The Breakdown - The Market Reacts to Square’s $50M Bitcoin Buy

Episode Date: October 8, 2020

A special breaking edition of The Breakdown follows the market’s reaction to Square’s surprise $50 million bitcoin investment.  NLW breaks down the foundations for the investment, including: 2020’s alignment between the bitcoin narrative and structural economic realities An increase in bitcoin’s perceived resilience The precedent set by MicroStrategy He also discusses the market’s reaction, from the (potential) connection to Coinbase’s “apolitical” stance from last week to the notion of Square intentionally setting a framework others can follow.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, nexo.io, an elliptic, and produced and distributed by CoinDes. What's going on, guys? It is Thursday, October 8th, and we have a special one today. I was all set to drop what is going to be an extremely exciting interview. on you, but I had to push it one day so that we could talk the big news this morning. Square has bought 50 million Bitcoin for long-term treasury. This is 1% of its cash. It's a big deal. Let's get into it. As I said, this is a special breaking edition of the breakdown, so no brief

today, because really what else do you guys want to talk about? As I mentioned first, the news. Square is buying $50 million worth of Bitcoin. This went, out over all the wires, and people started noticing it about an hour ago just after 9 a.m. We're going to dig into the reactions and my interpretation of it, but first, let's set the context. I believe that there are three key foundations for this move. The first is that the 2020 narrative around Bitcoin has met the structural reality of the economy. There's a growing sense that stimulus is here to stay. As Chow Wang said yesterday on the show, The base case isn't if stimulus, it's when stimulus.

The Democrats want the sort of checks that we've seen this year to be permanent, and frankly, the Republicans sort of want it to be permanent as well. There isn't really a debate anymore about whether there's going to be direct stimulus to Americans and to American companies. The sticking point right now has to do around the politics of state funding. Moreover, the structural reality is that we're pretty well locked into this modality. Last month on the show, Tavi Costa made the point that the Fed effectively has a new mandate to keep interest rates low. The reason for this is, of course, the rise of zombie companies. Zombie companies

are companies that can't even afford to service their debt, let alone pay it. And the percentage of companies in public markets that are these zombies is higher than ever. It's more than a fifth of public companies now. These companies only survive on the basis of being able to access more cheap debt. So were interest rates to go up, they would fail overnight, causing a wave of layoffs that while potentially in the long-term economically productive, in the sense that that that talent would be redistributed to companies that weren't just on life support, it would be incredibly painful in the short term. And that's both from a political perspective, i.e. a massive layoffs that no one is willing to bear from any party, as well as from a real

economic perspective. We can wax all we want about how this talent would later find its way into better, more economically productive uses, and I think in general that's true. However, if too many of these companies were to go under at the same time, which because they're all structurally vulnerable in the exact same way would likely be the case, it could cause the thing that economists fear most, which is a deflationary spiral. There's another dimension to why this monetary policy regime that we live in is just likely to continue or even deepen. That, of course, is the national debt to GDP ratio.

We're currently at 136%, and as has been flying around Twitter over the last few days, something like 51 out of 52 times, when a country has gone above 130% in this statistic, they default. The only other option is to inflate the debt away. Now, Fed officials have been very adamant that this is not a consideration for them, but even if it's not, even if it's just background noise, the reality is that we can expect the sort of money printing we've seen, the sort of change in how we think about deficit spending, to simply increase, right? Basically, from a top-down perspective, we're living in MMT,

UBI government stimulus world. This theoretically could lead to inflation, except we haven't seen inflation. Well, first of all, we have just not in the CPI categories. We've seen inflation in financial assets, housing, anything basically that's paid for with debt. A second reason we haven't seen inflation is that it's constrained by the velocity of money, particularly with regard to the CPI. velocity is dictated in part by confidence. Right now, and for the foreseeable future, consumers are unlikely to spend all this new money right away. They're more likely to try to save it, to try to be more resilient, and certainly that's what's showing up in the statistics with the savings rate being higher than ever. At the same time, if this sort of direct government stimulus,

direct government payment simply becomes the norm, you can expect that velocity to shift up radically and quickly whenever that confidence interval changes. Take this all together, and this is why you saw people like Paul Tudor Jones enter the Bitcoin market earlier this year on the fear of what he called a great monetary inflation. So that was a little bit long, but I think it's really important. The first foundation for this move from Square is that the narrative has caught up to some version of an economic reality. A second foundation that I think is really important is Bitcoin's resilience. Bitcoin was all but counted out by many commentators in March as it was crashing too right alongside everything. But when it bounced back so convincingly, it actually convinced a lot of

