August 11, 2020 is an important date for Bitcoin. The King of Cryptos has been recognised as a corporate cash asset by Wall Street. MicroStrategy, a leading provider of computer intelligence software, with a market valuation of $1.2 billion, announced the conversion of $250 million of cash into Bitcoin, representing 21,454 tokens.
Recently, MicroStrategy also acquired an additional 16,796 BTCs for $175 million. According to its CEO, Michael Saylor, these two purchases represent a total of $425 million for 38,250 BTCs. It is the first publicly traded company to announce bitcoin holdings on this scale. In this article, we will try to analyse what this means for corporate treasury, for public company valuations and for the indirect institutional stake in Bitcoin.
Bitcoin: A winning bet for MicroStrategy
MicroStrategy acquired 0.182% of the 21 million available bitcoins. This represents the majority of its excess cash reserves as a new capital allocation strategy. Moreover, given the scarcity of bitcoins, such an acquisition could only be completed by 978 other companies before the supply is technically „exhausted“, even though in practice a large part of the existing supply is not even for sale.
At the time of the announcement of the second quarter results at the end of July 2020, Michael Saylor, had announced his intention to explore the purchase of bitcoins, gold or any other alternative assets. Indeed, during this year of Covid-19 recession, MicroStrategy has seen its cash and short-term investments reach over $500 million. In contrast, the firm needed only $50 million to cover operating expenses for the year, leaving it with significant unused cash.
While Michael Saylor initially alluded to a broader portfolio of alternative assets, the full allocation was actually targeted at only one of the assets mentioned: Bitcoin (BTC), for the full amount of cash. Microstrategy’s investment thesis was built around the deterioration of the value of the cash currencies (in terms of purchasing power) and the belief that Bitcoin represents a more secure store of value than other alternatives. These concerns were explained in MicroStrategy’s announcement published on the company’s blog, justifying the exclusive purchase of Bitcoin as part of a new capital allocation strategy to support their fiduciary obligations to shareholders in order to maximise long-term value creation.
„MicroStrategy spent months deliberating to determine our capital allocation strategy. Our decision to invest in Bitcoin during this period was motivated, in part, by a confluence of macroeconomic factors affecting the economic and business landscape that we believe creates long-term risks to our treasury program – risks that should be proactively addressed. »
- Does this allocation of capital in Bitcoin signal the emergence of a new trend in corporate treasury programs?
- Should CFOs and management teams of other listed companies reconsider their plans for allocating excess cash?
- To what extent are the cash holdings of large listed companies exposed to currency depreciation and other macroeconomic risks?
- What does Bitcoin mean as an enterprise reserve asset for Wall Street and financial modelling?
An overabundance of cash amassed
Now that Bitcoin has been adopted as the primary reserve asset by NASDAQ-listed MicroStrategy, other companies will be forced to look at it. In the months following MicroStrategy’s announcement, a few firms have already taken the plunge, including Square, also listed on the NASDAQ, with a valuation of more than $75 billion. The latter has acquired $50 million of Bitcoins. A more or less complete list of 15 companies that have added Bitcoin to their treasury now includes more than 785,999 BTCs, which represents about 3.74% of the total supply of 21 million bitcoins, at the time of writing this article.
Following the economic slowdown caused by globalized confinement and supply chain disruptions in the first half of 2020, companies have slowed investment programmes, reduced costs and increased cash reserves to adapt to the economic uncertainty. The companies making up the Nasdaq 100 – the index of the 100 largest non-financial companies listed on the stock market – now have nearly $1 trillion in cash, or $1 trillion. US technology moguls like Microsoft, Google and Apple are accumulating more money than ever before. Despite $121 billion in cash, Google’s parent company Alphabet has raised $10 billion by issuing bonds with the lowest interest rate in history for a company. Collectively, since 2012, the Nasdaq 100 has grown from $405 billion to just under $1 trillion in cash reserves.
