Square Buys Bitcoin; Part of a Larger Trend
There are several implications to Square buying $50 million worth of bitcoin. There are some similarities with the MicroStrategy situation. It’s important that we cover the events separately, then relate them to the macro trend.
Square, A Jack Dorsey Company
Jack Dorsey is a long term proponent of Bitcoin. This is glaringly obvious when you check out Jack’s Twitter profile (@jack). His twitter bio consists of a single word; Bitcoin. Square invested 1% of its cash reserves into bitcoin on October 7th, 2020. According to the investment whitepaper, their cash reserves were mostly denominated in USD. The main reason for this investment, as cited in the paper is the following.
“rapid evolution of cryptocurrency and unprecedented uncertainty from a macroeconomic and currency regime perspective” — Square Bitcoin Investment Whitepaper
This is just a fancy way of saying that countries are printing way too much money. It is not just individuals anymore that are hedging against world currency inflation with bitcoin. Companies are now forced to ask the question of whether or not a USD denominated balance sheet is sustainable in the long term. The purchase of bitcoin by Sqaure, is an answer to that question, that answer is no.
MicroStrategy, A Michael Saylor Company
CryptoVantage has covered the MicroStrategy topic twice now. The first time was in August when they bought $250 million worth of bitcoin. The second was in September when they nearly doubled down and bought another $175 million. MicroStrategy is led by Michael Saylor. What is remarkable about the MicroStrategy story is that Saylor had to convince the board members that it was a good idea to convert 85% of their balance sheet into Bitcoin. While Square converted 1% of their cash reserves, MicroStrategy basically went all in. What this means is that the CEO and board members are taking the inflation of the USD seriously. Furthermore, they unified in fighting inflation with the best tool that the free market has to offer; Bitcoin.
Individuals Influencing Millions
In both situations (Square, and MicroStrategy), two individuals caught the bitcoin bug. They got hooked on the question, “What is money?”. The reason why this question matters to these people is because they’re sitting on billions of US dollars. If the USD is to lose a non-zero amount of its purchasing power over the next decade then it is extremely relevant to consider hedging against inflation. The best way to do that is with an asset with a fixed supply. This used to be gold, and now it’s gold 2.0, AKA Bitcoin.
We want to highlight Jack Dorsey and Michael Saylor because they are individuals. Bitcoin has always started at the individual level. It was never going to get adopted by Twitter, unless individuals in positions of power and influence adopted it first. Jack and Michael both had to take significant career risks when they walked into the boardroom and suggested buying bitcoin. To do this in 2012 would be ludicrous, but now it doesn’t seem as crazy. That’s because the threat of inflation, and losing purchasing power in cash reserves is real. The only reason these companies actually went through with their suggestion, is because it made sense.
The Macro Trend
Let’s identify the macro trends as plainly as we see it. Companies are buying bitcoin. The first major instance was MicroStrategy in August 2020, the second is Square in October. For the past decade, it has largely been individuals investing in bitcoin. That and bitcoin companies like exchanges. The macro trend that we’re identifying is that the individuals that are now getting turned on, are CEO’s in command of billions of dollars.
Who will be the third, and what percent of their balance sheet will be converted? There is actually a risk to being late to the game for one simple reason; The Bitcoin Supply. There are only 21 million bitcoin, and HODLing is at an all time high. Since there is a limited supply, it is unlikely that another company could come into the bitcoin market and do what MicroStrategy just did.
The Bitcoin Supply Narrows the Window of Opportunity
On any given day, only 900 new bitcoin are entering circulation. This is down from the 1800 that were being mined before the last halvening in May 2020. Let’s put this in perspective. In total, MicroStrategy bought 38,250 bitcoin. In other words, they bought 42.5 days worth of bitcoin production. Square just bought 4,709 bitcoin, which is 5.2 days worth. As companies purchase bitcoin faster than new bitcoin can be mined, this inevitably closes the window of opportunity for people and businesses to get a hold of their own bitcoin. The more companies do this, the less supply there is for the next party. Like dominoes, companies will one by one be forced to buy bitcoin because not owning some will be more of a risk than the risk of owning it.
A Perfect Storm for Adoption
If Bitcoin has a concrete use case for big business, it is that it’s a hedge against the risk of inflation. To recap, there are at least three factors that are creating a perfect storm for adoption. The first is high profile companies such as MicroStrategy and Square have both cited their reasons for buying bitcoin is to hedge against systemic risk of inflation. The second is that bitcoin has a limited supply. The number of companies that can purchase large amounts of bitcoin is getting smaller. There is simply not enough bitcoin on the market to satisfy the demand. The third is the level of discomfort that the unprecedented amount of money printing has caused. Square has followed MicroStrategy, who will follow Square?