A slowly growing trend has emerged among corporate treasuries: adding Bitcoin to their balance sheets. This strategy has garnered significant attention, with MicroStrategy leading the charge and other companies like Metaplanet, Kulr and Rumble following suit.
MicroStrategy, Michael Saylor’s software company turned bitcoin-holding vehicle, is now worth $88 billion, making it one of America’s largest 100 companies by market capitalisation.
The move towards becoming a Bitcoin treasury company has catapulted a relatively unknown company into the NASDAQ100, where it now ranks on par with well-recognised brands like Dell and Intel.
The pivot has grown MSTRs market cap more than 40-fold since 2020, which is mindblowing growth, inspiring many to claim that this strategy is the next big move for corporations.
However, reality is more complex than the “infinite money glitch”.
The MicroStrategy Playbook
MicroStrategy, under Michael Saylor’s leadership, has become the poster child for corporate Bitcoin adoption. Their strategy appears deceptively simple:
Start by sweeping your cash on hand into Bitcoin and announcing it to the world. Then, consistently sweep your free cash flows into Bitcoin and tweet about every purchase.
Once you’ve exhausted those efforts, it’s time to take leverage,
Your next step is to borrow money at relatively low interest rates to buy Bitcoin, betting that Bitcoin’s appreciation will outpace the cost of borrowing. By 2024, MicroStrategy had accumulated over 400,000 BTC, making it the largest corporate holder of Bitcoin.
This strategy looks brilliant when Bitcoin’s price rises significantly, as it did in 2020-2021 and again in 2023-2024.
MicroStrategy’s stock often trades as a leveraged proxy for Bitcoin, sometimes outperforming Bitcoin itself. However, this same approach led to paper losses in the billions during the 2022 crypto winter, so investors have to be prepared for volatility.
New FASB Rule Encourages Bitcoin Asset Integration
Valuing MSTR and its growing Bitcoin holdings, which stand at over 400,000, was also an area of contention, but that has changed with the recent update by The Financial Accounting Standards Board, which has introduced changes to the accounting standards for Bitcoin.
This update, known as the Accounting Standards Update 2023-08, responds to stakeholder feedback and aims to provide more relevant and transparent financial information. Under the new standard, companies must measure these assets at fair value each reporting period, with changes in fair value recognised in net income.Â
What To Do With Your Retained Earnings?
While MicroStrategy is the 800-pound diamond-handed ape of this move, companies like Tesla and Block have also added Bitcoin to their balance sheets, which adds to the legitimacy of the strategy. Apart from exchanges, other big players looking to grow their holdings are Bitcoin companies like Marathon and Fold, which have started to raise capital to acquire Bitcoin for their balance sheets.
The idea is simple: companies that generate a profit and have retained earnings must deal with inflation on a massive scale. When you’re sitting on tens of millions in cash, and you’re losing 4-7% each year, that can add to a sizable loss over a five or 10-year period.
Companies with cash reserves can purchase treasuries to help offset some of the effects of inflation, but that only stems from the bleeding and doesn’t solve the problem.
If you’re sitting in cash or treasuries, it also doesn’t encourage others to invest in your company since you don’t know what to do with the capital, so why would you need more?
Sometimes, companies look for strategic mergers or acquisitions to drum up excitement or share buyback programs, but those strategies have limits.
So, it leaves companies that generate reliable cash flow and grow cash reserves with a conundrum: what can I do with the cash that will help me outpace inflation and attract investment interest?
The solution, if Michael Saylor is to be believed, is to put your cash (which is losing value) into Bitcoin (which is increasing in value).
The Bitcoin Balance Sheet Strategy: Why It’s Not an “Infinite Money Glitch”
Just because you have the best-performing asset on your balance sheet doesn’t mean you’re immune to competition, market downturns, poor decision making or a broken business model.
A prime example of this is LUNA and UST.
During the bull market of 2021, the Luna Foundation Guard (LFG), the non-profit organisation, set out to acquire 80,000 Bitcoin to back their Ponzi altcoin.
They sold LUNA and UST and used those funds to acquire Bitcoin; the idea here was to diversify their treasury, so if the worst happens and UST depends and LUNA spirals out of control, LFG could sell Bitcoin to cover the shortfall.
Come 2022, the worst did happen: LUNA collapsed along with UST, forcing LFG to sell over 80 000 Bitcoin in reserves, crashing the market and, as a result, exposing others like Celsuis, BlockFi, Voyager and FTX.