people about how durable it is. Today it stands as one of the best performing assets of the year up over 40% from where it started. What's more, despite a barrage of volatility and seemingly bearish news over the last few weeks, it is currently in its longest run above 10,000 dollars per Bitcoin ever. These sort of new price floors are self-reinforcing. They bring new people in at that level because people get convinced that this thing is real and durable, but they also make it so that long-term holders want to acquire more at that level if it ever starts to dip. So you have a narrative foundation that's caught up with economic reality. You have a second foundation, which is the perception of Bitcoin's resilience. And then you have a third foundation,

which is precedent. In August, we found out that a smallish public enterprise called Micro Strategy would be putting at least 250 million of its cash reserves into Bitcoin. By September, we learned that that number had increased to 425 million. The interesting thing about this was that it came as a proactive treasury strategy that resulted from the same narrative logic as above. If you go back and listen to my interview with Micro Strategy CEO Michael Saylor, he based on a very important says that this is something that he really just dug into and learned about this year. It wasn't an issue until it was, but when he realized it was, it was a very big issue. He worried that if he was just sitting on cash that was losing value each year relative

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Visit elliptic.com slash coin desk to talk to a crypto compliance expert today. That's elliptic.com slash coin desk. When the micro strategy news hit, a question for many became who would follow suit. MicroStrategy is a relatively small company. And I think you'll agree if you listen to my interview with Michael Saylor that he's a pretty unique CEO who has done things very deep. differently than lots of other CEOs during his tenure as the longest-running tech CEO of a public company. Now, that precedent is pretty good. I mean, Micro Strategy has seen a 30% stock price increase since they disclosed, but still, many wondered who would follow. The obvious candidate was Jack Dorsey and either Square or Twitter, with Square making more sense for a variety

of reasons. Dorsey has a long record of being not just pro-Bitcoin, but one of the few public market officers who is a true philosopher of Bitcoin. He has frequently stated that he believes the internet deserves a native currency, and that to him, Bitcoin is it. He's put his money where his mouth is with Square Crypto, which has the ability to work on whatever projects they think are in the best interest of Bitcoin without any ROI considerations for Square itself. Square's cash app, meanwhile, is one of the most important drivers of new onboarding for Bitcoin

in the world. Tyrone Ross, on this show earlier in the year, called Square the most important company in crypto for that reason. And just recently, they launched the cryptocurrency Open Patent Alliance to try to keep things that related to Bitcoin and cryptocurrency open and free rather than locked inside companies. What's more, on top of all of this, Dorsey has a broader sense of the need to decentralize the underlying architecture of the web. He started an initiative aligned with Twitter to create a decentralized protocol where users own their own social network data, and the goal for him is that Twitter can just be a client implementing that protocol. All of these things point to Dorsey and Twitter or Square being the obvious choice for a next mover.

That said, when people have asked him on Twitter about this in the past, he's often had some sort of vague response like, there are many ways to support Bitcoin pointing to one of the things that I just mentioned. Well, that all changed this morning. Square announced that they had purchased $4,709 Bitcoin worth $50 million US dollars and representing about 1% of their total assets. Let's read the statement. Square Inc. invests $50 million into Bitcoin. The investment underscores Square's purpose of economic empowerment. Square Inc. announced today that it has purchased approximately 4,709 Bitcoins at an aggregate purchase price of $50 million. Square believes that cryptocurrency is an instrument of economic empowerment and provides a way for the world to participate in a

global monetary system, which aligns with the company's purpose. The investment represents approximately 1% of Square's total assets at the end of the second quarter of 2020. Quote, we believe that Bitcoin has the potential to be a more ubiquitous currency in the future, said Square's chief financial officer, Amrita Ahuja. As it grows in adoption, we intend to learn and participate in a disciplined way. For a company that is building products based on a more inclusive future, this investment is a step on that journey. So let's now move into reactions, both from me and from the rest of Bitcoin Twitter.

First of all, let's just get this out of the way. Fuck yes, Jack. Fuck yes. Although, of course, American Hodel responded to the official tweet saying that 1% were rookie numbers, but still, I think that the overwhelming consensus take, including from American Hodel, by the way, is F-Kess, Jack, fuck yes. Second, let's talk about the skeptical take. J.P. Coning tweeted out, Square has about $2.7 billion in cash.

