As the world continues to grapple with the economic fallout from a deadly pandemic provoking unprecedented fiscal and monetary policy expansion, corporate treasuries are being forced to rethink their risk/return strategies, with some of the most notable names including MicroStrategy (NADQ:MSTR), Square (NADQ:SQ), Galaxy (TSE:GLXY), and Stone Ridge Holdings Group.
In this article, we will take a look at some of the factors driving the rising trend of the corporate BTC treasury accumulation—and explore how the situation may evolve.
It was not too long ago that the largest financial institutions were shunning BTC, citing numerous problems with its volatility, intrinsic value, and lack of regulation. In 2017, JPMorgan CEO Jamie Dimon even went as far as to label it a "fraud" that would eventually "blow up." Today, the leading investment bank is calling for a BTC price of $146,000 over the longer term. The times, they are a changin’.
Since then, increased regulation has served to bring clarity to a space once filled with opaque practices. The infrastructure has been built out to accommodate larger players, with a growing derivatives market, a widening suite of trading tools, and institutional-grade custodians and trading platforms. At the same time, the global economic outlook has gone from uncertain to catastrophic.
Showing remarkable price resilience after the events of March 12, 2020, which shook all global markets, BTC has gained increasing legitimization from the very institutions that once predicted its demise. Household names such as payment services provider PayPal will begin allowing its users to purchase cryptocurrency. The Office of the Comptroller of the Currency (OCC) gave the green light for U.S. banks to provide custody services for customers with respect to cryptocurrency and other digital assets.
More recently, the OCC established a further landmark move allowing national banks in the US to use stablecoins and blockchains to facilitate the settlement of payments. With such bullish action surrounding BTC and digital assets in the face of a flailing global economy, it is perhaps unsurprising that corporate treasurers are buying BTC as a balance sheet asset.
Leading the charge in this practice was Michael Saylor's MicroStrategy in August 2020, when the company adopted BTC as its primary treasury reserve, purchasing 21,454 BTC at an average price of ~$11653 per BTC. Saylor then doubled down on his conviction purchasing a further 16,796 BTC at a price of ~$10419 in September 2020, and then confirmed a third purchase of 2,574 BTC ~$19427 on December 5.
Later that month, the company raised additional capital to make yet another purchase of 29,646 BTC, taking MicroStrategy's holdings to a massive 70,470 BTC. With BTC's prices today lifting that value to around $2.4 billion at the time of writing, it is impossible for other corporations not to take notice.
It is hard to find another company as bullish on BTC as MicroStrategy. In fact, when asked to explain why buying BTC was such a good idea, Saylor cited the early mover advantage that MicroStrategy was able to “buy the Bitcoins for a cheaper price.” He also said that the company had changed the rule book and the perception that “large institutions were not going to buy or could not hold Bitcoin on their balance sheets.”
MicroStrategy has indeed provided a playbook for other corporate treasuries to allocate BTC to their balance sheets. We saw Square following shortly after adding some 4,709 BTC to its balance sheet in October 2020, Stone Ridge Holdings Group now holds 10,889 BTC and Galaxy Digital has 16,402 BTC in its treasury.
Bitcoin bull and co-founder and partner at Morgan Creek Digital Anthony Pompliano (Pomp) said in a tweet, "It has now become irresponsible for publicly traded corporations to have zero Bitcoin exposure on their balance sheet. Shareholders must demand that corporate executives protect their balance sheet's purchasing power."
A key responsibility of corporate treasuries is cash and liquidity management for the corporation. They therefore typically look to hold a basket of assets in order to more effectively manage risk and enhance returns for their shareholders. To find the right balance between risk and yield, treasurers must consider multiple factors such as the short-term liquidity needs of the company, changes in foreign exchange rates, the macroeconomic environment, and other trends that can influence their business.
Corporate treasuries are usually conservatively managed with a heavier weighting toward low-risk assets. However, against the backdrop of this pandemic, cash assets, bank deposits, and treasury bonds are no longer generating yield.
The ramifications of COVID-19 that shuttered businesses and caused widespread unemployment led governments around the world to respond with massive stimulus packages in the trillions of dollars. As Fidelity points out, "These developments have led to diminished profits, low yields on excess cash, and potential depreciation of cash and cash equivalents."
So much money has been created in fact that a staggering 23.6% of all U.S dollars were created in the last year as of October 2020. Yet with "second waves," virus mutations, and extended lockdowns, this is just the tip of the iceberg. In fact, Saylor likened holding cash to "a melting ice cube."
With global governments creating some $10 trillion in stimulus in just two months (three times more than the financial crisis of 2008-09), despite the rising joblessness and other deflationary forces that impede spending such as lockdowns, this is still a never-before-seen level of money printing. It has led many businesses to be cautious, believing that inflation will be inevitable as too many dollars eventually seep into too few assets, goods, and services, thus diminishing the purchasing power of fiat currencies (the melting ice cube that Saylor alluded to).
Fiat currencies losing their purchasing power coincided with record-low interest rates, meaning there is simply not enough yield to keep holding them in such high proportions in a corporate treasury.
All major economies cut interest rates in order to allow companies to take on debt and refinance at knock-down rates. But, for those holding cash, it is impossible to earn a reasonable yield, making holding cash even less attractive and leading to increased pressure from shareholders holding unproductive funds.
With all these economic factors swirling around, the move from cash to a better-performing asset (BTC) looks inevitable. In May of 2020, famous global macro trader Paul Tudor Jones bought BTC as a "hedge" to what he sees as the inevitable inflation that is coming.
Bitcoin, rather than being subject to central bank printing at will and inflation of the money supply, is capped at 21 million, making it a scarce asset that no one can dilute. This also gives it a high probability of accumulating value over time, making it a far superior store of value to fiat currencies.
Moreover, unlike cash giving negative yield, BTC grants the prospect of rising purchasing power over time, and it allows companies to add another diverse asset to their basket to manage their risk/reward ratio that is currently much more attractive than holding a negative yield asset.
BTC is also much more efficient than holding a traditional haven asset like gold as it is much more liquid and easily transportable. In fact, JPMorgan predicts that the price of gold will suffer in the coming years as more and more investors transfer their wealth into BTC and other digital assets.
The stage looks set for more corporate treasurers to follow in the footsteps of MicroStrategy and other institutional pioneers. Stone Ridge Holdings cited the reason for adding BTC to its balance sheet as a hedge against "unchecked" and "unbacked" global money printing, and increasingly negative yields.
BTC was already beginning to attract institutional investment before 2020. But the pandemic has accelerated this process and, as the trend looks clear for more and more corporate treasurers to add BTC to their balance sheets, they will need to work with a credible and proven partner to trade and custody Bitcoin.
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