Author: Arunkumar Krishnakumar, CoinTelegraph; Translated by: Tao Zhu, Golden Finance
1. What is a corporate treasury?
The corporate treasury is the financial nerve center of the enterprise, tasked with ensuring liquidity, managing risk, and optimizing returns. They are traditionally conservative, relying on fiat currency, bonds, and other stable investments. However, MicroStrategy has adopted Bitcoin as its primary reserve asset, breaking this mold.
The main functions of the corporate finance department include the following.
Liquidity management: Ensuring the company has enough cash to meet its obligations. This also involves ensuring there is no liquidity mismatch between assets and liabilities. If short-term debts are expected to be financed by
long-term asset financing, that would be a significant risk.
Risk mitigation: Managing interest rate fluctuations, currency risk, and credit risk. Typically, there are risk management teams specifically responsible for market risk, credit risk, operational risk, and liquidity risk. The treasury closely collaborates with these functional departments to ensure that its financial decisions consider all these risk factors.
Short-term investments: Corporate finance holds the company's assets. It can be equity, debt, or simply the 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: Handling loans and credit to maintain optimal leverage is an important function of the treasury. This function is often referred to as asset and liability management (ALM). As mentioned earlier, this function is not only responsible for managing the company's liabilities but is also critical for ensuring there is no duration mismatch between assets and liabilities. The company cannot plan to fund liabilities (debt interest payments) due in a week with assets maturing within a month.
Strategic planning: Supporting long-term goals through effective capital allocation is one of the strategic functions of corporate finance.
Thus, 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 the impact of market downturns or liquidity crises while ensuring they achieve optimal returns on the company's remaining funds. They should also manage risks during periods of market volatility and stress conditions.
This is the crux of why MicroStrategy incorporated Bitcoin into its treasury, challenging traditional norms and adopting a high-risk, high-reward strategy. Thus, this bold strategy 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.
2. MicroStrategy: A Visionary Bet on Bitcoin
MicroStrategy was once the 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 has achieved a remarkable transformation.
By 2002, MicroStrategy's stock price hovered between $1 and $2, reflecting market disillusionment and internal challenges. Over the next two decades, the company regained influence with 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 against fiat inflation. He believes the purchasing power of the dollar is rapidly eroding, while Bitcoin has excellent value retention due to its limited supply. This strategy has transformed MicroStrategy into a hybrid of a software company and a cryptocurrency investment vehicle.
MicroStrategy's journey of accumulating Bitcoin
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 needs to comply with mainstream financial service regulations while ensuring it can handle volatile assets like Bitcoin.
Stock issuance: The company issues new shares to raise funds, benefiting from the acceptance of Bitcoin and the resulting increase in stock price. The rise in Bitcoin prices alleviates the risk of selling pressure brought about by new stock issuance. This strategy must be timed appropriately.
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: Leveraging existing Bitcoin holdings enables the company to obtain additional liquidity without diluting equity.
By employing a combination of the above strategies, MicroStrategy has built a treasury holding $22 billion worth of Bitcoin.
3. Timeline of MicroStrategy's Bitcoin acquisitions
MicroStrategy's bold Bitcoin acquisition strategy, utilizing convertible notes and dollar-cost averaging, transformed it from a struggling software company into a Bitcoin proxy, boosting its stock price over 1,000 times and redefining its market image.
Here is their timeline for acquiring Bitcoin:
As you can see, MicroStrategy adopted a consistent dollar-cost averaging approach to purchase Bitcoin under varying market conditions to mitigate price volatility. The company has also partnered with institutional-grade custodians to ensure secure storage.
MicroStrategy transformed from a struggling software company into a Bitcoin proxy, with its stock price soaring significantly. Starting at $2 in 2002, the price skyrocketed over 1,000 times, peaking at over $2,000, primarily due to the rapid rise of Bitcoin and investors perceiving MicroStrategy as a way to gain exposure to Bitcoin investments without directly purchasing cryptocurrencies.
Bitcoin has historically outperformed traditional investments such as bonds or cash equivalents. MicroStrategy has capitalized on this trend, significantly boosting its market capitalization and gaining a new position in the tech and finance sectors. While this may seem like a very aggressive funding management strategy to many, most initiatives that achieve exponential growth in capital markets initially appear to be anomalous decisions.
4. Returns of using Bitcoin as a treasury reserve
MicroStrategy's Bitcoin strategy has significant advantages. While the financial benefits are undoubtedly an important aspect of this strategy, MicroStrategy has also successfully built brand equity through this financial management strategy.
Similar to gold, Bitcoin can hedge against currency devaluation. This bold strategy has attracted forward-thinking investors seeking to participate in Bitcoin's growth. Banks traditionally rely on fractional reserve banking, which can make companies vulnerable during times of crisis, as evidenced by the collapse of Silicon Valley Bank.
Unlike banks, Bitcoin provides liquidity at any time through a decentralized global market, enabling companies to quickly obtain 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 due to its business fundamentals but because of its groundbreaking financial management strategies.
Compared to traditional financial assets, Bitcoin's limited supply and increasing adoption have yielded substantial returns for MicroStrategy investors. Despite all these positive factors for MicroStrategy, risks still exist for them and for those looking to draw inspiration from this strategy.
5. Risks and challenges of using Bitcoin as a treasury reserve
Despite the many advantages of Bitcoin, it also presents challenges and potential pitfalls as a financial asset. Building corporate finance on an asset that can drop in value by up to 75% during a bear market requires considerable planning.
Volatility risk
The price volatility of Bitcoin can greatly impact 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 actions and sentiment.
In times of market pressure, Bitcoin prices decrease, leading to declines in the company's stock price, and if debt matures simultaneously, the company's balance sheet may face systemic collapse. Moreover, bondholders may not convert bonds into stocks, leading to cash repayment, which could exacerbate MicroStrategy's financial condition.
For MicroStrategy, it successfully created a record of managing one of the deepest Bitcoin bear markets, thereby mitigating 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 purchases will be made with additional funds raised by the company in 2024. 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 will create a vicious cycle, similar to Terra, where the balance sheet shrinks exponentially as Bitcoin must be sold to build cash positions, while the price of Bitcoin continues to decline in the process of obtaining cash.
If the corporate finance department falls into this vicious liquidity crisis, it will also struggle to raise more funds.
Regulatory risk
With the approval of Bitcoin exchange-traded funds (ETFs), the regulatory risks of cryptocurrencies have diminished in 2024. However, the accounting treatment for companies holding cryptocurrencies on their balance sheets still lacks clarity.
Regulatory shifts 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 crucial, the trend of over-adopting Bitcoin may undermine the stability of the broader corporate financial ecosystem, amplifying risks during economic downturns.
Ultimately, companies considering incorporating Bitcoin into their treasury must weigh the commitment to Bitcoin against the risks to determine if it aligns with their financial goals and risk preferences.
