I recently posted two crypto-related videos with short commentary on LinkedIn yet decided to expand on these initial thoughts because I believe the optimal environment is forming that could enable the greatest corporate trade in history.
You read that correctly.
The. Greatest. Corporate. Trade. In. History.
A fundamental shift may be occurring in the US corporate sector. And since the problem is global in nature – as is the solution - there is no reason to believe that this couldn’t turn into a global corporate “gold rush”. Although in this case, it would be for 21st century gold equivalent. Namely, bitcoin.
Welcome to 2021, the year of the #bitcoinrush.
The Background – fiat currency
A quick overview of fiat currency is useful to provide context to firstly understand the problem and then see the solution.
The problem: that piece of paper in your wallet; otherwise known as a dollar, a euro, a yen, etc., also known amongst central bankers and investors as fiat currency.
Fiat currency is issued by governments and is declared “legal tender”. However, unless it’s backed by a hard asset (like gold – reference the US Dollar pre-1971), it’s merely a piece of paper that the government “supports”. In other words, it has no intrinsic value at all – just a government stating (sometimes emphatically) that it has value … so you better believe in it or else! (Wiki’s definition - https://en.wikipedia.org/wiki/Fiat_money).
My main point about fiat currency is that never, in the history of mankind, of nation-states, of civilisations far and wide, have fiat currencies withstood the tests of time. Eventually, and ultimately, every ruling class debases the currency for various reasons, ranging from economic mismanagement, over-indebtedness, even empire overreach. In fact, debasing one’s currency becomes an addiction because it enables the ruling class to cover up their mistakes. At least in the short term. Over longer periods of time, printing more fiat currency does not create more societal wealth. On the contrary, it acts as a hidden tax on the population, reducing their purchasing power over time.
Put bluntly, in all of human history, each and every fiat currency has failed; and they will continue to fail; regardless of the issuer.
Look no further than the US dollar, the world reserve currency for the past ~100 years or so. You can see here (https://www.investopedia.com/articles/forex-currencies/092316/how-us-dollar-became-worlds-reserve-currency.asp) that the dollar, and reserve currencies in the past, were generally asset-backed. That is, until troubles arrived, at which point the leaders of the day asked their citizens to just trust the government issued paper.
As the old expression goes, a picture says a thousand words. The US dollar has lost a vast majority of its purchasing power since 1950; particularly since 1971, when the dollar went off the gold standard and became purely paper.
Fast forward to 2021. Interest rates are zero, even negative in some places. Central banks are printing fiat at unprecedented rates (remember the term quantitative easing? It never went away, regardless of whether the media still cover it or not).
The bond markets are in a gigantic, historical bubble. The equity & real estate markets are also back to historically high levels.
This. Will. Not. End. Well.
Given this current economic timebomb, what is a corporate (and individual?) to do with dollars (or euros, or yen, or pounds, etc) accumulating on its balance sheet?
Enter Michael Saylor.
The Architect – Michael Saylor
In the second half of 2020, Michael Saylor, CEO of Microstrategy Inc (MSTR - https://www.morningstar.com/stocks/xnas/mstr/quote) converted his company’s balance sheet cash into bitcoin. He also borrowed money, via a bond issuance, to buy even more bitcoin. He essentially converted his company’s functional currency from the US$ to BTC. In a more than $1 billion bet. At the time, his company’s market cap was about $1.8bn.
Was he crazy? Is he still crazy? Or has he executed the best trade of all time?
For those interested in his rationale, I encourage you to watch this brief video (
). His logic is sound, as is his analysis of alternatives paths. Doing nothing, for him, was folly. And early results, as judged by Mr. Market, indicate success thus far as MSTR has more than trebled in market cap since October 2020.
Here is where our story starts getting interesting.
After completing this trade, Mr. Saylor engaged in a Twitter exchange with Elon Musk regarding bitcoin. To-date, Elon Musk has been coy regarding his views on cryptocurrency in general (except for, oddly, support of Dogecoin. But, alas, that is another story that one day may come out).
Is this a big nothing burger? Or is our scene now set?
What could be next?
Enter our Seer, Max Keiser. Mr. Keiser is one of bitcoin’s leading proponents, claiming to have gotten into the trade at $1 / bitcoin (it now trades at ~ $31k / bitcoin at the time of this writing)
The Seer – Max Keiser
Max took Michael’s tweet and extrapolated it (
). His theory is as follows:
· US (and global) corporates can borrow fiat money at next to no cost
· Fiat money is all racing downwards in purchasing power at unprecedented levels due to overzealous printing presses
· Bitcoin is decentralised, private, uncontrollable (and incorruptible) by governments and has a fixed supply of 21 million bitcoin
· Central banks are set up to now fail. With zero interest rates and a corporate sector able and willing to arbitrage, this could be like 1992’s Black Wednesday all over again (https://en.wikipedia.org/wiki/Black_Wednesday) (one of his more provocative predictions is that a major central bank will become insolvent in 2021).
