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There’s lots of attention on Bitcoin as being the new asset companies are placing on their balance sheet.
This makes sense due to the following mechanisms. If you’re trying to preserve wealth or rather the purchasing power of your corporate treasury you need to be concerned about both inflation and deflation. The traditional store of value asset was actually not gold for companies as some will tell you but rather US government securities (T-bills). Historically the interest rate exceeded inflation protecting on that front and the cash denomination meant it was also a good hedge against deflation.
However, in a zero interest rate environment with rising inflation the interest rate doesn’t come close to keeping up and you’ve got to find an alternative.
Cash denominated assets still provide a decent hedge against deflation but what about on the inflation side?
Here if you were to follow risk parity principles where you attempt to balance the asset allocation of the holdings by the volatility in each basket you could make an assumption something like this. BTC has a volatility that is maybe 20x greater than that of treasuries and as a result you’d want a ratio of say 95/5 government bonds to bitcoin to preserve wealth.
This is based on the as yet unproven assumption that bitcoin is a great hedge against inflation due to the fixed supply with superior properties for balance sheet holding vs gold such as the liquidity, ease of storage, transferability, etc. In other words a Bitcoin bonds mix becomes the new store of value.
This is significant because it means far from having BTC act as digital gold, which the traditional bitcoin community has expressed it is competing more with bonds, which are a market about 30x larger than gold.
But, why hold BTC? Let’s compare to another asset, Ethereum. ETH has traditionally not been very competitive with BTC for these purposes because it doesn’t have a fixed supply and therefore inflates, whereas BTC is disinflationary. ETH is considered less secure, less decentralized, more prone to changes and has essentially the same non-productive quality as BTC.
But as Ethereum moves to Eth 2.0 and proof of stake this all changes. This means corporations could earn yield off their ETH simply by holding it. In addition the recent EIP 1559 changes in the protocol added deflationary mechanisms. With this in mind once ETH 2.0 is rolled out and we can see the network achieve the same level of security as BTC there’s a strong reason to believe the economic incentives favor corporations holding ETH rather than BTC.
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