Most commentators agree that an inflow of corporate funding has fueled the 2021 Bitcoin (BTC) bull run. Increasingly, corporate treasurers are allocating part of their reserves to cryptocurrencies. Which firms are making the shift, and what’s behind the move?
A few short years ago, it would have been unthinkable for listed companies to consider putting their precious reserves into an asset as volatile as cryptocurrencies. A lack of regulation and market infrastructure coupled with relatively shallow liquidity have been historic blockers for both corporate and institutional adoption of crypto.
However, over the last year or two, there’s been progress in several critical areas. In mid-2020, the Office of the Comptroller of the Currency (OCC) in the U.S. provided the green light to banks to begin offering crypto custody services.
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Many crypto-native firms began to woo corporates and institutions with secure custody, prime brokerage, and OTC trading services. The markets for derivatives, offering exposure without taking ownership of the underlying, have also been steadily expanding, with regulated platforms CME and Bakkt branching out into new instruments and Diginex becoming the first institutional grade crypto trading platform to be publicly listed on the Nasdaq.
Perhaps most critically, though, since early 2020, the macro-economic outlook has been increasingly volatile. Governments have doled out trillions of dollars in an attempt to stave off the worst fiscal impacts of the pandemic. And this has had knock-on effects throughout all markets.
Throughout 2020, it became evident that institutions were starting to sit up and take notice of crypto. In two significant investments in August and September, MicroStrategy purchased over 38,000 BTC at $425 million. In October, payments firm Square announced that it had followed suit, adding $50 million worth of BTC to its reserves.
They weren’t the only ones. In mid-October, payments behemoth PayPal confirmed it was planning to launch a crypto service to its users, including enabling payments for its 26 million-strong merchant network. Only days later, JPMorgan announced that its JPM coin was being used for the first time, precipitating the creation of an entirely new blockchain business within the banking giant.
By the end of 2020, it was evident that a snowball effect was taking place. The more corporate investment announcements hit the headlines, the more firms wanted a piece of the action for themselves. In turn, the price of BTC headed steadily upward, creating more fear of missing out.
Currently, Bitcoin Treasuries lists dozens of firms that now own BTC as part of their treasury assets. In total, there’s over $78 billion worth of BTC held in treasuries. MicroStrategy is by far the most bullish, having invested $2.2 billion—84% of its total reserves. Tesla is in second place, with a $1.5 billion investment, and Square is in third, with $220 million invested.
However, a quick look at the yields demonstrates why these firms decided to invest when they did. MicroStrategy has seen 230% returns, Square 200%, and Tesla 160%. While MicroStrategy and Square both started investing in 2020, Tesla only made its first BTC purchase in February 2021. Those are some pretty impressive gains on a three-month timeline. Tesla’s first-quarter results show that the vehicle manufacturer made more money on its BTC purchase than selling its electric cars.
Although the top three treasuries holding BTC happen to be American firms, buying BTC for corporate reserves isn’t solely an American trend. Other investors include Japanese gaming firm NEXON, which bought $100 million in BTC at the end of April 2021, and Chinese web firm Meitu, which invested $40 million in BTC and Ether (ETH) in March.
Anyone who’s been around in crypto a while knows that gains are never guaranteed. However, the economic fallout of the COVID-19 pandemic and fears of the impact on balance sheets can’t be underestimated. In a Medium article explaining why his firm invested in crypto, NEXON CEO Owen Mahoney wrote:
“Usually ‘cash in the bank’ […] can generate a few percentage points of interest at very low risk, typically by lending it to others. But in the current historically low interest rate environment, these holdings generate almost no return, especially when compared with inflation. Even junk bonds—which carry higher risk and were formerly known as ‘high yield’—have become a source of ‘rewardless risk.’”
Mahoney’s statements make it clear that companies are taking on a risk by keeping funds in cash and bonds. In his 2020 letter to Berkshire Hathaway shareholders, Warren Buffett highlighted the decreasing rate of return on bonds, even pointing out that returns had moved into negative territory in some countries, underscoring Mahoney’s view of them as an asset of “rewardless risk.”
Cash is also suffering. In particular, there’s extreme nervousness about the inflationary effect of the COVID-19 government stimulus packages on the dollar’s value. 20% of all U.S. dollars in the total supply were created in 2020 alone, meaning that companies maintaining predominantly cash-based reserves risk seeing their value dripping away slowly over time.
So while stocks may be holding up well, it’s hardly surprising that companies are looking elsewhere for ways to diversify their balance sheets. It’s still early days for crypto adoption. But if BTC and ETH continue to hold their value amid broader economic uncertainty, the snowball effect of corporate treasury adoption and price increases could well continue.
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