· Finally, in his words, bitcoin is a “one-way move with no top”
Consequently, the perfect corporate arbitrage is in place for the bold to execute.
But why bitcoin?
Crypto advocates often refer to bitcoin as “digital gold”. But as a store of value, some believe bitcoin to be superior to gold as there are no storage costs, one can transact with bitcoin every second of every day in any currency desired, it’s not centrally controlled (indeed, governments cannot control it) and it’s anonymous.
And bitcoin is only just warming up. As a financial pundant recently described bitcoin’s journey, “it’s only in the first half of the first inning”.
But how to value bitcoin? One witnesses daily price rollercoasters that make equities look boring. With such past volatility, bitcoin has certainly not been for the faint of heart. However, the belief of an increasing number of investors is that as bitcoin continues to become more mainstream and more distributed amongst a larger owner base, price volatility will reduce. Only time will tell if this will happen, but such belief seems reasonable.
If bitcoin is a store of value – even superior to the ultimate time-tested store of value found with gold – then it’s natural to start benchmarking it against gold. The total value of global gold, at a price of ~ $1,800/oz, is approximately $9.5 trillion. Bitcoin is currently worth about 6% of the global gold reserves. Yet unlike gold, which will continue to be mined into the future (i.e., supply will go up – on average about 2% per year), bitcoin’s supply is fixed at 21 million bitcoins. With a fixed supply side (we’ll get to demand side in a bit), it not a stretch to see how its price could appreciate further.
But the story gets better.
Retail investors drove the bitcoin price spike back in 2018. Today, it’s becoming clear that recent price increases have being driven by a broader set of buyers. The early adopter “HODL”ing retail investors are still there, like in 2018, but institutional investors and some corporates are now buyers as well. And as Mr. Keiser has stated, and I will highlight below, corporate firepower is nearly limitless.
According to a January 2021 interview of Goldman Sachs’ Jeff Currie:
“The key to creating some type of stability in the market is to see an increase in the participation of institutional investors and right now they’re small,” he said, adding that, of the more than $600 billion invested in bitcoin right now, “roughly 1% of it is institutional money.”
However, institutional investor (i.e., pension funds, insurance companies, money managers and investment funds) interest IS rising, as written about most days in the financial press. Goldman Sachs announced this week that they are looking to get into digital asset custody. Citi and JP Morgan have announced similar. These three investment banks are client-driven so, clearly, they see an opportunity to become active in this space.
Fidelity, one of the world’s largest money managers, launched a bitcoin fund last year for wealthy investors. MassMutual recently invested $100 million in the crypto market and according to Tyler Winklevoss, co-founder of Gemini, institutional investor is “huge” yet “most of it is silent”.
To name a few more, renowned investors including Paul Tudor Jones, Dan Tapiero and Raoul Pal have each named bitcoin as a potential hedge against the inflation during this unprecedented central bank stimulus.
Momentum is clearly building amongst those sophisticated investors “in the know”.
And if one considers that bitcoin has a current market cap of “only” $582 billion (about 18.6 million coins are now mined out of the fixed amount of 21 million), it’s easy to see how a fundamental supply-demand mismatch could occur. And as we all remember from our Econ 101 class, price is the balancing element between supply & demand.
So, whilst it’s quite reasonable to assume that more and more institutional investors will continue to explore, with some subsequently investing in this still relatively new asset class, for the purposes of this article, I will ignore interest from entities other than the corporate sector. For it is the corporate sector that can, alone, play the game changing catalyst, propelling bitcoin to unimaginable price levels.
Gauntlet thrown (aka, the “TSLA challenge”)
Back to Messrs. Saylor and Musk. And corporate America.
In the 20 December tweet from Michael Saylor to Elon Musk, he proposed that Tesla (TSLA) follow MSTR’s lead – namely, convert TSLA’s balance sheet from (a depreciating, debasing) US dollar to bitcoin. Mr. Saylor believes that trade is worth $100 billion for TSLA’s shareholders. And if others follow suit, it could be worth $1 trillion for S&P 500 shareholders.
TSLA has a market cap of nearly $800 billion at the time of this writing. And Elon Musk is the type of person to take on such a challenge. But even if he doesn’t, non-financial American corporates have nearly $1.8 trillion in cash and cash equivalents sitting, dare I say wasting away, on their balance sheets.
At a global level, corporate cash firepower is obviously considerably more than a mere $1.8 trillion. And it’s leverageable to literally unlimited scale, curtesy of the central banks.
