The Potential Impact of Increased Capital Allocation to Bitcoin

Bitcoin is gaining the wider attention of traditional finance. The market is gearing for institutional adoption as companies look for alternative investment strategies to de-risk from geopolitical and macro uncertainty.

Microstrategy (MSTR) announced they converted cash on their balance sheet to bitcoin in August and again in September. From the time of the first announcement to two days after the second, their stock rallied 41%. Regarding their decision, MSTR cited that a confluence of macro factors posed a risk to their corporate treasury program. Ultimately the company turned to bitcoin as a primary treasury reserve asset because it’s dependable as a store of value and attractiveness as an investment asset with more long-term appreciation potential than cash.

Sovereign wealth and pension funds – deemed some of the most conservative investors – are facing the same geopolitical and macro risks and are beginning to invest in this historically-dismissed asset class.

Corporate Treasuries

Corporate Managers are charged with the unique challenges of ensuring their company’s liquidity, optimizing their company’s capital structure, managing financial risk and diversifying funding sources. This year, given the uncertainty, companies have hoarded cash defensively. S&P 500 companies (excluding Financials) have increased their cash holdings by$250 billion in Q1’20 to a record $1.8 trillion. The amount of idle cash on the S&P 500 balance sheet alone is 7x BTC’s market capitalization.

Companies have been unapologetic in stockpiling cash during this period of uncertainty. However, an unintended consequence of this is that they’ve inadvertently destroyed shareholder value. Cash has underperformed the S&P 500 market itself by 5% YTD while the purchasing power of the USD has eroded by 1%.