MicroStrategy Buying Bitcoin Shows Institutional Investors Seek to De-Risk

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Wall Street firms are waking up to the prospect of holding Bitcoin as a hedge against uncertainties in the mainstream equities market.

Bitcoin (BTC) adoption by big-money players is once again on the agenda following the recent $250 million BTC purchase by MicroStrategy. Industry commentators have also stated that corporations plugging into Bitcoin will provide prominent tailwinds to push BTC valuation to new heights.

With the coronavirus pandemic adversely impacting economies around the globe, investors appear to be looking toward safe haven assets. Indeed, the attention on both BTC and gold is causing a significant coupling of their respective price actions, given that central banks continue to pursue aggressive quantitative easing. With a firm like MicroStrategy hedging with Bitcoin, it appears this pivot might now spread to Wall Street.

Reports of the Trump administration looking to delay the collection of Social Security payroll taxes are also ringing alarm bells in the United States. The likely outcome of this executive order is more money being printed to fund the country’s social security, which consequently means further U.S. dollar debasement.

Well-established retail adoption

Since the start of 2020, the number of addresses holding 0.01 BTC and 0.1 BTC has been climbing steadily, while data from market intelligence platform Glassnode claims the number of “wholecoiners” — wallets with at least 1 BTC — has also increased in 2020, all highlighting a consistent culture of “stacking sats” by various groups of investors. 

When the U.S. government sent stimulus payments to the public in April, Coinbase reported a spike in BTC purchase sums to the tune of $1,200 — the exact amount in the checks. The Bitcoin bought with $1,200 at the time is now worth over $1,600, resulting in gains made by BTC over a weakening USD during the period. Even when Bitcoin dipped to $3,800 during the “Black Thursday” market crash, exchanges reported an uptick in retail BTC buying

Platforms like Square’s CashApp are even taking advantage of the stacking sats culture, with features aimed at automating periodic micro BTC purchases. Studies show that dollar-cost averaging — the practice of dividing total investment across fixed intervals — assures positive returns for Bitcoin investors, irrespective of volatile price action. Thus, the events of 2020 so far suggest that Bitcoin is being viewed as a viable safe-haven asset. 

MicroStrategy buys $250 million in Bitcoin

On Aug. 11, MicroStrategy — the world’s largest business intelligence firm — purchased 21,454 BTC, valued at $250 million. The move saw MicroStrategy swapping cash for BTC as its treasury reserve asset in what industry commentators say could be a watershed event for Bitcoin institutional adoption. MicroStrategy CEO Michael Saylor echoed the sentiments espoused by many BTC proponents, stating in a press release: “Bitcoin is digital gold — harder, stronger, faster, and smarter than any money that has preceded it.”

Saylor’s comments offer a snapshot of how Bitcoin’s perception on Wall Street appears to be changing. Back in December 2013, when one BTC was worth $520, the MicroStrategy CEO was not sold on its value proposition: 

Indeed, 2020 has seen Wall Street figures taking a significant interest in Bitcoin. Billionaire hedge fund investor Paul Tudor Jones revealed back in May that 1% of his total assets in BTC are a hedge against inflation, tipping Bitcoin to become the de-facto leader in the emerging global financial landscape. Despite dismissing BTC as an investment asset earlier in the year, Goldman Sachs is reportedly looking into client requests for cryptocurrencies in another 180-degree turn.

Brian Kerr, CEO of DeFi banking service Kava Labs, told Cointelegraph that businesses now more than ever need robust risk-management planning: “It’s the job of every corporate’s finance department to manage risk.” He added, “It’s a bit irresponsible of treasury departments if they are not considering Bitcoin to hedge risks of their assets.” Konstantin Anissimov, CEO of crypto exchange platform CEX.IO, highlighted to Cointelegraph the implications of a listed company investing in Bitcoin:

“What is really important here is that a listed company with strict requirements for financial diligence to the shareholders has taken a substantial position in BTC, announced it publicly (as it should do) and has taken a strong position that this move will not have a detrimental effect to the share price of the corporate social responsibility. If this position was taken by a private business, albeit large, then this would not be such a major pivotal price of news.”

