Is Bitcoin the world's safest reserve asset?

At least this is what follows from a statement by NASDAQ-traded MicroStrategy.Eleventh of August 2020a large Wall Street company placed inBitcoin is part of the company's reserve funds. MicroStrategy, a publicly traded business intelligence software company with a capitalization of $ 1.2 billion, announced that it had bought 21,454 BTC, converting $ 250 million from the company's own funds into a digital asset. This is the first time that a major public company has announced a listing of this magnitude in Bitcoin. Here we will try to analyze what this might mean for corporate treasuries, public company valuation, and indirect institutional participation in Bitcoin.

MicroStrategy under the new strategycapital allocation bought back 0.1% of the fixed total supply of Bitcoin of 21 million units, which corresponds to 50% of the company's excess cash reserves. Given the finiteness of the supply, only 978 companies can make such a large-scale purchase of bitcoins before the supply is technically exhausted, although in fact, a significant part of the existing BTC supply is not sold at all.

In its July announcement of financialcompany performance for the second quarter of 2020, Michael Saylor, the company's CEO, announced his intention to explore the possibility of buying bitcoin, gold or other alternative assets. During the COVID-19 recession, the combined value of cash, cash equivalents and short-term investments of MicroStrategy rose to more than $ 500 million, and while only $ 50 million was required to cover operating expenses during the year, this provided the company with additional cash.

Although initially the CEO of the company talked about morea wide portfolio of alternative assets, as a result, the entire distribution turned out to be aimed only at Bitcoin. All in. The company's argument was based on the potential decline in the real value of fiat currencies and the belief that Bitcoin represented a safer store of value over other alternatives. These considerations were outlined in MicroStrategy's August 11 announcement, in which the company elaborated on the rationale for purchasing Bitcoin exclusively as part of a new capital allocation strategy aimed at supporting the company's fiduciary commitments to maximize value creation for its shareholders.

“We at MicroStrategy have spent more than one month indiscussing a new capital allocation strategy. The decision to invest in Bitcoin was driven in part by a combination of macro factors affecting the economic and business landscape that we believe poses long-term risks to our corporate treasury program — risks that need to be addressed proactively. ”

Could such a placement in Bitcoinsignal the birth of a new trend in corporate treasury programs? Should executives at other public companies reconsider their plans for allocating excess cash reserves? To what extent are companies' cash reserves generally exposed to currency depreciation and other global macro risks? What could it mean to secure Bitcoin as a corporate reserve asset for Wall Street balance sheets and cash flow simulations?

Companies accumulate surplus cash

Now that MicroStrategy, a large company,traded on NASDAQ has made bitcoin its primary reserve asset, other companies will be forced to pay attention to it. Amid the recent economic downturn caused by global quarantines and supply chain disruptions in the first half of 2020, companies have slowed down their investment programs, cut spending and increased cash reserves to adjust to economic uncertainty. Companies on the NASDAQ-100 list, an index of the largest non-financial companies traded on the NASDAQ stock market, are now sitting on nearly a trillion dollars in cash. America's tech giants - Microsoft, Google and Apple - are accumulating more cash than ever. And even sitting on $ 121 billion in cash and cash equivalents, Alphabet, Google's parent company, raised an additional $ 10 billion by issuing its most affordable bonds in history. Collectively, since 2012, the Nasdaq-100 companies have increased their cash reserves from $ 405 billion to nearly a trillion dollars.

Global economic stimulus hits the cost of cash

Zero interest rates cutcost of capital, contributing to the $ 840 million (first half of 2020 only) surge in corporate debt financing, and monetary expansion by central banks complemented the stimulus programs launched around the world in response to the pandemic. Businesses, by liquidating assets and reducing operational risk management costs, ultimately increase their excess cash reserves, but now they need to protect those reserves from the threat of devaluation in the face of aggressive quantitative easing policies.

