Bitcoin on corporate balance sheets: What’s the risk and reward?
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What are corporate treasuries?
Corporate treasuries are the financial nerve centers of companies, tasked with ensuring liquidity, managing risks and optimizing returns. Traditionally conservative, they have relied on fiat, bonds and other stable investments. MicroStrategy, however, shattered the mold by adopting Bitcoin (BTC) as its primary treasury reserve.
The primary functions of a corporate treasury include the following.
- Liquidity management: Ensuring the company has sufficient cash to meet its obligations. This also involves ensuring there are no liquidity mismatches between assets and debts. If short-term debts are expected to be funded by long-term assets, that would be a major risk.
- Risk mitigation: Managing exposure to interest rate fluctuations, currency risks and credit risks. Often, there are risk management teams dedicated to market risk, credit risk, operational risk and liquidity risk. The treasury works closely with these functions to ensure their financial decisions take into account all these risk factors.
- Short-term investments: Corporate treasuries hold the firm’s assets. It could be equity, debt or just cash flows generated by the business. Treasury departments are responsible for allocating excess cash to low-risk, liquid assets to generate returns. Their role is to ensure yield is optimized on the firm’s assets while the risk is still kept as low as possible.
- Debt management: Handling loans and credit to maintain optimal leverage is an important function of treasuries. This function is often referred to as asset and liabilities management (ALM). As mentioned earlier, not only is this function responsible for managing the firm’s liabilities, but it is also critical to ensure there is no maturity mismatch between assets and liabilities. A firm can’t plan to fund a liability (a debt interest payment) that is due in a week with an asset that is maturing in a month.
- Strategic planning: Supporting long-term goals with efficient capital allocation is one of the strategic functions of a corporate treasury.
As a result, treasury managers aim to strike a delicate balance between risk and reward. Their primary objective is safeguarding the company’s assets against market downturns or liquidity crises while ensuring they manage optimized returns on surplus funds in the firm. They should also risk-manage periods of market volatility and stress conditions.
This is where MicroStrategy’s pivot to including Bitcoin into its treasury challenged traditional norms, embracing a high-risk, high-reward strategy. As such, this bold strategy not only transformed its balance sheet but also its stock performance, cementing the company as a pioneer in cryptocurrency adoption.
Other companies that have adopted or are considering Bitcoin as a treasury reserve asset include Metaplanet, Semler Scientific, DeFi Technologies, Solidion Technology, Nano Labs and Cosmos Health.
MicroStrategy: A visionary bet on Bitcoin
MicroStrategy, once a dot-com darling that suffered a major crash after 2000, has seen a remarkable turnaround under Michael Saylor’s leadership, driven by innovative treasury management.
By 2002, the MicroStrategy stock price had been hovering between $1 and $2, reflecting market disillusionment and internal challenges. Over the next two decades, the company regained relevance with its data analytics tools. However, its groundbreaking transformation began in 2020 when it adopted Bitcoin as a treasury reserve.
Bitcoin adoption
Michael Saylor, MicroStrategy’s co-founder and executive chairman, saw Bitcoin as an antidote to fiat inflation. He believed the dollar’s purchasing power was eroding rapidly and that Bitcoin, with its capped supply, offered superior preservation of value. This strategy turned MicroStrategy into a hybrid between a software company and a cryptocurrency investment vehicle.
MicroStrategy’s Bitcoin accumulation journey
As of Nov. 24, 2024, MicroStrategy holds an impressive 226,500 BTC, solidifying its position as the largest corporate Bitcoin holder globally.
MicroStrategy utilized different funding strategies to fuel its Bitcoin purchases. Its strategies needed to align with mainstream financial services norms and, at the same time, ensure it was able to handle a volatile asset like Bitcoin.
- Equity issuance: The company issued new shares to raise capital, benefiting from the rising stock price as Bitcoin gained acceptance. The rising Bitcoin price mitigated any sell pressure risks due to the issue of new shares. This strategy had to be timed
- Debt financing: Convertible bonds, offering low-interest rates and future conversion options, became a key tool. Additionally, senior secured notes helped fund purchases during Bitcoin dips.
- Free cash flow: Operational profits were redirected to bolster Bitcoin reserves.
- Bitcoin-backed loans: Leveraging existing Bitcoin holdings allowed the company to obtain additional liquidity without equity dilution.
Using a mix of the above strategies, MicroStrategy has built a treasury with Bitcoin holdings worth $22 billion.
Timeline of MicroStrategy’s Bitcoin acquisition
MicroStrategy’s bold Bitcoin acquisition strategy, leveraging convertible notes and dollar-cost averaging, transformed it from a struggling software firm to a Bitcoin proxy, driving its stock price over 1,000x and redefining its market identity.
