With companies investing spare cash in Bitcoin, how will their asset size and return jump look like?
The recent rush of Bitcoin investments by economy giants has unleashed a wave of speculation both over the cryptocurrency market and the traditional one. Many takes have been written about why companies are doing this and what it means for crypto, but there’s been far fewer opinions issued on what this means for traditional markets beyond “companies hedging their bets.”
And yet, it’s understandable that traditional markets wouldn’t know what to do with this information. Until now, economy has always moved around goods and production.
Everything traded in stock or commodity markets had a use, a supply, and a reason to be. Even arguably superfluous items, like jewelry, still have a use (in this case, looking good.) The appearance of bitcoin is not entirely speculative and should have been expected to shake the market.
Why does this new market matter?
As stated above, because it’s entirely speculative. Bitcoin, and its value, isn’t based on anything other than supply and demand for an entirely useless good. There is a world of good to Bitcoin and this can be seen in the huge amounts of money so obscene used in its daily trades that the GDP of several countries is dwarfed in comparison.
Why are companies buying it?
To hedge their bets against a recession, plain and simple. Bitcoin could be thought of as virtual gold (minus the actual, real life uses of gold,) and when markets expect an incoming recession it’s quite common for investment in stocks to drop and investments in certain goods to rise.
While several governments in the world keep acting like nothing is going on and there’s no recession whatsoever, large companies aren’t buying it. They know we’re in the middle of a recession. They know the more than a million deaths from COVID (and counting) plus countless people left with long-term illnesses will take a toll on the worldwide economy.
We just haven’t seen it. So many companies are taking steps to minimize the effect of the recession on their balance sheets.
Should companies then be recession-proof this time around?
Well, so far, fiat money printers have been hard at work with as much as 23 percent of USD ever printed rolled out just in 2020 alone. What this means is that the real value of fiat currencies has nose-dived while that of Bitcoin has remained intact.
Bitcoin cannot be over-minted over night as its block difficulty cannot be overridden by any legislation. In a sense, bitcoin is recession-proof and companies can boost their asset value by investing in bitcoin.
But the price is going up…
Yes, it is. But only because many companies are buying every Bitcoin on the market.
Being entirely speculative, the value of Bitcoin depends exclusively on supply and demand, and we’ve seen a hugely increased demand for the last few months. But that may or may not last.
Why would it last?
Because once the recession is over and economies start growing again, some of these big players on the Bitcoin market might want to cash out and return their liquidity to fiat currency. Not all will, of course, but here’s the detail with the Bitcoin market: It’s made up of very few people hoarding the vast majority of the supply. The recent uptick in USD value for instance led to a mild drop in BTC trading price.
So companies will lose? Returns will go down?
Depends on when they buy and when they sell.
Companies that started buying Bitcoin months ago naturally have an advantage, since they bought the tokens at much lower values than the current. This means they have a much bigger space to maneuver in case the market crashes.
Companies that have entered later, however, are taking risky positions because there’s no telling when one of the large players might want to cash out, potentially flooding the market and crashing it.
What if they don’t, uhm, cash out?
It’s also possible. Most companies will likely want to keep a percentage of their holdings in Bitcoin if their current gamble pays out, which would in turn give the Bitcoin market some stability.
But once again, the problem is how few players actually are controlling the Bitcoin economy. It might take just one company deciding to convert all its Bitcoin to fiat to send the price crashing. That company would, then, report a huge return. Any other holders who sell immediately might, too. But anyone else who takes too long to act, or anyone who buys tokens too late in the curve, will face huge losses.
So the result is…
Some companies will likely win big with this Bitcoin gamble. Others might lose big, and some might choose to invest in the crypto market in the long term, to the point where it won’t matter to them if the price goes crashing in the short term.
As with all recessions, it’s impossible for a market or company to completely assure they won’t be hit by the dip. What companies here are doing is trying their best not only to remain unscathed, but to also make some money along the way.
Will it work? It will, for some. It won’t for others. In general, companies that jumped in earlier have a head start. Since the stock market upheavals have yet to make companies exit global bourses, you can be sure BTC investing will likely endure as well.