Bitcoin finally matures as a corporate investment option

Bitcoin investment option Microstrategy Michael Saylor Elon Musk Ray Dalio Mike Novogratz
A two-day virtual conference is expected to provide guidance on how companies can transition to using Bitcoin in their operations.

If you are looking for the time when Bitcoin finally came of age, the middle of this week could be the date to circle in your diary.

While the best-known cryptocurrency has had a chequered history over the past decade with plenty of price volatility, a major virtual conference that explains exactly how companies can incorporate Bitcoin on their balance sheets looks like being a breakthrough.

Organised by major Bitcoin owning company MicroStrategy (NASDAQ: MSTR) which is led by Bitcoin enthusiast Michael Saylor, the two day virtual conference starting this Wednesday will bring together thousands of executives, directors and corporate advisors to share information on precisely how the cryptocurrency can be incorporated into company balance sheets.

MicroStrategy now owns around 70,000 Bitcoin worth more than US$2.3 billion (A$3 billion) after kicking off its Bitcoin-buying spree a year ago.

It has bought another 300 Bitcoin tokens recently, taking advantage of a Bitcoin sell-off which saw the price briefly fall under US$30,000 (A$39,000).

How to plug Bitcoin into balance sheets

Mr Saylor said those attending the conference “all want to figure out how to plug Bitcoin into their balance sheet or their PNL.’’

“We’re going to publish our playbook, all of our accounting guidance, our legal guidance, all the work we did over the course of months to get ready to do this as a publicly traded company.’’

Mr Saylor said the legal and accounting advice would also be made available as open-source documents which could help companies save a significant amount of money in transitioning to using Bitcoin in their operations.

Bitcoin companies coming together to broaden appeal

Many Bitcoin companies are also taking part in the conference including crypto exchanges Binance, Gemini and Coinbase while Mike Novogratz’s company Galaxy Digital, which specialises in investing and developing cryptocurrency-related services, will take part in sessions covering Bitcoin macro and corporate strategy discussions.

Certainly, MicroStrategy has benefitted from being an early corporate mover on Bitcoin, with some of its earliest purchases being around the US$11,000 (A$14,000) mark, which is probably why it has taken the trouble to thoroughly investigate the legal and accounting treatment for holding them within a company.

Bitcoin US dollars Microstrategy Michael Saylor Elon Musk Ray Dalio
Bitcoin continues to see wider adoption, albeit with significant price volatility as the asset class matures.

Stone Ridge Asset Management chief executive officer Ross Stevens will open the online conference with Mr Saylor, with Stone Ridge also a serious Bitcoin investor.

The mere fact of the conference happening could also have a price effect on Bitcoin, with Bitcoin media mentions and Google search volume both closely related to Bitcoin price peaks and troughs.

Elon Musk feels the Bitcoin temptation

The highest profile “query’’ about using Bitcoin came from none other than Tesla pioneer and the world’s richest man, Elon Musk, who on his Twitter feed posted a provocative cartoon showing Bitcoin covering a young woman’s exposed buttocks while a praying onlooker is tagged as “Me trying to live a normal productive life.’’

While Mr Musk might have been joking about Bitcoin leading him astray, Mr Saylor quickly replied, “If you want to do your shareholders a $100 billion favour, convert the $TSLA balance sheet from USD to #BTC. Other firms on the S&P 500 would follow your lead & in time it would grow to become a $1 trillion favour.”

Mr Musk was obviously intrigued, tweeting back, “Are such large transactions even possible?”, to which Mr Saylor replied: “Yes. I have purchased over $1.3 billion in #BTC in past months & would be happy to share my playbook with you offline – from one rocket scientist to another.’’

Naturally, that exchange led to a Twitter storm of people from both points of view outlining the benefits and perils of incorporating Bitcoin into company transactions and valuations.

One of the well-known benefits of Bitcoin and other cryptocurrencies is a combination of high security using blockchain technology and extremely low transaction costs compared to conventional currency.

Critics obviously point to the volatility of pricing in Bitcoin; however, all currencies are moving at all times relative to each other even if the effect is masked because we tend to base our experiences on a particular currency we use every day.

