The role of the corporate treasury is to hold cash and other short-term assets that can help manage the firm’s liabilities. Additionally, the ability to transfer long-term assets into cash is crucial to a business’s health and requires the consideration of all profitable opportunities.
Traditionally, corporate treasuries invested in conservative financial products to generate modest returns while preserving capital however, there has been a strategic shift in diversifying holdings.
Macroeconomic factors spurred by the Covid-19 pandemic, resulted in a decline of purchasing power, lower interest rates amid inflationary concerns and downward pressure on real rates of returns.
As businesses emerge from the pandemic, they are considering new opportunities to invest in assets that can provide alternative stores of value and greater yields – among them being digital currencies. Along with remaining on top of trends and industry standards, corporate treasurers must also consider proper financial risk management, including credit, counterparty and external pension fund risks before making an investment.
Since Bitcoin and other digital assets are unlike traditional investments, corporate treasurers may have concerns about the value vs. lack of value of an intrinsic asset. Therefore, as a counterargument, investors are encouraged to consider the opportunity cost. While cash is useful to have on hand, holding on to too much in excess is inefficient. Taking on some risk is normal in day-to-day business and, when properly calculated, can result in huge returns for investors. Therefore, failing to adapt to trends in digital currencies may do more harm than making the seemingly risky investment now.
The asset should be viewed as insurance against inflation rather than a gamble. Investors may view the purchase of Bitcoin as a gamble if they are a smaller organization that has invested the majority of its cash holdings into the asset without having any relationship to the digital currency. Investments in corporate treasury shouldn’t negatively impact the Company’s profitability. The amount of digitcal currency to invest in corporate treasury depends on whether your business plans on accepting the digital currency or is leveraging the technology within its core operations. Example, a payment processer that accept Bitcoin.
While managing the digital currency on your balance sheet may require some additional considerations, the benefits are many. Among them are:
Bitcoin is an opportunity to diversify cash and cash-equivalent holdings for maximum returns. A 5% share of Bitcoin diversifies an investment portfolio as efficiently as a 25% allocation in an ‘alternative’ Hedge Equity mutual fund.
Although it is unlikely that this is the primary reason for a corporation to invest in Bitcoin, publicity can be a great way for businesses to make headlines.
Businesses might also genuinely be backing the cryptocurrency and pushing for its widespread adoption. Therefore, investing in or accepting the digital currency may encourage other companies to do the same, starting an aggressive adoption cycle. As more companies announce their support of this asset class, analysts suggest this is a sign of a growing digital currency space.
Businesses that have a Bitcoin holding can take advantage of its peer-to-peer payment opportunities. Typically large transactions require expensive wire fees, reliance on banking hours and slow transaction times. Additionally, corporate treasurers are tasked with trying to earn a yield on their cash. Bitcoin can help businesses conduct large payment transactions, reducing the need for third parties and also result in significant appreciation.
Central banks have continued to print funds in response to Covid relief. The result of more money being printed is inflation. To help hedge against inflation, businesses may look to Bitcoin, which shares deflationary properties with gold. Businesses are protected from the devaluing of cash due to inflation as only a certain amount of the digital currency exists.
Taking the lead is MicroStrategy, an Intelligent software company. MicroStrategy’s CEO Michael Saylor announced back in December that the Company had accumulated $1.3 billion in cryptocurrency, in which he replied to Elon Musk’s tweet “that he would be happy to share his playbook.” The Company deliberated for months before determining that Bitcoin will mitigate several of the risks that currently exist in their portfolio, including the government’s inflationary financial policy.
Microstrategy continues to believe in Bitcoin’s ability to act as a peer-to-peer payment service and is believed to be continuing to hold it for the long term. The balance sheet treats Bitcoin as an intangible asset. According to GAAP, this means that Bitcoin is accounted for at the purchase price. The book value is also presented on non-GAAP financials.
Companies like Tesla have begun to move away from holding non-performing assets like cash instead of investing them into assets that will appreciate like Bitcoin. Tesla announced that their $1.5 billion dollar purchase of Bitcoin was an effort to “further diversity and maximize” their holdings while still being able to access it immediately. Bitcoin has an added benefit in that it provides a better return on investment than more traditional investment vehicles. Elon Musk has also stated that not investing in this asset “would be stupid” since the asset has had such positive returns. Other industry analysts have determined that amount to be over 230% a year.
Looking closely at the example of Tesla, the Company has also begun to accept the digital currency for its vehicles. Rather than converting the digital currency back into fiat, Elon Musk shared that all proceeds would be retained in Bitcoin.
So, how successful has this strategy been so far? Consider Square. The Company invested $220 million into Bitcoin in 2020 (a total of 5% of its total cash). These holdings are now worth nearly $424 million at the time of writing, a growth rate of 1.9x.
Tesla, which invested 1,500,000,000 into Bitcoin (0.3% of their total holdings), has seen a 1.5x increase. Putting a number on it, this means Tesla made approximately $1 billion in profits from its investment into Bitcoin. The recent profits are putting the business on track to make more from its investments into the digital currency than profits earned from selling electric vehicles in 2020. The CFO of Tesla, Zachary Kirkhorn, continues to share that Bitcoin Investment has “proved to be a good decision” since it is a safe store of cash that can be accessed almost immediately while still receiving returns.
Microstrategy has experienced a 2.3x return on its investment by successfully raising more than $1 billion of additional capital through their digital currency holdings. They now hold over 91,000 Bitcoins in their possession. Microstrategy believes that Bitcoin will earn better returns and preserve the value of their capital better than cash. For their team, investments in Bitcoin are essential to growing a profitable business.
Unfortunately, we can’t all get access to Microstrategy’s playbook. However, buying Bitcoin for a corporate treasury in Canada is not an overly complex process. In fact, treasury holders can do so in three simple steps:
Bitbuy has a new sign-up process for businesses. When creating an account, new users can toggle between personal and business options before providing their information. The sign-up process will include a username, password, phone number, email and referral code (if applicable).
Businesses will be prompted to fund their account with $50,000 CAD or the equivalent amount in digital currency. After doing so, users can send an email to email@example.com. Within 24 hours, you will receive a response on your request from our Traders.
After signing up for an account, businesses can engage with an over-the-counter (OTC) rep that specializes in investments of $50,000 or more. Users can get a live quote over the phone at a fixed price. This mitigates against risks pertaining to slippage, which can occur when buying directly from an exchange. This can force Businesses to buy up low price and high price orders, resulting in a higher than market price. To initiate the transaction, the deposit can be made through bank wire.
After making the purchase, users can transfer the purchased Bitcoin back into their corporate wallet for safekeeping. Coinbase holds more Bitcoin than anyone in the world, and uses a combination of USB keys and paper backups. These drives add storage through encryption and dispersion in a safety deposit box around the world. Other safe storage wallets include Armory for enterprises. This cold storage option is disconnected from the Internet but allows users to prepare a Bitcoin transaction and copy it to an online computer afterwards. Online storage methods are subject to hacking, and a lost key can be harmful to a business’ cash holdings.
Many are adopting Bitcoin, as they believe in its ability to diversify their investments. It won’t be long before more businesses follow the lead and begin replacing cash on their balance sheets. And this is only the first step. The next step is for businesses to issue their own tokens as a method of bootstrapping. Airbnb believes that taking advantage of tokenization and digital currencies will be key to their success in the future. The beauty community app, Supergreat, is not far behind.
But, before getting ahead of ourselves, let’s start small, learn the market and diversify our holdings.