October is a time of many surprises. On October 8, just in time, the mobile payments giant Square, which has a market capitalization of $ 86.6 billion, announced that it had invested USD 50 million and Bitcoin (BTC). Five days later, the asset manager Stone Ridge Holdings, which manages more than $ 10 billion in assets, revealed that it had purchased over 10,000 BTC, valued at about $ 114 million, as part of your cash reserve strategy.
They both followed in the footsteps of MicroStrategy, a Nasdaq-listed asset manager, which made it known last month that it had accumulated USD 425 million in Bitcoin, making BTC the main holding of its treasury reserve strategy.
Three public companies, three big purchases of BTC … it may be a mere coincidence. On the other hand, The Federal Reserve’s balance sheet has soared by $ 3 trillion since the beginning of 2019, while the US dollar has depreciated 70% against BTC, as Stone Ridge founder Ross Stevens noted in the company’s Oct. 13 press release.
BTC: The New Reserve Asset?
How do the experts explain it? The US dollar is falling, bond yields are almost non-existent, and gold is underperforming. Companies with liquidity have fewer places to put their money, which is why they are turning to cryptocurrency. “We are seeing a new trend emerge in which corporations are using Bitcoin as a reserve asset for part or most of their treasury,” stated Anthony Pompliano in his October 15 newsletter. Saifedean Ammous, economist and author of The Bitcoin Standard: The decentralized alternative to central banking, told Cointelegraph:
“Although I would have expected to see these companies take small positions more like a hedge, it speaks volumes for Bitcoin’s growing credibility that as soon as they were intrigued by the value proposition, they chose to go with a large allocation.”
“Fighting for alternative investments”
Edward Moya, a senior market analyst at Oanda – a currency trading company – told Cointelegraph that the COVID-19 pandemic has changed the macro backdrop for fiat currencies, adding: “LThe Federal Reserve, in particular, has clearly shown that an ultra-modern monetary stance will hold for a few years, and that is causing many institutional investors to scramble for alternative investments. “
Gold, the traditional refuge in times of crisis, has recently disappointed, and as a result, “Bitcoin has emerged as a favorite diversification play away from bonds, and will likely consistently attract new institutional investors. “Moya said. Ammous also added: “There is short-term concern of the devaluation of the dollar in light of increased government spending and stimulus in response to the coronavirus panic crisis.”
Paul Cappelli, portfolio manager at Galaxy Fund Management, told Cointelegraph that “a more sophisticated investor base has come to understand its value [de BTC] as a non-sovereign asset, of fixed and deflationary supply “. For his part, Lennard Neo, head of research at Stack Funds, told Cointelegraph:
“These companies probably see Bitcoin as a hedge or insurance against current market conditions. […] That these companies enter the markets opens the floodgates and establishes some kind of trust for the rest to follow. “
A long-term concern
However, the anguish caused by COVID-19 may soon subside – or so one fervently hopes. This leaves “the critical long-term problem many companies face with the diminishing returns they can get from their cash reserves by holding them in banks or treasuries”, according to Ammous. In the past, companies could keep their reserves in government bonds and be reasonably certain of exceeding the consumer price index (CPI), that is, the inflation. But today, “there seems to be a growing segment of companies that no longer reasonably expect that in the future”Ammous said.
In fact, Hidden in the Stone Ridge announcement was a call for banks and philanthropists to also make Bitcoin a main component of their treasury reserve strategies.. To do this, Stone Ridge was offering the services of its New York Digital Investment Group unit, which is licensed by the State of New York to convert dollars into cryptocurrencies and convert them back, along with custody, financing, anti-money laundering and “know your customer”.
Moya warned that BTC is still a risky asset, although that could change soon: “Both Europe and America are battling the coronavirus, and investors are expecting governments and central banks to continue to provide massive amounts of stimulus to the economy. For now, BTC remains a risky asset and its value increases mainly when risk appetite is strong. Eventually, once the dollar resumes a steady downward trend, Bitcoin and other cryptocurrencies will attract some safe-haven flows alongside gold.“.
Will Square lead the way?
Aside from what may or may not happen to corporate treasuries, Square Inc.’s investment could have reverberations. A $ 50 million investment in BTC may seem modest for a company whose market capitalization now exceeds that of Goldman Sachs, but most analysts expect crypto investment to grow.
Square has been bullish on Bitcoin for years. Its Cash App service allows users to buy and sell Bitcoin, and some analysts believe that other payment companies will have to facilitate the cryptoversion somehow, or they will risk being left behind. It has also not gone unnoticed that the younger generation, Millennials, are especially interested in cryptocurrencies like Bitcoin.
But aside from payment companies, could institutional investors and / or Fortune 500 companies follow Square’s lead as well? “Yes. This trend has moved from an ‘if it happens’ scenario to an ‘when it happens’ scenario,” according to Cappelli. Institutional investors will also have to find new ways to diversify their portfolios and maximize the return on their balance sheets. For its part, BTC has risen 50% since the beginning of the year.
But only 18.4 million BTC are currently in circulation, and supply could be a problem. “With only about 2.5 million Bitcoin to be mined, many institutional investors will look to other cryptocurrencies for better growth potential“Moya added.
Ease of access and options that meet diligence and compliance standards are also critical, Cappelli said, adding: “Institutions primarily want their investments in digital assets to look and feel like other more traditional investments in their portfolios, with everything from service providers to reporting.“It has helped the fact that in the last three years, many traditional players have entered the space” such as Fidelity, NYSE, Bloomberg, CME, Deloitte, KPMG, etc. All of them have expanded their offerings to include digital assets, and this trend is growing, “Cappelli told Cointelegraph.
This transformation will not fail for lack of infrastructure, added Neo, who applauded the institutional grade platforms that have been built by Fidelity and others. “We consider education and regulations to be one of the most significant barriers “that large companies must overcome if they want to adopt cryptocurrencies in their core businesses.
What is the size of a significant investment?
What could be considered a significant crypto investment for a large hedge fund or institutional investor? “Given the volatility and current state of the asset class, we have consistently recommended an allocation of 50 BP (basis point) at 2% for suitable investors”Cappelli replied. As Bitcoin and the broader asset class mature, that allocation could grow even further.
Moya told Cointelegraph that hedge funds and institutional investors will be more likely to have around 1% exposure to cryptocurrencies. Public corporations, for their part, “will be more interested in creating their own cryptocurrencies, but the regulatory battle that hit Facebook’s Libra project has demotivated many companies.” He added: “Eventually, a large company will take a decent-sized investment, and that should be enough to force other firms to follow suit.“.
A strictly limited supply
Reflecting on recent announcements by public companies, Ammous told Cointelegraph: “The most interesting thing to me about the MicroStrategy and Stone Ridge purchases is that they are not companies that deal with Bitcoin as part of their core business, and yet they chose to place the majority of their corporate reserves in Bitcoin, not just a small portion.“.
“We believe that Bitcoin has the potential to be a more ubiquitous currency in the future,” He said Square’s CFO Amrita Ahuja. “As adoption grows, we intend to learn and participate in a disciplined way.”
It was the vision of Satoshi Nakomoto that, In times of crisis, governments would never resist the temptation to print more money – even at the risk of degrading their currency – so the founder of Bitcoin wrote in the code of the cryptocurrency a limit of 21 million BTC. No more than that amount could be minted, and that seems to have served Bitcoin well in the time of COVID-19. As Ammous told Cointelegraph, “There seems to be growing recognition that Bitcoin’s strictly limited supply gives it a good chance to hold its value in the future.“.
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