The Great Corporate Trade (“GCT”) of a Lifetime
Pulling together all of the above-mentioned facts about fixed supply of bitcoin, increased demand for bitcoin from a growing number of buyers, the slow destructive purchasing power of fiat currency and the actions of early corporate adopter pioneers like Mr. Saylor, I believe the GCT of a lifetime is here, in front of our very eyes. All it takes is a bit of mosaic theory, coupled with a firm belief in the merits of bitcoin.
The GCT is, quite simply, “bitcoinizing” corporate balance sheets (i.e., from dollarized). The US billionaire corporate CEO class will play the prominent role. And once a critical mass is achieved by these billionaire pioneers, the broader corporate sector will be “forced” to follow.
My GCT mosaic theory logic is as follows:
US billionaires will lead this charge. Why? Because they are the best placed to be the catalysts, are driven by ego, greed and fear (as well as innovation, like Mr. Saylor has shown), they can mobilise enormous corporate cash positions & can best capitalise on the Fed’s cheap money policy.
1. Billionaires compete with each other more aggressively than us normal folk, and none of them want to be left behind if several of their fellow billionaires have discovered a new strategy of wealth creation. Ego plays into this, as does greed.
2. Said billionaires also have FOMO (a crypto community term meaning “fear of missing out”) and, if I may dare say, are also susceptible to herd mentality. The pioneers have already made their move. Fear also works.
3. Some of these billionaires still control and/or exert considerable influence in the companies that they have founded (examples include Facebook, Google, Oracle, Tesla, Microsoft, Twitter, etc).
4. Incorporating Max Keiser’s view about the “one way trade with central banks”, these corporates are also in the position to mobilise enormous leverage in this GCT by borrowing at little-to-no cost
5. Finally, the playbook is now out there, in public view, thanks to Mr. Saylor.
In fact, another US billionaire made a similar move to Mr. Saylor at around the same time – he just didn’t go to the extreme like MSTR did. Everyone knows Jack Dorsey as the CEO of Twitter; fewer know that he is also the CEO of Square, a financial services firm. Under Mr. Dorsey’s direction, Square decided bitcoin made sense to own on its balance sheet and so, last October, it bought ~4,700 bitcoins. At current market value, that represents $145 million (on an investment of $50 million). For a company with a market cap of ~ $100 billion, this is insignificant. But Square’s CEO, similar to MSTR’s CEO, saw the play. It’s just that MSTR amped the play to the extreme. Billionaires play at the extreme. That’s how many become billionaires in the first place.
The GCT literally “weaponises” corporate balance sheets, making these corporates even more supranational, influential and powerful than they already are today. And more and more corporates will have to make this same move, given:
· the precarious situation of fiat currencies
· the structural features of bitcoin
· other corporates are starting to do it. Corporate boards & CEOs will have to look hard at this, as per their fiduciary responsibility, and will be under increasing pressure if equity markets continue to reward the pioneers.
To summarise, I believe there are many more Michael Saylors & Jack Dorseys out there that recognise that they can convert their cash balances into a harder asset. They are now playing catch-up. Ego, greed and fear will start to seep in. And once more corporates join the GCT, a snowball effect will kick in.
Consequently, I believe we’re now at the beginning of the GCT. It’s starting to happen in real time and will proceed apace at internet speed. Greed and fear are two of the most powerful human emotions – and when coupled together with trillions of cash in firepower, a “one way trade” with cost-free money, mixed in with billionaire egos, you better stand back. Or lean in.
Back to Econ 101: such a torrent of new demand will send bitcoin’s price skyrocketing. Indeed, one can now start understanding why Wall Street firms like Citi & JP Morgan predict bitcoin to rise to $318,000 & $146,000 / bitcoin respectively in 2021. For his part, Max Keiser predicts a price of $225,000 / bitcoin this year. And there are even more bullish price predictions out there, starting from $400,000 / bitcoin, mostly from individuals in the space.
A quick look at bitcoin prices tells us that something is happening. Something profound.
Implications for the small fry?
A natural question may be “So what?” “What’s in it for me?”
Quite simple: if the big boys are moving into this space – and it seems that they are in unimaginable speed & scale – then one has a simple decision to make (and it can only be YOUR decision, as this article does not represent investment advice).
For me, and to borrow again from crypto lexicon, I am disenchanted with “FIAT”, I ignore the “FUD”, I’ve bought & am now “HODL”ing so as not to “FOMO”.
1. This article should not be construed as investment advice. Each and every person should do their own research and, if needed, consult with financial professionals before making investment decisions. Bitcoin can be a historic game changer and I believe it is. However, bitcoin is also a speculative product that may come under pressure from governments. In short, its future price is uncertain.
2. One may ask why does an “energy guy” writes about bitcoin? Well, besides for being a passion of mine, crypto mining could well turn into the “x” in Power2X. More on THAT in a future post!
3. What about government and/or central bank intervention / pushback? More regulation is coming for sure & it should be welcomed. However, when the billionaire class becomes significantly invested in bitcoin, their influence will play out as usual.