Predictably, MicroStrategy’s stock now often moves in response to bitcoin prices, which is a little weird for a company previously known for cloud computing and business intelligence software.
The average CFO isn’t interested in waking up to a plunge in an asset that’s supposed to be part of the company’s cash cushion.
Many corporate treasurers and chief financial officers are unlikely to follow Musk’s and Saylor’s lead. Bitcoin is prone to sudden plunges, often on the weekends when few are paying attention. The average CFO isn’t interested in waking up to a double-digit sell-off in an asset that’s supposed to be part of the company’s cash cushion. Shareholders might start to wonder, if the company can think of nothing better to do with the money than bet on crypto, why it doesn’t just pay them a dividend or buy back some stock.
Still, these public companies’ embrace of bitcoin seems to signal an important shift in sentiment. Consider the change in tune that’s occurred at JPMorgan over the years. In 2017, when Bitcoin traded for less than $US4,600, CEO Jamie Dimon said he’d fire anyone at his bank “stupid” enough to trade the cryptocurrency. But life comes at you fast. This month, co-president Daniel Pinto said on CNBC the bank will trade bitcoin if client demand gets strong enough, and he’s certain it will.
More than a sideshow
While it’s baby steps for now, crypto is clearly becoming more than a sideshow within finance and corporate America. And that has potentially big implications. Cryptocurrencies once served as sort of a pressure valve for investors’ speculative impulses. If the steam inflated a bubble, at least it was a quarantined bubble that posed very little risk to the rest of the system and economy – as opposed to, say, how the housing bubble triggered the global financial crisis.
One of the traditional selling points of bitcoin has been its reputation as an uncorrelated asset – in other words, an investment that won’t take it on the chin when the stock market tanks because it’s so detached from the fate of corporate America and Wall Street.
That notion looked a little dubious when the value of bitcoin sank more than 50 per cent during the pandemic-triggered bear market in stocks in 2020. And it still seems dubious as bitcoin has spiked in recent months, along with the more speculative and euphoric corners of the equity market.
The more bitcoin lands on corporate balance sheets, and the more it’s seen as part of the same bucket of tech investments that have driven the stock market, the less it will look like any kind of a hedge or an isolated asset class. That means the link between the two could grow stronger and could mean turbulence in bitcoin will lead to (or at least coincide with) turbulence in the stock market.
Currently, bitcoin’s realised volatility – a measure of how big its price swings are – is almost five times that of the S&P 500 Index over the past 20 sessions. It’s almost twice as volatile as Tesla itself, a stock that’s famous for its wild price movements.
Perhaps the embrace of bitcoin by corporations and Wall Street will help the cryptocurrency mature and calm its price swings. Or perhaps not, considering crypto is still an investment beloved by scammers and hackers. Never mind the millions of dollars of digital wealth lost because of forgotten passwords or missing hard drives.
And that’s before we even get to dogecoin, another cryptocurrency Musk has touted lately. Named after a dog meme popular on social media, it’s widely considered a joke. Probably the best thing dogecoin has going for it is a viral jingle on TikTok about “taking dogecoin to the moon”.
The earworm does offer some food for thought: “You may have studied the economy for seven years in college, but no one guessed that bitcoin would be $US30,000. So basically anything can happen at this point.”
True. And it’s about $US50,000 now. Wait, make that $US51,000….
Michael Regan is senior markets editor for Bloomberg