In 2020, Bitcoin Was Significantly Derisked
As more recognizable names become involved in one form or another, Bitcoin becomes largely derisked for interested parties that had previously been reluctant to dip in their toe.
In previous years, traditional investors and businesses had been averse to opening their arms (and wallets) to Bitcoin. It had too many unknowns. Bitcoin will be banned, they said. Bitcoin is just a ponzi scheme backed by absolutely nothing. It’s for criminals. Bitcoin is too volatile to be a good store of value. It will just be copied by someone else. Even legendary investor Warren Buffet threw his hat into the ring, stating that Bitcoin is “probably rat poison squared” at Berkshire Hathaway’s 2018 annual shareholder meeting.
However, fast forward a few years later to find that Bitcoin has not only not gone to zero, but it is increasingly being adopted by investors, hedge funds, financial institutions, and businesses.
Each of the above narratives declaring Bitcoin dead continue to be toppled over time and time again. The more time you spend researching and learning about each of these alleged flaws of Bitcoin, the more obvious it becomes that they are without merit. If you’re not averse to long-form reading, Parker Lewis of Unchained Capital has written some amazing pieces refuting each of these misunderstandings.
Times have certainly changed. The risk associated with allocating to Bitcoin has now been inverted. It is now become more risky to not own any Bitcoin. And now with each day that passes, seemingly more and more acclaimed investors, companies, and institutions have decided to dip their toes into the water by taking up a position in Bitcoin. Let’s take a look at some of these examples:
INVESTORS
What do Paul Tudor Jones, Stan Druckenmiller, and Bill Miller have in common? They are all part of the growing list of prolific investors that are holding some Bitcoin. Let’s take a look at what some of them have had to say about it:
Paul Tudor Jones
In a letter addressing investors, Jones prefaced readers by outlining the massive money printing that has taken place so far in 2020. “We are witnessing the Great Monetary Inflation, an unprecedented expansion of every form of money unlike anything the developed world has ever seen.”
In his full letter, readable here, Jones goes on to explain how he expects large amounts of capital to flow into safe haven assets to avoid this inflation. Bitcoin’s hard-capped, finite supply means it has extreme scarcity built in. It can offer an inflation-proof hedge against monetary and fiscal irresponsibility by central banks and governments.
“The best profit-maximizing strategy is to own the fastest horse. If I am forced to forecast, my bet is it will be Bitcoin.” — Paul Tudor Jones
Stanley Druckenmiller
The “Bitcoin is digital gold” narrative has nabbed yet another. Stanley Druckenmiller is the latest high net worth investor to come out as a Bitcoin believer.
Druckenmiller ascribes to a similar investment thesis as Jones. He sees a bearish dollar scenario lining up for the next 5–6 years due to the massive stimulus measures taken by the federal reserve and congress. “Bitcoin could be an asset class that has a lot of attraction as a store of value,” said Druckenmiller in an interview on CNBC.
“I own many many more times gold than I own Bitcoin. But frankly if the gold bet works, the Bitcoin bet will probably work better because it’s thinner, more illiquid and has a lot more beta to it.” — Stanley Druckenmiller
Bill Miller
Bill Miller formerly managed Legg Mason Capital Management Value Trust Fund, and had beat the S&P 500 for 15 years. He has recently emerged as a Bitcoin bull as well.
Similar to Druckenmiller and Jones, Miller stated the Federal Reserve is “gunning the money supply” in his reasoning for being long Bitcoin. It seems to be an ongoing trend here. The expectation is that unprecedented money printing will cause inflation, and that the hardest assets will benefit most.
“The Bitcoin story is very easy. It’s supply and demand. Bitcoin’s supply is growing around 2.5% a year and the demand is growing faster than that.”
COMPANIES
Bitcoin is the elephant in the boardroom. In some cases, Bitcoin is even being held as a “treasury reserve asset” by several publicly traded companies. We can view this spreadsheet at BitcoinTreasuries.org to see what companies have begun allocating to Bitcoin.
Perhaps the most significant being financial services and payments company Square ($SQ), where founder and CEO Jack Dorsey stated that Bitcoin is an “instrument of economic empowerment and provides a way for the world to participate in a global monetary system.”
While Square’s sentiment may sound bullish, it was still dwarfed by business intelligence company Microstrategy’s ($MSTR) move to put a whopping $425m USD (85% of treasury) into Bitcoin. Microstrategy followed up by releasing a statement claiming:
“Bitcoin is digital gold — harder, stronger, faster, and smarter than any money that has preceded it. We expect its value to accrete with advances in technology, expanding adoption, and the network effect that has fueled the rise of so many category killers in the modern era.” — Michael Saylor, Microstrategy CEO
As we look toward a highly uncertain future, where loose monetary and fiscal policy seems to be the continuing norm, it wouldn’t be surprising to see this become a trend. More companies will be looking for an inflation hedge to preserve their capital in an era of massive monetary inflation.
INSTITUTIONS
PayPal announced in October that it would allow its 346 million users to buy, hold, and sell Bitcoin on their platform. After initially intending to go live in 2021, PayPal then pushed up the launch date. They have launched their Bitcoin offering as of October 21st and are already seeing significant demand.
With PayPal joining the list of major institutions offering Bitcoin to its users, let’s take a look at where they fall in regards to some of their largest competitors:
- Square’s Cash App is currently selling twice as much Bitcoin than what is currently being produced by miners.
- PayPal has nearly 3x the amount of users than Square in this regard.
- Last but not least, Grayscale has been a behemoth when it comes to gobbling up newly minted Bitcoin supply as well.
“Since Q3 2019, Grayscale’s Bitcoin holdings are up more than 2x, and AUM is up more than 4x.” — Kevin Rooke
What About The Banks?
None of the information touches on the largest of financial institutions. The banks. Well, rest assured, because expectations are that traditional financial institutions could be getting involved soon enough.
The Office of the Comptroller of the Currency (OCC), which is the American regulator of banks, recently offered regulatory clarity that enables banks to get involved immediately if they so desire.
“From safe-deposit boxes to virtual vaults, we must ensure banks can meet the financial services needs of their customers today,” said Acting Comptroller of the Currency Brian P. Brooks. “This opinion clarifies that banks can continue satisfying their customers’ needs for safeguarding their most valuable assets, which today for tens of millions of Americans includes cryptocurrency.”
Consensus and Cover Fire
All of these recent events can help provide cover fire for any money managers looking to get involved with Bitcoin. Publicly traded companies, large institutions, and big money investors getting involved in the game helps remove the career risk associated with Bitcoin.
Bitcoin is no longer contrarian. In fact, having some exposure to a non-sovereign, hard-capped, apolitical, censorship-resistant, inflation-proof money is becoming consensus. At the end of the day, it may well completely flip the risk profile associated with Bitcoin. If these well-established and respected names are now involved and you are not, then perhaps it has become more risky to not have any exposure to Bitcoin, than it is to have just some. Get off zero exposure.
