Ask CryptoVantage: Why are Billionaires, Big Companies Buying Bitcoin?

A Hedge Against Inflation

Governments and banks are creating unprecedented amounts of money out of thin air in response to the COVID-19 economic crisis. Historically, newly printed money has led to an increase in the costs of goods and services, otherwise known as inflation. This inflation in turn decreases the purchasing power of cash savings, making cash a bad place to store value for the long term.

Some people expect there to be extremely high inflation in the coming years because of the COVID-19 economic response. In times of high inflation, scarce assets such as gold and real estate have been a place where people traditionally store value in a way that cannot be inflated away. Because bitcoin shares the scarcity and unchangeable supply aspects of these other assets, people with lots of cash are gravitating towards bitcoin as an alternative way to store their value and protect against inflation.

The two main store of value properties that bitcoin and gold share are scarcity and difficulty to produce. Bitcoin is even more scarce than gold because there is a finite amount of bitcoin that will ever exist (21 million), and it has a predetermined supply schedule that is not affected by increased demand. In contrast, no one knows how much gold exists, and as the demand for gold increases, more of it gets mined. Because bitcoin is scarce and difficult to produce, it cannot be debased by rapidly increasing supply, which is leading many people to view it as a way to store value for the long term to hedge against inflation.

Low Interest Rates

In 2020, the global economy took a big hit due to the economic response to COVID-19. As is common in recessions, central banks began reducing interest rates in an attempt to increase borrowing and spending. Around the world, interest rates have been hitting record lows. As a result of low interest rates, investment markets are much harder to approach for companies and wealthy individuals with a lot of capital to invest.

Low risk investments like bonds pay extremely low yields, riskier investments like stocks and real estate have greater potential returns, but also come with a much higher risk because those asset prices are already very high. While bitcoin is a high-risk investment, many believe it is still highly undervalued and therefore has the potential for extremely high reward.

There are two consequences to record low interest rates that lend to companies buying bitcoin. First, low interest rates prevent companies from storing their cash reserves in a way that can earn them a meaningful amount of interest income. Second, companies have access to extremely cheap credit that they can borrow from to invest in appreciating assets. In the past year, bitcoin has been an attractive investment opportunity for people with lots of extra cash who are looking for a place to store it.

De-Risking of Bitcoin

In the past, bitcoin had a stigma around it related to alleged criminal use. In recent years, blockchain analysis companies and financial regulators have produced reports showing that criminal use of bitcoin is relatively low. Cash remains the financial tool of choice for most criminals. With this stigma lifted, and the current economic situation, there has never been a better time for companies and wealthy individuals to buy bitcoin.

In 2020 MicroStrategy became the first non-bitcoin-related publicly traded company to buy bitcoin and hold it on their balance sheet as a reserve asset. MicroStrategy had so much faith in bitcoin that they decided to use it as their primary treasury reserve asset, which means any extra cash they produce gets stored in bitcoin. Over the past six months, they have purchased more than $2 billion worth of bitcoin, and have already seen the value of those bitcoins more than double.

In early 2021, Tesla followed MicroStrategy’s example and purchased $1.5 billion worth of bitcoin. As one of the biggest companies in the world, Tesla buying bitcoin removed the reputational risk that other companies were worried about from adding bitcoin to their balance sheets. Similarly, large investment funds such as Ruffer Investment Company and Stone Ridge have been buying bitcoin which paves the way for others to follow suit. All these high-profile purchases of large amounts of bitcoin have removed the stigma and anxieties for other companies to do the same. The more of these transactions that happen, the more likely other companies and wealthy individuals are to follow.

Conclusion

The economic landscape is setting the perfect stage for companies and wealthy individuals with excess cash to buy bitcoin. Interest rates are at record lows, and many believe that high inflation is on the way. Bitcoin is seen as an attractive opportunity for storing value long term with an added bonus of high potential for growth. Now mainstream companies are buying bitcoin, it is much less risky for others to do the same.