In a moment of deliverance for cryptocurrencies, institutional investors are turning to Bitcoin as a hedge against fiat currencies that are losing value.
The world’s preeminent cryptocurrency is on track to hit US$1 million (A$1.4 million) per coin in the next five years as a result of a wall of institutional money looking to tap into Bitcoin appreciation – that’s the verdict from former Goldman Sachs hedge fund manager Raoul Pal, the man who founded financial news platform Real Vision.
Bitcoin prices have quickly grown from around US$13 (A$12) per coin in late 2012 to as high as US$20,000 (A$25,000) in 2017, before collapsing to as low as US$3,000 (A$4,500) in 2019.
The volatile gyrations have led many market participants to declare the cryptocurrency as an unsuitable asset and far too risky to be considered as a significant long-term investment.
However, things are quickly changing with institutional fund managers seeing Bitcoin in a completely different light.
According to Mr Pal, heavy-hitting institutional investors are now eyeing up Bitcoin as a serious vehicle for long-term investment and portfolio allocation.
Earlier this month, Mr Pal revealed Bitcoin holdings in his portfolio were now “above 50%”, having previously been equally distributed between United States dollars, gold, equities, and Bitcoin.
Mr Pal also downplayed the obvious downside risk presented by Bitcoin’s comparative lack of liquidity to other assets by pointing out that the upside is “so much bigger” than the potential downside.
“Just from what I know from all of the institutions, all of the people I speak to, there is an enormous wall of money coming into this,” he said.
“It’s an enormous wall of money, just the pipes aren’t there to allow people to do it yet, and that’s coming. But it’s on everybody’s radar screen, and there’s a lot of smart people working on it,” Mr Pal said.
In the view of the former Goldman hedge fund manager, a growing number of companies are moving their cash reserves into Bitcoin instead of holding perceivably weaker or less secure assets, as a hedge against fiat currencies being devalued by central bankers desperate to spend their way out of trouble.
Legendary billionaire investor Paul Tudor Jones has been buying bitcoin futures to hedge against central bank-fuelled inflation. The chief executive officer of Tudor Investment Group called bitcoin “the fastest horse in the race”, when compared to other assets such as gold.
MicroStrategy leading the field
NASDAQ-listed business intelligence company MicroStrategy currently holds 38,250 Bitcoins – a staggering crypto haul worth about US$468 million (A$662 million).
Just last month, the company completed its second large acquisition of the cryptocurrency, purchasing almost 17,000 coins for around US$175 million (A$245 million) and taking its total holding to almost 40,000.
In a regulatory filing on 11 September 2020, the company revealed its board of directors had adopted a new treasury reserve policy that “updated the company’s treasury management and capital allocation strategies.”
Under its new policy, the company’s treasury reserve will consist of two types of assets: the first type comprises cash and short-term investments, held by the company that exceed working capital needs.
The second type consists of Bitcoin held by the company, with the cryptocurrency serving as the “primary treasury reserve asset on an ongoing basis”, subject to market conditions and anticipated needs of the business for cash assets, including future potential share repurchase activity.
The irony is that in 2013, in a now-famous tweet, MicroStrategy chief executive officer Michael Saylor exclaimed: “Bitcoin days are numbered. It seems like just a matter of time before it suffers the same fate as online gambling.”
#Bitcoin is the first software network capable of storing all the monetary energy in the world with no loss of power over time and negligible transmission loss. Assuming broad adoption, that would make it the most valuable invention of the modern era. Few understand this.
— Michael Saylor (@michael_saylor) October 16, 2020
In a tweet posted this past week, Mr Saylor called Bitcoin “an asset, not a commodity”.
“Commodities are abundant and should be traded. Assets are scarce and should be owned. Pure monetary energy is the ideal treasury reserve asset, and for the first time in history, we can now own some,” he said.
“In these challenging times, Bitcoin represents hope to billions of people in need of an instrument of economic empowerment,” Mr Saylor said in a separate tweet.
Twitter, Cash App and Square founder Jack Dorsey backs Bitcoin
There have also been other Bitcoin proponents, prepared to commit large chunks of their portfolio to the cryptocurrency. On 7 October 2020, US merchant services aggregator Square Inc purchased 4,709 Bitcoins at an aggregate purchase price of US$50 million (A$70 million).
Square has been working with Bitcoins in the crypto space since 2018 through its Cash App product, a means for customers to buy and sell Bitcoin securely.
“To maintain transaction privacy and price slippage on execution, Treasury purchased the Bitcoin over-the-counter with a Bitcoin liquidity provider that we currently use as part of Cash App’s Bitcoin trading product,” the company announced.
“We negotiated a spread on top of a public Bitcoin index and executed trades using a time-weighted average price (TWAP) over a predetermined 24-hour period with low expected price volatility and high market liquidity, to reduce risks associated with cost and pricing”.
Closer to home, ASX-listed DigitalX (ASX: DCC) executive director Leigh Travers confirmed with Small Caps that the company holds 431 Bitcoin on its books.
PayPal will allow customers to hold bitcoin and other virtual coins in its online wallet and shop using cryptocurrencies at the 26 million merchants on its network. With over 346 active PayPal accounts worldwide, Bitcoin is set to go mainstream.
So far this year, the Bitcoin price has been undermined by the COVID-19 pandemic with investors liquidating their positions in search of safer assets. Prices have gyrated between US$5,000 (A$8,000) and US$12,000 (A$17,000) per coin as investors were skittled by the economic impacts of government restrictions and quarantine measures.
According to Mr Pal, the global economy is now moving from the “hope phase” to the “insolvency phase” as investors come to terms with the prospect of an eventual recovery from the pandemic taking much longer than anticipated.
At the time the pandemic made its first appearance in February 2020, market participants largely discounted the effects of the disease as a short-term effect upon domestic and international business.
However, despite COVID-19 being brought largely under control in most countries, severe restrictions remain in all countries while hopes of strong economic recoveries are being pinned on impending vaccination programmes, set to be rolled out next year.
“The economy’s not going to recover for a lot longer than we expect,” Mr Pal said. “There’s no stimulus around, and we’ve got more problems to come in Europe, the US, and elsewhere.”
”Businesses don’t have enough cash flow. They’re closing in droves. And that’s what I called the ‘insolvency phase’,” he added.