Bitcoin is coming of age: make sure you own some
Bitcoin has consistently been underestimated by its critics. Yet now it’s on the verge of being adopted by institutional investors and corporations. Dominic Frisby explains why you should have a little in your portfolio.
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”.
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.
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.
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