- >MicroStrategy DeRisks their Financial Reserves with Bitcoin
MicroStrategy DeRisks their Financial Reserves with Bitcoin
First they ignore bitcoin, then they laugh at bitcoin, then they fight bitcoin, then bitcoin wins. If you’re paying attention to the world of cryptocurrency, then you get to experience this first hand. Everyone goes through these four phases at their own pace, some obviously faster than others. For those of us who adopted bitcoin in the first 5 years of its existence, we went straight to winning. Businesses and government are not as quick to jump aboard the bitcoin train. JP Morgan is an example of a company that was publicly dismissive on the topic of cryptocurrency. They now are accepting businesses that deal in bitcoin. The latest company to make waves is MicroStrategy. They just bought $250 million worth of bitcoin as their primary reserve asset. Let’s dive into why exactly this is a big deal.
Keegan Francis | Dec 9, 2020
MicroStrategy Purchase Legitimises Bitcoin
The acquisition of bitcoin from MicroStrategy, a $1.2 billion dollar NASDAQ traded company is huge. Let’s not understate the significance. MicroStrategy stock is owned by some of the biggest players in the investment space including the Vanguard Group. The acquisition totalled more than 21000 bitcoin, or .1% of the total supply. What is even more fascinating than the volume, is the reason behind the acquisition. MicroStrategy reports that the reason for the acquisition is that it is part of its “capital allocation strategy”.
This sets an amazing example for other companies exploring their options for capital allocation. Furthermore, the press alone received from such a large bitcoin purchase is bound to pay dividends. With this purchase of bitcoin, MicroStrategy has tied the valuation of their company in part to the value of bitcoin. With the meteoric rise of bitcoin not showing any signs of slowing down, MicroStrategy may get multiple boons from their investment. The first from the appreciation of bitcoin itself. The second from their own stock price traded on the NASDAQ.
Buy Bitcoin to De-Risk
The move to store bitcoin as the primary reserve asset of MicroStrategy may be part of their plan to de-risk their reserves. The job of the corporate finance department is to manage the financial risk of the company. It is therefore significant that in order to de-risk their reserves, they bought bitcoin. Bitcoin has been seen as a risky investment ever since its inception, despite its rise from pennies, to more than $10k USD. We now may be starting to see a reversal in the psychology of bitcoin. Instead of seeing bitcoin as risky, companies may begin to hold bitcoin as a hedge against other risks.
The looming uncertainty behind the geo-economic landscape has companies exploring various options. MicroStrategy explored, and ultimately pulled the trigger on one of those options. In order to protect themselves against a global or even national economic collapse, the move was to buy a self-sovereign, uncorrelated asset; Bitcoin. It’s always difficult to be the first to do something. When there is no proven path or model to duplicate, uncertainty is a risk in and of itself. Perhaps instead of looking for companies that have bought bitcoin, they took a note from the playbook of individuals.
The Bitcoin Bug Spread to Companies
Individuals have been towing the line for bitcoin since its inception. With the exception of companies operating in the bitcoin space, bitcoin has remained within its own bubble of influence. Individuals have largely proven the model of de-risking, and sound investing with bitcoin. Figures such as The Winklevoss twins, and Anthony Pompliano are adamant about the ability for bitcoin to be a proper hedge against government currency. Figures associated with the world top companies have also endorsed bitcoin. Steve Wozniak, and Bill Gates to name a few.
Until recently, it has been all but taboo to suggest that a NASDAQ traded company should derisk their reserves with bitcoin. Although now, it appears that the same ideology that is driving the aforementioned figures, has now made it into the finance department of MicroStrategy. Is there actually something to this derisking narrative?
The DeRisking Narrative
Bitcoin operates without government permission, without being limited by borders, and with a higher uptime than google. It has gone from being absolutely valueless, to $10000 USD per bitcoin in less than 10 years. Bitcoin is now the largest (albeit simply) supercomputer on earth. All attempts to stop bitcoin have been futile, and have only resulted in more free publicity for bitcoin. So exactly what is the risk of investing in bitcoin again?
These are the points made by the bitcoin army. That is, the 70 million people around the planet who hold, have held, and will continue to hold bitcoin long into the future. Trust for government based currencies have been falling almost as quickly as bitcoin has risen. People are freely and openly admitting to their lack of confidence in the system. Gold used to be the de facto method of de risking against undue currency inflation. Luckily, we have modern technology that has manifested Gold 2.0. After the US government outlawed the possession of gold in the 1930’s they made one thing clear. If there is something out there that is potentially more valuable than the US dollar, they’re willing to enact legislation to stop it.
Bring in the New World Currency
For many governments, ignoring and laughing at bitcoin is no longer working. Fighting bitcoin is an approach that has been explored by Korea, China, and India. It is an approach that will likely be explored in various novel ways by future governments. As bitcoin gains a larger foothold in the pockets and reserves of both individuals and businesses, there is little to be done about stopping it. Continuing on the narrative of de risking, how might a government de risk the disruption caused by the adoption of bitcoin as the global reserve? Perhaps by putting themselves back on the gold standard, backing their currency with gold 2.0. MicroStrategy is one of the first dominos to fall in the tsunami of companies that will explore bitcoin as a treasury reserve. Now that the path has been forged, it will not be the last.