Bitbuy Technologies Inc., does not provide tax, legal, investment, or accounting advice. This material is not intended to provide, and should not be relied on for, tax, legal, investment or accounting advice. Digital asset investments and regulations are complex and subject to change. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction. Digital assets are speculative and highly volatile, can become illiquid at any time, and are for investors with a high-risk tolerance. Investors in digital assets could lose the entire value of their investment.
The primary purpose of corporate treasuries is to help businesses with cash flow and liquidity management. Corporate treasuries usually hold a diversified portfolio of assets that are designed to manage the capital risk and enhance returns. For an organization to find the fine balance between risk and yield, they have to be agile enough to consider the short and long-term cash flow and liquidity needs. A corporation considers its business needs, competitive landscape, macro- and micro-economic conditions, fluctuations in interest rates, and other factors that may affect the business’ cash flow requirements. Due to the evolving nature of the economy and the momentous market climate, treasuries are considering Bitcoin and digital assets as an allocation to their portfolio for a viable long-term investment strategy.
An investment in Bitcoin since 2016 has outperformed other traditional assets like the S&P, gold, aggregate bond index, and MSCI World index1. Despite its volatility, Bitcoin’s absolute performance compensated investors with a 2.54 rolling annualized Sharpe ratio over a five-year period, a proof of performance worth noting2.
Corporations are considering Bitcoin as a strategic allocation in their corporate treasury as an alternative store of value and an asset that can deliver greater yields compared to other investments. While the pandemic has resulted in central banks printing fiat currency, institutional investors and companies have accepted Bitcoin’s nature as an emerging store of value that shields against inflation. As a recent report by Fidelity Digital Assets points out, “the unparalleled nature of the current economic crisis is pushing forward-thinking corporate treasurers to consider adding Bitcoin to their balance sheets.”3 Similarly, Bitcoin’s outsized returns and low correlation coefficient with the S&P showcases Bitcoin as a tool to improve the overall diversification of a corporation’s asset portfolio.
Now that Bitcoin has been proven as a solution to current economic challenges, companies like Tesla, Microstrategy, and Square have allowed an accelerated increase in adoption. From an institutional investor buy-in, a reserve currency, or a payment option, Bitcoin holdings also allow businesses to take advantage of peer-to-peer payment opportunities. While large transactions typically require expensive wire fees, reliance on banking hours, and slow transaction times, Bitcoin reduces the need for third parties and can result in significant appreciation. Therefore, it is predicted that crypto will break off from traditional market assets further to serve as a diversification strategy for these organizations.
Jack Dorsey, CEO of Square and Twitter, believes in the power of Bitcoin and its potential to become a universal currency by saying, “The world ultimately will have a single currency, the internet will have a single currency. I personally believe that it will be bitcoin4. Earlier this year, Square added Bitcoin to its corporate treasury. During their earnings press, the company justified this strategic decision to its ongoing commitment to Bitcoin and digital assets. The company said that in the coming months, it was planning to assess its aggregate investment in Bitcoin relative to its other investments on an ongoing basis.
Much like Square, Tesla announced earlier this year that they had bought USD $1.5 Billion worth of Bitcoin5. That being said, Tesla’s stance on Bitcoin still remains ambiguous to this day, with Elon Musk going back and forth about whether Tesla will accept Bitcoin, or step out of the game completely. Musk seems to be concerned with the rapidly increasing use of fossil fuels, and Bitcoin’s environmental impact. Yet, Musk has been infamously accredited for allegedly impacting Bitcoin’s price via his tweets.
MicroStrategy was the first well-known public company to make a substantial investment in Bitcoin. After their recent purchase, MicroStrategy now holds over 100,000 Bitcoins, worth more than USD $3 Billion, by far outweighing other public companies in the space6. Michael Saylor, CEO and Chairman of MicroStrategy believes that transforming their shareholder base into a company that’s able to sell enterprise software and to acquire and hold Bitcoin on their treasuries has been executed successfully with leverage.
RiskSolution Inflation risk as the organization’s purchasing power starts to diminish. Cash position declines against goods, services, and investments that the organization wants to purchase.Bitcoin’s scarcity and inelastic nature allows it to practice a rigid monetary policy that keeps it protected from the potential effects of increased money supply. Bitcoin acts as a store of value against inflation. Changes in foreign exchange rates may have a negative impact on organizations’ cost structure. Especially organizations that operate on a multinational level7. Bitcoin, amongst other digital assets can be leveraged as a bridge currency, to move in and out of different currencies, and lowering the transactional costs associated with a fluctuating exchange rate8. The credit risk of the borrowers (organization) or issuers of fixed-income securities (federal) Borrowers leveraging Bitcoin as a collateral could help reduce risk since Bitcoin operates 24/7, 365 days a year. It is also a globally recognized, non-sovereign, digital-bearer asset.
In order to benefit from the enhanced return and diversification effects of Bitcoin as an alternative investment, businesses and investors alike must accept certain limitations with digital assets, such as reduced liquidity, limited accessibility, and high fees. But as with any investment, one must weigh in the strengths and weaknesses of the asset class, comparing them side by side to the annualized returns.
Depending on your organization’s risk assessment and capital, it is important to set a target allocation percentage of Bitcoin, or digital assets, that is appropriate to your business. If the allocation rises above a predicted percentage of the portfolio due to its out performance relative to other assets, a disciplined rebalancing strategy would dictate selling the Bitcoin or digital asset to bring its allocation back to the original target9. Then, use the funds to allocate to other asset classes, which have drifted below their target allocation.
If you’re interested in learning more about how your organization can add Bitcoin as a treasury asset, or to get started with a Bitbuy account, the process is simple.
At Bitbuy, we are uniquely positioned to help Canadian corporations navigate the entire process of adding Bitcoin to your corporate treasury, and we are committed to guiding you through every step of the process.
Reach out to us at corporate@bitbuy.ca, and we will assign a dedicated account manager for a tailored onboarding process and client experience.
