Insider Insights October 2020 Issue

 Digital Assets Vie for the Safe Haven Throne

As economic uncertainty lingers, several large institutional investors have made not-entirely-expected purchases of Bitcoin, helping to buoy an already bullish market. Fiat currency devaluation has driven investors to seek new avenues to ride out the storm. Although Bitcoin has made inroads into this space in the past, it has enjoyed several new votes of confidence as a long-term asset class over the prior month.

Several Institutional Investors Dig Deep for Bitcoin

On September 14, 2020, business analytics firm Microstrategy added 16,796 bitcoins to their existing holdings at a purchase price of $175 million, reaching total holdings of 38,250 bitcoins for which they have paid a total aggregate sum of $425 million. This movement represents the second prong of a twofold strategy to managing their treasury reserve, which consists of “bitcoin held by the company, with bitcoin 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.” CEO Michael Saylor does not seem to have plans to move this bitcoin, adding that he feels “pretty confident that Bitcoin is less risky than holding cash, less risky than holding gold” and feeling he will hold onto it for “a hundred years.” This represents a notable shift from Saylor’s prior sentiment in 2013, when he tweeted that “Bitcoin’s days are numbered. It seems like just a matter of time before it suffers the same fate as online gambling.” Saylor added that taxes and fees will kill most other assets given a long enough timeline, and that Bitcoin has the added benefit of not being beholden to a CEO, government, or country, with continuing innovation giving it the staying power it needs.

Two major investors, payment processor Square and asset manager Stone Ridge Holdings followed Microstrategy’s lead, respectively purchasing $50 million and $114 million in October. In their October 13 press release, Stone Ridge founder Ross Stevens observed that the US dollar has depreciated 70% against Bitcoin and the Federal Reserve’s balance sheet has increased by $3 trillion since 2019. Square remained relatively mum regarding their investment but declared that “economic empowerment provides a way for the world to participate in a global monetary system.” With so many large purchases occurring, concerns over Bitcoin’s supply are growing. As of this writing, 18.4 million are in circulation with only 2.5 million left to mine. With investors now habitually buying tens of thousands of coins at a time, it is highly likely that such big moves will either drive up the price of bitcoin, or spill over into other digital assets – perhaps representing part of the impetus for Bitcoin’s 50% price rally since the beginning of the year.

While not investing directly in digital asset holdings, payment processor PayPal and subsidiary Venmo instead announced that they will allow account holders in the United States to store, buy, and sell Bitcoin, Bitcoin Cash, Ethereum, and Litecoin on their platforms beginning later this year, with plans to expand internationally in 2021. The move will introduce digital asset trading to its 346 million user accounts. Investors agreed that PayPal is well-positioned for this offering, with Joseph Edwards of the London-based Enigma Securities stating, “There’s no comparison with regards to the potential exposure between the upside of PayPal offering this, and the upside of any similar previous offering,” and adding that he expected positive price movement as a result.

Traditional Safe Havens No Longer Performing as Desired

The Federal Reserve has indicated that it will take an accommodating stance for at least a few years due to the pandemic. The United States budget deficit reached $3.1 trillion due to various measures taken by the government with significant spending expected to continue – and both parties have expressed the desire for another round of $1,200 stimulus checks sent to the public, though no total package has been signed as of this writing. The US dollar has proven unpopular due to devaluation, and bond yields have been whittled down next to nothing. Central banks in many other countries are also embarking on various qualitative easing programs, so there are no guarantees foreign investments will perform better. While gold popped in the initial economic uncertainty and reached an all-time high, the price has since struggled over the past quarter. There has been much talk of vaccines but the timeline for manufacture and distribution once approved is measured in quarters, not months, so if there are reasons for gold’s lagging price, an anticipated immediate return to normal shouldn’t be counted among them. For an asset to outshine another, it must have both a fixed supply as well as strong usage and fundamentals, which digital assets have been displaying a strong showing in recently, leading them to edge out other options.

Anthony Pompliano described the changing trend as investors seeking new options to put their cash, and digital assets are increasingly fitting that bill. While it was more expected that investors would take smaller positions at first, the fact that larger allocations are happening is a vote of confidence that Bitcoin is proving its worth, a prediction also made in prior Insider Insights articles. As it is non-sovereign, fixed supply, and deflationary, it ticks all the required checkboxes, and it is also being increasingly perceived as a less risky asset rather than holding cash or gold, engendering further confidence – quite a notable difference from the common fly-by-night, get-rich-quick allegations levied against it in its youth.

The points of contention that investors held regarding digital assets were that they were new, unproven, and unregulated, and this is a perception that they are rapidly shedding. A primary ask of investors was that digital assets act, look, and feel more like traditional investments that they might see in their portfolio. Now that offerings are being conducted through trusted firms like Fidelity and the New York Stock Exchange, that is a demand that they are delivering on, and one that PayPal will soon be mirroring on the consumer end. Digital assets now look and feel like fiat currency more than ever before.

Concluding Thoughts

Although it is well-documented that Bitcoin jumps in uncertain times, investors should take note that it is jumping far higher than its traditional competitors. Currency devaluation and uncertain gold prices mean that a new place to store liquidity is desired, and sentiment around Bitcoin reveals it is now considered a long-term asset class rather than a speculative investment. It is likely with these bullish movements into the asset that more investors will follow suit before the pandemic has fully run its course.

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Darius Askaripour
Managing Partner

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