When a publicly owned company decides to invest about $250 million in an asset that was widely attacked more than a decade ago, it says a lot about how the world has changed. The reasons and the timing of Microstrategy’s bitcoin incursion could not have come at a better time for the company’s investors.
The constant reminders about the waning fortunes of the U.S. dollar on one hand and the growing recognition of bitcoin, on the other hand, all tell the story of a changing world.
Changing Environment
To illustrate, it has been reported that the U.S. Federal Reserve has printed more money in two months than it had done in more than four decades. Such an unprecedented feat means it cannot be business as usual. There has to be a response to this new normal.
Similarly, the story of the Office of the Comptroller of the Currency (OCC), giving the green light for Banks to offer cryptocurrency custody services, is another important signal. It is a signal that reinforces the notion that the world has changed and that businesses need to embrace this. The OCC’s pro-fintech chief currency comptroller, Brian Brooks, elucidates this point in a recent interview.
Elsewhere, a U.S. Court had ruled that bitcoin is a form of money. The implications of such a ruling are potentially far-reaching.
While such signals might make it seem obvious that companies need to invest in bitcoin, it appears a much larger catalyst was needed to kick things off. Unfortunately, it had to take something on the scale of Covid-19 to jolt companies into action. The rapid spread of the virus set off a chain of extraordinary events which ultimately led to global financial markets crashing.
The inevitable (if not alarming) response by governments around the world added a new sense of urgency to the issue of embracing cryptocurrencies. Whether it is the stimulus check or any other appropriately named welfare scheme, the response by governments has been unprecedented. Such interventions extinguished any hopes that the era of unbridled money creation ended with the 2008/9 financial crisis.
Meanwhile, before governments intervened by pumping money, the collapse of markets in March had alarmed investors. The carnage that saw stock markets like the NYSE suspending trades several times in a short space of time, showed just how vulnerable financial markets are.
Bitcoin a Better Inflation Hedge
While bitcoin initially crashed alongside global financial markets, it did recover and quite quickly too. Those buying the digital asset realised it had a better chance of protecting funds against the inevitable inflation than fiat assets.
The unprecedented largesse by the US government is certain to cause inflation and value dilution. Hence something else is needed to act as a hedge and for Microstrategy that something is bitcoin.
There is no doubt that government aid in times like these is well-intentioned as George Ball, the former CEO at Prudential Financial remarked in an interview. However, the negative effects of such generosity–which seem to have no limits–will outweigh the positives in the medium to long term.
Irrespective of the circumstances that justified the decision, any addition of new money to that which is already in circulation, is inflationary. Ball, a former bitcoin basher, knows this and that why he is now encouraging investors to invest in bitcoin.
Already, usual inflation indicators like the price of gold shows it is growing. Many now expect the safe-haven commodity which has already touched new all-time highs to continue with this streak.
Why Now?
Similarly, many people like executives at Microstrategy also believe that bitcoin, just like gold, can protect wealth from bad economic policies. Their faith is premised on the fact that just like gold, bitcoin has a finite supply. Furthermore, the process of extracting or adding more bitcoin into circulation cannot be manipulated.
Although gold cannot be counterfeited, in the past, some have tried and even had some success before their luck ran out. With bitcoin, so far that possibility is almost zero. The technologies behind bitcoin require massive resources for anyone to have that chance.
So after more than ten years of proving itself, bitcoin is now likened to a digital version of gold. It is this designation that prompts interest from unusual suitors like Microstrategy, the Nasdaq listed billion-dollar business intelligence firm.
It, therefore, stands to reason, that when Microstrategy announced the acquisition of bitcoins worth $250 million, it had a clear plan. The plan is to maximize the long term value of its shareholders.
There will be risks involved yes but to Microstrategy, these pale into insignificance when compared with risks that are now associated with investing or storing wealth in fiat asset form only.
Or as aptly put by the Microstrategy CEO, Michael J. Saylor, “bitcoin is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash.”Bitcoin is such a unique asset that allows corporations to limit exposure to fiat-based financial assets.
The Future of Bitcoin Price
Another interesting fact about Microstrategy’s purchase of bitcoin is the effect this has on the digital asset’s supply on the market. As Mike Novogratz, a bitcoin bull noted during a conference call with analysts in August, Microstrategy’s purchase of bitcoin reduces supply.
Reduced supply means speculators’ will have less influence on bitcoin prices going forward. This helps to reduce bitcoin’s price volatility, a key concern for many potential investors.
With growing evidence that more institutional investors in the mold of Microstrategy, are acquiring the digital asset, it means less and less bitcoin will be available on the market. The law of supply and demand dictates that the price will have to go up.
It is interesting that at this point, some might see Microstrategy’s decision to invest in bitcoin as a gamble but in a few years, those looking back will say this was a no brainer! Bitcoin is going mainstream and those from Mainstreet that go in early will enjoy the first-mover advantage.
Microstrategy maybe the first but many more corporations will follow and invest in bitcoin and their shareholders will fare better in the post-Covid-19 era.
What are your thoughts about Microstrategy’s bitcoin investment? Tell us what you think in the comments section below.
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