The Bitcoin purchase announcement also had a positive impact on MicroStrategy stock, as it surged by 12%.

Bitcoin as a treasury asset

Back in June 2020, crypto research firm Messari estimated that institutional investors allocating 1% of their capital in Bitcoin could drive the BTC spot price to $50,000. Such a surge will see Bitcoin’s market capitalization reach the $1 trillion mark, similar levels to commodities such as the bullion. A publicly-listed company like MicroStrategy holding Bitcoin as a marketable investment on its corporate balance sheet certainly falls into that same category of institutional investment.

The move also signals an emerging sense of Bitcoin as a more mature asset than it was in previous years, according to Anissimov. “The market now has a substantial proportion of professional trading houses and institutional investors, which dampens the volatility and increases the liquidity in the market. Regulation is also more mature and in certain jurisdictions,” he said.

For Ruben Merre, CEO of crypto hardware wallet NGRAVE, Bitcoin’s improving fundamentals such as the meteoric rise in its hash rate over the years and the spread of trading activity are a testament to its maturity. For Merre, investors see Bitcoin as a way to diversify their investments, as there’s a growing mismatch between the stock market and the economic realities on the ground:

“Stimulus spending has a strong effect on stock market prices and even bubble behavior. Meanwhile, economic growth isn’t fully following the pricing, so there is a mismatch. The risk/reward ratio doesn’t make much sense, you might argue. It’s therefore important for institutional investors to diversify.”

More institutional involvement in Bitcoin will likely enhance the maturity of the asset and improve its overall appeal even further. Corporations also wield considerable lobbying power and push favorable regulations that will trigger more growth in the still-nascent crypto scene. But the sheer volume of the buying positions associated with big-money investors can also cause a new wave of FOMO in the retail space. Given that new coin distribution decreased after the May 2020 halving, demand may outstrip Bitcoin supply, which should exert upward pressure on the spot price.

Potential for huge upside

Another interesting aspect of MicroStrategy’s Bitcoin purchase is that it constitutes a direct exposure to the asset, as Saylor believes Bitcoin has “more long-term appreciation potential than cash.” Usually, institutional interest in BTC involves indirect investment via shares in hedge funds or derivative contracts, so holding Bitcoin either via self-custody or through third-party custodians has not been popular. 

However, with improving regulatory clarity, this trend might be due for a change. Back in July, the Office of the Comptroller of the Currency granted approval for federally chartered U.S. banks to provide crypto custody service. The news will see national banks in America join the growing trend of large banks extending their custodial services to cryptocurrencies, thereby helping out the big-money investors, who, by law, must store investment assets with approved third-party custodial platforms.

Direct exposure to Bitcoin does come with certain risks given the intermittent volatility of the largest crypto by market capitalization. However, the potential upside for investors who hold significant positions does exist amid expectations of the spot price setting a new all-time high. As Kerr opined, many believe Bitcoin to represent “a call option on the current financial system in that it may be a sunk cost and go to zero, but the upside is tremendous if it happens.”

Bitcoin is no stranger to a parabolic advance within a bull cycle which usually happens over a few months in contrast to the more measured gains for the likes of gold and silver. For Anissimov, this potential return on investment is providing an enticing incentive for institutional players that are keen on riskier alternatives.

So, most seemingly agree that the influx of institutional money into Bitcoin will cause the spot price to climb further. In a note to Cointelegraph, Nisa Amoils, managing partner at crypto hedge fund Frontier Capital, summed up the investment thesis of BTC:

“People are looking for a way to protect their wealth or that of their shareholders. Bitcoin has always served as a great tool for that purpose. It is sound money built for a digital world. The provable scarcity of Bitcoin will lead to a higher US dollar value as demand for the artificially capped supply sees material increases in demand.”