​In recent years, Bitcoin has rapidly emerged as a viable and strategic option for companies seeking to diversify their corporate treasury holdings. Traditionally, corporate treasuries have managed their assets conservatively, allocating the majority of capital to low-risk investments such as bank deposits, money market funds, treasury bills, commercial paper, and repurchase agreements. However, the economic landscape has become increasingly complex, with factors such as inflation, fluctuating interest rates, and heightened geopolitical risks challenging the effectiveness of these traditional strategies. As a result, more corporations are exploring alternative assets that can not only preserve value but also potentially enhance it over time.

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Over the past decade, Bitcoin has exhibited remarkable growth, solidifying its reputation as one of the best-performing assets in modern financial history. The average annual growth rate (CAGR) of Bitcoin over the last 10 years has been approximately 62%. This rate significantly outpaces traditional assets like gold and the S&P 500, which have much lower average annual growth rates during the same period.

The trend of allocating corporate treasury funds to Bitcoin began to gain significant traction in 2020, when a number of high-profile companies made substantial investments in the cryptocurrency. One of the most notable examples is MicroStrategy Incorporated, a business intelligence firm that made headlines by adopting Bitcoin as its primary treasury reserve. Between July and September 2020, MicroStrategy invested $425 million to purchase 38,250 BTC, signaling a bold shift in corporate asset management. Following in MicroStrategy's footsteps, global payments company Block Inc. (formerly Square) also made a significant move into Bitcoin, purchasing 4,709 BTC for $50 million in October 2020. Since then, other prominent companies, such as Tesla, have joined the ranks of corporations holding Bitcoin as part of their treasury strategy.

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The rationale behind these decisions is rooted in the potential benefits that Bitcoin offers as a corporate treasury asset. As a decentralized digital currency with a fixed supply of 21 million, Bitcoin is seen by many as a hedge against inflation and a store of value that could potentially outpace traditional assets over the long term. Additionally, Bitcoin's liquidity profile allows companies to access capital relatively quickly if needed, while its historical performance, particularly over four-year holding periods coinciding with Bitcoin's halving cycle, has demonstrated significant appreciation potential.

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However, holding Bitcoin as a corporate treasury asset is not without risks, particularly due to its well-known volatility. The price of Bitcoin can fluctuate significantly, which means that while it offers the potential for substantial gains, it also carries the risk of significant losses. This volatility is a critical factor that corporate treasurers must consider, especially if the company might need to access capital on short notice. In situations where capital is required for operational expenses, emergency funding, or short-term investment opportunities, the risk of having to sell Bitcoin at a loss during a market downturn may outweigh the potential benefits of holding it.

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This is why Bitcoin is considered an effective long-term store of value with capital growth. Due to Bitcoin’s four year cycle tied to issuance of new bitcoin halving every four years, holding bitcoin for at least 4 years has historically seen an overall increase in bitcoin price.

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Given the evolving economic environment, exacerbated by unprecedented fiscal and monetary policies since 2008 and particularly since 2020, corporate treasurers are increasingly considering whether a balance sheet allocation to Bitcoin could be a prudent strategy. In this article, we re-examine the risks that corporate treasurers continue to face, update the progress of companies that have made Bitcoin allocations in recent years, and explore why more corporate treasurers might be inclined to consider Bitcoin as part of their financial strategy moving forward.

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Money Printing and Inflation

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The argument that central banks printing massive amounts of money during the pandemic has supercharged inflationary pressures in the global economy can be effectively supported by referencing both economic theory and real-world consequences observed in recent years.

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During the pandemic, central banks worldwide, including the Reserve Bank of Australia (RBA), embarked on large-scale bond-buying programs as part of their quantitative easing (QE) measures. The RBA, for instance, purchased $281 billion worth of government bonds between November 2020 and February 2022. This process, often described as "money printing," involves the central bank creating new money to buy these bonds, which increases the money supply within the economy.

