Bitcoin on corporate balance sheets: What’s the risk and reward?

What are corporate treasuries?

As a seasoned investor with over three decades of experience, I have witnessed the rise and fall of numerous financial trends, from dot-com bubbles to the 2008 global financial crisis. The story of MicroStrategy’s Bitcoin treasury has caught my attention for its audaciousness and potential impact on the corporate finance landscape.

Company financial hubs, often referred to as corporate treasuries, are responsible for maintaining liquidity, assessing risks, and maximizing returns. Historically, they have favored traditional assets like fiat currency, bonds, and other secure investments. However, MicroStrategy bucked the trend by choosing Bitcoin (BTC) as its main reserve asset.

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. 

In essence, treasury managers strive to achieve a fine equilibrium between potential gain and potential loss. Their main goal is to shield the company’s resources from economic fluctuations such as market declines or cash flow shortages, all while maximizing returns on excess funds within the organization. They must also handle periods of market uncertainty and extreme conditions with careful risk management strategies.

MicroStrategy dared to incorporate Bitcoin into its financial reserves, going against conventional wisdom and adopting a risky-but-potentially-profitable approach. This audacious move not only revamped its financial structure but also boosted its stock performance, making it a trailblazer in the field of cryptocurrency investment.

Companies such as Metaplanet, Semler Scientific, DeFi Technologies, Solidion Technology, Nano Labs, and Cosmos Health are among those who have already implemented or are pondering over the idea of holding Bitcoin as a part of their financial reserves.

MicroStrategy: A visionary bet on Bitcoin

Under the guidance of Michael Saylor, MicroStrategy – a tech company that faced a significant setback following the dot-com bubble burst in 2000 – has experienced an impressive resurgence, primarily due to forward-thinking financial management practices.

By the year 2002, MicroStrategy’s stock price fluctuated between $1 and $2, indicating market skepticism and internal hurdles. Over the subsequent two decades, the company regained significance through its data analytics tools. However, its remarkable transformation commenced in 2020, when it decided to hold Bitcoin as a reserve asset.

Bitcoin adoption

Michael Saylor, the co-founder and chairman of MicroStrategy, views Bitcoin as a solution against rising fiat currency inflation. He thinks that the value of the U.S. dollar is rapidly decreasing and considers Bitcoin, due to its limited supply, to be a more reliable way to safeguard worth. As a result, MicroStrategy transformed into a business that combines software development with Bitcoin investment.

MicroStrategy’s Bitcoin accumulation journey

By November 24, 2024, MicroStrategy has accumulated a remarkable 226,500 Bitcoins, establishing itself as the world’s leading corporate Bitcoin owner.

MicroStrategy adopted diverse financing methods to fund its Bitcoin acquisitions. These strategies aimed to comply with conventional financial service standards while also enabling them to manage the volatility inherent in an asset such as 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.

Employing various tactics, MicroStrategy has amassed a substantial Bitcoin treasure valued at approximately $22 billion.

Timeline of MicroStrategy’s Bitcoin acquisition

Through an innovative approach using convertible notes and dollar-cost averaging, MicroStrategy significantly shifted its strategy towards Bitcoin, ultimately propelling it from a faltering software company into a Bitcoin surrogate. This strategic move skyrocketed its stock price more than 1,000 times over, drastically altering its market image.

Here is a timeline of their acquisition of Bitcoin:

It’s evident that MicroStrategy has adopted a steady strategy of investing in Bitcoin regardless of market conditions, aiming to reduce price fluctuations through dollar-cost averaging. Additionally, they have teamed up with reliable custodians known for their institutional-level security, ensuring safekeeping of their Bitcoin assets.

MicroStrategy’s remarkable journey from a faltering software company to a proxy for Bitcoin led to an astounding surge in its stock price. Initially valued at just $2 in 2002, the price skyrocketed more than 1,000 times to surpass $2,000 at its peak, mainly because of Bitcoin’s extraordinary growth and investors viewing MicroStrategy as a means to acquire Bitcoin without making direct cryptocurrency transactions.

Bitcoin, as an investment, has often surpassed conventional investments such as bonds or cash alternatives in historical performance. Embracing this trend has significantly boosted MicroStrategy’s market value, redefining its presence within the technology and finance industries. To some, this might seem like a highly unconventional approach to managing assets; however, strategies that lead to exceptional growth often appear as unorthodox decisions initially.

