Summary Bitcoin adoption by public companies is happening amidst greater institutional recognition. Semler Scientific stands out as a recent example. The mainstream recognition of Bitcoin as digital gold and a safe haven asset is increasing, leading to more companies adopting BTC. The U.S. regulatory landscape for crypto is improving, which is expected to be very bullish for Bitcoin and altcoins. There is a strong game theory element to all of this. I deconstruct this thinking in the article. Bitcoin (BTC-USD) has been fighting the $73,000 resistance for months now. The Halving in April has yet to deliver on the promises of parabolic returns. With the approval of the Ethereum (ETH-USD) spot ETFs, it seems that the U.S. regulatory picture for crypto has taken a much more favorable turn. There’s a lot going on under the surface for Bitcoin, but today I want to cover game theory. I think this will be extremely impactful for the price action over the next year. Bottom line is that I remain very bullish on BTC and I think adoption will continue growing, which inevitably drives the price upwards. Public Companies Entering First of all, Semler Scientific ( SMLR ) has announced that it will adopt a BTC treasury, taking a page from the MicroStrategy ( MSTR ) playbook. This is a very interesting move and the market certainly liked the news as the stock shot up over 20% after this press release went out. SMLR (Google) It doesn't really take a genius to see the benefits of adopting a Bitcoin strategy. MSTR is a mediocre software business that made one very important decision in 2020 which led to its outperformance over its enterprise software peers, most big tech peers, and even BTC. The latest MSTR quarterly presentation speaks for itself. MSTR Investor Presentation (microstrategy.com) Eric Semler, chairman of SMLR, had this to say about SMLR’s new BTC strategy: Bitcoin is now a major asset class with more than $1 trillion of market value. We believe it has unique characteristics as a scarce and finite asset that can serve as a reasonable inflation hedge and safe haven amid global instability. We also believe its digital, architectural resilience makes it preferable to gold, which has a market value of approximately 10 times that of bitcoin. Given the gap in value between gold and bitcoin, we believe that bitcoin has the potential to generate outsize returns as it gains increasing acceptance as digital gold. So the thesis here is frankly a very old one: BTC is digital gold, and is currently a tenth of the value of physical gold. This gap can be expected to close, and that would mean a very attractive opportunity. Mr Semler also speaks about BTC being a safe haven amid global instability and an asset that is uniquely finite. These are all things which have been discussed in crypto discourse for a very long time. It came into U.S. corporate finance discourse when MSTR adopted its BTC strategy, and now this idea is starting to spread, likely catalyzed by institutional recognition from big players like BlackRock and Fidelity when they pushed the spot ETFs through in January. SMLR had $62 million in cash and cash equivalents on its balance sheet as of 31 March 2024. It put $40 million into BTC per the press release. This is a commitment of two thirds of the cash treasury. SMLR carries virtually zero debt. It is financing everything purely through accumulated cash flows which could have been returned to shareholders via a buyback. And shareholders rewarded the stock by assigning it a much higher price. This is remarkable. The important takeaway right now is that this thesis is gaining attention in the mainstream. First it was the spot ETFs endorsed by major asset managers. Other public companies will probably take notice and replicate MSTR. With FASB rules for digital assets updated in 2023 and the U.S. government taking a more friendly stance on crypto in general, all the external pieces are in place for companies to start adopting BTC. The last thing that remains is for the C-suites to do their due diligence and arrive at the same conclusion that Eric Semler, Michael Saylor, and others before have come to. Bitcoin adoption is a bit like a prisoners’ dilemma. If everyone doesn’t adopt it, then nothing really happens. If everyone adopts it, then of course BTC will go up over time. The tricky part is when some people adopt it and some people do not. The fact is BTC is just neutral, digital hard money which has a tendency of storing purchasing power across time while being able to move value across space at lightspeed. So those who adopt it enjoy what are objectively benefits, which gives them a leg up against those who do not adopt it. And this advantage is sometimes within the context of a zero sum game, so the advantage gained by adopters comes at the expense of those who do not adopt it. MSTR, for example, has enjoyed some of these advantages at the expense of other companies who have not adopted BTC. MSTR