MicroStrategy may have been the spark required to move the market into the next phase of S curve adoption, gradually then suddenly.
Throughout 2017/8 the popular meme ‘’the herd is coming’’ was used extensively to describe the anticipated institutional adoption of Bitcoin by traditional finance, pension, and hedge funds alike. If we are honest with ourselves, this adoption has yet to be really seen at any scale despite the encouraging institutional-grade infrastructure that has been built out since the previous bullish cycle. Another meme that many crypto and technology evangelists like to quote feels rather apt with the latest hyper bullish adoption news from publicly traded MicroStrategy (MSTR) — ‘’gradually then suddenly’’ first coined by Ernest Hemmingway and now adopted across crypto and FinTech circles.
Technology adoption can happen extremely fast once you enter the ‘’hockey stick’’ phase of the S curve and start to follow the hundreds of examples of technological inventions and products that have successfully found escape velocity to get out of early adoption phase and into the mainstream. New technology tends to hit an inflection point whereby it ceases to be niche and relatively unknown by all except for early adopters, to where adoption rates explode on an exponential level as shown by the charts below.
Last week saw NYSE owned Bitcoin futures exchange, Bakkt, hit all-time high trading volume in a single day alongside institutional competitor the CME which saw record BTC futures volumes across August. There is little doubt that the ‘’herd’’ is gradually increasing in size but easily the most encouraging sign of greater institutional adoption is that of MicroStrategy and its CEO Michael Saylor, the new poster boy for Bitcoin. Is this the inflection point that was needed to be reached prior to suddenly entering the next phase of adoption?
Last week Michael doubled down on his initial conversion of $250M of his company’s treasury to Bitcoin with a further investment of $175M, taking his haul to 38,250 BTC — arguably one of the punchiest ‘’buy the dips’’ we have ever seen. Following a slew of interviews across the usual crypto/fintech podcasts, we got an insight into his and his board’s thinking and rationale behind MicroStrategy’s adoption of Bitcoin as a treasury reserve asset.
“We just had the awful realization that we were sitting on top of a $500 million ice cube that’s melting”
‘’This is not a speculation, nor is it a hedge…this was a deliberate corporate strategy to adopt a bitcoin standard’’
“I want something that I could put $425 million into for 100 years” Michael Saylor, CEO MicroStrategy
Via Michael’s coms and PR, what we understand this week is the deliberate, calculated, and structured methodology that this respected and established listed technology company went about during the process of becoming one of the first known listed entities to adopt Bitcoin. This isn’t a speculative bet, this was the product of months of intensive investigation, learning, and risk assessment by all factions of the MSTR company and their corporate service providers. All carried out with careful and meticulous consideration of the legal, compliance, and security challenges that come with running a listed company in the US and taking such a bold leap with treasury management. A 6-month process was diligently adhered to before orders were executed in the market and MSTR started amassing their Bitcoin.
If this is indeed the inflection point on the S-curve then we can expect that after 11 years of Bitcoin’s existence, more corporates may take this same path and further public announcements will come in 2021 and beyond as boardrooms around the world struggle with protecting their cash reserves and gradually then suddenly (perhaps inevitably) turn to Bitcoin.
The Bank of England’s recent admittance that negative interest rates maybe on the cards for the first time in its history just adds conviction that we are likely at a turning point for institutional adoption of digital assets and specifically Bitcoin. At some point, it will be financially irresponsible for global FD’s and Heads of Treasury to be sitting on cash reserves as the real rate of inflation is encouraged and pushed higher as rates stay at zero or lower. We have learned that this was the exact mindset of MSTR. They understand that the 10’s of trillions of USD held in Treasuries that corporates hold as the reserve assets on balance sheets are, as Michael puts it, melting away. There will likely become a moment in time, an inflection point, where the fiduciary responsibility of public companies to their shareholders will grind into gear and many, like MSTR, will suddenly find Bitcoin.
MicroStrategy’s cash reserves pale into insignificance when compared to the below listed companies. A mere 5% allocation of the cash reserves of just the top 3 companies would inject $24.5 billion into the market and lock away significant BTC volume from the market resulting in price appreciation. It’s important to realize that the acquisition of BTC by MSTR is likely a serious long-term play. The BTC that is taken out the market will not come back to the market for many years, if at all. Institutional adoption when companies specifically look at BTC as a treasury reserve asset is fundamentally bullish due to this decades long time preference for hard money. Adoption is coming and MicroStrategy may have been the spark required to move the market into the next phase of S curve adoption, gradually then suddenly.
Crypto exchanges’ ongoing friction with the legacy banking system is nothing new and for years has been a significant risk and bottle neck for greater adoption. Bitfinex is a classic example of an exchange that has battled with banking over the years. With Kaitlin Long’s tireless work in the State of Wyoming contributing towards the successful establishment of Special Purpose Depository Institutions (SPDI) in 2019, the legislation is now here for crypto banks to be built. Kraken Financial is one of the first to be approved for an SPDI which will allow it to bank its own exchange, therefore not relying on third-party financial institutions and their resistance inherently existing towards digital assets.
Kraken Financial’s SPDI paves the ways for more traditional banking products and services to be offered to the crypto community and Kraken’s ~4million clients, interest-bearing accounts, debit cards, and pension products. A key difference between SPDI’s and traditional banks is the inability of SPDI’s to lend their clients’ deposits, therefore, strictly maintaining full reserves for its clients. In comparison, most traditional banks are fully in the business of acting as a fractional reserve with the rules recently changing to allow a 0% reserve requirement meaning banks can lend 100% of the deposits out to the market and are actually encouraged to do so by the zero rates environment we are stuck in.
As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions. — Board of Governor of the Federal Reserve System
This is a great development for further institutional adoption of crypto, and ushers in a new mature look and feel to the digital asset markets. Crypto is growing up fast.
As discussed last week, the ongoing incentive wars between competing DeFi protocols creates some fascinating dynamics. Governance tokens provide part of that incentive to users and with the rampant success of YFI and the recent, now less successful Sushi token distribution, pressure and focus has been on Uniswap, one of the largest and most respected DEX’s, to distribute its token to the community.
Via an airdrop to any user who has connected an Ethereum wallet to the DEX prior to September 2019, the community was rewarded with a minimum of 400 UNI tokens per wallet, representing a tidy $1,200 windfall for the thousands of users who have traded on the exchange. Within literally hours, many of the main centralized exchanges listed UNI and provided secondary markets for many Uniswappers to cash out their airdrop, creating a deluge of positive marketing across social media channels.
Like with many governance tokens, their value is still somewhat to be determined or defined and therefore they remain largely a speculative bet on the success of the underlying protocol or project they are associated with. But with Uniwap, the community remains bullish and the price of UNI has reflected that by more than doubling over the course the week.
In time, the UNI token has the potential to take a 0.05% cut of the trading fees that accrue across the order books of the DEX and eat into the fees that are currently paid directly out to the Liquidity Providers. Unsurprisingly, questions will be asked as to what exactly is UNI when classifying it as an asset and whether it falls under the security laws of various financial regulators including the SEC.
Watch this space…
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