The Viral Nature of Bitcoin inside Publicly-traded Company Stocks

In mid-August of this year Microstrategy, a public business intelligence and enterprise analytics company, announced that it had acquired 21,454 bitcoins at an aggregate purchase price of $250 million ($11,653/BTC). Yesterday, Square Inc., a payment and point-of- sale solutions provider founded by Jack Dorsey of Twitter, announced the purchase of $50 million in bitcoin. Square’s investment represents 1% of their investment portfolio, for Microstrategy it was 90%.

These two purchases represent a new use-case for the digital currency: public companies seeking inflation protection and aggressive use of investment portfolios for their shareholders.

Publicly-traded companies shifting cash to Bitcoin brings up a lot of questions. Why would a company invest in Bitcoin? How does a company purchase and secure it? What does this mean for Bitcoin and for investors at large?

Microstrategy explains in their press release: “This investment reflects our belief that Bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash.” They go on to explain that Bitcoin has proven useful to individuals and institutions and that as governments and central banks grapple with Covid and increasingly common financial crises, fiat currency is likely to depreciate.

How does a company buy $50+ million of Bitcoin?

Though Bitcoin has experienced ups and downs, investnnt infrastructure has been steadily building. Today, there are more than a handful of brokers that can execute large transactions. Such brokers may conduct a series of small trades on spot markets where retail investors trade. They may call on OTC markets where lot sizes start at $25k and reach into the millions of dollars.

For context, Microstrategy made an announcement in the previous quarter about a new capital allocation strategy wherein, half its cash would be returned to shareholders through “a cash tender offer for up to $250 million of MicroStrategy’s class A common stock via a modified Dutch Auction offer.” The other prong would be to invest up to $250 million in one or more alternative asset. There was little coverage of the annoucement, which set the stage for the Bitcoin purchase.

How can a corporation secure large amounts of Bitcoin?

Nearly everyone has heard of Bitcoin hacks where millions of dollars in value have be stolen. Though perpetrators are caught often enough, very few stolen bitcoins are recovered. So being able to secure the company’s stock of Bitcoin is an important purchase prerequisite.

For security, Microstrategy relied on a number of established Bitcoin custodians, which are companies well versed in keeping large amounts of Bitcoin secure. Typically these companies, Bitcoin exchanges, brokers, or miners, implement cold storage with multisignature contracts and other business controls.

Cold storage refers to keeping signing keys offline. A multisignature contract requires transactions to be signed by m-of-n keys, similar to a nuclear launch code scenario and business controls can ensure secrecy around who has keys, limit where coins can be sent, by multiple employees around the globe.

Square has even developed and open-sourced a cold storage solution of their own:

Bitcoin exposure about to go viral?

In the US, corporations generally have few restrictions as to how they manage their investment portfolios. Internally their Investment Policy Statements (IPS) describe their holdings, investment goals, and allowable asset types. For companies that hold currency, Bitcoin would go in that bucket.

What‘s new here is passive and potentially viral exposure to Bitcoin. For example, BlackRock and Vanguard (the two largest shareholders) now indirectly own 5783.9984 bitcoins worth $63.9 million due to Microstrategy’s Bitcoin investment. Many individuals and family offices would not hold currency but almost all hold stocks, which means that investors-at-large may gain significant exposure to Bitcoin through the stock asset class as more company treasuries include the digital asset.

Couple this with Bitcoin’s historical volatility, and investors may have their attention drawn to unexpected gains (or losses), find Bitcoin is the root cause, and make direct investments of their own.

Gradually, then suddenly.

There’s always been a feeling in Bitcoin circles that the technology and currency have enormous potential to change the world, and it’s been reinforced by milestone after milestone. Price growth, mining technology advancement, penetration into popular culture have all progressed in fits and starts.

By now, two public companies have disclosed investments in Bitcoin and many others have gained indirect exposure. What will be the case in a year or two or twenty from now?