Why every person, company, asset manager and government will eventually own Bitcoin: Part 2 — Companies
My last post discussed why I believe we will see mass adoption of Bitcoin by the general public over the next couple decades. In this post, I want to dive into why I believe the same thing will happen with corporations.
Holding Bitcoin on the Balance Sheet
According to estimates from the Harvard Business Review, US non-financial corporations are sitting on over $4 trillion dollars in cash as of the start of 2020. This figure has nearly doubled over the last decade, which suggests the majority of large corporations are stockpiling cash for relatively long periods of time. The challenge with holding cash on the balance sheet for long periods of time is that the value of these dollars depreciates with inflation. Traditionally, corporations would offset this by converting this cash into treasuries or bonds as a low-risk way to earn a small return or at the very least, offset inflation.
The problem facing all corporations today is that interest rates are at or near zero and are expected to stay at these levels for the foreseeable future. As a result, treasuries and bonds are no longer a viable alternative as the real rate of return for this $4 trillion is currently negative. And that is not even accounting for whatever impact the recent explosion in federal money printing may have in the coming years.
Fortunately for corporate America, Bitcoin and its unique monetary policy provide an attractive alternative. Corporations now have the ability to convert a portion of their capital to Bitcoin to hold as a reserve asset on their balance sheets, knowing it can never be debased. As previously discussed, Bitcoin is the best store of value ever created and an ideal corporate treasury asset. It retains its value better than any other asset over the long term and is liquid 24/7.
The first public company to do this was MicroStrategy. In August 2020, MicroStrategy, a Nasdaq-listed software firm worth over $1.2 billion at the time, announced it had purchased $250 million worth of Bitcoin. MicroStrategy CEO Michael Saylor stated that his company was doing so as part of a new capital allocation policy aimed at hedging against inflation. Then in December, MicroStrategy doubled down on their Bitcoin investment, buying another $50 million as well as issuing $650 million worth of convertible senior notes, the proceeds of which went to purchasing more Bitcoin. By the end of 2020, MicroStrategy spent $1.1 billion purchasing Bitcoin and its current holdings are worth over $2.5 billion at the time of writing.
“MicroStrategy has recognized Bitcoin as a legitimate investment asset that can be superior to cash and accordingly has made Bitcoin the principal holding in its treasury reserve strategy. MicroStrategy spent months deliberating to determine our capital allocation strategy. Our decision to invest in Bitcoin at this time was driven in part by a confluence of macro factors affecting the economic and business landscape that we believe is creating long-term risks for our corporate treasury program ― risks that should be addressed proactively. Those macro factors include, among other things, the economic and public health crisis precipitated by COVID-19, unprecedented government financial stimulus measures including quantitative easing adopted around the world, and global political and economic uncertainty. We believe that, together, these and other factors may well have a significant depreciating effect on the long-term real value of fiat currencies and many other conventional asset types, including many of the assets traditionally held as part of corporate treasury operations.”
- Michael Saylor, CEO of MicroStrategy
While MicroStrategy was the first and most aggressive, it is not the only company to buy Bitcoin as a reserve asset. In October 2020, Square announced it had purchased $50 million worth of Bitcoin for its treasury. In December, insurance giant MassMutual purchased $100 million worth of Bitcoin. Rumor has it that other insurance companies are quickly following suit.
As first movers, the process of adding Bitcoin to their corporate balance sheets likely took each of these companies at least 6–9 months. Not only did the CEOs and management teams have to gain conviction about this novel strategy, but they also had to convince their boards with little to no precedent. Second, they had to put new technology and policies pieces in place to both buy and hold Bitcoin. Now that these three companies have blazed a trail, there is precedent and a playbook for others to follow. I guarantee there are many CEOs and CFOs that are now talking with their boards about this option. For many, it will take them time to implement the same strategy, so I expect a lot more corporations to announce later this year that they have purchased Bitcoin to hold on their balance sheets as well.
Holding Bitcoin on a company balance sheet isn’t just for the largest corporations. In a recent interview, Parker Lewis and Will Cole of Unchained Capital, which helps companies own and custody cryptoassets in a complaint fashion, stated they are seeing increasing demand from small and family owned businesses. As individuals own Bitcoin in their personal accounts, they are beginning to take that same line of thinking and apply it to their businesses. Much like we saw smart phones and file sharing apps such as Box and Dropbox transition from the consumer world into the enterprise world, so too will Bitcoin penetrate many companies.
But this trend potentially goes much further than simply holding Bitcoin. In an interview with RealVision, Pierre Rochard had an interesting observation on the implications of corporations putting Bitcoin on their balance sheets as a reserve asset. Rochard points out that regardless of what currency a corporation gets paid in, they will be converting a portion of those proceeds into Bitcoin. However, there are costs and operational processes to buying Bitcoin. As a result, corporations may want to be paid directly in Bitcoin (either portion or in full) in order to avoid transaction fees. Thus, the simple act of holding Bitcoin may create a viral feedback loop that further accelerates the adoption by other companies that wish to transact with that company.
