It is no secret that Jack Dorsey is an avid Bitcoin fan. Being a CEO and co-founder for both Square and Twitter would make a lot of people envious and simultaneously hesitant to take on such lofty responsibilities with two very influential companies. His ambitions for the world are mostly known within Wall Street, but in recent years Bitcoin has become a bigger part of those plans. In 2018 he successfully led Square’s subsidiary, Cash App (a direct competitor to PayPal’s Venmo platform), to arguably be the easiest to use platform for people to obtain their first Bitcoin. It is somewhat surprising for most Bitcoiners to finally hear the news that the parent company, Square, has set aside 1% of its total assets to be stored in Bitcoin. However, based on the regulatory nature within a publicly traded company and all of the parties involved, there are many protocols that must be addressed before a company may act on any decision.
What factors prevented Square from investing in Bitcoin earlier?
None of the information below is confirmed to be the direct cause of preventing Square from buying Bitcoin but it is very likely that they were attributed to the delay. Given that Dorsey is the CEO of Square, his sphere of influence is much less stifled than anyone else within the company. This does not however guarantee he is able to act without approval.
1. Convincing the board
The board of directors are initially elected by shareholders and then decided upon by a separate nomination committee. Once confirmed, these individuals are required to operate in the best interests of the shareholders. This is known as acting as a fiduciary, where their duties fall under the umbrella of consulting for the acting executives (CEO, CFO, COO, etc.). The C-suite may or may not agree with the board but no action is taken until a unanimous vote is conducted during board meetings. For example, Dorsey may present a proposal for the company to consider using Bitcoin as a store of value or as a hedge against inflation. The board members will then convene to discuss the possibilities and processes of acquiring Bitcoin. A vote is then cast in order to reject or move forward with the proposal.
2. Convincing the shareholders
Dorsey currently holds about 13-14% of the Square shares and has a considerable amount of influence for the decision making process within Square. With a publicly traded company, the general structure for voting rights is that for every 1 share an investor holds, they may cast 1 vote in the decision making process. Many younger companies have avoided offering shares with equal voting rights by implementing a dual class share offering during its IPO. Square has followed suit in this structure by offering a class A and class B share structure. For every 1 class A share an investor holds, they will have the ability to cast 1 vote during shareholder meetings. However, for those who hold class B shares (Dorsey and other early investors) they will receive 10 votes for every 1 share they own. The purpose of this structure is to hold as much voting control as possible so that management cannot be easily vetoed during important decisions. Based on Square’s structure, the class B shares will hold 99.1% of the voting power. In Dorsey’s particular situation, he did not need to seek approval from retail investors in order to follow through with Square’s Bitcoin investment. Interestingly, Microstrategy also has a similar share structure.
3. Plan for execution
Despite Dorsey having substantial control and influence within his own company, Square would still need to ensure that they do not alert the public or run up the price of Bitcoin. Fortunately, they already have the necessary contacts with over the counter (OTC) exchanges in order to execute purchases and avoid slippage. In Square’s investment white paper, there is a straightforward breakdown of how they planned on purchasing and holding Bitcoin. Included is a fair assessment of the possibility for internal and external risks. Square also secured insurance for the loss of their Bitcoin. Taxes and how to categorize their Bitcoin holdings for GAAP accounting standards were also planned accordingly to adhere to SEC regulation. All of these considerations could have significantly affected the amount of time needed for Square to finally purchase their Bitcoin.
Potential candidates that may buy Bitcoin
It is safe to assume that many board members of various companies will begin to take Bitcoin much more seriously when the market capitalization reaches the trillion dollar mark. This would place Bitcon’s price around the $45,000-$50,000 range. At this point, managers of pension funds, endowments, and other large institutions (public and private) will be more open to the idea of utilizing Bitcoin for their cash reserves. They currently view Bitcoin as a risk-on asset based on its volatility and small market cap, but we are heading into the era where Bitcoin is being used as a hedge against inflation and as a store of value. Perceptions of Bitcoin will gradually change as more companies like Square and Microstrategy place it on their balance sheets.
A pattern is emerging in the equity markets where companies that have a CEO with a controlling interest (a large amount of voting shares) are investing cash reserves into Bitcoin. This is not investment advice but it will provide an excellent starting point for our readers when examining prospective companies.
What type of company to look for:
- Provides technology related services or products (this reasoning is based on management’s understanding of technology and network effects).
- A CEO who has incredible control of the company’s direction.
- A dual class share structure where management has the majority of voting shares.
- Ample cash reserves that have not yet been allocated to R&D, equity products, or real estate.
- Have stated in a 10K or within other financial documents (like a 10Q) that management is considering alternative investments for their cash reserves.
Dorsey may very well have been in the process of convincing the board members to convert a portion of the company’s holdings into Bitcoin prior to 2018. Microstrategy’s allocation of $425 million into Bitcoin could have been one of the final incentives that Square’s board needed to approve the proposal. This is very much speculative but it seems far from coincidental. If one company makes the commitment to try something new and it works out well enough, many more fall in line to do the same thing. As of this writing, Microstrategy’s share price has also increased an impressive 32% since August after its first purchase of $250 million worth of Bitcoin. The board members and investors of Square will most certainly expect the same type of rise in share price over these next few months. We do not know the exact reasoning for waiting so long on their Bitcoin purchases but we can safely assume that Square will be purchasing more Bitcoin in the near future. Stay alert and on the lookout for similar companies with share structures like Square and Microstrategy. The more power a CEO has, the faster they will be able to allocate company reserves toward Bitcoin.