By Andrea O’Sullivan
May 20, 2021
“If you don’t believe me or don’t get it, I don’t have time to try to convince you, sorry.” —Satoshi Nakamoto, July 29, 2010
Bitcoin has weathered its fair share of theoretical criticisms over the years. It’s just like tulips. It’s insecure. It’s technically unsound. It’s on the wrong side of a global macroeconomic network effect. It’s economically unworkable. It’s wasteful. It’s dangerous. It’s stupid. Besides, if it does eventually overcome these problems, the government will shut it down. And yet, there Bitcoin stands—thriving.
It was easier to fixate on such remote pessimisms while the price flagged about in the long bear market of the post-2017 ICO crash. Yes, the Bitcoin zealots could annoyingly play with their little computer money in their odd corners of the internet, but it was only a matter of time until it would fade away. BTC did go “over 9,000” in the summer of 2019 and bounced comfortably in that ballpark for a decent year. Then a sudden crash following the COVID craziness of the spring of 2020 seemed to undermine many folk theories of the risk properties of Bitcoin as an asset, at least in the minds of critics.
Advocates, always sure of the big picture, hodled. While some kept to the Nakamoto school of passive evangelist thought, you could set a block timer to the goodly number of self-proclaimed cyber hornets that would quickly buzz about any blinkered enough naysayer online. If you didn’t believe them or didn’t get it, sure, they would look nuts.
It’s harder to write off Bitcoin for any number of the above clichés when we observe Goldman Sachs humbling itself to sheepishly reopen its crypto trading desk not even a year after proclaiming that it is definitely not an asset class. 2021 has proven to be the year of institutional Bitcoin adoption, as its handsome price—hovering in the comfortable $45–60K range—testifies.
This is no CryptoKitty economy, trolly dogeposting notwithstanding. Some of the savviest investors and analysts on Wall Street now “get it” and are betting on Bitcoin in a big way. Tesla gobbled up some $1.5 billion in BTC to be managed by its newly minted “Master of Coin.” Markets recently moved upon Elon’s last minute tweets that Tesla would not accept Bitcoin for car sales any longer due to concerns about energy expenditures. But note that Tesla is still planning on holding Bitcoin reserves—a somewhat perplexing decision given the latter activity’s far greater energy needs.
Muskian theatrics aside, it is no longer surprising to hear that a major corporation is expending billions of dollars on a strategic Bitcoin reserve. We learn that a global energy concern is pouring money into mining and think “well, that is just good sense.” Morgan Stanley just announced it would offer wealthy clients access to Bitcoin funds—and why wouldn’t it?
Each new instance of institutional Bitcoin adoption ratchets up the likelihood that others will follow suit. In the biz, they call that FOMO. For starters, the more that established institutions adopt Bitcoin as part of their strategies, the more normalized it becomes. This is no longer a niche hobbyist pursuit. These guys have plenty of lawyers—it can’t be that risky.
There is a very human element here as well. Executives notice when Bitcoin-adopting competitors are rewarded for announcements of new partnerships and services with healthy stock price boosts and reputations as financial innovators. Although there will always be bet hedging, few will want to be left behind.
We probably have Michael Saylor to thank for kicking things off. MicroStrategy’s talkative co-founder and CEO has developed quite the reputation as a Bitcoin bull and industry cheerleader since he started directing his publicly traded business intelligence firm to stockpile strategic Bitcoin reserves in the fall of 2020.
First, it was $250 million from its cash reserves moved into BTC. Then $175 million, followed by another $50 million. It wasn’t enough. By December, MicroStrategy was issuing debt to get its hands on more Bitcoin—$1.125 billion worth. The madman! Today the company holds some 90,000 BTC, worth over $2 billion.
Why? Saylor is clear, the new capital allocation strategy “reflects our belief that Bitcoin, as the world’s most widely adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash.” Post-COVID financial stimulus, quantitative easing, and global uncertainty are all fingered as long-term risks for the value of fiat (government-issued) currencies. Contra conventional wisdom, the Saylorian perspective sees anything else as just too risky. Bitcoin, according to this line of thinking, is for safety.
This is where it helps to “get” Bitcoin. Skeptics that can cast off preconceived notions about boiling oceans and deflationary spirals can come to appreciate the basic utility of a private digital currency that offers the ability for direct rapid transfer and verifiable scarcity. All else follows from these two simple yet profound properties. For the institutions that are embracing Bitcoin, it just makes for better money, or at least a good improvement on money, to make major bets on.
The first of Bitcoin’s unique innovations—peer-to-peer or “censorship-resistant” transactions—ironically both bootstrapped the new currency and turned off institutional investment in the early days. Before Bitcoin, there was no “reliable e-cash,” no “method whereby on the internet you can transfer funds from A to B without A knowing B or B knowing A” like happens with physical cash transactions—the key missing innovation of the internet, in Milton Friedman’s 1999 estimation.