In time, holding Bitcoin as a treasury reserve asset will not only become commonplace, but considered best practice.
The Market Has Rewarded Bitcoin Adoption
It’s one thing for a company to announce it added Bitcoin to its balance sheet, but the reaction of the market will have a major impact on the adoption of Bitcoin by other corporations. Thus far the market has spoken, and every CEO of a publicly traded company better be taking notice.
Since its announcement in August, MicroStrategy’s stock, which has traded within a relatively narrow range for the past five years, suddenly exploded.
In 2018, Square began allowing Cash App users to buy and sell Bitcoin. Since adding that feature, the company’s stock price has been on a tear. In Q3 2020, Cash App generated $1.63 billion of Bitcoin revenue which represents roughly 54% of the company’s total net revenue. When Square announced it added Bitcoin directly to its balance sheet, the stock continued on its parabolic trajectory.
I’m not suggesting that every company that announces it has bought Bitcoin will see a huge pop in its share price. The point I am trying to make is that every public market CEO is judged, at least to some degree, on the performance of the company’s share price. As more and more companies realize holding Bitcoin not only protects against inflation but also is looked upon favorably by the market, the incentive for companies to adopt Bitcoin becomes too great to ignore.
Demand from Customers & Employees
Corporations are beginning to realize just how much consumer demand there is for cryptoasset services. When PayPal and Square announced they would allow their users to buy and sell Bitcoin, hundreds of millions active users got instant access to digital currencies. This resulted in PayPal and Square buying more than 100% of new Bitcoin supply in recent months as consumer demand on these two platforms alone has exceeded the entire supply of newly minted Bitcoins. Grayscale, which launched the first publicly traded Bitcoin trust, grew its assets under management by 900% in 2020 from $2.2 billion to $20 billion. Bakkt recently went public via a SPAC at a valuation over $2 billion and Coinbase has filed to go public in what is one of the most anticipated IPOs of 2021. The success of these companies is not going unnoticed.
Big name corporations are not only realizing that adding Bitcoin services can drive revenue growth, but if they do not begin to offer these services to their customers, they risk losing customers for good. This is why Visa recently partnered with Blockfi to launch the first credit card to offer Bitcoin rewards and is considering adding cryptocurrencies to its payment network. Fidelity has added the ability to hold bitcoin as collateral for cash loans. Banks can now custody Bitcoin and stablecoins. Every financial services company will eventually integrate Bitcoin into its product suite in some fashion. This will force companies to hold, transact and get comfortable with Bitcoin within normal day to day operations.
But what about non-financial services companies? Until Bitcoin becomes a viable medium of exchange (ie: people start buying cups of coffee with Bitcoin), none of these companies will need to interact with cryptoassets right? Wrong.
Demand for Bitcoin isn’t just coming from customers, it’s starting to come from employees who want to be paid in Bitcoin as well. The most prominent example of this is Russell Okung, pro bowl offensive lineman in the NFL, who now receives half of his salary in Bitcoin. According to the Bitcoin startup Zap, other pro athletes, including unnamed members of the Brooklyn Nets basketball team and baseball’s New York Yankees, have also begun receiving part of their salaries in Bitcoin.
These sports organizations are going to have to learn how to buy, hold and pay their players in Bitcoin or risk the possibility of not being able to sign top free agents. As a result, they will be forced to interact with Bitcoin whether they want to or not. While this is the most public example, this is beginning to happen in industries beyond professional sports. Younger generations see the value in Bitcoin and in order to attract and retain top talent, more companies across all industries will slowly begin to offer Bitcoin as an option in compensation packages in the coming years.
Streamlining International Financial Operations
A common misconception about Bitcoin is that it is competing at the payment layer with the likes of Visa or Mastercard. I do not believe this to be accurate. As Murad Mahnudov and Nic Carter have discussed, Visa and Mastercard are more akin to layer 2 or layer 3 solutions built on top of a base settlement layer. While layer 2 solutions such as Lightning Network may one day allow Bitcoin to scale, today, Bitcoin is a much better settlement layer than it is a medium of exchange. As such, the competitive comparison should be with SWIFT and ACH, in which case Bitcoin completely outshines both.
These settlement layers are designed to securely handle large transactions on a relatively infrequent cadence compared to payment layers. International bank transfers can take anywhere from 1 to 5 days because these legacy systems are not directly connected. Instead, payments have to go through intermediaries known as corresponding banks, similar to how passengers often have to take a series of connecting flights to arrive at a destination. These transactions come with a host of fees including bank fees and transfer operator fees that can range up to $50 depending on the bank you use. Worse still, banks often inflate currency exchange rates in order to increase their profits. In fact, Wells Fargo was recently exposed to have routinely overcharged clients on foreign exchange rates.
