The story of bitcoin over the last 12 months is a fairy tale for the poster child of crypto. It has conquered both retail investors enthused by the 1,137% growth, and payment businesses alike, with Paypal and VISA integrating cryptocurrencies into their platforms. Banks, hedge funds, and asset managers seem to have paused on their normal scorn and joined the party, with recent votes of confidence from Blackrock, JP Morgan and DeutscheBank. The corporate buy in, from outside the financial institutions, until recently, has proved elusive. Thanks to a certain trend-setting Mr Elon Musk, who moved $1.5bn worth of Tesla’s cash into bitcoin, this looks set to change.
This is huge news for the crypto-industry, as it suggests that bitcoin is finally being accepted as a viable treasury asset. Even the Financial Times ran a story about “bitcoin’s bid to go mainstream”, although it has to be noted whilst maintaining their traditional position, euphemistically referencing the “digital tulip”.
Elon Musk himself is a great advert, not only as a forward-thinking entrepreneur and one of the richest men on the planet, but also because the decision to switch hold some of Tesla’s assets in crypto made $420million profit in a week.
A few other corporates have preceeded Musk’s example with similar success stories thanks to the phenomenal growth of the last year. Jack Dorsey, CEO of Square and Twitter, has put $50 million of Square’s balance sheet investment in bitcoin, a not insubstantial 1% of total assets as of Q2 2020. Interestingly, he believes that bitcoin is the heir apparent as native currency of the internet, stating “the world ultimately will have a single currency, the internet will have a single currency. I personally believe that it will be bitcoin”. Microstrategy, the first public company to make a substantial balance sheet allocation to bitcoin, found itself seeking protection from what the CEO saw as “the melting ice cube” of their cash assets, thus resulting in a $475m bitcoin purchase over Q4 2020.
There are many other corporates sitting on cash, with an uninspiring return. A Moody’s report at the end of 2020 suggested that record stockpiles were being hoarded, with of $2.1 trillion being held by S&P 500 companies not in the financial, transportation or utility sectors. This is up 30% from the same period the previous year, and is the most cash ever held, in data going back to 1980. Even a tiny fraction of this cash moving to bitcoin would have a dramatic effect, and as a result bitcoin prices could easily increase 5-10 fold in 2021.
Indeed, the options market would suggest bitcoin has a sunny outlook for 2021, pricing in a 10% chance of $400,000 by year’s end, 15% chance of $300,000, 30% chance of $160,000 and close to a 50% chance of higher than $100,000. Clearly such a bullish market is enough to moisten the lips of even the most conservative CFO. Unsurprisingly, a few other large corporates are rumoured to be following suit, namely Apple, which is currently sitting on $193bn in cash. The ever-growing numbers of banks offering reputable custody services for crypto is also a big enabler, including an announcement from BNY Mellon, the world’s largest custodian bank, announcing it would start a digital custody unit, with Goldman Sachs, JP Morgan and Citi all rumoured to be looking to do the same.
Of course, this is a story that could see played out in all developed economies, that share the predicament of low interest rates and potentially high inflation. Interestingly, the recent rise in bond yields seems to have done little to hamper rising crypto prices. It would appear that the broad economic outlook in the medium term is uninspiring.
I would also expect to see bitcoin’s stranglehold as the crypto of choice to loosen over the course of 2021. Indeed, the bitcoin dominance that we see in daily traded volumes has dropped substantially so far this year, from 72% to 60%. I would expect to see Ethereum, and to a lesser extent Litecoin, being considered for treasury in the coming years. As the ‘new kid on the block’ for crypto to be taken seriously as a viable asset over cash is a phenomenal achievement.