Bitcoin can be hazardous to the health of corporate balance sheets, as evidenced by second-quarter earnings reports from MicroStrategy and Tesla. Their latest earnings spotlight the question of corporate cryptocurrency strategy and its balance sheet risks.
The relatively minor impact on titanic Tesla versus the massive effect on comparatively miniscule MicroStrategy is a cautionary tale.
MicroStrategy and Tesla exemplify the two polar extremes of crypto asset allocation.
One takeaway from this tale of two companies is that scale matters. Chief financial officers (CFOs) who choose to dabble in the cryptoverse are well advised to scale their positions proportionately to revenues and reserves.
Another consideration is timing. The time-tested trading maxim “buy low, sell high” applies, which begs the question of whether CFOs should, in effect, become amateur commodity or security traders versus being prudent stewards of corporate funds by using more traditional, time-tested strategies. Cryptocurrency can hardly be viewed as a strategic investment in the mergers and acquisitions (M&A) sense, nor does it have the same shareholder value as stock buybacks.
Perhaps the biggest strategic risk is that overexposure to any commodity makes a company’s stock trade like that commodity, the last thing a firm seeking to maximize shareholder value wants to be. Saylor’s levered crypto sortie is a poster child for this scenario. The massive impairment suffered by MicroStrategy is strikingly disproportionate to the firm’s relatively modest $122 million Q2 revenue. Thus, the stock trades much like cryptocurrency itself — year to date it is down 50%, as is bitcoin.
Avoiding this fate if a small crypto position becomes large requires position management. One of the differences between MicroStrategy and Tesla is that MicroStrategy was a “Holdr” with “diamond hands” — hanging on to all its bitcoins. Tesla had softer hands — it reported selling a substantial number of bitcoins at an opportune time.
As prudent stewards of corporate funds, the prospect of terrifying volatility hardly sounds terrific from the CFO’s perspective. While Saylor is wont to opine that “volatility is vitality,” CFOs are more likely to view it as an existential threat, especially in high doses.
To Crypto or Not to Crypto?
The fundamental question is whether to play at all. There are several environmental analyses to consider.
Regulatory
Crypto may amount to yet another commodity that needs hedging from the CFO-suite perspective, and a purely financial one with no intrinsic relation to non-financial firms’ core businesses.
The current regulatory outlook, while murky, seems to point in that direction. Depending on which government agency ends up regulating the space, crypto may be treated as a commodity. There are compelling arguments for classifying it as such, and the crypto industry is supporting the Commodity Futures Trading Commission (CFTC) in the longstanding federal agency turf war for crypto oversight. Meanwhile, crypto is in a regulatory white space.
Volatility Outlook
U.S. regulatory clarity may be bullish for crypto. From a technical perspective, blue-chip crypto names seem to have found a support at the $20,000 level. Crypto trades in tandem with low or no revenue growth companies in the tech space (including FinTech), and it is arguable that all such assets have more upside than downside. However, that is traditionally the domain of speculators, not treasury managers.
Risk-Free Returns
Cleary the era of de minimis risk free rates has passed. Today’s blowout jobs report is likely to embolden the Fed to continue its march to raise rates, making risk-free treasuries much more attractive cash management options, and undercutting the case for crypto exposure.
Inflation
There are clear signs that inflation has peaked. Commodity prices in several sectors, notably energy and construction, have dropped substantially, especially as expressed in the futures markets. Now that the Fed has a green light to use its most powerful tool, the federal funds rate to hammer down inflation, along with the powerful but often underemphasized quantitative tightening initiative, inflation may well be tamed.
In any event, the recent catastrophic crypto cratering has discredited the alleged utility of cryptocurrency as an inflation hedge to say the least.
Digital Transformation
It’s hard to envision crypto as a tool to address digital streamlining of the payment ecosystem. The U.S. dollar remains the premier denomination of global trade in all major sectors, notably energy. While geopolitical tensions may be an opening for crypto denominated transactions, it is far from certain that the major trading states which might trigger such a transition (principally China and Russia) are willing participants.
The bottom line: The crypto misadventures of titanic Tesla and relatively miniscule MicroStrategy will have a chilling effect on corporate appetite for crypto risk, unless and until the currencies stabilize and a U.S. regulatory regime is in place.
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