Rewards of using Bitcoin as a treasury reserve

MicroStrategy’s approach to Bitcoin offers notable benefits. Certainly, the potential for financial gains is a major part of this strategy, but it’s also important to note that MicroStrategy has effectively enhanced its reputation by employing this innovative method for managing its corporate treasury.

1) Investing in Bitcoin serves as a protective measure against the decline of fiat currencies, similar to investing in gold. This attractive approach resonates with visionary investors eager to tap into Bitcoin’s expansion. Conventional banking, based on fractional reserve systems, may expose businesses to risk during turbulent periods, as demonstrated by the failure of banks like Silicon Valley Bank.

Instead of banks, Bitcoin provides immediate access to funds through its decentralized, worldwide marketplaces. This means businesses can obtain funds swiftly without having to depend on centralized organizations. By holding Bitcoins in a treasury, companies can reduce operational risks and guarantee they’ll always have quick access to liquidity when needed.

MicroStrategy is frequently recognized as a pioneer in financial innovation, typically discussed in the same breath as Tesla and Nvidia. However, this recognition isn’t based on its traditional business foundations, but rather its revolutionary approach to treasury management.

Investors in MicroStrategy have reaped significant, disproportionate gains from Bitcoin’s scarcity and rising popularity compared to conventional investment options in treasury assets. While MicroStrategy has undeniably benefited from these Bitcoin-related advantages, there are still potential risks associated with their strategy that should be taken into account by both current investors and those considering this approach as a model for their own investments.

Risks and challenges of using Bitcoin as a treasury reserve

Although Bitcoin offers several benefits when used as a treasury asset, it also presents difficulties and risks that need careful consideration. Constructing a company’s treasury using an asset prone to drops of up to 75% in bear markets necessitates thoughtful preparation.

Volatility risk

The volatility of Bitcoin’s value can significantly influence a company’s financial statements, leading to variations in declared profits and investor perceptions. When the value and sentiment decrease, the company may find itself compelled to offload Bitcoin, which could exacerbate price drops and negative sentiments further.

If Bitcoin’s value decreases significantly in a market crisis, causing a drop in the company’s share price, and if debts are due at the same time, there’s a risk of a domino effect on the company’s financial statements. Furthermore, bondholders might choose to receive their repayments in cash instead of shares, potentially worsening MicroStrategy’s financial predicament.

In MicroStrategy’s situation, they have effectively lessened the risk by establishing a solid track record of navigating one of the most severe Bitcoin bear markets successfully. The freshly issued debt won’t be due until 2029, giving them plenty of time to produce more revenue from their primary operations, thereby enhancing their durability during potential Bitcoin market downturns in the treasury.

In simple terms, the convertible bond that MicroStrategy sold back in 2020 will reach maturity in 2025. The company obtained funds for this purchase in 2024 through additional fundraising efforts, indicating forward-thinking planning over a five-and-a-half year period.

Liquidity risk

If you feel compelled to sell Bitcoins during a market slump, it could exacerbate losses and cause market instability. This would lead to a harmful cycle similar to what happened with Terra, where the reduction in assets on the balance sheet occurred rapidly as Bitcoin had to be sold to establish a cash position, while Bitcoin’s value kept decreasing due to the selling pressure needed to obtain cash.

As a crypto investor, I’d put it like this: If a corporation finds itself entangled in this relentless liquidity crunch, it might struggle significantly to secure additional funds, which could hinder its growth and survival in the market.

Regulatory risk

2024 saw a decrease in regulatory risks associated with cryptocurrency due to the approval of Bitcoin exchange-traded funds (ETFs). The results of the 2024 U.S. election indicate a government supportive of cryptocurrency, which could spur innovation in this sector from 2025 onward. Yet, there remains confusion regarding how companies should account for cryptocurrencies listed on their financial statements.

Regulatory shifts, such as capital gains taxes or outright bans, could devalue Bitcoin holdings. 

MicroStrategy’s approach could potentially motivate other businesses to invest heavily in unpredictable financial instruments like Bitcoin. Although diversification is essential, an increasing tendency towards excessive Bitcoin investment might disrupt the overall corporate financial system, magnifying risks during economic slowdowns.

In the end, businesses evaluating if they should include Bitcoin in their cash reserves need to balance its potential benefits against its risks to decide if it fits with their financial objectives and risk tolerance level.