Digital gold reserves

And this is where we keep the ones and zeroes...

There are more and more indications that bitcoin is marching steadfast toward becoming the digital gold. One such indication is a trend among public companies that developed in the recent months: they buy bitcoin. For the long term. And they do it because they do not trust cash. On the other hand, they see bitcoin as a good hedge against inflation, so they invest a part of their cash reserves into it.

We already knew about smaller companies that keep bitcoin on their balance sheets. But this time, serious corporations with billion-dollar market caps also joined the ride. Kicking it off was the Nasdaq-listed company MicroStrategy. It spent a total of $425 million in August and September and is now the proud owner of 38,250 bitcoins. That is huge, not least because it means that one-third of its market capitalization is in the largest cryptocurrency.

Shortly afterward, Twitter CEO Jack Dorsey’s other public company, the financial services provider Square announced in October that it is investing 1% of its cash reserves into bitcoin. Compared to MicroStrategy, this reflects a far more conservative approach, but we are talking about a much larger corporation — with a market cap of $96 billion. They spent $50 million to acquire nearly 5,000 bitcoins.

A nice trivia is that the Government Pension Fund of Norway has exposure to both companies, so now every Norwegian citizen indirectly owns some bitcoin.

But next to public companies, institutions and investment funds are also showing growing interest toward cryptocurrencies. The gigantic U.S.-based bitcoin fund, the Grayscale Bitcoin Trust provides access to bitcoin through traditional markets for institutions and high-net-worth individuals. And their bitcoin holdings almost doubled year-to-date (currently close to half a million), while the price of bitcoin also doubled. Documents submitted to the U.S. Securities and Exchange Commission reveal quite a few hedge funds that bought Grayscale products, each with billions of dollars under management.

However, it is not just for institutions and high-net-worth individuals. Bitcoin is also available to anyone on traditional exchanges. Coins are wrapped into so-called ETPs (exchange traded products): the ETP’s issuer sells a share and buys bitcoin with the cash. This way, the buyer of the share indirectly acquires bitcoin. Such a product has been available on the Swedish exchange Nasdaq Stockholm for years, called Bitcoin Tracker. But in the recent months, new bitcoin ETPs kept popping up on various exchanges. Last December WisdomTree launched its product on the Swiss stock exchange, 3iQ did the same on the Toronto Stock Exchange this April, and ETC Group debuted theirs in June on the Frankfurt Stock Exchange.

There is only one group of investors missing from the bitcoin market: central banks. Today it may still sound absurd that central banks would buy cryptocurrencies. But a few years ago, public companies and giant hedge funds buying bitcoin sounded absurd too.

We sometimes hear the argument that bitcoin threatens financial stability. If it is a threat, central banks will apparently not buy it. However, the truth is that bitcoin does not threaten financial stability any more than gold does. And central banks hold plenty of gold. But why do they hold it?

They hold it because the greatest threat to financial stability is central banks themselves, with their monetary policies, money printing and negative interest rates. Each national central bank faces the problem that they need to hold foreign reserves, while all competing central banks strive to debase their own currencies. So which currency should they hold? That is where gold, the hard money enters the stage, that no central bank can print. They deem it safer to stock up on that too.

However, the world is appointing a new safe haven asset as we speak. And for some more progressive central banks, it may be an attractive idea to be the first buyer. Once the word is out, it would earn bitcoin massive legitimacy and obviously also start a huge price rally. So it is better to move first than to buy later at a higher price. The canton of Zug already accepts tax payments in bitcoin. It seems logical that this stray thought has also occurred to the competent authorities. Maybe they will not do it in the near future. But I find it quite likely that, in a few years, central banks will have reserves in not just traditional but also digital gold. I am very much looking forward to that day.

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