Companies like Tesla, MicroStrategy, Stone Ridge and Twitter founder Jack Dorsey’s investment company Square have this in common: they have all made huge bets on bitcoin.
Last month Tesla CEO Elon Musk announced his company had purchased $1.5 billion in bitcoin, equivalent to 8% of the cash or near cash on the balance sheet.
The person credited with coaxing Musk into this seemingly radical move was MicroStrategy CEO Michael Saylor, who last month organised a conference for CEOs and finance officers, explaining the logic behind adopting bitcoin rather than cash as a store of value.
There’s no question that these are the first movers in what is likely to become a much bigger trend in the years ahead.
The question many are asking is when Apple, Amazon and Google holding company Alphabet are going to make their first bets on bitcoin.
“This might seem like a radical move by companies like Tesla and MicroStrategy, but there is some powerful logic behind this corporate adoption of bitcoin,” says Jon Ovadia, founder and CEO of crypto company Ovex.
“Anyone taking a long look at what has happened to the value of the US dollar and the rand over the last few decades would be horrified at the loss of purchasing power of these currencies – and the rand has been far worse than the US dollar. A chief financial officer or CEO looking 10 years into the future will have to answer to shareholders whether they took the most responsible path in protecting shareholder value.”
Why holding cash is a risk
The US dollar has depreciated by an average of 3.4% a year since 1947, while the rand has depreciated by 8% a year since it came into being in 1961. That is a huge erosion of purchasing power, and the trend is unlikely to be reversed any time soon. Central banks are issuing fiat currencies at record rates to help overcome the economic devastation caused by the Covid lockdowns, and this will result in accelerating inflation in the months and years to come.
Bitcoin, in comparison, has proven that its deflationary lower. Its value has gone up by a compound 200% a year over the last decade, making it the best asset class in the last decade.
“Any company holding cash on its balance sheet is on the losing side of this race,” says Ovadia.
Either you invest that and earn returns better than you can achieve elsewhere, such as on the JSE, or you will be under pressure to return cash to shareholders.
“You can see from the share prices of companies like Tesla, MicroStrategy and Square how shareholders have benefitted immensely from the foresight of their CEOs.”
Ovex was founded more than three years ago to offer companies and retail investors access to crypto arbitrage – making risk-free profits from price differences on cryptos in different markets. Cryptos like bitcoin can typically be bought on overseas exchanges and sold in SA at a slight premium, generally between 2% and 4%.
Rather than scouting arbitrage opportunities with bitcoin, Ovex found that arbitrage profits are better using a stablecoin called Trust USD, which is backed 1:1 by the US dollar. These arbitrage opportunities are available in most countries with exchange controls, though the arbitrage gap varies depending on demand. A stablecoin, though backed by a regulated currency like the US dollar or rand, is a crypto asset that is often used by investors to park profits made on other cryptos in a safe asset that does not move in tandem with the rest of the market.
Ovex’s OTC desk
The larger part of Ovex’s business is an Over-The-Counter (OTC) desk that allows large buyers of crypto assets to get rapid settlement without the risk of moving the market.
This is important for companies or family offices that may be looking to diversify into crypto assets like bitcoin. A large purchase of say R20 million or R50 million would get noticed on regular exchanges and drive prices up. Ovex is able to eliminate this problem by settling large crypto orders in a way that does not move the market. It does this because it has deep financial backing by crypto investment group Invictus, which it can then extend to its clients.
Making it easier for companies to adopt bitcoin and other cryptos
How long before SA companies follow the example of Tesla and MicroStrategy?
“I think it will come sooner than many people believe,” says Ovadia. “There may be restrictions on companies or investment funds have direct exposure to an unregulated market like cryptos, so we will soon be launching a public company, rather like Grayscale Bitcoin Trust in the US, which allows corporate investors to gain exposure to bitcoin by owning shares in the company, rather than owning cryptos directly. This overcomes most regulatory issues facing large-scale investors, and we will also take care of custody issues, in much the same way as Grayscale does,” adds Ovadia.
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