Square Inc. has announced a $50 million investment in Bitcoin. The firm purchased approximately 4,709 BTC through an over-the-counter platform which services the company’s Cash App.
Square’s 1% investment of its balance sheet represents a growing trend among institutional players investing reserves in Bitcoin. The payments firm noted in its investment whitepaper:
“We believe now is the right time for us to expand our largely USD-denominated balance sheet and make a meaningful investment in [Bitcoin].”
Veteran hedge fund manager Paul Tudor Jones, whose firm boasts of an AUM of $22 billion, first deployed this hedging strategy earlier this year. Drawing an analogy from the unprecedented economic situation in the 1970s to the current global crisis, Jones believes Bitcoin is an appropriate hedge like gold.
Similarly, MicroStrategy, a NASDAQ-listed business analytics firm, converted $425 million of its assets into Bitcoin.
Moreover, Square, Tudor, and Microstrategy aren’t the only businesses with Bitcoin on their balance sheets. Crypto centric data analytics firm Nansen has reportedly allocated 5% of its assets in Bitcoin. The co-founder of Nansen, Alex Svanevik, told Crypto Briefing:
“Generally speaking, we try to limit our exposure on the treasure side to crypto, since we’re already in the crypto industry. But having some exposure to BTC and ETH is natural for us.”
Square is in a similar position as it has already “invested in bitcoin from a product, leadership, and legal innovation perspective.”
Until now, American companies have relied on USD as the go-to investment for their treasuries. However, the unprecedented increase in cash supplies by the U.S. government and its central bank this year has raised concerns around the currency’s valuation.
“As an international company, USD is the primary liquid asset on [Nansen’s] balance sheet, but the unparalleled money printing means it’s simply too risky to have a 100% USD portfolio for most companies. A 1% exposure to BTC and/or ETH represents insurance against political risk and M2 inflation.”
A Small Allocation Goes a Long-Way
Investing 1-5% of a company’s assets has reaped strong returns historically as well. VanEck confirmed this in its report titled “The investment case for Bitcoin” in August 2020.
In the research, the firm calculated the cumulative returns from holding 0.5-3% in BTC. It found that the annualized returns from a generous allocation of 3% in Bitcoin earned 5% more than a portfolio with non-allocation to BTC.
Hypothetical returns from small allocation to Bitcoin. Source: VanEck
According to the digital asset strategist and director of VanEck, Gabor Gurbacs, “established institutions are looking at this research” as well.