The Outsized Influence Of Central Banks Have Changed How CEO's View Reserve Assets

On February 3rd, 2021, Microstrategy held their annual Microstrategy World Conference.  The event typically celebrated the role of analytics and business intelligence.  However, in August 2020, Microstrategy moved its cash reserves into Bitcoin. At the conference, the conversation around Bitcoin was prevalent and top of mind.  In fact, the company doubled down on the future of Bitcoin with full tracks on how enterprises should use the cryptocurrency as CEO and founder Michael Saylor and Phong Le (President and CFO) shared their experiences with the virtual audience.  Over 12,000 attendees attended the live virtual event with almost 250k watching the virtual content, post event.

"The keynote fireside chat with Microstrategy CEO - Michael Saylor and Ross Stevens, CEO of Stoneridge Capital and Founder, Executive Chairman of bitcoin player NYDIG, was the biggest highlight of the conference and probably the best keynote of any enterprise software conference in the past 12 months."

The central argument behind Bitcoin's rise and the need for CEO's to pay attention can be summarized in 7 ways:

1. The CEO's most important jobs comes back to capital allocation.
2. Central banks around the world have capitulated to politicians around the world by setting interest rates at near zero and in some cases below zero.
3. Cash is no longer an asset, it has become a liability as it rapidly becomes devalued,
4. Central banks can control the supply of money but they cannot set the value of money.
5. When risk of a currency is no longer priced, the market will set a price by moving into other assets that increase in value or devalue at a slower rate
6. Central banks are out of control and continue to print money
7. CEO's must determine how to de risk their cash holdings with assets that are not being devalued.

As one can imagine, non-asset owners are the most vulnerable as they will be left behind.  This major shift in thinking about the weakness of fiat currency will lead to a generational shift to more stable assets and restricted supply assets such as Bitcoin.

Bitcoin Plays A Key Role In Protecting Reserve Assets

As unlimited printing of fiat currency endangers the global financial system, forward thinking organizations will consider Bitcoin as part of their reserve asset strategy.  Why? Traditional corporate finance and conservative financial manager types have often moved to precious metals such as gold and silver as a hedge.  Pricing of these metals have been based on supply and demand.  For example, gold grows at 2% per year while the supply of silver grows 20 to 30%.  Bitcoin has a finite supply where only 21 million bitcoins that will ever be mined. 

As supply moves asymptotically to zero, the value continues to rise.  When gold is compared to Bitcoin on supply alone, the limit of Bitcoin will make the cryptocurrency exponentially more rare in supply than gold.  More importantly, Ross Stevens astutely pointed out that "Bitcoin is the first stored value asset and currency where supply is completely unaffected by demand."  One will not be able to print or make more when the final Bitcoin is mined.

In addition to the value of Bitcoin in the long run, Ross Stevens pointed out a few other factors that make Bitcoin a better reserve asset today and a future open source decentralized value exchange network in the future:

• Bitcoin is easier to move and transact.  As a digital currency, bitcoin is easy to move and transact.  Final settlement is in milliseconds not days or in some cases months.  Banks and parties don't have to worry about debt nor credit risk.
• Bitcoin is an electronic bearer asset meets open source monetary data driven digital network (DDDN).  Transacting parties can achieve final liquidity in any currency pair.
• People to people (P2P) transactions can occur in an open source monetary network.  Intermediaries in the financial network are rendered useless as global trade, credit card transactions, remittance markets, and individual payments can interact with no merchant fees, financial fees, or currency exchange charges.
• Bitcoin ensures that money is preserved as a global property right.  Anyone in the world can use the open source monetary network to transact with confidence and finality.

Why Organizations Will Move Their Reserve Assets to Bitcoin

During the fireside chat, Ross made a compelling argument as to why organizations have and will continue to move their reserve assets to bitcoin. He asked a compelling question, "What do we have to believe to be true to move to Bitcoin for reserves?"

• Dollar depreciation vs Bitcoin will exacerbate.  Dollar has declined 80% in the past two years and 30% in the past year.
• Move to Bitcoin will create exponential end state economics.  While not risk free, organization's who move to Bitcoin will see a better yield for reserves and set higher hurdle rates for investments.
• Bitcoin financial innovation will emerge in 2021 and beyond. Ross envisioned a world where income annuities, salaries, and other financial instruments will be paid out in Bitcoin.
• Bitcoin is no longer in its infancy.  The cryptocurrency has operated with 12 years of safe operation of the network. At above $500 billion in market cap, the price of bitcoin could easily hit $50,000 a coin reaching $1 trillion in market cap by end of 2021.
• Fiat reserves are more risky than Bitcoin.  Crazy theories such as Modern Monetary Theory (MMT) and other schemes to devalue fiat currencies place global currencies as a risk not an asset.

Bitcoin Brings Clean Energy, Responsible Development, and Equitable Development Into The Future

While many environmental activists and climate crisis promoters often see bitcoin as an energy hog, Ross Stevens ended the fireside chat with a conversation on how the energy used to mine Bitcoin could be used to create equity and societal good.  He and his firm estimated that the Bitcoins mined will consume about 10 million humans worth of energy.  Stevens puts forth an argument that the the world has been challenged by not the ability to produce energy but with the ability to channel energy to the right geographical location.   

In the case of Bitcoin, the use of energy to mine a Bitcoin is a definable math problem, not a geographical problem.  He sees Bitcoin mining as the most efficient and profitable use of clean energy.  Why? Energy usage to mine Bitcoin and the related monetization do not require geographical constraints. He imagines that countries with clean energy sources such as a hydro, geothermal, or wind can mine bitcoins anywhere and in hard to reach or under developed locations.  The profits from Bitcoin mining could fund the infrastructure build outs for roads, clean water, connectivity, housing, and public health.  Humanity can cluster around clean energy sources instead of waste those resources. 

As Stevens put it, "We used to move power to people. Bitcoin moves people to the power."  Unlike the useless and costly feckless climate accords, or green mandates for virtue signaling, he sees change when clean energy aligns with a clear and real profit motive. This development of abundant clean cheap energy coupled with manufacturing money from clean energy can fund a country's development and take emerging markets and developed countries into a more equitable and sustainable period of growth.

The Bottom Line: The Pandemic Has Accelerated The Rise Of Bitcoin And Every CEO Must Take Notice

Irresponsible over borrowing and printing of fiat currency has created a reflation trade crisis and perpetuated the equity crisis.  In the past, central banks could print with some abandon by repatriating currencies into property, equity markets, tech startups, and direct foreign investment.  Given how much fiat currency has been printed over the past 20 years, there is more money on the sidelines and more money in circulation than value or worth in the world.  As Bitcoin moves from an asset that touches millions to a data driven digital network that impacts billions, fiat currencies and reserve currencies are at risk and face competition with efficient cryptocurrencies.  New digital giants will emerge around Bitcoin and organizations that fail to build or partner in these networks will perish.

The recent moves by Microstrategy, Tesla, and over 250 institutional investors and family offices represent the growing momentum for the use of Bitcoin.  In just three years, association with Bitcoin has gone from radioactive to visionary.  As decentralized finance (Defi) accelerates and central banks continue to placate politicians, this rise of Bitcoin will be more than just a fad, it will transform markets and destabilize reserve currencies.

Learn more in my newest book Everybody Wants To Rule The World: Surviving and Thriving In A World of Digital Giants

Your POV

Will you put your reserves into bitcoin? Is this the future of reserve assets?  What's your CFO thinking?

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