Now, this is a worst-case scenario; to compare publicly traded companies with a blatant Ponzi is unfair, but it doesn’t mean companies don’t have to deal with operational risks or make miscalculations.
Interest Rate Risk
Not every company can secure uber-cheap debt or tap into the convertible bond market and raise zero-interest funding. So, mimicking MSTR might be out of the question for some.
Companies borrowing to buy Bitcoin face real interest costs that must be paid regardless of Bitcoin’s performance. In a rising rate environment, as we saw in 2022-2023, these costs can become substantial.
Unlike Bitcoin holdings, which can be volatile, interest payments are a fixed obligation that can strain cash flows.
If the company runs into issues and free cash flows aren’t enough to service your debt and you can’t refinance, you’ll be forced to sell your Bitcoin to cover the obligations.
And if Bitcoin is what attracts investors to your stock, and they see your treasury dwindle, your stock price could also take a knock.
Balance Sheet Volatility
Adding Bitcoin to a corporate treasury introduces significant volatility to the balance sheet. Under current accounting rules, companies must mark down Bitcoin’s value when it falls (impairment) but can’t mark it up when it rises until they sell.
This creates asymmetric reporting that can impact financial statements and potentially affect relationships with lenders, suppliers, and customers.
Operational Constraints
Most businesses need working capital for day-to-day operations. Tying up significant capital in Bitcoin can restrict operational flexibility and investment in core business activities.
Should you run into a shortfall, you’ll be faced with a tough decision: do you sell off your Bitcoin or pledge it as collateral for a short-term loan? Depending on the way Bitcoin is trending, those sales or loan terms might not be as favourable as you would have hoped.
This opportunity cost isn’t always obvious but can significantly impact long-term business growth.
Regulatory and Audit Complexity
Bitcoin holdings introduce additional regulatory scrutiny and audit complexity. Companies must implement robust custody solutions, internal controls, and risk management frameworks. These requirements add operational overhead and costs that can eat into any potential gains.
Additionally, if your custodian or your company were ever to stuff up key management, how would the market react to the news that some of your balance sheet is now inaccessible?
Why Companies Are Still Following MicroStrategy’s Lead
Despite these challenges, some companies continue to adopt this strategy for several reasons:
Inflation Hedge
In an environment of monetary expansion and inflation concerns, Bitcoin is seen as a potential hedge against currency debasement. Companies with significant cash reserves worry about losing purchasing power over time.
First-Mover Advantage
Some companies believe early corporate adoption of Bitcoin will provide competitive advantages, whether through direct appreciation of their holdings or by positioning themselves as innovative leaders in their industries.
Strategic Positioning
For some companies, especially those in the technology or financial sectors, holding Bitcoin aligns with their business strategy and customer base expectations. It can serve as both a treasury strategy and a marketing tool.
The Better Approach: A Balanced Strategy
Rather than viewing Bitcoin treasury adoption as an all-or-nothing proposition, companies should consider a more nuanced approach:
Size Appropriately
Bitcoin positions should be sized according to a company’s risk tolerance and cash flow needs. A small allocation might make sense for some companies, while others might be better served avoiding it entirely.
Consider Core Business Needs
Treasury management should prioritise supporting the core business. Bitcoin holdings should not compromise working capital needs or planned investments in growth initiatives.
Develop Clear Policies
Companies adding Bitcoin to their treasury should establish clear policies regarding:
- Maximum allocation limits
- Rebalancing triggers
- Risk management frameworks
- Custody solutions
- Exit strategies
Maintain Transparency
Clear communication with shareholders, regulators, and other stakeholders about Bitcoin treasury strategy and risk management is essential for maintaining trust and compliance.
Bitcoin Treasuries Aren’t A Silver Bullet
While adding Bitcoin to corporate treasuries isn’t necessarily a bad strategy, it’s far from the “infinite money glitch” some suggest. Success requires careful consideration of numerous factors, including risk management, operational needs, and regulatory compliance.
Companies considering this approach should learn from both MicroStrategy’s successes and challenges, developing a balanced strategy that aligns with their specific circumstances and goals.
The key is understanding that Bitcoin treasury adoption is a tool, not a panacea. Like any financial strategy, it comes with both opportunities and risks that must be carefully weighed against a company’s specific situation, goals, and risk tolerance.
As the market matures and regulatory frameworks evolve, companies will need to continue adapting their approaches to this emerging treasury management option.
