Business leaders and policymakers that still conflate Bitcoin with drug dealers and cybercriminals are like music executives that once thought streaming was only for pirates, in for a huge shock. In the years since the last great Bitcoin boom-and-bust cycle, the original cryptocurrency has significantly bolstered its financial ecosystem and evolved into a legitimate alternative investment for Wall Street asset managers.
My last article provided the economic rationale behind the increasing interest in Bitcoin by financial professionals and business leaders. The next day, MicroStrategy, which has become the bellwether for adding digital currency to corporate balance sheets, hosted a Bitcoin for Corporations event that will go down as a watershed event in the history of crypto assets and will unleash a flurry of activity by corporate boards and C-level executives discussing the feasibility of holding what some call "Gold 2.0."
By bringing together Bitcoin investors, tax and legal professionals and the people responsible for developing and implementing its Bitcoin strategy (and sharing the documentation they developed) MicroStrategy eliminated the FUD and normalized the cryptocurrency. The impressive attendance at the event, which CEO Michael Saylor said included 6,000 people live-streaming his keynote and more than 40,000 downloads of day one sessions, illustrates the seriousness with which many organizations take Bitcoin as a financial holding and means of exchange.
Making the case for holding Bitcoin
Saylor began his keynote by describing how the 2020 pandemic unleashed what he terms a "virtual wave," namely the migration of business processes and activities from the physical to the online worlds. He detailed how the forced adoption of online collaboration forums and videoconferences to replace in-person meetings and business travel evolved from being necessary inconveniences to foundational technologies that allowed MicroStrategy to create asynchronous follow-the-sun workflows that significantly reduced the time needed to resolve problems, make decisions and wasted in project meetings.
Saylor then pivoted to Bitcoin and how the monetary policy response I describe last time was the catalyst that got him searching for inflation resistant assets. As he pointed out in an interview last year, Saylor studied "every asset that you might purchase," stocks, bonds, various currencies, precious metals, real estate, even art, before evaluating Bitcoin. He was impressed by Bitcoin's technical resilience, security and maturity, but its selling point is inflation resistance via the hard cap on the number of coins. In sum, Bitcoin is a better gold than gold and the best store of value currently available.
To expound on the rationale for holding Bitcoin, Saylor enlisted Ross Stevens, Founder and CEO of Stone Ridge Capital, whose NYDIG subsidiary is one of the largest providers of Bitcoin services to corporations and investment professionals. Stevens gave an hour-long dissertation on the history of money as both a unit of exchange and store of value, the ascendence and fall of various reserve currencies, inflationary monetary policies and the role of hard assets like precious metals, fine art and real estate as an inflation hedge. Stevens discusses these themes in detail in his 2020 Stone Ridge Capital Shareholder Letter in which he writes,
"Money is, and has always been, technology. Specifically, money is technology for making our wealth today available for consumption tomorrow. …
Money is unique among all the goods we seek because we value money not for its own sake, but rather solely for its prospective exchange utility. That’s a fancy way of saying we hope it keeps its value long enough to enable us to trade it in the future for stuff we actually want. The question of which money humans will choose, therefore, boils down to which good, or goods, any individual believes will best store the sum total of their lifetime of daily labor (i.e., their life force).
Stevens proceeds to outline four insights that led him to see Bitcoin as a revolutionary financial technology.
Salability (and stability) across time - Unlike gold, whose supply increases 1-2 percent annually and is somewhat affected by the price, the total supply of Bitcoin is capped. According to Stevens:
Bitcoin is the first store of value in history for which its supply is entirely unaffected by increased demand. From this perspective, Bitcoin is better at being gold than gold – it’s even more salable across time
Salability across space - Unlike gold, which is difficult to transport, Bitcoin is a frictionless virtual asset that can freely move between holders and continents. Indeed, Bitcoin settlements are much faster than credit cards, which take about 2-3 days to complete a transaction and as a bearer instrument, Bitcoin eliminates the credit risk associated with card transactions, equities or conventional bonds.
The Difficulty Adjustment associated with coin mining - The protocol limits the creation of new Bitcoin by modulating the difficulty of the coin-creation algorithm according to the demand. Stevens also highlights the algorithm's robustness in the face of vast increases in demand and processing power, writing:
The Difficulty Adjustment has now been continuously tested for twelve years, at total global network power levels ranging from just a few laptops, all the way up to enough energy to power New York City, and with lots of total network power volatility along the way. The total network power volatility is what requires the Bitcoin protocol to continually adjust the mining difficulty, akin to continually adjusting the number of digits of the product of the two primes. And, astonishingly, just as Satoshi designed, no matter the global mining capacity, or its variability, a new block is verified every 10 minutes…every 10 minutes…every 10 minutes.