“Macro factors include, among others, the crisis inthe economy and health care caused by COVID-19, unprecedented public financial stimulus measures taken around the world, including quantitative easing, and global political and economic uncertainty. We believe that, together, these and other factors may well significantly reduce the long-term real value of fiat currencies and many other traditional types of assets, including those traditionally used in the framework of corporate treasury strategies. "

Headed by the Fed. the US reserve and backed by the rest of the central banks, global asset purchases through quantitative easing will reach a staggering $ 6 trillion in 2020 alone - more than half of the cumulative global quantitative easing between 2009 and 2018. According to the St. Louis Fed, while stocks have skyrocketed on new liquidity injections through corporate debt buying programs, the US Federal Reserve now holds nearly $ 7 trillion in assets - an astounding 72% gain in less than three months.

As the MicroStrategy example showed,monetary expansion on such a scale is forcing even large public companies to reassess the long-term real value of available cash reserves to guard against the effects of massive leverage and sharp sell-offs. While the dollar may not face inflation immediately given its status as the world's reserve currency, some companies, like MicroStrategy, see the problem and are taking proactive steps to protect their balance sheets and manage the long-term risks of their investors. The evolution of capital allocation strategies today favors assets that cannot be trivially devalued and are able to protect against the risk of currency devaluation.

Bitcoinization of corporate treasuries

Companies' treasury operations are usuallyinvolves managing the company's cash with the ultimate goal of managing its liquidity and reducing operational and financial risks. Depending on the size and type of business of the company, such transactions may include opening and managing positions in various fiat currencies, trading in bonds or financial derivatives. This is the most important component of the activities of any companies, especially those publicly traded and obliged to disclose their financial condition to the market.

High quality and reliable investmenta company's treasuries need to be reliable in the long term, whether it be price stability, liquidity, or long-term value creation for shareholders. MicroStrategy's decision to favor Bitcoin as its primary reserve asset is a signal to the market that Nakamoto's “digital cash”, due to its “hard” properties, is gradually being adopted by responsible organizations.

“This investment reflects our confidence inthat Bitcoin, as the world's most widely used cryptocurrency, is a reliable store of value and an attractive investment asset with a higher potential for value appreciation compared to holding cash. Since its inception more than a decade ago, Bitcoin has become a significant addition to the global financial system with characteristics that are useful to individuals and organizations. MicroStrategy recognizes Bitcoin as a legitimate investment asset that can outperform cash and, in line with this vision, has made Bitcoin a major asset in its new strategy for managing the company's treasury reserves. "

Fiduciary managers need Bitcoin

Top managers managing corporatetreasury programs could violate their fiduciary obligations if they do not develop adequate and responsible capital allocation strategies for bitcoin. MicroStrategy's decision as a public company sets a precedent and effectively "removes the career risk for treasury managers from investing company treasury funds in bitcoin." Andy Yee, senior director of public policy at Visa, noted that the allocation is in some ways akin to the recent letter from billionaire Paul Tudor Jones about placing 1-2% of his investment portfolio in bitcoin.

Paul Tudor Jones removed career risk for hedge fund managers from investing in Bitcoin.

MicroStrategy removed career risk for CFOs from putting company treasury into Bitcoin. # Bitcoin #crypto

— Andy Yee (@ahkyee) August 11, 2020

“Paul Tudor Jones has eliminated the career risk of investing in bitcoin for hedge fund managers.

MicroStrategy has eliminated the career risk of a Bitcoin offering for treasury managers. "

- Andy Yee (@ahkyee), August 11, 2020

The ownership structure of MicroStrategy ispredominantly institutional in nature - 477 companies own 97% of the total number of shares. According to Swan Bitcoin, a US-based brokerage firm, BlackRock and Vanguard, the two leading institutional funds with $ 7.43 trillion and $ 6.2 trillion in assets, respectively, account for more than 25% of MicroStrategy's capitalization table. Both of these institutional members now have an indirect investment in Bitcoin, which will encourage them to do more extensive research of their own on it. As shareholders in many other publicly traded companies, these institutional investors regularly assess the health of their portfolios using industry benchmarks, simulate cash flows and analyze, among other things, competitors' capital use. Bitcoin is now part of that equation too.