Global recovery hurts currencies
Interest rates close to zero have lowered the cost of capital, acting as a favourable ingredient for an $840 million surge in corporate debt financing in the first half of 2020 alone, while the monetary expansion comes on top of the global stimulus packages that were triggered earlier in March following the damage caused by the Coronavirus. Business managers are liquidating assets and cutting costs to manage operational risk and uncertainty. They are eventually increasing their excess cash reserves, but must now also ensure that these reserves are not excessively devalued in the face of aggressive quantitative easing programmes.
„Macroeconomic factors include, among others, the economic and health crisis precipitated by Covid-19, unprecedented government financial stimulus measures, including the globally adopted quantitative easing (QE), and global political and economic uncertainty. We believe that these and other factors taken together may well have a significant depreciating effect on the long-term real value of cash currencies and many other types of conventional assets, including many assets traditionally held as part of corporate treasury operations. »
Led by the US Federal Reserve (Fed) and supported by other central banks, global purchases of quantitative easing (QE) assets in the year 2020 alone are expected to reach a staggering $6 trillion, more than half of the cumulative global QE observed between 2009 and 2018. While equities have skyrocketed with further cash injections through corporate debt purchase programs, the Fed now holds nearly $7 trillion in assets on its balance sheet, a meteoric rise of about 72% in less than 3 months, according to the St. Louis Fed.
As MicroStrategy’s decision shows, monetary expansion on this scale is causing even large publicly traded companies to reconsider the long-term real value of existing cash reserves, as the amount of hard currency is inflated to avoid widespread deleveraging events and a drastic sell-off of the financial markets. While the dollar may not be subject to inflation in the short term, given its status as the dominant global reserve currency, some responsible companies, such as MicroStrategy, are taking preventative measures to protect their balance sheets and manage long-term risk to their shareholders. Changing capital allocation strategies now favor assets that are not abnormally manipulated to hedge against currency devaluation risks.
„Bitcoinization“ of corporate cash flow
Treasury operations include the management of a company’s cash position, the purpose of which is to manage liquidity and mitigate operational and financial risks. Depending on the size of the company and its activities, these transactions may include holding positions in various fiduciary currencies, trading in bonds or using financial derivatives. This is an essential activity for any business, particularly for publicly traded entities that have a duty to publicly disclose their financial health to the financial markets.
Good corporate treasury must be reliable over the long term, whether for price stability, liquidity or the creation of shareholder value. MicroStrategy’s decision to hold Bitcoin as its primary reserve asset is a signal to the market that Nakamoto’s digital treasury is being progressively adopted for its sound properties by responsible institutions.
„This investment reflects our belief that Bitcoin, as the world’s most widely adopted cryptography currency, is a reliable store of value and an attractive investment asset with greater long-term appreciation potential than holding fiat currency. Since its inception more than 10 years ago, Bitcoin has become an important addition to the global financial system, with features that are useful for both individuals and institutions. MicroStrategy has, therefore, recognised Bitcoin as a legitimate investment asset that can be superior to fiat money and has therefore made Bitcoin the primary asset in its cash reserve strategy. »
Executives in need of Bitcoin
Senior executives or CFOs managing corporate treasury programs may thus breach their fiduciary duties to shareholders if due diligence regarding capital allocation is not developed by considering an asset such as Bitcoin (BTC). As a public company, MicroStrategy’s decision effectively „eliminated the career risk for CFOs to invest corporate treasury in Bitcoin. In addition, Andy Yee, Director of Public Policy at Visa, noted that this allocation is similar to the position defended by billionaire Paul Tudor Jones, a hedge fund manager, regarding his recent allocation of 1-2% in Bitcoin within his portfolio.
