Why Corporate Treasury Departments Will Come to Embrace Bitcoin
MicroStrategy, a Nasdaq-listed company with a roughly $1.5 billion market cap, is the first publicly traded entity to embrace Bitcoin as a corporate treasury asset. But it won’t be the last.
As of Sept. 15, 2020, MicroStrategy (MSTR) revealed it had purchased 38,250 Bitcoins at an aggregate price of $425 million, including fees and expenses.
MicroStrategy had originally purchased $250 million worth of Bitcoin in August 2020, and then added $175 million more.
“This investment reflects our belief that Bitcoin, as the world’s most widely adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash,” said Michael Saylor, MicroStrategy’s founder and CEO, in August.
“We find the global acceptance, brand recognition, ecosystem vitality, network dominance, architectural resilience, technical utility, and community ethos of bitcoin to be persuasive evidence of its superiority as an asset class for those seeking a long-term store of value,” Saylor added.
That might sound familiar. We’ve said much the same for years now, and pounded the table for Bitcoin’s long-term investment case at its low point below $3,200 in December 2018.
Saylor is used to being ahead of the curve on technology.
In the 1980s, Saylor attended the Massachusetts Institute of Technology (MIT) on a U.S. Air Force scholarship, earning multiple degrees in aeronautics and astronautics (with a specialty in spaceship design), as well as science, technology, and society (the history of science).
Saylor founded MicroStrategy in the late 1980s, while still in his 20s, and took the company public in 1998; by his own reckoning he is the longest-serving CEO in the enterprise software industry.
Given that background, Saylor is uniquely equipped to understand the intersection of technology and society, and the nature of technological revolutions.
In a recent interview, Saylor described Bitcoin as “a hive of cybernetic hornets doing the bidding of Mother Nature, protected by a wall of encrypted energy.”
In Saylor’s view, Bitcoin is “dematerialized gold,” but it is also much more than that, because the global Bitcoin community makes it a kind of living technological entity.
While the core of Bitcoin and the sanctity of the ledger remain the same – immutable and unchanging – the outer layers of Bitcoin continue to evolve through community innovation, making it stronger, safer, and increasingly useful over time.
MicroStrategy, as a U.S.-listed, publicly traded company, took a big step in deciding to make Bitcoin its primary corporate treasury asset.
For publicly traded companies, corporate treasury assets are usually kept as bland and boring as possible, tending toward a mix of cash, government securities, and high-grade corporate bonds.
The idea behind corporate treasury conservatism is that a publicly traded company is not in business as a money manager. When investors buy the company’s shares, they want undiluted exposure to the company’s product line and business model, not an embedded investment portfolio.
There are exceptions to the rule, and companies where the investment portfolio is a major draw. Berkshire Hathaway is the most famous example of this. But as a general rule, corporate treasury departments are supposed to be boring.
As he described it in a Real Vision interview with Raoul Pal, Saylor discovered Bitcoin as a result of the pandemic.
After the pandemic hit, Saylor saw the extreme things the U.S. government did as a form of policy response, and the way U.S. Treasuries seemed destined to lose money after inflation, and could not, in good conscience, keep MicroStrategy’s corporate treasury holdings in dollar-denominated assets.
This led Saylor to ask himself a question: What is the best way to preserve value over time? If the goal was to maintain, say, $100 million worth of purchasing power for at least 100 years, transferring it to someone in the year 2120, what would be the best way to do it?
After looking at all the various options — stocks, bonds, gold, real estate — Saylor decided that Bitcoin was the most logical store of value imaginable. In the long run, even gold sees annual supply expansion year after year; it is only Bitcoin that has absolute scarcity and a dilution factor of zero.
“If you go out more than a decade, all the noise drops away and stuff becomes real clear,” Saylor said.
It will take time before, say, the majority of corporate treasury departments in the S&P 500 embrace Bitcoin as a balance sheet asset. But on a longer-term timeframe, the decision seems inevitable.
As of 2020, the U.S. dollar and U.S. Treasury bonds are still seen as the bedrock of the global financial system and the lowest-risk assets imaginable from a corporate treasury perspective.
This view may not hold, however, if inflation pressures return alongside currency debasement fears and persistent negative real yields.
To a significant degree, the corporate treasurers of U.S.-listed public companies are guided by social convention. In the eyes of their peers, sitting in dollar-denominated assets is the respectable thing to do. That may not be the case when U.S. dollars and Treasuries are seen as eroding at the margins like sand.
At the same time, it may seem increasingly bizarre for corporate treasury departments not to own Bitcoin, at least in some modest percentage amount, once the crypto reaches a sentiment tipping point.
Consider a scenario where the U.S. dollar is consistently losing 5% per annum in real-world purchasing power, with Treasury bond yields near zero.
If the main body of corporate treasury assets is losing 3 to 5%, year in and year out, putting 2% of assets into Bitcoin as an inflation hedge could become a no-brainer, with the inherent risk of loss from inflation (3 to 5%) being greater than the hedge.
When S&P 500 corporate treasury departments embrace the logic of, say, putting 2% of assets into Bitcoin, it should be well on its way to a 10X return from current levels, if not headed far beyond.