Bitcoin moves closer to Main St.
The recent explosion in Bitcoin price reflects a new wave of buying from institutional investors, demarcating a new era in adoption. We don't know, and can't say, when it will end, but one thing is clear - the trends are pointing in the right direction to further legitimise Bitcoin, and cryptocurrencies in general, as an investable asset class.
Why Are Publicly Listed Companies Buying Bitcoin?
Just a few years ago, institutional heavyweights were quick to decry bitcoin, with some referring to the emerging market as… insert your negative adjective of choice here...
Now, times have changed, with the perspective provided by a tumultuous 2020 bringing about a reorientation. Businesses, including publicly listed companies, aren’t just bigging up bitcoin - they’re buying it.
Becoming a new asset class
Bitcoin, and by extension other cryptocurrencies, consistently has the lowest correlation to traditional asset classes over time, providing a rare opportunity for investors with existing bond and equity portfolios. By reallocating a percentage of these holdings to bitcoin, with its low correlation and superior performance, the volatility of the portfolio as a whole should decrease while increasing absolute returns at the same time.
Based on Bitcoin’s unique investability, use cases, uncorrelated price, and asymmetric risk profile, it is establishing itself as the first new asset class of the century.
Here’s just one illuminating corporate case study:
The business intelligence company MicroStrategy - and its CEO Michael Saylor - hit the headlines in the summer following the announcement that it was adopting bitcoin as its primary treasury reserve asset, replacing USD. The move saw the Nasdaq-listed (MSTR) firm buy up 38,250 BTC for $425 million between August and September. A third bitcoin purchase was announced in December, when the company bought another 2,574 bitcoins for $50 million in cash, bringing its holding to 40,824 BTC.
Commenting on the initial announcement, Saylor said all the right things in Bitcoin’s favour. That it was “part of our new capital allocation strategy” to “maximise long-term value for our shareholders”... That the investment reflects “our belief that bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash.”
He called the granddaddy of cryptocurrency a “significant addition to the global financial system, with characteristics that are useful to both individuals and institutions”, and that MicroStrategy “has recognised bitcoin as a legitimate investment asset that can be superior to cash and accordingly has made bitcoin the principal holding in its treasury reserve strategy.”
MicroStrategy’s increasingly emboldened stance, perhaps spurred on by its 170% share growth since it adopted bitcoin as its treasury reserve asset, has now led to a planned debt offering, raising cash to buy more bitcoin. In this latest announcement, MicroStrategy confirmed it anticipates selling $550 million in unsecured convertible senior notes, paying out 0.75% annual interest to qualified institutional buyers. The offering has already been significantly marked up from the $400 million targeted in its original announcement.
This latest move saw a Citi analyst downgrade MSTR to “sell”, arguing that the focus on bitcoin was distracting the company from executing its business model. The positive stance has certainly raised eyebrows, but the increase in the value of its bitcoin holdings - which has nearly doubled since being acquired - alongside MicroStrategy’s significant stock growth, cannot help but increase institutional awareness of the benefits associated with the asset class.
That reality seemed to kick Square into action. Despite already offering bitcoin services through its Cash App platform, the payments company run by Twitter CEO Jack Dorsey then announced it had purchased 4,709 bitcoins for itself, representing 1% of the firm’s total assets, or around $50 million.
Square is not alone, with several other companies adding to their bitcoin treasuries following MicroStrategy’s bold positioning.
While Cash App’s bitcoin services have proved to be a major revenue driver for its parent company, crypto has not escaped the attention of other payment processors too.
Heads turned when payments giant PayPal became the latest institution to launch crypto services to US customers among its total 346 million users. In partnership with crypto startup Paxos, it allows users to buy, hold, and sell cryptocurrency directly from their PayPal account and use it as a funding source for purchases at 26 million merchants worldwide. It also went further by announcing the expansion of the service to its Venmo platform and additional international markets from 2021.
Building on a previous partnership with BitPay, leading e-commerce platform Shopify also added support for payments in 1,800 cryptocurrencies for its merchant network, following a new deal with the service provider CoinPayments.
And it seems that no one can avoid the inevitability of exploring the crypto space - least of all the heavyweights which in any industry are often prone to inertia or moving late, or at least too slowly. Previous detractors Visa and Mastercard have also became more positive on the space recently, announcing partnerships with Bitcoin Lightning Network startup Zap and a crypto card partner programme, respectively.
