Bitcoin Economics
Tesla and other institutions are a double-edged sword for Bitcoin
by Dominik Stroukal — Economic Expert at SatoshiLabs and external contributor to Trezor Blog
Celebrations over big companies buying Bitcoin are in full swing. It’s something many of us have been waiting for a long time, and we’ve almost forgotten the euphoria caused by the slightly older news that this or that company started accepting Bitcoin as payment. Do you remember the moment when companies like OkCupid, Overstock, Zynga or Microsoft announced crypto payments? Sweet memories.
Now we’ve come a huge leap further: Bitcoin is not only accepted by the giants, but also bought by them directly. This in itself creates a great additional demand, but it also induces an incredible wave of good mood, which pushes the price up. When Tesla announced that it had bought bitcoins for $1.5 billion, the price of Bitcoin jumped 10% almost immediately. Of course, $1.5 billion is a lot of money, but Bitcoin would be doing just fine without it.
It is a signal of the massive change that is taking place across the Bitcoin ecosystem. And it’s a change for the better, no doubt about it. Unfortunately, there is a flip side, which may pose significant risk.
If we can survive, Bitcoin has a clear path to the Moon, Mars and beyond.
Institutions have an end-game
Let’s try to suppress the enthusiasm for a moment — yes, it was a milestone event — and look at the mostly unspoken-about risk that these institutional purchases pose. Sometimes we forget it, but they can also easily sell, and they can sell furiously.
Think back to when large companies started accepting bitcoins and subsequently decided to turn it off, with many citing high fees as the reason. Institutional buying may be pushing Bitcoin to new highs, but will there come a time when they sell?
So far, it looks like the first wave of the converted, such as Elon Musk of Tesla or Michael Saylor of Microstrategy are fans of Bitcoin at a fundamental level and will stick to the good old HODL strategy, even if the price falls from here.
But institutions are not like your traditionalist hodler friend who, mostly out of habit, chooses not to sell and is a complete master with his hardware wallet. Who owns the private keys to Tesla’s bitcoins? Are they safe in a Trezor or managed by multiple keyholders, and who is in charge of selling them when the market looks about to topple?
It is likely that both Musk and Saylor have established a strategy in their companies enforced by various risk and financial management departments, which may have the last word on whether to sell or not. Even if the bosses ideologically don’t want to do it, monolithic corporations can have a mind of their own — as many of us know from even smaller companies.
Copy-cat capital
Even if it’s not Tesla or MicroStrategy selling, at least not in the near future, there’s a time where big money may rock the boat. Companies with reserves in bitcoin will become more common, but their motivations may not all be so pure.
It’s a double-edged sword.
On the one hand, in a growing market, we want to enjoy every billion-dollar splash and the subsequent ripple of media attention as companies jump in to buy bitcoin, and push the price even higher.
But if the trend reverses, which happens to Bitcoin from time to time, it could trip the price to fall much lower than the small corrections we’ve been getting used to. If that were to happen, it could take a long time for the companies to buy again.
There are thus two variants of the future influence of institutional investors on the price of bitcoin. In both cases, it is good news, and we mustn’t forget that. Institutions will give Bitcoin credibility to people who didn’t quite get it before.
Up or down?
Hearing that companies are investing in Bitcoin makes people more interested in what Bitcoin is. They don’t want to miss out when big successful companies are jumping on the bandwagon, which is great for those who like seeing prices rise.
The two outcomes are really so simple that it may seem unnecessary to explain. But maybe, somewhere in all the euphoria, we forgot the first one. If the price starts to fall sharply, bitcoins from institutions can flood the market and overwhelm orderbooks and send the price extremely deep. We have experienced three 80% falls, and it’s possible that the next may be even worse if giant institutions join the sellers and panic.
Let’s hope instead that once the trend reverses, these pioneers from the ranks of large companies will rejoice and buy at a more discount. That is the second scenario, and indeed what’s been happening so far. If they join us in hodling through future bear markets and suppress any giant corrections so we see a much smaller drop, it would further boost Bitcoin’s credibility.
Seeing companies buy Bitcoin has already catapulted it back into the news cycles and all-time-highs. The next big step will be those bets on Bitcoin actually stabilizing its notoriously volatile price.
Then it becomes extremely interesting.
