Balance sheets ballooning with bitcoin.
For a smattering (but growing roster) of firms, adding bitcoin holdings as part of the typical corporate finance strategy of maximizing returns on assets may look like a shrewd move, at least when the price of bitcoin keeps moving up.
But the question becomes: What happens on the downside? And what happens next?
MicroStrategy has been adding to its bitcoin holdings, where Coindesk reported this week that CEO Michael Saylor has said the company bought another 328 bitcoin, which equates to an addition of about $15 million. All told, the company now has roughly $4.3 billion in bitcoin on the balance sheet, as of the most recent pricing.
Tesla, of course, has its own hefty bitcoin holdings on its balance sheet, at about $1.5 billion. Square, in its most recent earnings report, said that it had made a $170 million investment in bitcoin in the most recent quarter, where the previous quarter’s purchase had been about $50 million.
Now: The strategy behind taking all of these bitcoin purchases on various corporate balance sheets has been one where the returns on the holdings themselves far outpace what would be generated with, say, cash or bonds. For corporate treasurers, the outsized returns, conceivably, give more firepower (should the bitcoin be sold for more than it was bought) to then deploy into operations or even acquisitions. The question becomes too, what happens if the price of bitcoin — volatile to be sure, and sometimes “gapping” to the downside — falls markedly. Treasurers and CFOs may have to scramble to hedge their hedges.
But bitcoin in the portfolio also is a way for corporates, which have been increasingly into the digital realm, to embrace, as it evolves, decentralized finance (DeFi), at least in part, through the blockchain as a key technology underpinning.
In broad strokes, DeFi allows buyers and sellers, senders and receivers to lend and borrow and trade (and even execute smart contracts) without traditional intermediaries such as banks in the mix. No third party (or central bank) has authority for the release of, say, bitcoin, or other assets that may conceivably be making their way between parties.
Laying A Cornerstone
In an interview with Karen Webster, Circle CEO Jeremy Allaire said DeFi may in fact lay the cornerstone for a new, accessible, internet-based credit market. In broad terms, the software itself winds up acting as the financial intermediary (and not, we note, the cryptos themselves) and gives institutions the ability to do far more in the electronic realm than just hold digital assets on the books and seek appreciation.
We noted that the institutional uptake of DeFi would also still come with a nod toward what might be termed traditional, centralized financial constructs (termed CeFi for short). Allaire said firms trafficking in high-dollar, perhaps high-volume transactions may wish to “face” CeFi institutions. Eventually he said, regulators will likely require commercial banks and other institutions to provision and provide DeFi services over time to their corporate clients — as those clients in turn transact with one another with cryptos or with stablecoins that are in turn pegged into some sort of underlying value.
“This is going to be also an infrastructure that allows someone without an official identity — someone who works in some context in some emerging market who has a smartphone — to download a piece of software and plug into the global digital economy and transact,” he told Webster of DeFi. “And they won’t have to get crushed with exorbitant fees or time delays. They’ll participate as a value creator in the world economy.”