MicroStrategy’s shareholder structure is mainly institutional. It has 466 companies representing 97% of the total shares. BlackRock and Vanguard, 2 leading institutional and private wealth managers, hold respectively $7.43 billion and $6.2 billion of assets under management and represent more than 25% of MicroStrategy’s capitalization table, as revealed by Swan Bitcoin, a US-based Bitcoin brokerage service. As a result, both institutional participants now have indirect exposure to Bitcoin, which will prompt them to conduct extensive due diligence and research on Bitcoin. As shareholders of a multitude of other listed companies, these institutional investors regularly assess the health of their portfolios, comparing, among other things, industry benchmarks, cash flow modelling and the use of capital by competitors. Bitcoin is now part of that equation.
Bitcoin: celebrating individual responsibility
Two questions come to mind:
- What happens if MicroStrategy’s Bitcoin holdings grow significantly in the coming years?
- How will management manage this exposure and rebalance its risk?
As Bitcoin’s purchasing power increases, this could be a major lever for MicroStrategy’s future capital deployments when it comes to penetrating other markets, launching new products, or even acquiring competitors. As suggested by Preston Pysh, host of The Investor’s Podcast, the practice of companies holding Bitcoin on their balance sheet is just beginning. MicroStrategy, which has invested $425 million of cash reserves in Bitcoin, is just the beginning of a new era in corporate treasury.
More than an inflation hedge, holding Bitcoin can become an effective way to strengthen corporate balance sheets in times of financial crisis when revenue streams decline. Because bitcoin holdings inflate unrealized gains for company executives, these gains can be used as a source of cash to cover operating expenses and stay afloat while other competitors suffer from poor economic conditions and over-leveraged balance sheets.
The massive increase in US corporate debt from $3.3 billion to $6.5 billion, combined with the sharpest drop in consumer spending ever experienced in the US, will prove very profitable for companies owning bitcoins and seeking to acquire struggling competitors. The competitive landscape could be completely reshaped by Bitcoin over the next decade, proving that balance sheet resilience is worth more than cheap leverage.
MicroStrategy’s Board of Directors has five members who act as trustees and are responsible for capital allocation strategies and long-term value creation. The Board of Directors has selected Bitcoin as the primary reserve asset for the company’s cash flow, allowing MicroStrategy to become an indirect vehicle for Bitcoin’s price exposure. If Bitcoin appreciates in the coming years, MicroStrategy’s shares could increase significantly.
- When does MicroStrategy become a Bitcoin ETF rather than a software company?
- If Bitcoin rises, is management under pressure to execute regular cash rebalancing?
- Is it their duty to seek dollar earnings or to hold unrealized gains for future leverage?
These remain open questions that MicroStrategy’s management team will need to answer in the future.
Ramping Up New Cash
As part of an inescapable monetary Darwinism, CFOs and management teams will gradually, then suddenly, add bitcoin to their books in order to protect their cash reserves. MicroStrategy’s CEO tweeted in 2013 that „Bitcoin days are numbered“.
About seven years later, MicroStrategy transferred $425 million, or more than 90% of its cash reserves, to Bitcoin. Eventually, everyone will understand the monetary evolution that Bitcoin brings. For most, this will take time and will require the revision of pre-established but now obsolete mental models. Michael Saylor should be congratulated for updating his point of view, and it is likely that others in the industry will follow him very soon. Jack Dorsey, Square’s CEO, is one of the first to do so. His company recently invested $50 million in Bitcoin.
Apparaissant de facto comme une protection contre l’inflation avec sa rareté inaltérable, le Bitcoin peut également être compris comme un actif investissable possédant un bon rendement. À l’avenir, les entreprises pourraient même décider de libeller leurs marges d’exploitation et leurs retours sur investissement par rapport à Bitcoin, non au dollar américain, à l’euro ou à tout autre monnaie fiduciaire basée sur l’inflation.
La détention de bitcoins dans les comptes de trésorerie d’entreprise pourrait devenir une norme pour Wall Street. À mesure que le bitcoin rend obsolète toute autre monnaie et que sa valeur augmente avec le temps, le déploiement du capital Bitcoin dans les ressources de production va devenir plus conservateur. Le simple fait de conserver du bitcoin pour une appréciation du prix à long terme réinitialise l’opportunity cost et donc la balance de l’équation dans une thèse d’investissement qui planifie l’allocation des ressources dans le cycle de production pour la plupart des entreprises.
