Sygnum Market View – 14 August 2020
Bitcoin used as large-scale hedge against inflation by NASDAQ-listed Micro-Strategy
Continued balance sheet expansion of central banks globally increases risk of significant inflation and may lead to more companies taking similar steps
A new Bitcoin whale takes the stage – MicroStrategy purchases Bitcoin as hedge against inflation
MicroStrategy, a NASDAQ-listed multinational providing software and cloud solutions, announced this week that it had purchased USD 250 million worth of Bitcoins. This equates to over 21,000 BTC, with a slight price premium due to the size of the trade.
This investment is meant to be a hedge against inflation, protecting the company’s USD-heavy balance sheet from the potential weakening of the currency – due to COVID-19, quantitative easing, as well as political and economic uncertainty. The company’s share price jumped 18 percent on the day of the announcement.
This is the first time that Bitcoin has been purchased on such a scale as a hedging instrument for a listed company, and it will be interesting to see if other companies follow in MicroStrategy’s footsteps. More moves like this could have a significant impact on the market and will change existing dynamics and forces at play.
Balance sheet expansion by central banks could lead to more companies taking a similar action to MicroStrategy
A key driver for companies to take an action such as MicroStrategy’s is the expansion of balance sheets by central banks across the globe. Due to the COVID-19 related economic crisis, many central banks are injecting large amounts of capital to support their economies.
For example, as a country already reliant on stimulus, assets on Bank of Japan’s balance sheet were equivalent to its gross domestic product (GDP) prior to the crisis and is estimated to be 1.3 times by the end of year. The Federal Reserve’s assets are expected to account for more than a third of GDP, while the European Central Bank’s assets are expected to rise to two-thirds of GDP [1].
The expansion of government balance sheets and the flood of money into the system could result in large-scale inflation, with nominal prices for stocks, precious metals and real estate rising. At this point, with a protracted crisis and recovery the risk seems to be increasing, which could lead to more companies and individuals seeking out alternative investments, such as Bitcoin (as in MicroStrategy’s case above), to protect the value of their existing assets.
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