The Breakdown - Will Apple Be the Next Fortune 500 to Buy Bitcoin?

Starting point is 00:00:00 There is literally no reason to think there won't be another company, Apple or not, and likely sooner rather than later. The dynamic in particular that these RBC analysts identified about the announcement increasing the price, one is true, but two won't be true forever. There's a small window of early adoption when it will be, and smart companies are going to recognize that, and I bet there's a race right now to be the next one to announce. 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 nexo.io and produced and distributed by CoinDesk.

Starting point is 00:00:46 What's going on, guys? It is Tuesday, February 9th, and today we are talking about whether Apple will be the next Fortune 500 to get involved in Bitcoin. First up, however, let's do the brief. First on the brief today, a shifting inflation narrative. So what's going on? A Bloomberg article was published today called Surging Inflation May Force Fed to resort to yield curve control. The Federal Reserve is at risk of getting schooled in a classic adage.

Starting point is 00:01:17 Be careful what you wish for. So what's actually happening? Basically, the Fed has been saying for over a year now that it actually wants to allow inflation to run hot. They change the way they measure and think about inflation to actually have it be an aggregate and average that they're targeting not any specific point. This could mean that we could see a wild swing into inflation

Starting point is 00:01:41 or at least more inflation than we've seen before the Fed actually wants to do anything about it. Well, it seems like the market is starting to price a little bit of this in. The way the U.S. bond market proxies future inflation have accelerated, according to this Bloomberg piece, at the fastest pace since 2014. The 30-year treasury yield eclips 2% this week for the first time since February of last year. The reasoning is the combination of the anticipation of more fiscal stimulus plus more vaccines, which means all that pent-up demand can actually go out there and get spent.

Starting point is 00:02:16 Basically, markets are getting ready for a rip-up in consumer inflation at some point, and subsequently, they're wondering what happens when it does. Obviously, contributing to this is the discussion around stimulus, another Bloomberg headline, Biden warms to fast-track stimulus after liberal pressure mounts. Effectively, they're looking into strategies to use a simple majority to get this stimulus bill passed. As you might imagine, from a macro-narrative perspective, this is good for perceived inflation hedges like Bitcoin. Next up on the brief today, the Reddit valuation is up to $6 billion. $3 billion. Reddit has raised another $250 million in late-stage venture at a $6 billion valuation.

Starting point is 00:02:58 Its previous round valued it at $3 billion. Here's what the CEO and co-founder Steve Huffman had to say. He said it's a good market to fundraise. Valuations are very high right now, and it never hurts to raise money when there's an opportunity to do so, and Reddit had a strong year. He went on to say that advertising revenue for the company shot up 90% in Q4 relative to a year earlier. Now, if you feel like $6 billion as a valuation for Reddit is really low, me too, especially considering that Wall Street bets took about that much value off a hedge fund last week. The only reason that Reddit isn't valued more highly is that it's been much harder than other

Starting point is 00:03:36 networks to convert to commercial value because it's so community-centric. You can't just shove brand advertisers in there and have it work the same way it does on Facebook or any other social network. But frankly, you love to see this company finding the right balance between big business and their community, and I think this was exemplified in Huffman's response to the whole Wall Street Betts thing. Not only did they not back down, and not only did they say they supported Wall Street Betts, they actually used effectively their entire ad budget on a five-second Super Bowl ad. The ad started like a traditional cliched car commercial with two SUVs just screaming across a deserable.

Starting point is 00:04:18 But then the signal frayed, Reddit's logo, the alien came out, and there was a big printed statement. And the idea of this was that they thought that it was going to go so fast that it means people would screenshot it or go look it up after. And here's what it said. It was titled, wow, this actually worked. If you're reading this, it means our bet paid off. Big game spots are expensive, so we couldn't buy a full one. But we were inspired and decided to spend our entire marketing budget on five seconds of airtime.

