2trn. Once land or grain or gold were the most valuable assets. Today the value is in intangible goods – software, brands, intellectual property, networks, unique supply chains.
The reason for this shift is scalability. Companies built around intangibles can grow faster than those based on tangible assets. If a system – Google’s search engine, for example – works, it can scale much more rapidly than anything a “physical” company can offer. A software app need only be produced and uploaded to an app store once, but it can be downloaded millions of times. Compare that with the logistics of building, selling and distributing a million widgets. With such rapid growth potential, the intangible economy attracts more investment, and so you have a virtuous cycle. It is all facilitated by the greatest intangible of the lot: the internet.
The internet is a borderless network. Bitcoin is a borderless store of wealth for this borderless network. National currencies such as the dollar, pound or euro are limited by national borders. There is a limit to how big they can grow. Bitcoin is far more scalable. By total value, it is already the 14th-largest currency in the world. Its inflation rate is transparent and set in code (because supply is limited). It cannot be printed and devalued if a politician or central banker deems it necessary. The extraordinary computer power that goes into mining equates to more than a thousand of the world’s most powerful supercomputers combined. It’s stronger, sounder, faster and more scalable than any national currency.
Google is an information network. Youtube is a video network. Facebook a social network. Amazon is a retail network. Twitter is a speech network. Bitcoin is a monetary network – its role not unlike that of gold in the global economy of the 1800s, during the gold standard era – which is why bitcoin is sometimes described as “gold 2.0”. It won’t find much use as a means of exchange for small transactions (one of the original purposes was meant to be for microtransactions) – you wouldn’t use it to buy a pint of milk. But it is hugely useful, not only as a store of wealth, but as a cross-border medium of exchange. You could, if you wanted to, send a billion dollars of value anywhere in the world. It’s as easy as pressing “copy and paste” on a word processor. It would cost just a few pennies and would happen in a few minutes. Try sending similar amounts of fiat money, let alone gold, across such a distance. A government will struggle to impose capital controls on bitcoin, let alone tax and regulate it. Since its inception, transactions worth $10trn have taken place across the network.
Everyone who owns any bitcoin is invested in this network. Bitcoin holders are determined to make the cryptocurrency work by whatever means there is available to them. Coders will work on the code; companies will develop its services and applications; and those with communication skills will talk up this open, fair and equitable monetary network. In other words, like any other social network, bitcoin improves as new members contribute their human and financial capital. It is the collective result of a plethora of individual contributions. This is one reason why critiques of bitcoin, whether verbal or technical, are absorbed, addressed and only make it stronger.
The energy question
What about bitcoin’s energy consumption? Critics note that this doesn’t fit well with the trend towards paying more attention (or lip service, depending on your cynicism) to environmental, social and governance (ESG) issues in investing. And bitcoin mining (the process by which bitcoins are produced and the network maintained) does consume huge amounts of energy. Research by Digiconomist shows energy consumption at 77.78 terawatt-hours a year, similar to the energy consumption of the Netherlands.
As a result, bitcoin mining gravitates to wherever energy is cheap. Iceland, with its geothermal energy, was a hotspot for years. Today, half of global mining takes place in Sichuan, China. Why? Hydroelectricity. During the rainy season, its electricity prices are as low as anywhere in the world. Roughly 5% of Sichuan bitcoin mining is powered by nuclear or coal – 95% is from renewables. Indeed, research by Coinshares estimates that the bitcoin network obtains 74% of its electricity from renewables. “Many renewable energy generators are poorly located and underutilised... bitcoin mining has become the only viable use for this electricity,” says strategist Tatiana Revoredo.
But does it need to consume so much? Can’t we just redesign it so it consumes less? The answer is no. Its power consumption is essential to its success. Here’s why. When the still-anonymous Satoshi Nakamoto first designed bitcoin, a key idea was that money should have a cost of production to it. If something takes effort, then it has value. If no effort goes into something, why should it have any value? Hence we have the process of bitcoin mining (see the box on page 20). Early bitcoins were easy to mine. There was not much competition, the network was small. But, as bitcoin evolved, the mining process grew more intense. The more intense the mining process, the more resilient bitcoin becomes. In effect, the blockchain is protected by a digital wall, made secure by all the energy expended securing it. It would take an equivalent amount of energy to tear it down – and as such is almost impossible to do. Bitcoin pioneer Nick Szabo calls this “unforgeable costliness”. In short, bitcoin experts see energy consumption as a feature, not a fault – it’s what makes the network so strong.
To sum up, the more governments across the world print money and the longer the currency wars and competitive devaluation continue, the more compelling apolitical money becomes. On the other side of the coin, if you will forgive the pun, the more bitcoin is adopted, the stronger the network becomes. The cost of not adopting bitcoin becomes greater than the cost of adopting it. It is an astonishing technology, not some passing fad, and its day is far from done. Its potential is so vast, that the risk lies not in owning it, but in failing to own it. I’m not saying you should sell your worldly belongings and put them all into bitcoin. But you do owe it to yourself to make an effort to understand how it works, and have at least a little in your portfolio. In the box on the facing page, I start you off with a few ideas on how to go about it.