In a previous post, I highlighted a real world example in which a Bitcoin account transferred $1 billion worth of Bitcoin that cost the sender a grand total of $0.68 in total transaction fees. Better still, these transactions can finalize in a matter of minutes rather than days because one party is transacting directly with the other party without the need for middlemen or intermediaries. Bitcoin is simply a far superior international settlement layer than legacy systems.
So, what does this have to do with companies adopting Bitcoin? Well, imagine you are a corporation that conducts business internationally. You have international customers, suppliers, and employees that you need to send and receive money from. This means you are likely dealing with a complex network of international banks, wire systems, and foreign exchange services. Remember that $4 trillion worth of capital sitting in corporate bank accounts? A Harvard Business Review study estimates up to 85% of that is held by multi-national corporations in foreign subsidiaries.
Bitcoin is a borderless currency that can be sent anywhere in the world in large amounts for a fraction of the price and in a fraction of the amount of time as current legacy systems. Rather than having to constantly exchange between currencies, companies could hold Bitcoin as their reserve asset and convert into a local currency when needed. For companies that operate internationally, Bitcoin could prove to be a far more efficient way to operate.
Reducing Legal & Counterparty Risk
This might sound counterintuitive to most, but Bitcoin can reduce the legal risk for a corporation operating internationally in two ways. The first is as a hedge against the risk of having authorities freeze a company’s assets and the second is not having to rely on local rule of law in order to enforce an international transaction.
Every large corporation keeps its assets diversified across jurisdictions in order to reduce the risk of having the company’s assets frozen by local authorities. Even if a company is law abiding and didn’t commit a crime, there is still risk that something might happen in which a lawsuit or criminal charge is brought against that organization. In the US, where rule of law is arguably the strongest in the world, it is still well within a judge’s authority to freeze the assets of a company prior to a trial regardless if the claims are frivolous or not. If all the assets are housed in one jurisdiction, all of a sudden that company may not be able to make payroll the next week. While less of a concern in the US, this is a real risk in many parts of the world where there might not even be a court to appeal to. Having assets across jurisdictions gives a company the ability to go through a legal process in one jurisdiction without the entire business going insolvent during that time.
Now what if the company held those assets in Bitcoin instead? As I have explained in previous posts, depending on how you choose to store Bitcoin, it can be seizure resistant. Even if a corrupt, foreign government wanted to freeze or confiscate a corporation’s assets, it would not be able to access any Bitcoin the company held regardless of jurisdiction. This lowers the risk of operating internationally for corporations because they are less reliant on the rule of law to protect their assets from unlawful seizure.
The second way Bitcoin reduces risk for a corporation is related to the first and is laid out by Ari Paul in his interview on RealVision. Ari points out that if a US based company does business with a UK based company, there is a lot of faith in the legal system of both countries to hold up that transaction. If there is a dispute, there is legal action that either party can take to recoup any losses or damages incurred. However, if a company based in one geographic location with a strong rule of law decides to do business in country where there is much less confidence in the rule of law, there may be no legal recourse if that company does not honor the contract. There may be no way to get the money back or ensure the terms of the agreement are enforced.
In this situation, settling in Bitcoin would reduce the counterparty risk. The parties could transact directly in Bitcoin or choose to escrow the value of that transaction in Bitcoin. Because cryptocurrencies are programmable, it could be written into the code not to be released until certain criteria are met but once met, would be guaranteed to be released. Thus both parties merely have to trust the code to operate as intended, not each other.
Challenges of Adopting Bitcoin
While there are a number of compelling reasons why every corporation should and will own Bitcoin, adoption is not without its challenges. There is a learning curve to storing and using Bitcoin. Corporations will have to get comfortable with this new technology and learn how to integrate it into their existing financial controls, compliance and corporate governance. While we have some early examples of success that have opened many people’s eyes, holding and using Bitcoin is still a new concept that larger corporations will want to understand in much more detail before adopting themselves. All of this will take time.
However, the biggest challenge to widespread adoption among corporations, especially the largest companies, is Bitcoin’s current market size. As of writing this, the $4 trillion worth of capital sitting on balance sheets is many multiples bigger than Bitcoin’s entire market cap of only $600 billion. The top ten largest US companies alone have more cash on their balance sheet than the entire market cap of Bitcoin.
Currently, it’s difficult for the largest corporations to convert any meaningful amount of cash on the balance sheet into Bitcoin simply due to the overall size of Bitcoin. Ironically, as Bitcoin’s price continues to grow, and so does its market cap, it actually makes it easier for more and more companies to begin buying Bitcoin. That’s right, the higher the price the more we are likely to see demand from corporations to begin holding Bitcoin as a reserve asset.
Make no mistake, corporations are coming. It will take time, but eventually, holding Bitcoin on the balance sheet will be seen as best practice and having Bitcoin related services and transacting in Bitcoin will be table stakes. When it does, Bitcoin will be part of every corporation’s assets.