You could easily lose up to 90% of your fiat savings to inflation alone in 100 years, but that would never happen with Bitcoin.
At the time of writing this article, around 3.6% of Bitcoin (BTC) is locked up in long-term holdings by institutional investors. According to the data, 13 entities have amassed close to 600,000 BTC — about 2.85% of all Bitcoins and worth approximately $6.9 billion.
The list includes MicroStrategy at the top, with close to 38,250 BTC (about $450 million). The second on the list is Galaxy Digital Holdings with 16,651 BTC (about $198 million). The third, with 4,709 BTC, is the payment company Square Inc., founded by Twitter’s CEO Jack Dorsey. Separately, some companies help their clients invest in BTC. One such company is Grayscale Investments through its GBTC trust, which holds around 450,000 BTC.
With that stated, the amount of Bitcoin that publicly traded companies hold as a reserve is a tiny fraction of the corporate treasuries around the world. Indeed, the actual amount of cash held in reserves is in the trillions of U.S. dollars. But consider this: Nine companies in the S&P 500 are sitting on close to $600 billion in cash and short-term investments, and if just 5% (or $30 billion) of that amount is converted into Bitcoin, the price could easily increase fivefold.
Of course, there is the question of where to place Bitcoin in company investment portfolios. The most likely category is “alternative investment.” The need to strike a balance between traditional and alternative investments might reduce the appetite the market might have for the cryptocurrency.
Nevertheless, the potential demand is still huge. As mentioned in a recent report by Fidelity, the alternative investment market grew to $13.4 trillion by the end of 2018, and very little of it was in Bitcoin. It might take converting as little as 5% of that to see the Bitcoin price moon.
Some investment firms have chosen to create entirely separate holding companies for Bitcoin and other crypto assets. For example, Stone Ridge launched New York Digital Investment Group, which today has over $1 billion worth of crypto.
What drives this movement?
To understand this phenomenon better, I recently had an enlightening chat with Michael Saylor, the founder of MicroStrategy. In particular, I found his pick of 100 years as the base on which to measure the success or failure of a reserve asset very interesting.
Of course, most companies are founded with the expectation that they are going to be around for quite some time — centuries, preferably. Even for individuals, it still makes sense to look at how investments might change over a hundred years, as a person might amass wealth intended for heirs or even causes that are close to the heart, such as climate change. As Michael Saylor said:
“An excellent way to evaluate any investment is to take $100 million and move it forward a hundred years and ask the question what happens. If I had $100 million worth of currency in any of the largest cities of the world in the year 1900, and I went forward for 100 years, and I put the money into the best bank in the city, I have two types of risks; counterparty risks and inflation risk. Regarding counterparty risk, every major bank in every major city around the world failed in 100 years. And that is a 90% probability you lose everything.”
Of course, the most obvious weakness to spot when considering the performance of any reserve asset in 100 years is inflation. Out of all asset types, fiat currency experiences the most inflation over time. For example, what $5 could buy in the 1920s is far more than what it can in 2020. According to a website that collects and processes government data for the benefit of the public, the U.S. dollar loses close to 2% of its purchasing power every year.
What about the other assets?
While real estate might seem like a great asset to hold as a reserve for the long term, it is susceptible to losing value through things like taxes. More importantly, though, real estate faces risks that come with changes in regulation or public governance. In the span of 100 years, it is highly likely that a government that respects private property ownership is replaced with one that does not. This has already happened several times around the world in the last century.
Meanwhile, stocks also face risks of poor management and regulation changes. Michael Saylor gave the example of power and water utilities, industries in which highly lucrative companies have become nationalized. We cannot say with conviction that in the next 100 years, internet service providers, for example, aren’t going to be turned into public utilities.
Even gold and other precious metals run into issues when you look at them in terms of 100 years. While they appreciate over time, the logistics of holding them can be stressful. You could use third-party storage services such as commercial banks, but history has taught us that gold can get lost even there, especially during wartime or political upheavals such as revolutions. This has also happened several times in the last century. During World War II, large masses of gold were stolen by both state and non-state actors. Similarly, during the Soviet revolution, a lot of privately owned gold was seized by the incoming government.
What about Bitcoin?
As for now, Bitcoin has no counterparty risks. In other words, we don’t have to worry that the actions of a third party are going to lead to a significant loss of the asset’s value. It is also protected from risks that might come from regulation or extreme change in government policy. The holders of Bitcoin are always going to be in complete control of it.
As a peer-to-peer network, the Bitcoin platform gives holders of the asset a level of control that bypasses regulation or the use of state force. Meanwhile, we are almost assured that its value will continue growing over the years, as the supply is determined and the emission rate of new units halves every four years.
The autonomy and increasing scarcity of Bitcoin is most likely going to drive its value up over time, and it would come as no surprise in 100 years to see its price considerably higher than where it is today.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, readers should conduct their own research when making a decision.