Here is a timeline of their acquisition of Bitcoin:
As you can see, MicroStrategy has employed a consistent dollar-cost averaging approach, buying Bitcoin across market conditions to mitigate price volatility. The company also partnered with institutional-grade custodians to ensure secure storage.
MicroStrategy’s transformation from a struggling software firm to a Bitcoin proxy saw its stock price soar dramatically. From $2 in 2002, the price exploded over 1,000x to exceed $2,000 at its peak, largely due to Bitcoin’s meteoric rise and investor perception of MicroStrategy as a way to gain Bitcoin exposure without direct crypto purchases.
Bitcoin, as an asset, has historically outperformed traditional investments like bonds or cash equivalents. MicroStrategy’s alignment with this trend has supercharged its market capitalization, giving it a renewed identity in the tech and financial sectors. While this can seem like a very radical treasury management strategy to many, most moves in capital markets that deliver exponential growth look like outlier decisions in the beginning.
Rewards of using Bitcoin as a treasury reserve
MicroStrategy’s Bitcoin strategy presents significant advantages. While financial upside is definitely a big aspect of this strategy, MicroStrategy has also managed to build brand equity through this treasury management strategy.
Bitcoin offers a hedge against currency devaluation, akin to gold. The bold strategy appeals to forward-thinking investors seeking exposure to Bitcoin’s growth. Banks traditionally rely on fractional reserve banking, which can leave businesses vulnerable during times of crisis, as seen with Silicon Valley Bank’s collapse.
Unlike banks, Bitcoin offers liquidity at any time through decentralized, global markets, allowing firms to access funds quickly without relying on centralized institutions. By maintaining a Bitcoin treasury, companies can mitigate operational risks and ensure timely access to liquidity.
MicroStrategy has positioned itself as a thought leader in financial innovation, often mentioned alongside Tesla and Nvidia — not for its business fundamentals, but for its groundbreaking treasury management strategy.
Bitcoin’s limited supply and growing adoption have already delivered outsized returns to MicroStrategy investors compared to traditional treasury assets. Despite all these positives that have emerged for MicroStrategy, there are risks that still remain for them, but also for those who want to draw inspiration from this strategy.
Risks and challenges of using Bitcoin as a treasury reserve
Despite several advantages, Bitcoin as a treasury asset introduces challenges and potential pitfalls. Building a corporate treasury on an asset that has seen up to a 75% decline in value during bear markets requires a lot of planning.
Volatility risk
Bitcoin’s price swings can dramatically impact a firm’s balance sheet, causing fluctuations in reported earnings and shareholder sentiment. As price and sentiment fall, the firm might be forced to sell Bitcoin, which further leads to negative price action and sentiment.
In a market stress scenario, where Bitcoin’s price falls, resulting in a fall in the firm’s stock price, and if debt matures at the same time, there might be a systematic collapse of the firm’s balance sheet. Additionally, bondholders might not convert their bonds into stock, leading to cash repayments instead, which could exacerbate MicroStrategy’s financial situation.
In MicroStrategy’s case, it has managed to mitigate this risk by successfully creating a track record of managing one of the deepest Bitcoin bear markets. The newly issued debt matures in 2029, providing ample time to generate additional cash flow from its core business, ensuring resilience for a Bitcoin-driven treasury during potential downturns.
The previous convertible that MicroStrategy issued in 2020 matures in 2025 and was bought through additional funds raised by the firm in 2024. This demonstrates planning over half a decade into the future.
Liquidity risk
A need to liquidate Bitcoin during a market downturn could deepen losses and destabilize markets. This would create a vicious cycle like it did with Terra, where the size of the balance sheet shrunk exponentially as Bitcoin had to be sold to build a cash position, while Bitcoin’s price was constantly falling in the process of getting cash.
It would also make it difficult for a corporate treasury to raise further capital if it got caught in this vicious liquidity crisis.
Regulatory risk
The regulatory risks for crypto have been reduced in 2024 through the approvals of Bitcoin exchange-traded funds (ETFs). The United States election results have also shown that a pro-crypto government could start driving innovation in this space forward from 2025. However, there is still a lack of clarity around accounting treatment for firms holding cryptocurrencies on their balance sheets.
Regulatory shifts, such as capital gains taxes or outright bans, could devalue Bitcoin holdings.
MicroStrategy’s example might inspire other corporations to overexpose themselves to volatile assets. While diversification is critical, a trend of excessive Bitcoin adoption could destabilize broader corporate finance ecosystems, amplifying risks during downturns.
Ultimately, companies considering adding Bitcoin to their treasury must weigh Bitcoin’s promise against its perils to determine whether it aligns with their financial goals and risk appetite.
