With nearly $3 billion spent on purchasing Bitcoin assets, what is the investment logic of Silicon Valley technology companies?

Author | Allison

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Source: Silicon Rabbit Race

Since the beginning of this year, Silicon Valley technology giants and American financial giants have frequently come forward to support Bitcoin.

Tesla announced the purchase of $1.5 billion worth of Bitcoin assets; BNY Mello, the oldest bank in the United States, began to support Bitcoin asset storage and transactions; MasterCard said it would support some merchants to accept Bitcoin payments by the end of the year; Financial Technology Company Square has successively purchased $220 million worth of Bitcoin assets; Meitu also announced this week that it has purchased $40 million (about 260 million RMB) of Bitcoin assets...

The investment enthusiasm of technology companies has pushed up the price of Bitcoin. On a quiet Sunday, February 21, Bitcoin hit an all-time high of $58,000.

From top investment institutions to popular technology companies to policy and regulation makers, everyone is discussing the hot Bitcoin. Silicon Valley technology companies frequently purchase Bitcoin, spending nearly $3 billion to enter the market.

Why are Silicon Valley technology companies accelerating their entry into the market at this time? What is their investment logic? Are they investing or speculating?

Bitcoin, one currency to rule the world?

The last time Bitcoin was so popular on our social media was in 2017. In just one year, the price of Bitcoin soared from US$789 to nearly US$20,000.

However, this investment boom came and went quickly. After the price of Bitcoin approached its historical high of 20,000 in December 2017, it began a long decline that lasted 12 months.

Finally, in January 2019, the price of Bitcoin fell to US$3,400 and began to rebound. After a full two years, on January 3, 2021, the price of Bitcoin had exceeded US$34,000.

Bitcoin price historical trend, picture from zorinaq

Also starting this year, we have seen more and more traditional financial giants speaking out, changing their previous conservative attitudes towards digital currencies including Bitcoin.

Financial and banking giants including Mastercard and Bank of New York Mellon, the oldest bank in the United States, have announced that they will support digital currencies including Bitcoin and will allow customers to use, store, transfer and pay for multiple digital currencies. As long as customers have demand, these traditional financial industries will have to follow the trend and make changes.

Not to mention the technology companies in Silicon Valley, many of which have already laid out their Bitcoin plans:

Software development company MicroStrategy announced at the end of last year that they purchased approximately 70,470 bitcoins at a cost of approximately US$1.1 billion;

Since November last year, PayPal in the United States has allowed users to buy and sell a variety of cryptocurrencies including Bitcoin on its platform. In the first half of 2021, this service will be open to users in more countries;

Payment company Square allowed customers to trade Bitcoin in its payment app Cash as early as the beginning of 2018. At the company level, Square also purchased about $220 million worth of Bitcoin.

Tesla disclosed in a document submitted to the U.S. Securities and Exchange Commission at the beginning of last month that it had purchased $1.5 billion worth of Bitcoin. Elon Musk also hinted on Twitter that Tesla will accept Bitcoin as payment for car cars in the future. This news pushed up the price of Bitcoin by 16% on the same day.

Image from Elon Musk's Twitter

Why do Silicon Valley technology companies love Bitcoin?

For the vast majority of Silicon Valley technology companies that invest in Bitcoin, the pursuit of wealth and the fear of inflation and asset shrinkage are significant motivations.

As institutional investors continue to join, Bitcoin has become more mature and safe as an asset in the eyes of Bitcoin supporters. Looking at other investment methods on the market, no matter how prosperous the investment targets are, they cannot be compared with the strong rise of Bitcoin. After all, in the past 12 months, there has only been one investment category with an increase of more than 400%, and that is Bitcoin.

The desire for wealth has driven Silicon Valley technology companies to buy Bitcoin. In January, JPMorgan Chase predicted that Bitcoin is becoming a competitor to gold. Once Bitcoin becomes a recognized safe haven for investors, it can attract as much money as investing in gold. In theory, the price of Bitcoin can reach $146,000.

Michael Saylor, founder and CEO of MicroStrategy, once gave the logic behind his company's large purchase of Bitcoin: "Before choosing Bitcoin investment, I had considered investing our assets in ordinary currencies, bonds, stocks, index funds, options, real estate, precious metals, artworks, etc., but after comparing them, Bitcoin still looks like a better long-term investment asset."

Square also explained when it purchased Bitcoin last year: Square believes that cryptocurrency is a means to enhance economic strength, and cryptocurrency provides a way to participate in the global monetary system, which is in line with Square's mission.

In recent years, the zero or even negative yields on traditional assets such as government bonds have long prompted investors to look for new investment alternatives.

Economists from various countries have predicted that the world will be shrouded in the shadow of inflation caused by the COVID-19 pandemic for the next few years, and capital will definitely shift from investment areas with weaker returns to stronger areas, such as Bitcoin, whose prices continue to rise.

Despite repeated warnings that Bitcoin is likely to experience another price crash, and Bitcoin opponents warning Bitcoin investors to "be careful that one day they might lose everything," there are still many investors who firmly believe that Bitcoin will continue to rise.

In addition to the direct pursuit of economic benefits, more and more investors are looking to Bitcoin as a hedge against inflation risks and a weak dollar.