secured extremely low interest rates on convertible debt; that money was not loaned to another entity presumably because MSTR offered a more attractive risk-reward profile thanks to its soaring stock price (which is obviously thanks to BTC). So in order for another company to get into that position, it needs to adopt BTC too. The Nash equilibrium to all this is that a sizable minority of companies will begin doing this. And eventually that will cause more boards, executives, and shareholders to take notice. The reason I think it has taken so long to play out is precisely because of the lack of institutional recognition. For instance, even after the spot ETFs were approved, some financial giants like Vanguard still refused to offer these products to their clients. There is a massive amount of inertia in all of this. But we are witnessing the early phases of the shift, and as more companies follow, the shift is going to get faster. Crypto Is Big For This Election In a very similar light as the BTC prisoner's dilemma in corporate finance, there is a similar prisoners’ dilemma playing out in politics. The SEC basically pivoted from trying to sue the Ethereum Foundation for securities violations to approving the Ether ETFs within a very short time frame. This pressure has largely come from the Biden Administration realizing that anti-crypto policies are a terrible political decision because it's a pretty hardlined stance against something that doesn’t really hurt anyone. There aren't a lot of people who are so strongly anti-crypto, who will make that a deciding factor for their vote. The opposite however, isn’t true because there are tens of thousands of jobs linked to crypto and these voters will prioritize pro-crypto stances. So as a politician, being anti-crypto basically wins a lot of strong resentment without winning any strong support. The Congressional vote about digital asset regulatory clarity saw many Congressmembers crossing party lines . This is an indication of the underlying game theory. Those who take a crypto-friendly stance win at the expense of those who do not take a crypto-friendly stance. The Nash equilibrium again is greater regulatory clarity and pro-crypto stances. Trump is certainly doubling down on the crypto vote . He is promising many things which are near and dear to crypto folks: the right to self-custody, the protection of innovation, and the illegalization of CBDCs. All of this means that the U.S. regulatory landscape, long since regarded as a minefield in crypto, is about to improve dramatically. This is going to be very, very bullish for BTC. And it could probably be even more bullish for altcoins. A Word Of Warning I don’t think extremely big changes will happen very quickly, although I am certainly not going to be surprised if they do. We could see several more companies announce BTC strategies before 2025, and even one or two S&P 500 companies. We could see more inflows in the spot ETFs and also more activity on Bitcoin and Bitcoin L2 ecosystems. We could see the U.S. government effectively pivoting to become a hub for crypto innovation. My warning is to not get carried away with any of this. I think it is easy to forget that there is an entire world that is uninterested in BTC. Many Bitcoin bulls were clamoring at the huge inflows of the spot ETFs signaling widespread enthusiasm for BTC as an asset. I wrote about a major reality check on this perspective. I estimate that much of the inflows are traders who are doing pairs trades and basis trades against Bitcoin ETFs, which are marginable securities. These positions should obviously not be taken as a long term bullish stance on the future of BTC. With the release of the 13F filings in May, we can finally get a global view of the institutional investors which have taken positions in the BTC through the ETFs during the first quarter of the ETFs’ existence. There were some standouts, like the State of Wisconsin pension fund . Even though there is certainly a large and impressive lineup of institutional longs, it’s good to remember that 13F’s don’t show shorts or a detailed lineup of derivatives positions. In the reality check, I talk about capturing the basis of the /BTC futures contracts. A trader could easily have locked in 16% annualized gains on a totally risk free position. These things are not covered by 13F filings (though we could probably assume that pension funds are not doing basis trades). The Bottom Line I am still buying BTC, and nothing else, hand over fist. The long term future is very bright, in my view. I did not discuss the macroeconomics picture or the thriving landscape of Bitcoin L2 and meta protocol development. These I have covered in the past, such as in this article from February . The point right now is that the game theory is playing out right in front of us. There are layers of the Nash equilibria which all point to further adoption. I think the opportunity and upside is immense.