Starting point is 00:04:45 One thing we learned from our communities last week is that underdogs can accomplish just about anything when they come together around a common idea. Who knows? Maybe you'll be the reason finance textbooks have to add a chapter on tendies. Maybe you'll help R slash superb owl teach the world about the majesty of owls. Maybe you'll even pause this five-second ad. Powerful things happen when people rally around something they really care about. And there's a place for that. It's called Reddit. Last up on the brief today, Castle Island raises. another 50 million. I wouldn't normally do this one. Obviously, I try to do much bigger macro stories or huge companies in this brief section, but I'm a big fan of Nick Carter and his team at Castle Island,

Starting point is 00:05:28 and I wanted to just give a quick shout out to it. Castle Island won. Their first venture fund was 30 million. Castle Island 2 is up to 50 million. Funding came from high net worth individuals, family offices, and will target 20 different investments with slightly larger check sizes than before. Now, in terms of what they're going to focus on, Nick said that Bitcoin is his first love and will remain a focus, but he's also interested in the larger set of Bitcoin and crypto financial market infrastructure that needs to be built, mentioning Stablecoins specifically. Nick and I have actually talked a couple of times on this show about the role of stable coins as part of a new financial rail, so if you're interested, go check that out.

Starting point is 00:06:04 With that, however, let's go to our main discussion about whether Apple might be the next Fortune 500 to get into Bitcoin. Yesterday, to recap, if somehow you weren't alive at all, Elon Musk's Tesla made a $1.5 billion purchase of Bitcoin. Of course, the day was filled with speculation on what that would mean, what the implications would be. What would it mean for environmental battles around Bitcoin? What would it mean for the memeers who love Tesla? And of course, one of the biggest questions is who would it inspire next? Would it be a starting gun and a permission slip for other Fortune 500 CEOs to follow suit? As you might imagine, there were a lot of varied takes on this question. Let's start with the pooh-poo's,

Starting point is 00:06:47 which came unsurprisingly from the usual old media suspects. The Financial Times wrote Tesla's Bitcoin bet is unlikely to have many corporate copycats. Starting off, cryptocurrencies play almost no role in the stayed world of corporate treasury where protecting a company's financial liquidity and cash reserves are key. Their massive volatility has ruled them out. It then went on to have a bunch of professors talking about why it doesn't make sense. It also brought the climate change thing, and overall was pretty representative of the subset of articles that thought that this was going to be an isolated incident. However, far more people think that it's likely the continuation and jumpstart of a larger trend. Many investors want to be a part of the next

Starting point is 00:07:32 bull run. Others seek to build their dream home, finally launch that startup or fund their education. Try nexus instant crypto credit lines and borrow against any major cryptocurrency with no minimum or maximum withdrawal amounts, no fees whatsoever, no credit checks, and flexible repayment. Not to mention the APR starts at just 5.9%. Stay on top of your investment game with nexo.io. And remember, it's your crypto, your credit, your choice. Get started at nexo.io. Alex Kruger told CoinDesk that he expected other heavyweights to follow suit. Singapore-based QCP Capital said, quote, although the actual amount isn't large. comparatively, the signaling effect and market reflexivity of projecting other global market-leading

Starting point is 00:08:18 companies to do the same will have a positive spiral on prices. John Kramer, trader at GSR, said, quote, tides are continually shifting in crypto, and what may be lurking close to port are sovereign funds becoming the next wave of institutions to adopt this corporate playbook. And then there was Frank Chaparro from the block with this great quote. He tweeted out, I was among the skeptics who thought that the Bitcoin balance sheet thing would be limited to weird outliers like micro strategy. It's not. Publicly traded firms see an opportunity in the yield and upside BTC offers. With the right risk parameters in place, volatility not as big of a deal. This is going to be huge for the asset, and I don't see why, for the first time, 500K plus Bitcoin is anything but reasonable.

