What seemed unthinkable a year ago, Bitcoin (BTC) has found its way onto corporate balance sheets. Square, Tesla, and MicroStrategy have all made significant investments in Bitcoin (BTC) in recent months. And as the price of BTC hit an all-time high of over $ 58,000 at the end of February, those decisions have paid off. Even when it plunged 25% to $ 43,000 a week later, its volatility did not deter the controversial discussions underway over the Corporate Finance and Treasury Zoom calls around the world: “Can we allocate some of the our excess cash at BTC? Would the board approve an allocation of our excess cash to BTC as part of our corporate treasury policy? How to buy it? How can I track and manage it? With all of these questions exploding on the scene, it’s clear that Bitcoin has finally become mainstream with major institutional adoption.
So first of all, why would this make sense? Typically, managing corporate cash surpluses involves balancing the trade-off between return and risk while maximizing liquidity. In other words, the main job of Corporate Finance & Treasury is to ensure that liquidity is always available. One simple solution is to invest in safe overnight funds to earn enough interest to beat inflation. The common debate around this strategy is whether it is worth the risk of gaining, say, an extra 30-40 basis points, while locking up money for 3-6 months with access only at the cost of penalties? Most of the time this is not the case, and corporate treasurers keep excess cash in low yielding money market funds and move on.
However, since the start of the COVID-19 closures in March 2020, the federal funds rate – the rate that U.S. banks charge each other for overnight loans – has fluctuated between 0% and 0.25% while the Inflation was 1.4% in 2020. This translates into what is effectively a negative interest rate of -1% on corporate cash. With US companies holding a record $ 2.5 trillion at the end of 2020 with no short-term accretive alternatives to earn on that money, you can see why allocate 5-10% to BTC after the 10-fold increase. last year does not seem this
crazy more. And with sky blue BTC price targets hovering around $ 100,000 + (JPM Link), the target posts continue to change on a daily basis.
Given the circumstances, should companies invest in BTC as a hedge against inflation and store of value in 2021? Institutional purchasing is starting to intensify with more and more avenues open to businesses. As inflation is set to climb further to 2.2% in 2021 and the Fed continues to print money, many corporate treasurers are starting to seriously consider taking a ‘digital gold’ stance this year. . When considering investing in Bitcoin, here are a few things to consider:
o Complete alignment internally (obviously).
Despite its rise and somewhat improved stability, Bitcoin remains volatile. Shares of companies that have taken large stakes in BTC have followed suit to some extent, such as Microstrategy and Square. Therefore, make sure that BTC is discussed in depth and that your management team and board are fully on board before going ahead.
o Cash policy.
Treasury policies will generally not allow you to buy Bitcoin. You will need to make changes to your policy to accommodate any BTC investment. Any change in the treasury policy must be approved by the Board. This will require you to fully explain your rationale to the board and obtain formal approval before taking any action on the investment side.
For example, in a recent MicroStrategy public filing, their treasury policy now reads: “Cash reserve assets will consist of (i) cash, cash equivalents and short-term investments (” Cash assets’) held by the Company that exceed working capital needs and (ii) Bitcoin held by the Company, with Bitcoin serving as the primary cash reserve asset on an ongoing basis, subject to market conditions and anticipated needs of the business into cash assets, including potential future share buyback activities.
o Find the right partner.
There are now several institutional funds or asset managers that are concentrating. Choose the right partner for your business, like Fidelity, Grayscale, Stone Ridge, NYDIG or Ark Invest. Many more will be online this year. Make sure you line up with the right partner who will help you navigate the landscape as you take the extra risk. There are several angles to play here. You can invest in a fund that holds BTC in which you do not own the underlying cryptocurrency, work with an asset manager or advisor, and / or buy BTC yourself.
Currently, monitoring and reporting options on Bitcoin are limited. Traditional enterprise resource planning (ERP) systems and legacy cash management systems (TMS) lack the data architecture, user interfaces, or APIs capable of reporting and tracking Bitcoin that can deliver real-time critical account information. And when the price of Bitcoin can change +/- 10% in a day against fiat currencies, it’s vitally important that your team stay on top and report data in a timely manner to track and report exposures.
Given the volatility, be sure to investigate and research cloud-based solutions to stay on top of any changes to Bitcoin and how it affects your cash positions, tax accounting, and accountability. recognition of realized and unrealized gains and losses. One of these companies, Trovata, used by Square’s corporate treasury team, can connect directly to banks and automate treasury reporting as a big data platform with natural language search, analytics cash flow and cash flow forecasts.
o How can treasury teams prepare for the scrutiny associated with the decision to continue with Bitcoin investments?
Before moving forward, create a document that addresses potential issues to have on hand, including, but not limited to:
▪ Can the treasury policy be changed?
▪ What is the feeling of your board of directors?
▪ What is your risk tolerance given the volatility of Bitcoin? It’s worth considering now, especially with Bitcoin at record highs due to an unprecedented set of events around the world.
▪ How will Bitcoin and potentially other cryptocurrencies affect your balance sheet? A less regulated digital currency like Bitcoin has major tax implications. Additionally, Bitcoin may take longer to settle if you use it for cross-border payments. Be prepared to anticipate, defend and rectify the possible challenges that BTC would likely have on your company’s balance sheet and the volatility that this could cause for your company’s stocks.
Bitcoin as part of your corporate treasury.
While Bitcoin is a hot topic now, with some pioneering publicly traded companies like Square already aggregating cash positions with BTC as it continues to thrive in this volatile market, it is worth considering as a small allocation. and measured excess liquidity as a store of value to counter the current ultra-low interest rate environment and hedge against a higher rate of inflation. And while it seems like the investment these companies are making in Bitcoin seems large, in reality they are only a small part of their balance sheet.
If you do decide to invest in Bitcoin for your business cash flow, be careful not to over-communicate every step of the way to ensure full alignment internally given the risk and uncertainty that this entails. Make sure you have a strong cash management partner to help you collect and analyze all of the company’s financial data, including Bitcoin investments, in real time. Having a real-time, clear, and complete view of your current cash positions, cash flows and cash flow forecasts will help you quickly identify exposures and minimize risk in an accelerating world where it is critical to stay aware and anticipate volatility.