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According to the Quantity Theory of Money, which links the money supply with inflation, an increase in the money supply, assuming the velocity of money remains constant, should lead to an increase in inflation. The theory posits that inflation occurs when there is more money chasing the same amount of goods and services. During the pandemic, although the velocity of money initially fell as people were less able to spend due to lockdowns, the eventual reopening of economies led to a resurgence in spending. This sudden increase in the circulation of money, combined with the inflated money supply, contributed to inflationary pressures.

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While the RBA argues that its QE program primarily increased the "money base" (the reserves held by financial institutions) rather than the broader money supply that directly influences consumer spending, this distinction may oversimplify the complex interactions in the economy. Even though the initial injection of liquidity was into institutional accounts, these funds eventually made their way into the broader economy through loans, investments, and other financial activities. This process can lead to an indirect but significant increase in the broader money supply, which then fuels inflation when economic activity resumes.

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Moreover, the argument that inflation is not solely driven by money printing but by other factors such as supply chain disruptions and pent-up demand post-pandemic does not negate the role of expanded money supply. Instead, it suggests that inflation is multifactorial, with excessive money supply amplifying the effects of these other factors. The surge in demand post-lockdown, combined with a larger money supply, created an environment where prices could rise more sharply than they would have if the money supply had remained stable.

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In light of the inflationary pressures resulting from central bank money printing, holding a strategic percentage of Bitcoin as part of a corporate treasury is an increasingly compelling response. This approach leverages Bitcoin’s unique properties as a fixed-supply asset, positioning it as an effective hedge against the devaluation of fiat currencies.

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As central banks engage in quantitative easing and significantly increase the money supply, the purchasing power of fiat currencies tends to decline. This devaluation occurs because more currency units are chasing the same amount of goods and services, leading to higher prices, particularly in assets with limited supply. Historically, when inflation rises due to an expanded money supply, assets like real estate, commodities, and precious metals have appreciated in value. These assets are seen as stores of value, offering protection against the erosion of purchasing power.

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Bitcoin, with its fixed supply of 21 million coins, shares similar characteristics with these traditional stores of value but with several additional advantages. Unlike real estate or commodities, Bitcoin is not subject to physical constraints or geopolitical risks, making it a more flexible and accessible option for a corporate treasury. Its digital nature allows for easy transferability and global accessibility, which is particularly valuable in an increasingly digital and interconnected economy.

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Bitcoin as a Hedge Against Macro Uncertainty

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Bitcoin has shown resilience during the economic disruptions caused by recent health and economic crises, remaining largely uncorrelated to the demand shocks that affected many traditional investments. This characteristic makes Bitcoin an attractive option for companies seeking diversification benefits, potential outperformance, and a strong liquidity profile, particularly when core business operations and other investments are hindered by broader economic conditions. Bitcoin offers the potential for long-term appreciation while maintaining liquidity comparable to shorter-term investments. As a result, allocating a portion of corporate assets to Bitcoin could help preserve and potentially enhance purchasing power over time, providing a financial cushion during periods of reduced profitability and cash flow, while also ensuring sufficient liquidity to meet immediate obligations.

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Bitcoin, like gold, is often criticized for not generating direct yields. However, during periods when interest rates are at or below zero, the opportunity cost of holding Bitcoin diminishes significantly. In fact, in such environments, the appeal of a non-yielding asset with a favorable risk-return profile increases, especially when compared to assets that yield negative returns, whether in nominal or real terms.

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In contrast, during high-interest-rate environments where market performance may be subdued, Bitcoin offers a largely uncorrelated asset that can reduce overall portfolio risk by not relying on traditional financial markets. Since its inception, Bitcoin has outperformed even the most aggressive and high-risk traditional investment assets. If high interest rates are deployed by central banks to combat inflation, corporate treasurers may view Bitcoin’s verifiable scarcity and fixed monetary policy as a hedge against the potential devaluation of fiat currencies due to central bank monetary policies.

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In this challenging economic environment, Bitcoin’s predictable and inelastic monetary policy has bolstered its reputation as a store of value. As a result, some institutional investors and companies are beginning to view Bitcoin as an emerging store of value that could benefit from the asset inflation associated with fixed-supply assets. Additionally, Bitcoin is increasingly seen as a tool for preserving wealth in the face of potential loss of purchasing power due to consumer price inflation in fiat currencies.

