Bitcoin as a hedge in corporate treasury management.
The latest news making headlines in crypto twitter, and beyond, are coming in from Square, on it’s latest move putting $50M of their cash treasury into bitcoin. this post will
- Review what is corporate treasury management,
- How does this latest move fits into traditional treasury management
- Ask the question if this is the beginning of a trend
- This post assume the reader already understands bitcoin and it’s potential value as hedge against inflation, but in case not, references are included for further reading.
Square is a native candidate to be one of the leaders doing such a move. Being a publicly traded company makes it more than just a treasury management move, it is a statement, and an act that demonstrates the company’s commitment to the values and vision of the decentralization movement, something that sits well with previous statements coming from Jack Dorsey on the decentralized future of twitter, and on the formation of Square Crypto, a team focus on developing an open-source decentralized internet standard that the social platform would eventually adopt itself,
“We believe that Bitcoin has the potential to be a more ubiquitous currency in the future,” Chief Financial Officer, Amrita Ahuja said in a statement Thursday. “For a company that is building products based on a more inclusive future, this investment is a step on that journey.”
It is then clear that for a company like square, it is just a natural move to do, being a trailblazer in understanding the value of bitcoin and adopting it’s narrative in it’s products and strategy, but when you take the CFO prism, is it a wise move in treasury hedging for a company?
Treasury management — role and scope in traditional companies
There are 3 main objectives in treasury management of a traditional company a CFO looks at when deciding how to manage it’s treasury and assets.
Cash flow management
How do you ensure sufficient liquidity and cash flow for your ongoing business operations — this is highly dependent on the business type, like seasonality of business and it’s burn rate and how much working capital is required to operate the business (aka CCC — Cash Conversion Cycles)
Foreign exchange rates hedging
When a company operates globally, foreign exchange rates are becoming a factor, and treasury management should be including this in it’s decisions
Long term Investments
This is where the decision of holding bitcoin is mostly relevant for companies today. We are not yet at a stage that products and services are denominated in BTC, thus the reason to hold it as part of a treasury portfolio is because you think it’s value will increase, in compare to other investment opportunities a company may have
This should be seen as the opportunity cost of the company’s assets, or WACC (Weighted average cost of capital) — If I were to invest this capital, what is the optimal way to do so to maximize returns
Of course, a decision like this holds more than just optimizing for yield, as factors like liquidity, sharp ratio and other consideration which are not all financial, (as I highlighted in the case of square) in which this move aligns well with the company’s values and strategy.
Inflation — how do corporations address this risk
Corporations evaluate the risk they face and make investment decision accordingly. Inflation is definitely seen as a high risk for any company operating in an economy that lacks price stability, but CFO face other risk types that most probably are seen as more immediate and concrete to their business — business operation risks, competition, business cycle risk & economical down terms, and on top, Bitcoin volatility today can impose a greater short terms risk than a potential risk of inflation. As such I don’t think in the immediate term we will see companies allocating a portion of their treasury into bitcoin
Does it mean Square will be the last? probably not. There are many companies sitting on an endless pile of cash, and it wouldn’t be unreasonable to estimate that if huge stimulus plans continue , and the economic uncertainty continues, companies will take action in hedging their cash position, starting with gold and other vehicles like TIPS (Treasury inflation-protected securities). Will they consider holding Bitcoin? The first movers will be those that already understand Bitcoin, decentralization movement and the mindset generation Z has, so if a company has a large user / customer base of young people who already understand and probably hold themselves, this could be another reason a company will decide to take that path, in an attempt to drive / ride the trend and indeed make it a movement
Other more established companies will need to cross the chasm to do so, and this may take some time — it will be accelerated once significant signs of inflation already being measured, and a wave of traditional asset managers start including bitcoin in their portfolio.
BTC role in the uncertain economic situation
It is outside the scope of this post to explain the fundamentals of Bitcoin and how it is well positioned to be the tool for hedging inflation, but some reference is required to give the context for the discussion
MicroStrategy, the first to take the Bitcoin path in corporate treasury management, published this page containing their reasoning and lots of content from introduction to bitcoin to more advanced references on the thesis of bitcoin as a store of value and it’s place as the future of money.
Another good resources is “Gradually then suddenly” series by Parker Lewis One, of the most complete and well put reading series I found and liked
To give context, the global economic situation serves as a perfect storm for the rise of a next generation bearer asset like Bitcoin. Amid the increasing in-stability, polarization and lack of trust in corporations and governments, record high money supply growth and 2nd stimulus plan just around the corner while the global economy is shut down, inflation is clearly a suspect for the possible outcome.
Bitcoin is being seen as a store of value and hedge against inflation due to it’s limited supply and hard money characteristics, making it seen as a protection, similar as Gold role in previous hyperinflation rounds
- Bitcoin is the scarcest and hardest money ever to be invented, with a fixed supply.
- Dollars are being debased on an unprecedented scale, and Corporations need a reserve asset that cannot be debased
- Leading companies such as Square and MicroStrategy demonstrating not only the safety of, but a necessity to hold Bitcoin on corporate balance sheets to avoid dollar debasement
- Bitcoin has become incredibly deep and liquid, able to sustain a $500M purchase over a short period of time without major slippage. Highly liquid asset, and diversified to other assets types (though the narrative of anti-correlative asset to stock has not been proven yet)
Of course there is much more behinds, and I recommend following Raol Pual, and Preston Pysh for more well put and interesting content.
Gradually, then suddenly. Is Square the first follower case?
Are we witnessing the very beginning of a movement ? Crypto twitter is rubbing their hands waiting for the coming bull market just to start as a result of this announcement.
Clearly being first and first follower, entitles a great risk, regulatory risk, shareholders risk and financial risk, that’s why full credit should be given to these CEO’s who took that path no other publicly traded company has taken before
We even already have a leader board ready for anyone to join in
https://bitcointreasuries.org/
Worth noting, having these pioneers, paved the way to other to do it much easily, the blueprint of what does a company need to do is already public, and we all know the infrastructure is there — from custody to insurance and legal/ accounting treatments
Conclusion
When someone takes a path no one stepped before, it’s hard to tell whether it is a good move or not. Only history judges. With Bitcoin, a network effect is an inherit part of the essence of it, and as such, in the same way early adopter ran the Bitcoin core code on their PC and kick-started a network effect of miners, developers and hodlers, in the same way they pioneered a movement that could have failed like previous attempts, the journey for adoption of Bitcoin in corporate hedge strategy depends on it’s ability to generate a network effect. This is a necessary step in bringing Bitcoin to be a cornerstone in the global financial system, and the way there goes through decisions like those Michael Saylor & Jack Dorsey made. If this becomes a movement, the next phase will be nation state and central banks taking the same route. reason is that the same network effect applies at larger scale, and once the first central bank decides to take the move, the race begins. We are still not there , but when we do get there, these tend to be happening fast. but let’s wait and see.
Thanks to Daniel Bar for asking me to write this piece
