Traditional companies know that no matter how hard they try to avoid it, ultimately, disruptive technologies will force them to change, with no possibility of return. At the same time, while the dollar has been devalued in the recent year, zero interest rates drive companies to hold their reserves in Bitcoin and cryptocurrencies. So, when you can’t fight the trend, buy into the technology to stay relevant.
Several Nasdaq-listed companies joined the trend in a speculative move. Among those are MicroStrategy, Square, PayPal, and CleanSpark. Allegedly, some might argue that these companies come from the digital payments industry, or have just disrupted their industries. However, it is well-known that the fear of future innovation brings companies to make creative, self-preserving moves. For instance, MicroStrategy, Michael Saylor’s software company, which some analysts treat as a Bitcoin holding company, has recently raised $650M from the bond market at 0.75% interest to purchase Bitcoin as part of its treasury management strategy.
So what are the reasons for choosing Bitcoin over the alternative assets? The answer lies in demand and supply. They fear upcoming inflation when Bitcoin is seen as the new gold of the 4th industrial revolution. Over $30 billion in Bitcoin is now held by companies, instead of traditional reserves, such as cash and shares.
Grayscale Bitcoin Trust (GBTC) owns well over 500,000 Bitcoins (worth over $18 billion) and MicroStrategy itself is now holding over 70,000 Bitcoins, bought for around $1.1 billion, and worth over $2.5 Billion at current market prices (January 2021).
To grasp the demand for Bitcoin by the investors, let’s look at the P\E ratios. Nasdaq P\E nears its all time high, while mainstream companies get a much lower P\E ratio. When traditional firms can’t find a way to innovate, they choose creative ways to ride the trend.
Bitcoin holding companies are being sought after by capital market demands
The Bitcoin companies benefit twice: firstly, they offer an opportunity for institutional investors to invest in Bitcoin through the traditional stock market. In this way, they’ve found the way to one of the biggest money markets in the world. Secondly, mutual funds and other money managers are eager for the opportunity to invest in the blockchain industry, while in the beginning of 2020, there weren’t any options available in the stock market. So why wouldn’t institutional money managers buy cryptocurrencies directly? They don’t want to deal with complicated transactions and try to avoid security issues related to Bitcoin ownership. Hackers can’t steal stocks, but cryptocurrency crimes do happen.
Companies seeking Bitcoin as a hedge against inflation and disruption fuel a growing Bitcoin shortage problem. Since the Bitcoin creation is restricted to the complicated mining formula (only 900 new Bitcoins are mined every day), a substantial demand by the capital markets drives the prices higher. It is estimated that 14-15 Million Bitcoins have either been lost or are being held as a reserved asset. Thus, the number of traded bitcoins (approx 4 Million) is limited by the new demand source who is also looking to HODL (hold for the long run) .
The narrative of high demand led by public companies finds its way to the social media and money markets. Others speculate that growing demand for Bitcoin will persist and decide to hold Bitcoins for the same reasons.
When the amount of printed dollars is increasing from one crisis to the next (more than $3 trillion has been created in 2020 alone, which means that almost 20 percent of all existing USD has been created last year) and disruptive powers threaten these companies, the alternative of doing nothing is just too risky and too expensive.
Written by Liron Rose, a serial entrepreneur, venture capitalist, and has advised tech companies for the past 20 years.