As a scarce resource, gold has long been widely regarded as a hedge against inflation and a reliable measure to protect against purchasing power risks. However, the US dollar has been falling in recent times, which should have been good for gold, but gold has also fallen recently. As a result, only Bitcoin continues to grow, which makes more investors believe that Bitcoin can be used as a safe-haven asset.

Bitcoin is not controlled by governments and their monetary policies, and its supply is much more restricted than gold. In 2020, affected by the epidemic, governments and central banks accelerated the printing of money to cope with huge fiscal expenditures. Inflation is inevitable after the epidemic is over, which is why Bitcoin has attracted more attention as digital gold than ever before.

As "digital gold", Bitcoin also has technological attributes, which coincides with Silicon Valley. In theory, Bitcoin can be combined with any financial product or technological product. This is one of the reasons why Bitcoin is favored by the technology industry.

In addition, from the perspective of business operations, any company is under pressure to increase profits. Usually, profit growth is accompanied by cost growth. Once there is a problem with cost control, profits will definitely be squeezed. Therefore, if a company can choose a better investment target, making money through investment is also a good choice for corporate profits.

Why are some people still pessimistic about Bitcoin?

Last month, Cathie Wood, founder of the US ARK Fund, known as the "female version of Buffett", publicly stated that Bitcoin has the potential to reach a market value of trillions of dollars. She said that in the future, more companies will use Bitcoin as a company reserve asset allocation. If all listed companies included in the S&P 500 index use 10% of their cash flow to buy Bitcoin, the price of Bitcoin will soar to $400,000.

If you want to get rich, why not just go all in on Bitcoin and wait for the future to make money? Before you decide to do this, you need to see if you have the courage to lose all your money.

Bill Gates recently expressed his views on Bitcoin: If you are not a world-class billionaire, don't touch Bitcoin!

In an interview with Bloomberg, Bill Gates said: "Elon has a lot of money and he is very sophisticated. I am not worried about him investing in Bitcoin, but I do think that many ordinary people who are not financially strong are affected by the current Bitcoin craze. I generally think that if you have less assets than Elon, you have to be careful when playing Bitcoin!"

Take a look at the latest ranking of the world's richest people. According to Bill Gates, the only person who can afford to play with Bitcoin is Jeff Bezos of Amazon.

Screenshot from Forbes

Bill Gates said he did not invest in Bitcoin, saying he would rather invest his money in companies that manufacture products. Thinking about the success of the former world's richest man, creating value has always been the key concept of Bill Gates and the Microsoft company he founded, and Bitcoin itself cannot create value, so Bill Gates is not fond of Bitcoin.

In addition, for Bill Gates, who has been committed to promoting global environmental protection for many years, Bitcoin mining itself consumes a lot of energy and is very environmentally unfriendly.

Image source: Yahoo Finance

Warren Buffett, the stock god, has also publicly stated that cryptocurrencies have no value. Buffett said, "I don't have a single Bitcoin, nor any other cryptocurrency, and I never will in the future."

Buffett is not optimistic about Bitcoin because he believes that Bitcoin is an unproductive asset. Buffett has always favored companies that can create value and generate cash flow through production. From this point of view, cryptocurrencies definitely do not meet his investment standards.

Secondly, in Buffett's eyes, Bitcoin is not a currency at all. As early as 2014, when commenting on Bitcoin, he said, "Bitcoin does not meet the standards of a currency. Not only can it not become a lasting medium of exchange, it cannot also maintain its value."

Finally, Buffett’s logic is also very simple: don’t invest in things you don’t understand.

Image source: medium

The official attitude of various countries towards Bitcoin is also very cautious, and such official attitude will threaten the legitimacy and stability of Bitcoin.

Janet Yellen, the new U.S. Treasury Secretary, commented that she believes that "Bitcoin transactions are extremely inefficient and are a highly speculative asset" and she is worried that "Bitcoin will be used for illegal financing and will pose a danger to investors and the public."

European Central Bank President Christine Lagarde has also criticized Bitcoin many times. She also believes that Bitcoin is a speculative asset, not a real currency, and facilitates criminal activities. The European Central Bank will not consider buying Bitcoin in the short term. She warned investors that "if you want to invest in Bitcoin, you must be prepared to lose everything."

Even if governments and central banks dislike it, cryptocurrencies such as Bitcoin have been developing in an unstoppable manner. Therefore, many central banks in countries including the Federal Reserve and the European Central Bank are currently studying how to digitize their sovereign currencies and considering developing alternative digital currencies.

After the global financial crisis broke out in 2008, a mysterious person named Satoshi Nakamoto introduced Bitcoin to the world. At that time, the emergence of Bitcoin was inevitable, including the fact that many people already hated the government's behavior of over-issuance of sovereign currencies and monetary policy intervention in the commodity economy.

After more than a decade of development, whether people now regard Bitcoin as an ideal investment method or an excellent tool to hedge against currency, both governments and investment institutions can no longer ignore the powerful presence of Bitcoin.

In recent years, various fraud, extortion, and scam cases surrounding Bitcoin have emerged one after another. Ordinary investors rarely consider the characteristics of Bitcoin, such as being not controlled by the government, being anonymous, and being difficult to track. These characteristics are precisely what criminals are using to become a criminal tool.

The current Bitcoin investment boom is attracting more investors to enter the market and buy Bitcoin. The enthusiastic investors can only see the life winners who have become millionaires and billionaires because of Bitcoin. They probably have forgotten the painful lessons of how many people lost all their money when Bitcoin plummeted in early 2018.