Une fois que Bitcoin atteindra une certaine base monétaire et une certaine stabilité en terme de pouvoir d’achat, les rendements des entreprises pourraient être libellés en bitcoin, et non en dollar ou dans toute autre monnaie fiduciaire. Comme Preston Pysh l’a souligné dans le podcast de Stephan Livera, Bitcoin pourrait devenir le numéraire mondial par défaut – un élément de référence pour comparer la valeur de produits ou d’instruments financiers similaires. Les flux de trésorerie et la dénomination de trésorerie en bitcoin vont changer la façon dont des entreprises, telles que MicroStrategy, façonnent leurs stratégies d’allocation de capital à long terme, transformant le bitcoin en une unité de compte, son ultime point de basculement dans sa monétisation menant à une déflation mondiale soutenue – le point de départ d’un avenir prospère : c’est l’hypothèse – âprement débattue – de l’hyperbitcoinisation.
En prenant du recul, il reste à voir ce qui se passera lorsque d’autres entreprises décideront de mettre à jour leurs stratégies d’allocation de capital pour inclure Bitcoin dans leurs programmes de trésorerie. Devraient-elles investir 1, 5 ou 50 % de leurs réserves de liquidités excédentaires en marchant sur les traces de MicroStrategy ? Une chose est sûre : ce nombre cible ne devrait plus être zéro. Les équipes de direction des entreprises publiques ont une obligation fiduciaire envers leurs actionnaires et doivent « Get Off Zero », un slogan popularisé par le partenaire du fonds institutionnel Morgan Creek Digital, Anthony Pompliano.
Vers des marchés déflationnistes
Après plus d’une décennie de production de blocs, de fonctionnement du réseau pendant 99,98 % du temps, d’appréciation en valeur monétaire, de croissance de la communauté, de construction d’infrastructures et d’approfondissement de la liquidité, Bitcoin ne peut plus être ignoré. Le rejet de Bitcoin de la part de Michael Saylor en 2013, juxtaposé à l’attitude de MicroStrategy, en dit long aujourd’hui.
« La thèse d’investissement de MicroStrategy sur Bitcoin en tant que réserve de valeur est de bon timing. Parmi tous les autres actifs, Bitcoin correspond à toutes les propriétés d’un actif de trésorerie dans lequel une entreprise peut allouer des liquidités pour préserver son futur pouvoir d’achat dans un environnement d’expansion monétaire. Depuis que Michael Saylor a fait le premier pas, le jeu des chaises musicales pour les entreprises par rapport à bitcoin est officiellement lancé » – Louis Liu, CIO de Mimesis Capital
Dans l’ensemble, cette nouvelle est indéniablement optimiste pour Bitcoin, compte tenu de son ratio « Stock-To-Flow » renforcé à plus de 50 lors de l’événement du halving en mai dernier, qui réduit de moitié la récompense de minage et rattrape le S2F de l’or de 60. Avec toute la documentation mise à disposition du public sur internet, les directeurs financiers et les équipes de direction financière seront-ils toujours en mesure de respecter leurs obligations fiduciaires s’ils ne détiennent pas de bitcoin dans leur trésorerie au cours des 10 prochaines années ?
L’appréciation du prix du bitcoin sera également un résultat direct de cette nouvelle adoption si les entreprises commencent à ajouter Bitcoin à leurs trésoreries. Une fois que le bitcoin sera adopté par la plupart des entreprises, un avenir déflationniste mondial et durable pourrait nous attendre, permettant aux investisseurs responsables d’accumuler du capital pour des utilisations productives, comme l’a popularisé Jeff Booth dans son livre « The Price of Tomorrow ».