Corporate Treasuries Caught Between an Inflation Rock and Bitcoin
Bitcoin's main attraction as a reserve asset for corporate treasuries is as an inflationary hedge. Companies need to decide which risk is greater: volatility, regulatory uncertainty, slippage, or not investing in BTC?
Bitcoin (BTC) is gradually becoming acceptable among mainstream investors and corporations. Nowhere has this been made more evident than with MicroStrategy’s adoption of the most popular cryptocurrency as its main reserve asset.
The Virginia-based tech consultancy converted over USD 400m of its cash reserves into bitcoin, with co-founder Michael Saylor declaring that he expects other companies to follow suit out of a “fiduciary obligation” to avoid inflation.
Figures within the cryptocurrency investment and custodial industry agree with Saylor, telling Cryptonews.com that bitcoin investments have increased from corporations in the wake of the MicroStrategy move. They also suggested that BTC’s growing use as a store of value among corporations and investors alike will help it gain traction as a means of exchange.
Corporate BTC investment is growing
MicroStrategy’s investment in bitcoin had an almost immediate effect on other firms.
Within a couple of weeks of MicroStrategy’s initial announcement, Canadian software and design firm Snappa announced that it had moved 40% of its cash reserves into bitcoin. More recently, payments company Square revealed that it had converted USD 50m of its reserves.
Industry figures believe that more companies will follow in the near- to mid-term. In fact, Blockstream Chief Strategy Officer Samson Mow told Cryptonews.com that an increase is already happening right now.
“Michael Saylor's move is going to have a profound impact on company financial decision making in the years to come. Some industry contacts have already told me that they are seeing an uptick in corporate bitcoin buys — Bitcoin Reserve is one Bitcoin brokerage that has disclosed this publicly,” he said.
It’s also worth noting that a number of crypto companies have launched custodial services in order to accommodate a rise in corporate demand. Unchained Capital launched a business account service for bitcoin in late September, while French startup Multis raised USD 2.2m for a business bank account solely for cryptocurrencies.
Nabeel Qadri, the managing partner at Protocol Ventures, is another industry figure who estimates that holding bitcoin as a reserve asset will become common.
“I believe bitcoin's main attraction as a reserve asset for corporate treasuries is as an inflationary hedge on the heels of unprecedented coronavirus-induced stimulus measures by central banks globally,” he told Cryptonews.com.
This mention of inflation touches on the main reason why MicroStrategy and other companies are becoming increasingly interested in bitcoin. Because with the US Federal Reserve printing USD 3tn in a few months, and with its chairman Jerome Powell announcing a new ‘relaxed’ approach to inflation in August, it’s likely that the US dollar will witness higher than average inflation over the next few years.
“I think the appeal of holding bitcoin as a reserve asset would be the same appeal that Michael Saylor and the MicroStrategy team saw: sound money. If your cash is becoming worthless, what else can you do except for buying bitcoin?” said Samson Mow.
Store of value vs. medium of exchange
For the purposes of this article, Cryptonews.com reached out to companies with some of the biggest cash reserves in the world, including Apple, Microsoft, and Google. Microsoft explicitly declined to comment as to whether it had any plans to purchase bitcoin, as did mid-cap exercise/media company Peloton.
But while companies yet to invest in bitcoin are likely to remain tight-lipped right up until they make an announcement, it seems safe to conclude that corporate investment in bitcoin will increase in parallel with institutional investment.
In July, crypto asset management company Evertas surveyed British and American institutional investors, who together manage some USD 78.4bn in assets. It found that 90% of fund managers expect to increase their crypto investments, with 26% reporting that they’re likely to “dramatically” increase their holdings.
However, with corporate and institutional investment potentially flooding into bitcoin and cryptocurrency, does this mean that crypto can no longer expect to become a widely used medium of exchange? In other words, given an expected rise in the use of bitcoin as a store of value, wouldn’t this mean that fewer people will use bitcoin and other cryptos as a medium of exchange?
Samson Mow said that something like the opposite is more likely to be the case, arguing that money must first be a store of value before it can be used as a medium of exchange and then as a unit of account.
“Bitcoin can already be used as a medium of exchange now, but will be far better once its volatility is reduced. That will happen once Bitcoin's market capitalization is in the trillions, and companies, institutions, and nation-states buying BTC as a reserve asset are what will do that,” he said.
Risks for companies
While bitcoin has had a strong 2020, isn’t there also a risk for companies in converting so much of their cash into the cryptocurrency?
“Absolutely,” said Nabeel Qadri. “The risk is volatility/price instability, regulatory uncertainty, slippage on exiting large positions, etc.”
Qadri also pointed to a custodial risk. However, he added, “there are viable solutions for that in the marketplace already, so I have no reservations there as it is totally manageable.”
But Samson Mow is more optimistic about risks.
He concluded that it’s now “more risky to not hold bitcoin for company reserves.”
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