 

Microstrategy

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Michael Saylor, as the head of MicroStrategy, faced a unique financial dilemma in March 2020. The company, with a market cap of $500 million, also held an equivalent amount in its treasury, primarily in cash and credit. This substantial cash reserve, which once earned modest but stable returns, became a liability as the economic landscape shifted due to the pandemic. Interest rates plummeted to near-zero levels, and asset values began to soar. This drastic change in the financial environment meant that the cost of capital had effectively tripled, while the returns on their treasury assets evaporated. Faced with these dynamics, Saylor realized that simply holding cash was not just unproductive, but it was actively eroding shareholder value.

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The situation was further complicated by the size of MicroStrategy's cash holdings relative to its market cap. While other companies might have smaller reserves, where a minor negative yield might be manageable, MicroStrategy's substantial cash position meant that the company was losing significant value each year due to inflation and the rising cost of capital. Specifically, the negative monetary yield on their cash reserves was estimated to be as high as 28%, a stark contrast to the positive returns expected by investors, particularly when compared to the S&P 500’s performance. Saylor recognized that the company's treasury strategy was undermining its business efforts, effectively negating the operational income generated by MicroStrategy.

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Faced with the prospect of losing hundreds of millions in shareholder value annually, Saylor sought a solution that could preserve and potentially increase the value of MicroStrategy's treasury assets. This led him to Bitcoin, which he identified as a deflationary, decentralized digital asset with the potential to appreciate significantly over time. By converting a large portion of MicroStrategy's cash reserves into Bitcoin, Saylor aimed to protect the company’s balance sheet from the corrosive effects of inflation and low interest rates, while also positioning the company to benefit from the long-term growth potential of Bitcoin as a corporate treasury asset.

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As of 26 April 2024, Microstrategy has 214,400 in bitcoin holdings at a total cost of $7.54 billion, or $35,180 per bitcoin.

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Tesla

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Tesla (TSLA) has seen significant benefits from its early investment in Bitcoin, which has now surged past $722 million as the cryptocurrency approaches new highs. In early 2021, Tesla made headlines by investing $1.5 billion in Bitcoin, becoming one of the few large public companies to allocate a portion of its cash reserves to cryptocurrency. Tesla also for a period accepted Bitcoin as payment for its vehicles.

Over time, Tesla’s position in Bitcoin fluctuated, with the company's holdings increasing to $2 billion at one point before the cryptocurrency's value declined significantly in 2022. During this period, Tesla chose to divest about 75% of its Bitcoin holdings, generating over $1.2 billion in proceeds. Despite the reduction in its Bitcoin holdings, Tesla still retains 11,509 Bitcoins, making it one of the largest corporate holders of the cryptocurrency. This strategic investment underscores Tesla's complex but ongoing relationship with Bitcoin as both an asset and a potential payment method.

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Conclusion

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For corporations, incorporating Bitcoin into their treasury strategies offers a way to preserve value in an environment where cash holdings are increasingly at risk of devaluation. Traditional treasury management often involves holding large amounts of cash or cash equivalents to ensure liquidity. However, in an inflationary environment, the real value of these cash reserves can diminish rapidly. By allocating a portion of their treasury to Bitcoin, companies can diversify their assets and reduce their exposure to fiat currency risk.

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Furthermore, Bitcoin’s growing acceptance as a legitimate asset class adds to its appeal for corporate treasuries. As more institutional investors and companies adopt Bitcoin, its market becomes more liquid and its price stability increases, making it a more viable option for corporate investment. This trend reinforces Bitcoin’s potential as a strategic reserve asset in a world where central banks are likely to continue their expansionary monetary policies.

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In summary, holding Bitcoin as part of a corporate treasury is an excellent response to the inflationary pressures induced by central bank money printing. As the money supply increases, the value of fixed-supply assets like Bitcoin is likely to rise, offering companies a way to protect their wealth and maintain purchasing power. This strategic allocation not only serves as a hedge against inflation but also aligns with the broader shift toward digital assets in the global financial landscape.