Bitcoin is no longer someone else's area of responsibility

One obvious question comes to mind: what happens if MicroStrategy's investment in bitcoin rises significantly in value over the coming years? How does management plan to act and rebalance its risk in this situation? As Bitcoin's purchasing power grows, it can act as the primary leverage for the future deployment of MicroStrategy capital when entering other markets, launching new products, or even acquiring competitors. As Preston Pisch, the host of the Investors Podcast, suggested, the practice of companies holding bitcoins on their balance sheets is just beginning to gain traction. MicroStrategy's investment of 250 million of the company's nearly $ 420 million in Bitcoin holdings is the beginning of a new era in corporate treasury strategies.

Investing in bitcoin can not only protect againstinflation risk, but also serve as a capital-efficient way to strengthen corporate balance sheets in times of financial turmoil and dwindling profit streams. Since investing in bitcoin increases unrealized profits for corporate investors, it can be used as a source of liquidity to service operating expenses to stay afloat while competitors suffer from poor economic conditions and over-leverage. The massive surge in US corporate debt from $ 3.3 trillion to $ 6.5 trillion, coupled with the largest decline in consumer spending in US history, will play into the hands of bitcoin-based companies looking to acquire distressed competitors. Over the next decade, Bitcoin could completely change the competitive landscape, proving that balance sheet resilience is worth more than efficiency and cheap credit.

Amazingly, the MicroStrategy board of directorsconsists of five members, acting as fiduciary managers for an institutionally oriented shareholder base. Responsible for capital allocation strategies and long-term added value creation, the board of directors has selected bitcoin as the main reserve asset for the company's treasury, making MicroStrategy shares a tool for indirect investments in bitcoin for a wide range of investors. If Bitcoin rises in price in the coming years, MicroStrategy shares could rise significantly as investing in Wall Street shares is long established and strives for diversified returns. At what point does MicroStrategy become more of a Bitcoin ETF than a software company? If Bitcoin rallies, does this put pressure on management to regularly rebalance Treasury investments? Should they aim for dollar returns or hold unrealized profits for future use? These issues remain open, and MicroStrategy's management will have to address them in the best interests of their shareholders.

New unit of account

Within the framework of inevitable monetary Darwinismmoney managers will gradually and then suddenly add Bitcoin to investment portfolios in an attempt to protect their cash reserves for productive use later. In 2013, MicroStrategy's CEO tweeted that "Bitcoin's days appear to be numbered." And seven years later, MicroStrategy has converted $250 million, or about 50% of its cash holdings, into bitcoin. Eventually everyone will understand the monetary evolution that Bitcoin brings with it. For most people, this will require time and re-examination of long-held but outdated mental models. Michael Saylor is to be commended for having renewed his views, and it is likely that his colleagues will soon follow his example.

#Bitcoin days are numbered. It seems like just a matter of time before it suffers the same fate as online gambling.

— Michael Saylor (@michael_saylor) December 19, 2013

“The days of #Bitcoin are numbered. It seems that it is only a matter of time before it suffers the same fate as online gambling, ”

- Michael Saylor (@michael_saylor) December 19, 2013

De facto inflation hedgedue to its ultimate deficit, Bitcoin can also be viewed as a highly profitable investment asset. Companies in the future may even choose to denominate their operating and investment returns in bitcoin rather than dollars or some other inflationary fiat currency. Holding bitcoins in corporate treasury accounts could become the standard for all Wall Street companies. As Bitcoin makes all other money obsolete and its value grows, the allocation of bitcoin capital to resources for production will become more conservative. For most companies, simply holding bitcoins for long-term growth nullifies the importance of opportunity cost in economic terms for planning resource allocation in the production cycle.