Investing 50 million of that in Bitcoin is a good way to attract publicity without the CFO or board getting too upset about gambling corporate funds. On the one hand, this is a completely reasonable take, right? If you abstracted everything we know about Jack Dorsey and Square and assumed that they were the type of company that just wanted some publicity, this would make sense. Where I diverge from JP is that it just doesn't strike me that they're that type of company. Third, this is something that I haven't seen many people talk about, but it seems pretty clear to me that this was at least in some way a dig at Coinbase's move last week to try to be, quote-unquote apolitical. When that news was busting around, Jack retweeted Brian Armstrong's tweet

about Coinbase's quote-unquote apolitical stance and said, Bitcoin, aka crypto, is direct activism against an unverifiable and exclusionary financial system, which negatively affects so much of our society. Important to at least acknowledge and connect the related societal issues your customers face daily. This leaves people behind. effectively then Dorsey was in the camp of you can't pick and choose which parts of economic empowerment you're going to deal with. If you believe that part of economic empowerment includes racial injustice, the idea of somehow excluding that from the discussion that you're willing to have in your company doesn't make sense. Now, the reason that I think that this particular

move from Square may have at least some part to do with that conversation comes to the in the subheader of the press release. The investment underscores Squares purpose of economic empowerment. This got sent out over the wire as well, cryptocurrency and instrument of economic empowerment. It basically seems to say, look, Brian, you and Coinbase can say all you want that your mission is economic empowerment, and that's the only quote unquote political speech you're willing to have. But our bet is that Bitcoin and crypto is a foundation of a new system that is more economically empowering, and here's our commitment to that. I could be wildly off, but I have a feeling I'm not. A fourth thing to note is that although there is this key aspect of

economic empowerment, there's also fiduciary responsibility language, and I think this is really important as well. The quote that I'm referencing is the potential to be a more ubiquitous currency in the future, and note that the quote came from the CFO, not from Jack. I think they want to position this as something that other CFOs will likely want to do in the future, and in the not too distant future could be seen as the responsible thing to do, not some strange out there thing to do. A fifth reaction that I'm seeing, which I wholeheartedly agree with, is don't underestimate the capped supply fomo. Every time we have one of these types of announcements now, the faithful Bitcoin Twitter folk get on there and show how much of a percentage of this, the total Bitcoin supply this represents. How many other companies could actually do this?

Right now, we are way early in any potential domino scenario. But it doesn't take that much imagination to see a point at which enough companies who have a similar mindset start to do this, and they realize that there simply isn't enough Bitcoin to go around. This is a very different way that the cap supply could influence the market, but I think it's a big deal and worth noting for future. A sixth reaction that I've seen quite a bit is that despite a smaller number overall, this is a bigger deal than micro strategy. Masari's Ryan Selkis put it this way. Square investing 1% of its balance sheet in Bitcoin is a bigger deal than micro strategy going all in, in my opinion. First, company treasuries will lose 1 to 2% to inflation, so this is a

reasonable hedge. Two, higher profile company and more conservative, i.e. replicable, position that CFOs can get behind. So basically, Ryan is saying that even if you are just the most sort of take the CPI as the official inflation number type of thinker, this hedge makes sense based on that sort of number. And second, this approach is highly replicable. One percent is something that you can actually get your board to potentially agree with. Which leads to a seventh reaction, which is actually a little Easter egg that Pomp picked up on. He tweeted, everyone is looking at Square's Bitcoin purchase, but this may be more bullish. And then he quotes, has open-sourced documentation to articulate the process behind the execution of its purchase

as others consider similar strategies. In other words, Square isn't just saying we bought 1%, they're saying, here's how we bought 1% in case you want to do it too. Finally, the price reaction, both Square and Bitcoin are up. Last I looked, Square was up something like 2.8%, and Bitcoin was up as well. Zero hedge even had a headline. Bitcoin up after Square investment. So there you have it. I think this feels very natural. It feels very aligned. We want Square to be the company that's providing this type of model to other companies. And certainly I don't think that this means all of a sudden dominoes are going to fall crazily. I think it takes the people who are really out on the vanguard like Micro Strategies Michael Saylor, making it safer and creating

some pressure for a company that has a public leadership position in the Bitcoin space to take the next move like Square. I think the other dominoes are less clear, but it's going to be really interesting to see. And I think Ryan Selkis's point about this being an easier to imitate position is really right on. As you can tell from the fact that we did an early breaking podcast, I think this is a big deal. I was incredibly excited to see it. But now, let me know what you think. Hit me up at NLW on Twitter. Let me know. in the YouTube comments. Is this a big deal? Is this more the show and publicity that J.P. Koenig was arguing for? What's the story? What's your take? We'll be talking about this for weeks to come,

if not longer. But for now, I appreciate you listening. And until tomorrow, guys, be safe and take care of each other. Peace.