For months, there has been news about CEOs and mainstream businesses getting involved in cryptocurrencies. The last couple of week, however, have been flooded with news about large organisations joining the crypto-mania. Bitcoin's price is pushing toward the $50,000 mark as corporate adoption appears to boost the legitimacy of the crypto-currency. Most news have concentrated around the $1.5B stake in Bitcoin reported by Tesla (NASDAQ: TSLA). The electric car maker is also planning to let their customers purchase cars with crypto currencies in the future.
Tesla isn't the only institution getting into the crypto-game. Visa and Mastercard have both announced plans to adopt crypto-currencies. BNY Mellon (NYSE: BM), the oldest bank in the US, said it will hold and transfer cryptocurrencies. Canada's securities regulator, OSC, has approved the first Bitcoin ETF, which is now expected to be listed on the Toronto Stock Exchange.
(Chart source: SwissBorg)
In a recent interview with Yahoo Finance, Catherine Wood, CEO of ARK Investment Management, states that more and more companies will be looking at crypto-investments to hedge agains inflation.
I think we're going to hear about more companies putting this hedge on their balance sheet as well particularly tech companies who understand the technology and are comfortable with it
She also reveals that more and more companies are seeking professional advice in crypto-currency investment. Tesla's recent move and the success story of MicroStrategy will definitely fuel the trend with more copy-cats emerging to explore crypto as hedging or investment strategies.
What is hedging?
A hedge is an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security.
(Quote source: Investopedia)
The reason why corporations started getting interested in Bitcoin as a hedging vehicle is due to its limited supply, which cannot be influenced by price. Inflation on its own is not necessary a bad thing. "Good inflation" happens as a result of economic growth or low unemployment; it encourages investment and more growth. "Bad inflation," however, deepens uncertainty and often damages trust in financial institutions and governments.
In my view, inflation hedging isn't the only strategy used by corporate CFOs. They use Bitcoin to hedge against dollar (or their local currency). Uncertainty and negative GDP often trigger weakening of local currencies, which in turn results in higher prices for imported goods. The hedging strategy against dollar helps to offset the risk of currency devaluation as, in theory, if USD goes down without devaluating BTC, the corporate holdings in BTC get stronger as the BTC/USD ration grows.
Economies worldwide are struggling as a result of the COVID-19 pandemic and creative strategies used by institutions are not really surprising. Can Bitcoin replace gold as the favourite hedging asset, though? The time will tell but I'm certain of one thing - the next decade will be characterised by a rapid growth in crypto-currency and blockchain technologies being adopted by traditional players.
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