It’s shocking to think that Bitcoin, heralded still as a high-tech solution for the future, is over 12 years old, while the blockchain technology that underpins it is over 50 years old. Over the last decade as cryptocurrency has evolved and changed, arguments for its potential and value have changed as well.
The most recent argument largely formed after Tesla (TSLA) CEO Elon Musk expressed his love for Bitcoin and the company purchased over a billion dollars of the cryptocurrency, where it remains as part of the company’s assets. Musk was a longtime critic of cryptocurrency, so his about face is significant and has been seen as a very bullish move for Bitcoin. Following Musk’s decision, many investment institutions with products aimed at retail investors have begun looking at cryptocurrency offerings which could compete with the very high margin and recently IPO’d Coinbase (COIN).
The speculation around BTC has helped it surge to new heights in recent weeks, although its performance is a bit beneath that of Dogecoin, a joke cryptocurrency that some people say mocks the Bitcoin project.
In this new speculative bull run, questions about its value and usefulness have come up. What is Bitcoin, exactly? What is it used for? What makes it valuable? These questions have had a variety of answers in the past, but perhaps most interesting for now is the argument that it has value as a reserve asset.
This is a very new argument, and one that did not appear before Musk’s decision. The idea is that Bitcoin is an excellent store of value and can be used to store the billions of dollars on corporate balance sheets. Instead of facing the cost of storage, as with paper money, or the low yields of short-dated U.S. Treasuries or government bonds, Bitcoin can be a way for companies to store cash and cash equivalents (C&CE) at lower cost and greater potential reward.
There are a couple of problems with this argument. Firstly, currently cryptocurrencies cannot be classified as C&CE per GAAP rules, and must be classified as intangible assets. Crypto evangelists say this is a sign of regulation lagging reality, and GAAP rules will change. But for now, on a strictly accountancy-based view, BTC cannot be a C&CE equivalent.
The other point is whether investing in BTC will produce a greater potential reward, and this is really complicated. On the one hand, for that reward to appear in a sustainable fashion there needs to be a reason why it will appreciate: it needs to be attached to a cash flow, as stocks and bonds are, or it needs to have an incredibly unique and valuable use case. Neither seems to be true for now, so this argument is specious at the moment; again, evangelists counter that this will change in time.
Also, there is the more self-evident point that BTC can produce its own reward for the right person. When Elon Musk announced TSLA’s BTC stake, it caused BTC to climb in value immediately. Many large companies have this power over BTC; by simply announcing they will trade it in, as Goldman Sachs (GS) could, or by announcing they will use it as a reserve asset, as Apple (AAPL) or any other large tech company could, these companies could essentially front run their own announcement and increase the value of their BTC holdings after the fact. And, with current rules, this would be an entirely legal way to make BTC appreciate.
However, history shows us that simply announcing you have an asset and thus it is more valuable is unsustainable. This is the classic “pump and dump” methodology, and while it is legal in some arenas, it has never been a sustainable way to create value. For that reason, companies will need to find another more replicable and sustainable way to demonstrate an intrinsic value for BTC in the long term, even if their Bitcoin-interest announcements can and will increase the value of BTC in the short term.