And like all freedom-enhancing developments, the rise of a real e-cash that could provide individuals an escape from government predation and surveillance would bring its negative sides. Bad guys use cash, and e-cash, too. It is no wonder that cryptocurrency developed a reputation as sketchball drug money, and even less that legacy financial institutions for a long time stayed away. Fortunately, perspectives have matured, and today we see more clearly the critical human rights use case for censorship-resistant currencies; Bitcoin has facilitated social movements against government repression in countries like Nigeria, Russia, and Venezuela.
Speaking of Venezuela, the second of Bitcoin’s unique innovations—digital scarcity—is what is now piquing serious financial interest, as Saylor’s many missives make clear. Bitcoin is verifiably scarce, with only 21 million units possible to extract, and digitally divisible, making it nicely analogous to an online gold. Its capacity for direct transfer makes it even better than gold, since it can be securely and relatively cheaply settled between institutions instantly and at any time.
And this is before getting into some of the more exotic self-authenticating financial arrangements that can be programmed into Bitcoin transactions. In a time of unprecedented monetary operations and unstable geopolitical arrangements, these assurances are attractive indeed.
MicroStrategy is engaging in a good bit of corporate education on these points. In February, Saylor headlined a “Bitcoin for Corporations” seminar aimed at bringing his competitors—some 10,000 of them—up to speed. (Laggards take heart: the videos and associated resources are all available for free on the MicroStrategy website.) Presenters explained the value proposition of a combination digital gold/direct monetary network to participants including representatives from SpaceX, Amazon, and JPMorgan. Those who haven’t already walked away with some kind of public Bitcoin strategy or acquisition may be quietly doing so in the form of soon-to-be-released corporate income statements or investor reports.
Here is a smattering so far from just the past few weeks:
In early March, Fidelity’s Director of Global Macro, Jurrien Timmer, released an analysis encouraging investors to consider Bitcoin as a component of the bond portion of a 60/40 portfolio. He cites the cryptocurrency’s finite distribution as a form of “digital gold” as an attractive property to hedge against inflation “and even hyperinflation.”
Citi’s March edition of the Citi GPS: Global Perspectives and Solutions report upgraded Bitcoin from its former “wannabe asset” for retail investors category of 2014 to something “attractive to institutional investors” for its “inflation hedging properties.” Again, it is likened to “digital gold” favorably. Within seven years, the report opines that Bitcoin could become “the currency of choice for international trade.”
Morgan Stanley’s wealth management unit is a bit coyer, writing that Bitcoin is still in a “speculative phase.” But its report concludes that the “threshold is being reached” for Bitcoin to be considered an investable asset class. And not a moment too soon, as the firm recently joined Stone Ridge Holdings Group, New York Life, MassMutual, Soros Fund Management, and FS Investments in a major investment into the Bitcoin firm NYDIG. After all, someone’s got to give their clients access to Bitcoin investing.
Now, it is easy to be confident in the cozy run-up of a bull market. There have been slight slips even in these robust weeks. But long-term Bitcoin holders know that the next bear market is a question of if and not when—in fact, most of them are pining for the decline when their favored asset will go on “sale.” Some of these institutional investors will back away. But Saylor’s selectorate will be more than happy to gobble up the refuse of the weak hands.
In the meantime, service providers will continue to build new infrastructure and applications that enhance Bitcoin’s use cases—right now, the scuttlebutt is that Bitcoin’s layer 2 “Lightning network” could be an attractive censorship-resistant communications protocol. Developers will magic all sorts of new value propositions (that look so obvious in retrospect) in time for the next bull market.
The next high-water mark may be when that most respected class of institution—traditional governments—decide to start investing in Bitcoin. Some already accidentally hold the proceeds of criminally expropriated enterprises. Most, but not all, sell off the Bitcoins in official auctions.
Will we see intentional state investment in Bitcoin? There has been some chatter. In my own state of Florida, Miami Mayor Frances Suarez is exploring ways to collect Bitcoin for fees and taxes. Florida Governor Ron DeSantis has not hidden his displeasure with the allocation of the federal COVID stimulus bill, which he feels short-changes states that responsibly weathered 2020’s storm. Might some leaders start connecting the dots, and realize that strategic Bitcoin reserves could provide some measure of sovereign fiscal freedom in these oh-so-interesting times? It has got to be tempting for those bold enough.
What’s driving institutional adoption of Bitcoin is a combination of the deep-pocketed true believers that get it and copycat observers who may not “get it” but are close enough to getting what the first group is doing. With each higher price plateau and expanded infrastructure and applications, Satoshi’s hurried deflection becomes more attractive to the first group. Just you watch. In the meantime, they will be holding. Do you really want to be left out?
Andrea O’Sullivan is the director of the Center for Technology and Innovation at the James Madison Institute. You can follow her on Twitter here.
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