Bitcoin's Emerging Balance Sheet Act

As this piece is being penned late Wednesday, Bitcoin is hovering around $56,000, up 9% over the past week. An assault on February's all-time high of roughly $58,000 and then $60,000 seem likely.

Rallies in the largest cryptocurrency have a way of bringing novices out of the woodwork and with that comes a host of questions for advisors to answer. Many revolve around how to appropriately value Bitcoin, whether digital assets are stores of value and whether cryptocurrencies possess intrinsic value.

Another question clients new to Bitcoin are sure to ask is “What is it used for?” The initial use case for Bitcoin revolved around transactions in which there aren't middlemen – no banks – but the landscape is evolving to include investing (obviously) and purchases of goods and services. Consumers can use Bitcoin to book travel accommodations on Expedia as just one example.

On the high end of the spectrum, Tesla (NASDAQ:TSLA) recently announced it will accept Bitcoin as a form of payment for its vehicles. The electric vehicle maker is also accepting gold and some bullion-backed exchange traded funds as payment.

Speaking of Tesla...

Tesla is relevant in the Bitcoin conversation because not only is taking Bitcoin as payment, the company is an investor and a large one at that, recently purchasing $1.5 billion of the digital currency.

Elon Musk's company isn't the only company to buy large amounts of Bitcoin. It won't be the last, but to date, it's storing the cryptocurrency on corporate balance sheets is an unusual move. Still, this is an emerging usage and one with multiple factors behind it.

“First, some companies—and especially tech companies—have piles of extra cash sitting on the balance sheet earning diminished returns in the current low-yield environment,” writes WisdomTree analyst Jianing Wu. “Corporations are seeking alternatives to better invest their cash. Bitcoin, an asset historically uncorrelated to equities and bonds, not only has the potential to diversify a portfolio but also to generate significant returns. It appears that companies investing excess cash not required for operating liquidity have viewed taking on some volatility as warranted and invested a small portion to participate in the digital assets potential.”

Second, as Wu notes, many of the other corporate buyers of Bitcoin have business models that make these purchases relevant. Think Square (NYSE:SQ) and MicroStrategy (NASDAQ:MSTR).

As for future corporate buyers of Bitcoin, it's just speculation at this point as to what company makes the move, but the technology sector is loaded with cash-rich companies, many of which have business models where Bitcoin makes some sense.

“In its latest 10-K, Apple holds $189B of cash, cash equivalents and marketable securities. Apple Pay also started accepting bitcoins for the first time through support of the BitPay Prepaid Mastercard on February 16, 2021,” notes Wu.

Why It's Important to Bitcoin Investors

It's impossible to know if more companies will put Bitcoin on their balance sheets, but it is clear that investors holding the digital asset prior to increased corporate adoption are likely to benefit.

ARK Investment Management estimates that if each S&P 500  company allocated 1% of its cash to Bitcoin, the price of the crypto would jump by $40,000. Take that percentage to 10% and Bitcoin could soar by $400,000. No, this aren't typos.

Forecasts like that play a role in why nearly a third of Millennials and Gen Zers and almost 30% of Gen Xers are planning to buy a cryptocurrency this year and those are statistics advisors need to pay attention to.

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