Starting point is 00:09:00 Doesn't mean it will happen, but it's reasonable. Many reasonable things don't happen, and many unreasonable things, Dogecoin, AMC, do happen. And then there was good old Jim Kramer on TV, this very issue. Let's just listen to this one. Look, I happen to think that Bitcoin is exciting. It's something we can talk about endlessly. They're promoters of it. There don't seem to be a lot of sellers of it. We're going to hear from PayPal and an analyst meeting coming up about how it's begun to be mainstream. I just think that in the end, you have to have some sort of hedge on it because if you take it and it goes down, I think that you're going to end up saying, why did I use Bitcoin when I could actually transact in dollars? But as far as far as,

Starting point is 00:09:42 As far as a way to be able to have a pastiche of things that you should do your cash with, I'm all for it. I think it's almost irresponsible not to include it. Every treasurer should be going to boards of directors and saying, should we put a small portion of our cash in Bitcoin? It seems to be an interesting way to hedge against the rest of the environment. Nice hedge against fiat currency. Perhaps, however, most interesting of all,

Starting point is 00:10:06 and the context for the title of this episode, is a note released by the Equity Research Group at the Royal Bank of Kansas. Canada, which is the largest bank in that country. They released a report yesterday called Pad Your Wallet First, Flashy Cars Can Come Later, focused entirely on Apple. Here's the headliner from the overview. Quote, while we think the firm has a long-term opportunity with a car product, the Wallet Initiative appears to be a clear multi-billion dollar opportunity for the firm, potentially for well over $40 billion in annual revenue with limited R&D. So here's their basic argument. Apple has been seemingly interested in competing around electric vehicles. And this piece says effectively that

Starting point is 00:10:47 competing against Elon could be really dicey, especially when it already has so many assets in the mobile space. It has 1.5 billion installs. If instead, Apple decided to enter the crypto exchange business, it could immediately gain market share while, according to this piece, simultaneously making the USA a leader in crypto for the next 10 years. So let's talk about how they got that $40 billion revenue number. They took squares $1.6 billion of revenue per quarter from Bitcoin, with installs of around $30 million. They took Apple's install base of $1.5 million, assumed only $200 million would transact, which is also consequently the number of new iPhone unit sales annually, and that gave them a 6.66 times larger than square quarterly opportunity, which comes out to over $44 billion,

Starting point is 00:11:37 which would be 15% incremental top line revenue. So the question is, is, why is the RBC thinking about this right now? Well, part of it has to do with speculation around exchanges. Coinbase is going public later this year, and early Nasdaq secondary sales have suggested prices of 200 or 300 a share, which would value the company at somewhere between 50 and 70 billion, so obviously a big opportunity. Part of it also has to do with a perception that the competition is weak. This report mentions how that every time something big happens, like Tesla coming into the space, the biggest exchanges go down. they can't keep up. Part of their analysis has to do with seeing new competitors from the traditional

Starting point is 00:12:17 world already getting in. They point a lot to square and especially PayPal. But part of it that's the most interesting for insiders like you, if you're listening to this show, has to do with an assessment that actually when it comes to exchanges, an Apple-style closed ecosystem would actually work well from a business perspective. They recognize the critique of exchanges that we all have that don't let you withdraw your crypto, i.e. PayPal, but they say, or their argument is at least, that Apple could turn that into an advantage. Basically, one part of their argument is that it's actually very worrisome to the exchange model that so much is leaving exchanges to be custodied in other places. This is a trend that we've discussed here, but they say that this openness could actually be a liability,

Starting point is 00:13:00 again, from a business model standpoint. They also argue that Apple's closed ecosystem could remove friction, saying, quote, since they have access to world-class software and arguably one of the most secure ecosystems in the world, they could offer a closed system which, one, prevents nefarious activity, two, improves the security of assets with multi-signature capabilities, and three, has instant access to the buyer and seller of crypto assets. In our view, this solves many issues simultaneously. Consumers would have easier access to buying and selling crypto assets, Apple would have a limited set of issues complying with KYC and transfer laws, and the firm would not occur a major R&D expense. On this R&D side, they referenced Square's entire R&D budget of

