Author: Arunkumar Krishnakumar, CoinTelegraph; Translated by: Tao Zhu, Golden Finance
1. What is a corporate treasury?
Corporate treasuries are the financial nerve center of a business, tasked with ensuring liquidity, managing risk, and optimizing returns. They are traditionally conservative, relying on fiat currencies, bonds, and other stable investments. However, MicroStrategy has broken this mold by adopting Bitcoin as its primary treasury reserve.
The main functions of the company's finance department include the following.
Liquidity management: ensuring that the company has sufficient cash to meet its obligations. This also involves ensuring that there is no liquidity mismatch between assets and liabilities.
Long-term asset financing, which would pose a significant risk.
Risk mitigation: Managing interest rate fluctuations, currency risks, and credit risks. Typically, there are dedicated risk management teams responsible for market risk, credit risk, operational risk, and liquidity risk. The treasury works closely with these functions to ensure that its financial decisions consider all these risk factors.
Short-term investments: The company finances its assets. This can be equity, debt, or just cash flow generated by the business. The treasury is responsible for allocating excess cash to low-risk, liquid assets to generate returns. Their role is to ensure that the yield on the company's assets is optimized while keeping risks as low as possible.
Debt management: Managing loans and credit to maintain optimal leverage is a crucial function of the treasury. This function is often referred to as asset-liability management (ALM). As mentioned earlier, this function is responsible not only for managing the company’s debt but also for ensuring that there is no maturity mismatch between assets and liabilities. The company cannot plan to use assets maturing within a month to fund liabilities maturing within a week (debt interest payments).
Strategic planning: Supporting long-term goals through effective capital allocation is one of the strategic functions of corporate finance.
Therefore, the goal of fund managers is to strike a delicate balance between risk and return. Their primary objective is to protect the company's assets from market downturns or liquidity crises while ensuring optimal returns on the remaining funds they manage. They should also manage risks during periods of market volatility and stress conditions.
This is why MicroStrategy's inclusion of Bitcoin in its treasury is significant, challenging traditional norms by adopting a high-risk, high-reward strategy. Thus, this bold strategy has not only transformed its balance sheet but also changed its stock performance, solidifying the company's position as a pioneer in cryptocurrency adoption.
Other companies that have adopted or are considering Bitcoin as a treasury reserve asset include Metaplanet, Semler Scientific, DeFi Technologies, Solidion Technology, Nano Labs, and Cosmos Health.
II. MicroStrategy: A Visionary Bet on Bitcoin
MicroStrategy was once a darling of the dot-com bubble but suffered significant blows after 2000; however, under the leadership of Michael Saylor and driven by innovative financial management, it achieved a remarkable transformation.
By 2002, MicroStrategy's stock price hovered between $1 and $2, reflecting market disillusionment and internal challenges. In the following twenty years, the company regained influence through its data analytics tools. However, its breakthrough transformation began in 2020 when it adopted Bitcoin as a treasury reserve.
Adoption of Bitcoin
MicroStrategy co-founder and executive chairman Michael Saylor views Bitcoin as a remedy for fiat inflation. He believes the purchasing power of the dollar is rapidly diminishing, while Bitcoin, due to its limited supply, has excellent store-of-value capabilities. This strategy has transformed MicroStrategy into a hybrid of a software company and a cryptocurrency investment tool.
MicroStrategy's Bitcoin accumulation journey
As of November 24, 2024, MicroStrategy holds 226,500 Bitcoins, solidifying its position as the largest corporate holder of Bitcoin globally.
MicroStrategy employs various financing strategies to drive its Bitcoin purchases. Its strategy must comply with mainstream financial services norms while ensuring it can handle volatile assets like Bitcoin.
Stock issuance: The company issues new shares to raise funds, benefiting from the rise in stock price due to Bitcoin's acceptance. The increase in Bitcoin's price alleviates the risk of sell-off pressure from new stock issuance. This strategy needs to be timed carefully.
Debt financing: Convertible bonds offering low interest rates and future conversion options have become key tools. Additionally, senior secured notes help fund purchases during Bitcoin downturns.
Free cash flow: Operating profits are redirected to increase Bitcoin reserves.
Bitcoin-backed loans: Utilizing existing Bitcoin holdings allows the company to obtain additional liquidity without diluting equity.
Through the comprehensive use of the above strategies, MicroStrategy has established a treasury holding $22 billion worth of Bitcoin.
III. Timeline of MicroStrategy's Bitcoin Acquisitions
MicroStrategy's bold Bitcoin acquisition strategy, utilizing convertible notes and dollar-cost averaging, has transformed it from a troubled software company into a Bitcoin proxy, driving its stock price up over 1,000 times and redefining its market image.