When Bitcoin reaches a certain basemoney supply and its purchasing power will stabilize, the profits of companies can be denominated in bitcoins, and not in dollars or some other fiat currency. As Preston Pisch emphasized in Stephen Levera's podcast, Bitcoin could become the global default unit of account, a benchmark for comparing the value of similar products or financial instruments. The denomination of cash flows and corporate treasury in Bitcoin could change the way companies like MicroStrategy shape their capital allocation strategies over the long term - a tipping point leading to sustained global deflation - the basis of future abundance.

We have yet to see what will happenwhen and if other companies decide to update their Treasury investment programs to include bitcoin. Should they invest 1%, 5% or 50% of excess reserves following MicroStrategy? One thing is certain: this target value is no longer zero. Managers of public companies have fiduciary obligations to their shareholders. They need to show profits, and not investing in bitcoin becomes just irresponsible for them, as Anthony Pompliano, partner at Morgan Creek Digital, said.

Pragmatic risk management

In the short term, manyadditional issues related to holding bitcoins for public companies that do not specialize in private key management, including internal controls and a governance model, to be adopted by management teams. Should they use trusted custodians such as Knox or Fidelity, or would they be better off keeping keys in multisig sovereign joint quorums such as Unchained Capital? What about a hybrid storage model? Their MicroStrategy filings for the SEC on August 11, 2020 indicate that the company's bitcoins are currently held by various custodians, with a lack of insurance clearly presented as a clear risk:

“Although we keep the bulk of our BTC withprofessional cryptocurrency custodians, a successful security breach or cyberattack may result in partial or total loss of our BTC in a way that will not be covered by insurance or compensation provisions from our agreements with these custodians. This loss could have a material adverse effect on our financial condition and results of operations. ”

Considering how much time we spend at Knox onmanaging bitcoin storage systems with full insurance coverage, this became another interesting area for us to observe. We are particularly interested in whether auditors and securities regulators can demand. to ensure that the savings of NASDAQ-listed companies such as MicroStrategy are protected by the full insurance coverage that first wave bitcoin custodians have historically struggled with. We believe that fiduciary managers and CEOs of public companies will still have to consider all the risks associated with investing in bitcoin, whether it is limiting onerous costs such as slippage in large positions or getting adequate insurance coverage for their long-term savings.

Moving towards deflationary markets

After more than a decade with time99.98% uptime, rising value, increasing liquidity, community and infrastructure development, Bitcoin can no longer be ignored. And juxtaposing Michael Saylor's 2013 tweet with MicroStrategy's new investment program speaks volumes. “MicroStrategy's investment pitch regarding Bitcoin as a store of value is correct. Of all other assets, Bitcoin fits the bill of a treasury asset into which a company can invest cash to preserve its future purchasing power in a world of “easy money.” Now that the first step has been taken, the game of «extra won» (where there are fewer chairs than participants) for companies buying Bitcoin has officially begun,” says Louis Liu of Mimesis Capital, a single-family money manager specializing in Bitcoin.

Overall, this news is undoubtedly"bullish" for the scarce information space of Bitcoin, especially against the backdrop of the fact that its S2F coefficient after the May halving rose to more than 50 and almost caught up with gold's S2F equal to 60. With all the openness of the documentation that is freely available on the Internet, will they be able to Will company managers continue to fulfill their fiduciary obligations in the next 10 years if they do not invest the company's cash reserves in Bitcoin? A direct consequence of this new acceptance. If companies start placing cash reserves in Bitcoin, its value will also rise, although it is also reasonable to wonder whether other traditional asset classes could become worthless if companies withdraw their cash reserves from them en masse. Once Bitcoin is adopted by the majority of companies, we can expect to see a global and sustainable deflationary future, allowing responsible managers to invest their accumulated capital wisely for truly productive use, says Jeff Booth, author of The Price of Tomorrow. .

Looking back at this MicroStrategy solution years later, we will likely find that this was a historic moment in the rise of Bitcoin.

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