Bitcoin's use of energy - Critics point to the energy used by miners as an enormous flaw in the Bitcoin system, however, Stevens counters that miners are making an economic judgment that the usage and cost has a positive ROI and is a necessary input to sustain a superior technology for money. Furthermore, Stevens notes that Bitcoin allows monetizing locked-in, previous unviable sources of energy since "Bitcoin mining is the only profitable use of energy in human history that does not need to be located near human settlement to operate." Indeed, the Russian energy company Gazprom is doing just this by turning previously wasted natural gas from its Siberian oil fields into electricity used for mining. The same option is available to land-locked oil fields in Alberta, hydropower in South America or solar power in Australia. As Stevens puts it, "Historically, our energy challenge has been to move the power to the people. With Bitcoin, we can move the people to the power."
Stevens closes by echoing Saylor's concern about the inflationary destruction that could be unleashed by central banks' relentless money printing over the past decade (emphasis added):
The trillions of dollars of central bank-driven low or negatively yielding financial instruments demolish the dreams of savers and retirees, prohibiting an enormously large and growing group of individuals from meeting their retirement wants, wishes, and – tragically – even needs. Free money has consequences. Because it is not free. No matter how well-intentioned, runaway global money printing, and the resulting financial repression, is society’s largest global challenge.
The corporate Bitcoin playbook
The second, longer, part of MicroStrategy's Bitcoin event covered the details of developing and implementing a corporate Bitcoin strategy, along with short presentations from 10 vendors specializing in Bitcoin and (related digital assets) financial services. The first question facing executives is determining if Bitcoin fits their investment strategy, and if so, how might it be used and to what extent. Deloitte, which had several presenters during the event, nicely sums up the issues in a paper where it writes:
The main purpose of the treasury function is risk management and the preservation of capital. When deciding and executing on an investment in digital assets, governance is key to all activities. More than creating a policy, governance begins with understanding the types of investment the company is making and where this alternative investment vehicle - digital assets like Bitcoin - fits within the broader investment strategy
Deloitte notes that cryptocurrencies like Bitcoin can be used as a digital asset, aka the gold 2.0 thesis that underlies MicroStrategy's investment, but also a method of payment, debt management or raising capital (via an equity round or the infamous ICO).
Accounting treatment is particularly tricky since Bitcoin is classified as indefinite-lived intangible assets under ASC 350, which requires them to be recorded on balance sheets at cost, but periodically (usually quarterly) tested for impairment and marked down to the lowest price during the period. This one-way ratchet effect can significantly underestimate the book value and cause write-downs that don't reflect a company's underlying health. Indeed, MicroStrategy's CFO recently explained such charges in Q3 and Q4 and how it publishes non-GAAP numbers to help analysts reconcile the disconnect between Bitcoin accounting and its actual market value:
It [GAAP accounting rules] creates a perceived disconnect between the book value and what one might interpret as the market value of our Bitcoin. What we've done is we provided non-GAAP financials that back out that impact in our financial statements and in our earnings report. And as a result, I think there's transparency into both means, the book value and a potential market value that someone can understand better. And I think the market understands that very well and it's very mature.
MicroStrategy also discussed a Bitcoin project roadmap that it developed for other companies considering Bitcoin investments and is based on its process for Bitcoin evaluation and adoption. Key steps in the process include:
- Strategy development, project planning and identification of external legal and financial advisors.
- Review of corporate governance and regulatory issues.
- Determination of financial and IT implications and requirements.
- Identification and evaluation of vendors and partners.
- Finalization of a detailed project timeline and BoD approval.
- Project execution and initial Bitcoin purchases. Includes:
- Setting up brokerage and custodial accounts
- Obtaining insurance
- Preparing SEC and PR communications
- Post-execution planning of future purchases.
After watching the presentations of Saylor and his executive team I was struck by both the magnitude of their decision and how seriously they took it. No corporate board will approve a $1.1 billion investment lightly. Despite the commentary by crypto-skeptics in finance and the business press, MicroStrategy didn't buy Bitcoin on a lark or for a quick buck. Indeed, part of Saylor's discussion included strategies for maximizing one's Bitcoin holdings by using credit lines or even longer-term debt for working cash. Companies that believe as Saylor does that Bitcoin is a superior asset for value retention, will become the ultimate Bitcoin HODLers.
MicroStrategy might have been the first, but Saylor's courage and conviction mean it won't be the last company to trade some of its fiat cash for Bitcoin. Square and Paypal were already on board before last week's event, but then Tesla jumped in with the biggest corporate investment yet at $1.5 billion (although Bitcoin's price appreciation since it bought means that MicroStrategy still has the largest corporate balance). Indeed, Tesla, like Paypal and Square, also plans to accept Bitcoin for payment.
Tech legends like Michael Saylor (who co-founded MicroStrategy when he was 24) and now Elon Musk granting their imprimatur have made Bitcoin safe for corporations which will unleash a flood of institutional investments. The Mayor of Miami is already working on a Bitcoin proposal and it won't be long before other Fortune 500s and Ivy League endowments announce their interest. MicroStrategy provided the playbook, now it's up to business leaders to determine how and when to diversify into crypto-assets.