Starting point is 00:13:41 $670 million, and you have to assume that not all of that was for their crypto products. Effectively, their argument comes down to the idea that if Apple spent about $500 million on R&D, they could create a product with an income stream of maybe $44 billion a year. Now, I don't want to get too deep into what we would think about an Apple-style closed exchange ecosystem that's a little bit different than the scope of this particular show, but that's That's their argument. Of course, the exchange thing might be interesting, but the bigger trend we've been exploring and all paying attention to has to do with the balance sheet. And RBC covers that too. So let's just actually read the two paragraphs they say about it. While the bigger

Starting point is 00:14:19 business is likely in the exchange of assets, we think the firm could also fund its own initiative by adding a small amount of Bitcoin or another crypto asset to its balance sheet. If we assume that the firm can add $1 billion to its balance sheet, which is only four to five days of cash flow, we think the price of the underlying asset would then go up in a substantial manner. Looking at it from another angle, if we assume that the cost of developing a crypto wallet or exchange on the Apple ecosystem would cost $500 million, they could synthetically pay for the development costs by acquiring the underlying asset. For example, if the firm purchased $5 billion of Bitcoin, 20 to 25 days of cash flow,

Starting point is 00:14:55 the price of the underlying asset would need to rise by 10% for the firm to fully fund the entire project in the first place. This is a solid value proposition in our view as the business would be funded without diluting any other projects at the firm. So the notable thing here is that they're not actually arguing about the long-term value proposition of Bitcoin as a treasury asset. Instead, they're recognizing a particular game theoretical market force right now, which is that when one of these Fortune 500s buys Bitcoin, almost by definition it increases the price

Starting point is 00:15:24 of Bitcoin. They use micro strategy and PayPal as an example, but this was written before Tesla's announcement. So what do we know about Tesla and specifically how much it paid for this Bitcoin? Palm tweeted out a post from Reddit, which may or may not be true, but it said this is 37 days ago, you heard it here first. Our company just bought $800 million worth of Bitcoin. I am a software dev working at R&D in Tesla in California. Over the past 72 hours, our company bought 24,701 Bitcoin at an average price of 33,142. The way we did it was buying small amounts of Bitcoin every few seconds and big amounts of Bitcoin after a dip of at least 1.5%. We did this with a bot, which I developed

Starting point is 00:16:02 with Python and Node.js. I have no idea what will happen once this reaches the newspapers, but I think the price will explode even more. Thank me later. Now, some people are calling BS, some people are skeptical, although this is kind of what the strategy was for micro strategy, so it seems at least plausible. But let's say that it's accurate. You're talking about 36% price appreciation right away, even if they bought closer to $35,000 on average, where it spent most of last month, you're still talking about 25 to 35% gains just by announcing the position, which means that that $1.5 billion is probably worth at least $2 billion, if not more, already. So let's briefly wrap up with some interpretations. First, we are Fox Mulder. We want to believe. I saw a couple of chats on Clubhouse

Starting point is 00:16:47 yesterday with this Apple buying Bitcoin idea, clickbait, plastered as the title. We want to believe that something like Apple, a company that so many of us have strong affinity or connection to, is going to be in this space. However, number two, this is very specifically simply an analyst's analysis. There's no real reason to think Apple is the next domino to fall. Analysts are paid to create these types of scenarios around different companies all the time. It's their job to think about how a company could evolve, how it could use its assets to further gains in that company. The flip side is that at the same time, there is literally no reason to think there won't be another company, Apple or not, and likely sooner rather than later. The dynamic in particular that

Starting point is 00:17:31 these RBC analysts identified about the announcement increasing the price, one is true, but two won't be true forever. There's a small window of early adoption when it will be, and smart companies are going to recognize that, and I bet there's a race right now to be the next one to announce. Anyways, guys, let me know what you think. It's a fun thing to think about and consider. And like I said yesterday, this is exciting and there's going to be more of it. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Will Apple Be the Next Fortune 500 to Buy Bitcoin?

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