August of 2020 may very well have seen a bellwether event for Bitcoin as Microstrategy became the first major company to shift a major portion of its cash reserves to Bitcoin. The company announced on August 11th, 2020 that they had acquired 21,454 Bitcoins with a valuation as of today’s writing worth over 251 Million in US Dollars. Canadian restaurant chain Tahini followed suit shortly thereafter. This represents an unprecedented confidence in the valuation and longevity of Bitcoin.
Why are companies doing this? You might look at the meteoric rise of Bitcoin since March of 2020 as the answer, but the truth is deeper than that. Since the global pandemic hit, the US has funded about $3 trillion in relief funding or other aid. This money came from essentially printing it out of thin air. This can’t help but ultimately cause the US Dollar to devalue. That means the cash reserves companies have in US Dollars fall in value as well.
Value in a currency comes from among other things: a scarcity of the currency, an ability of the currency to have liquidity, and confidence in the currency as an asset.
- Bitcoin has a built in scarcity. Only so many Bitcoins can be mined and the rate of that mining halves periodically. It can’t be “printed out of thin air”. There are only 21,000,000 Bitcoins in existence. At the time of writing, there are over 18,000,000 Bitcoins already in circulation, leaving under 3,000,000 left to be released via mining rewards.
- Bitcoin increasingly has more and more liquidity. An internet connection and a cell phone are all that is required to trade it. The value of daily cryptocurrency transactions now exceeds the value of Paypal transactions. Most of that is in Bitcoin.
- Confidence in Bitcoin as an asset takes initial investors having the courage to acquire it – that is organizations such as Microstrategy and Tahini taking the leap to hold it as an asset. Today, financial institutions are increasingly holding and trading Bitcoin. Confidence in Bitcoin appears to be continuing to grow.
As investment and exchange of decentralized currencies increases, a number of questions emerge:
- Will the US Dollar as the world standard currency since 1944 continue to erode and is decentralized currency a driver for that?
- Will US Treasuries continue to be viewed as a secure investment?
- Will companies’ confidence in Bitcoin as a reserve asset enhance the value of the currency?
- Will others follow suit?
The times ahead will prove very interesting for both the US Dollar and Bitcoin as answers to these questions present themselves!