Here is the timeline of their Bitcoin acquisitions:
As you can see, MicroStrategy has consistently adopted a dollar-cost averaging approach to purchase Bitcoin under various market conditions to mitigate price volatility. The company also collaborates with institutional-grade custodians to ensure secure storage.
MicroStrategy transformed from a troubled software company into a Bitcoin proxy, with its stock price soaring significantly. Starting at $2 in 2002, it skyrocketed over 1,000 times, reaching over $2,000 at its peak, primarily due to Bitcoin's rapid rise and investors viewing MicroStrategy as a way to gain Bitcoin exposure without directly purchasing cryptocurrencies.
Bitcoin has historically outperformed traditional investments such as bonds or cash equivalents. MicroStrategy has capitalized on this trend, significantly increasing its market value and gaining a new status in the tech and finance sectors. While this may seem like a very aggressive financial management strategy to many, most endeavors that achieve exponential growth in capital markets initially appear to be unusual decisions.
IV. Returns of Using Bitcoin as Treasury Reserves
MicroStrategy's Bitcoin strategy has significant advantages. While financial benefits are undoubtedly an important aspect of this strategy, MicroStrategy has also successfully built brand equity through this financial management strategy.
Like gold, Bitcoin can hedge against currency devaluation. This bold strategy attracts visionary investors seeking to participate in Bitcoin's growth. Banks traditionally rely on fractional reserve banking, which can make companies vulnerable during crises, as the collapse of Silicon Valley Bank indicates.
Unlike banks, Bitcoin provides liquidity through a decentralized global market at any time, allowing companies to quickly access funds without relying on centralized institutions. By maintaining a Bitcoin treasury, companies can reduce operational risks and ensure timely liquidity.
MicroStrategy positions itself as a thought leader in financial innovation, often mentioned alongside Tesla and Nvidia—not for its business fundamentals but for its groundbreaking financial management strategies.
Compared to traditional financial assets, Bitcoin's limited supply and growing adoption have yielded substantial returns for MicroStrategy investors. Despite all these positive factors for MicroStrategy, risks remain for them and those looking to draw inspiration from this strategy.
V. Risks and Challenges of Using Bitcoin as Treasury Reserves
While Bitcoin has many advantages, it also poses challenges and potential pitfalls as a financial asset. Building corporate finance on an asset that can drop in value by as much as 75% during a bear market requires significant planning.
Volatility risk
Price volatility of Bitcoin can greatly affect the company's balance sheet, leading to fluctuations in reported earnings and shareholder sentiment. As prices and sentiment decline, the company may be forced to sell Bitcoin, further leading to negative price behavior and sentiment.
In times of market stress, Bitcoin's price may decline, leading to a drop in the company's stock price; if debt matures simultaneously, the company's balance sheet may face systemic collapse. Moreover, bondholders may not convert bonds into stocks, leading to cash repayments that could exacerbate MicroStrategy's financial situation.
For MicroStrategy, it has successfully created a record of managing one of the deepest Bitcoin bear markets, thereby successfully reducing this risk. Newly issued debt will mature in 2029, providing ample time for its core business to generate additional cash flow, ensuring that the Bitcoin-driven treasury remains resilient during potential downturns.
The last convertible bond issued by MicroStrategy in 2020 will mature in 2025, and the additional funds raised by the company in 2024 will be used for purchases. This indicates planning for the next five years.
Liquidity risk
The need to liquidate Bitcoin during market downturns may exacerbate losses and undermine market stability. This would create a vicious cycle, similar to Terra, where the scale of the balance sheet shrinks exponentially as Bitcoin must be sold to establish a cash position, while the price of Bitcoin continuously declines in the process of obtaining cash.
If a company's finance department falls into this vicious liquidity crisis, it will also be challenging to raise additional funds.
Regulatory risk
With the approval of Bitcoin exchange-traded funds (ETFs), the regulatory risks surrounding cryptocurrencies have diminished in 2024. However, the accounting treatment of companies holding cryptocurrencies on their balance sheets still lacks clarity.
Regulatory changes like capital gains taxes or outright bans could devalue Bitcoin holdings.
MicroStrategy's example may inspire other companies to over-invest in volatile assets. While diversification is essential, the trend of over-adopting Bitcoin could undermine the stability of the broader corporate financial ecosystem, amplifying risks during economic downturns.
Ultimately, companies considering Bitcoin for their treasury must weigh the commitment to Bitcoin against the risks to determine if it aligns with their financial goals and risk preferences.