In perhaps the most surprising institutional move into bitcoin to date, the latest development saw one of the largest and longest established insurance companies, MassMutual, announce it had allocated $100 million in bitcoin for its general investment fund. MassMutual commented that “We see this initial investment as a first step, and like any investment, may explore future opportunities.”
The funds in an insurance company’s general account are usually invested in conservative low-risk assets, as they pay out policyholder claims. With a bitcoin investment, MassMutual has signalled to the wider industry that it considers bitcoin safe and liquid enough to make an allocation.
While the position represents just 0.04% of a $235 billion fund, it is still one of the biggest stamps of approval possible and indicative of a realisation that in a world where yields are trending towards zero, it now seems too risky not to own bitcoin.
It did not stop there either. Perhaps recognising what its move would signal, along with the macro trend, it also acquired a $5 million stake in the company that will provide custody services for its bitcoins, NYDIG, a subsidiary of Stone Ridge.
What Comes Next?
In the short to medium term, we are likely to see more of the same. Establishing positions in this new asset class takes time, from an educational to custodial and regulatory perspective.
The genie is out of the bottle
However, the genie is out of the bottle and it is unimaginable at this point that more venture capital will not invest in the space, more financial instruments will not develop, more funds will not allocate to it, more banks and professional service companies will not offer crypto services, more companies will not start adding it to their corporate treasury, more payment processors will not support it, and more industries like insurance will not make use of it.
Longer-term, things get even more interesting.
Pension funds have been slow to invest in crypto, understandably so given their necessarily conservative approach.
Two pension funds in Virginia are known to have joined a $40 million investment in the Morgan Creek Blockchain Opportunities Fund. In addition to backing some of the best-known startups in the space, the fund will invest in cryptocurrency directly.
Further adoption among pension funds will not be easy, but again, given that yields are trending toward zero, the need for an inflation hedge, and a lack of opportunity elsewhere, at least a small allocation makes sense, especially given the asymmetric returns of an asset like bitcoin. Indeed, a recent investment report from Evertas suggests that over a quarter of institutional investors expect pension funds, among others, to increase their level of investment in cryptocurrencies over the next five years.
Allocations in other conservative fields like insurance will likely boost confidence that it has sufficient maturity. Once some start allocating even a small percentage, others will be under pressure to do the same, bringing in substantial capital.
Though bitcoin and crypto-based ETF-like products have already launched in parts of Europe and Canada, a bitcoin ETF in the US has thus far proved elusive. Attempts by the Winklevoss Bitcoin Trust, Van Eck, Wilshire Phoenix, and others, have all been rejected by the top financial market regulator, the Securities and Exchange Commission.
As institutional infrastructure continues to build, and concerns surrounding market manipulation, market size and surveillance become addressed, the chances of an ETF application approval grows stronger, at which point institutional investors will pay further attention.
States and Nation states
In one of the more unlikely forms of adoption, some US states have allowed, or are considering allowing bitcoin use as payment for taxes, including Ohio and Georgia. Understandably, there has not been much uptake, and states would convert to fiat rather than hold the assets in any case, but it is another indication of acceptance at an institutional level.
In other parts of the world, countries like Venezuela and Turkey have ramped up their use of crypto to evade US sanctions and facilitate trade with other nations. In Iran, a revised crypto law requires bitcoin miners to sell bitcoin directly to its central bank to obtain a license. As a result, Iran is custodying bitcoin funds, using them for imports, and potentially building up a reserve. In Kazakhstan, the government is actively trying to attract investment in its booming (to clarify, crypto) mining industry, which it claims accounts for 6% of global crypto mining, taking advantage of its relatively cheap oil-based power.
At present, nation-state adoption is confined to developing countries. However, as wider adoption takes hold and the benefits become more apparent, sovereign funds in wealthier countries may start to allocate too. Indeed, the Norwegian fund already has indirect BTC exposure considering its investments in MicroStrategy and other global stocks. At that point, the cat is well and truly out of the bag, and a global race to allocate funds before competing nations likely ensues.
Overcoming remaining challenges
There are still many challenges to overcome to achieve full institutional acceptance, most notably in the form of regulatory clarity, proposed disruptive legislation, and the impact of Central Bank Digital Currencies.
Ultimately, institutions will need to adapt and embrace this new world to benefit from it. In the meantime, the continued developments in the space are all signs of the road to mainstream adoption.