“[Bitcoin’s] going to grind up to replace gold… but there are three things that cause a massive acceleration… they take us to $5 million a coin,” MicroStrategy
Those three things Saylor referenced were the approval of a spot bitcoin ETF, a change to fair value accounting for bitcoin balance sheet holdings, and increased prevalence of bank custody and collateralized lending.
As the previous MicroStrategy CEO, Saylor spearheaded the effort to add bitcoin to the company’s balance sheet in the fall of 2020. The nascent digital asset is now the company’s primary reserve asset. At the time of writing, MicroStrategy now holds 152,800 bitcoin, worth nearly $4 billion.
Interestingly, the criteria laid out in Saylor’s interview are starting to come to fruition. With Jay Clayton, former SEC Chair claiming the inevitability of a bitcoin ETF approval, let’s take a look at the other two conditions laid out in Saylor’s bold prediction.
Fair Value Accounting
Bloomberg Tax reported a recent change to the way bitcoin is treated with respect to accounting rules. In the past, bitcoin had been treated as an intangible asset which forced companies to capture losses but prevented marking gains to market as the price recovered.
The new rules proposed provide for fair value assessments, allowing companies to mark their holdings to market, which allows for capturing gains in price. This development is significant because it no longer treats the volatile asset punitively with valuation adjustments for price declines only.
According to Greg Foss, an institutional market veteran turned bitcoin advocate, the prior treatment was unfair. “Not being required to mark your book to market when there is a fluid, liquid reference punishes stakeholders,” Foss told me in a short discussion about the development.
“When a liquid market exists, the value of assets should be recorded accurately, for fair market evaluation and interpretation,” Foss concluded. Though the rule does not come into effect until 2025, companies have the option to start applying them early. This development could lead companies to look more closely into adding bitcoin to their balance sheets to capture positive price action.
Banking and Lending
Big banks are starting to demonstrate interest by jumping into the custody game. CoinDesk reported last week that Deutsche Bank has partnered with fintech platform Taurus to provide custody for bitcoin and crypto assets.
According to the CoinDesk article, Deutsche Bank global securities services head Paul Maley thinks the cryptocurrency space will likely become a priority for investors and institutions and expects the market cap to grow into the trillions of dollars.
With Coinbase’s recently announced institutional lending service, the tide may be turning with big money interest in the space. The Coinbase product has already garnered $57 million in investments according to a report from Reuters earlier this month.
Custodial structures however may still give investors pause. In 2022, Coinbase experienced some controversy surrounding its customers’ characterization as unsecured creditors. Details came out following unfounded rumors of a potential Coinbase bankruptcy amid the 2022 market turmoil.
Custodia, a Wyoming-based Special Purpose Depository Institution is looking to change the custody game for institutions. “SPDI’s are required to be fully reserved. They do not allow for lending of fiat on deposit.,” Lisa Hough, Vice President of Strategic Relationships at Custodia said in our interview.
Hough added that customer digital assets, like bitcoin, are held in a bailment, meaning assets remain under the legal ownership of depositors. Custodia appears to be targeting bitcoin and crypto businesses with their banking services, however, their digital asset custody structure is something that may help traditional businesses feel more comfortable entering the space.
Macroeconomic Mixed Signals
Some are predicting an imminent Fed policy pivot in the face of a quietly simmering regional banking crisis. The increased liquidity would be a boon for bitcoin as it moves towards its halving.
Every four years, the amount of newly issued bitcoin is cut in half, a condition which is widely believed to precipitate bull markets. Macro analysis from The Bitcoin Layer, however, paints a stark contrast to the bullish conditions spelled out above.
“Cuts are simply a hope right now,” Nik Bhatia, business economics professor and founder of The Bitcoin Layer told me in an interview. He cited relatively healthy credit markets and a still growing economy as key metrics for this opinion.
Bhatia says that the Fed risks its reputation by pivoting too soon, especially with the recent rise in inflation. He assessed the probability of a pre-halving policy rate cut at 20% to 25%.
Though Bhatia does expect eventual rate cuts, the sentiment surrounding its pre-halving timing are not realistic in his opinion. Considering the macroeconomic environment, investors may have to wait a bit longer for liquidity conditions to improve before experiencing price action even close to Saylor’s prediction. Only time will tell.