Last week, Mr Musk updated his Twitter bio to “#bitcoin”, stating that “in retrospect, it was inevitable”.

The final hurdle

While some progressive companies might be adding Bitcoin to their corporate treasuries and that trend could be on the rise, the holy grail for real Bitcoin enthusiasts is to be officially recognised by central banks and national governments.

That is a big hurdle, but it is one that has been progressively and tentatively embraced by both sides.

Central banks and governments each have a vested interest in the status quo – both because having your own currency is an important tool of economic management and also because having a currency is usually a money-making proposition.

After all, if you print a note for only cents and then attribute it a value of $100, that is quite a profit which is known as seigniorage, which is why mints and treasuries usually make a lot of money for their governments.

Central banks are active in the cryptocurrency space

However, many central banks and countries have been examining the use of cryptocurrencies themselves, with most of the proposals involving a new creation rather than using Bitcoin.

The distributed ledger/blockchain aspects of cryptocurrencies make them ideal for governments because all transactions can be traced and fraud, tax avoidance or evasion would be much harder.

In its submission to the Senate Select Committee on Financial Technology, Australia’s Reserve Bank disclosed that it has run a simulation of a wholesale settlement system – where financial institutions such as banks settle customer payments between themselves – running on a private, permissioned Ethereum network.

Ethereum is a global computer network with its own software which can be programmed to complete certain computer tasks, with every computer on the network completing the task in tandem.

Ethereum also operates its own virtual currency, called Ether, which is a popular competitor to Bitcoin.

The Reserve Bank simulated what would happen if central bank-backed tokens were issued to commercial banks in exchange for their exchange settlement account balances.

The banks could then exchange these tokens among themselves to settle obligations, and could eventually redeem them with the central bank.

Although the Reserve Bank has yet to commit to there being a case for using central-bank digital currencies in settlement systems, the simulation did discover several big advantages of using blockchain technology.

Faster and cheaper real time transactions

The main advantage is that it would increase the speed and reduce the cost of payments because a central bank digital currency that was integrated into a blockchain platform could enable payments in real time around the clock without relying on external payment systems.

Under the current system, financial institutions exchange instructions with each other throughout the day but to reduce transaction costs, they wait until the close of the business day to calculate their net obligations to each other.

A central bank digital currency would also allow for easier “atomic” transactions, “all or nothing” arrangements in which all parts of the transaction are executed or none at all.

Settlement risks would also be lower because the payment and the exchange of the corresponding asset can happen at the same time.

So called “smart contracts’’ on a blockchain would also allow for new kinds of “programmable money”, which has conditions attached as to how it can be spent or transferred.

However, the Reserve Bank has pointed to problems with implementing an entire digital currency system, saying that such an implementation would be risky on some levels.

One potential problem would be that banks and other users are happy with the status quo and don’t adopt the digital currency, while another could be that it would dramatically change the financial system.

For example, customers might decide to hold the central bank’s digital currency rather than keeping their money on deposit in commercial banks, with the commercial banks then forced to borrow directly from the central bank to finance loans due to a lack of conventional deposits.

Billionaire investor Ray Dalio calls Bitcoin “a hell of an invention’’

One of the more interesting characters to express serious interest in Bitcoin is billionaire Ray Dalio, the founder of the world’s largest and arguably most influential hedge fund, Bridgewater Associates.

“I believe Bitcoin is one hell of an invention,’’ Mr Dalio said in a note to investors.

“To have invented a new type of money via a system that is programmed into a computer and that has worked for around 10 years and is rapidly gaining popularity as both a type of money and a storehold of wealth is an amazing accomplishment.”

While acknowledging the risks of Bitcoin, Mr Dalio pointed out there aren’t many alternative gold-like assets currently, and in a world of rising debt and aggressive money printing by central banks, there will be a growing need for assets that can be privately held.

“I and my colleagues at Bridgewater are intently focusing on alternative storeholds of wealth assets, and Bitcoin won’t escape our scrutiny,” Mr Dalio said.

He has previously pointed out risks to Bitcoin including the arrival of new and better competitors and the potential for demand to drop if it was outlawed by some governments.

Other challenges for Bitcoin include volatility, regulatory uncertainty, cyber risk, liquidity and immature infrastructure.

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