What is a corporate finance fund?
The main functions of corporate finance funds include the following:
Liquidity Management: Ensuring that the business has enough cash to meet its financial obligations. This also includes ensuring that there is no liquidity imbalance between assets and liabilities. If short-term liabilities are expected to be paid with long-term assets, this is a major risk.
Risk Mitigation: Managing risks associated with interest rate, foreign exchange and credit fluctuations. Typically, dedicated risk management teams handle market risk, credit risk, operational risk and liquidity risk. The fund works closely with these departments to ensure that their financial decisions take into account all risk factors.
Short-term investments: The corporate treasury department will hold the company’s assets, which can be stocks, bonds, or simply cash flows generated by the business. The treasury department is responsible for allocating excess funds into low-risk, highly liquid assets to generate returns. Their role is to maximize the return on the company’s assets while maintaining the lowest possible risk.
Debt Management: Managing loans and credit to maintain appropriate leverage ratios is an important function of the finance department. This function is often referred to as asset and liability management (ALM). As mentioned earlier, not only does this function manage the financial obligations of the company, but it is also important to ensure that there is no mismatch in the maturity of assets and liabilities. A company cannot plan to pay a debt (such as interest) due next week with assets that are due next month.
Strategic Planning: Supporting long-term goals through efficient capital allocation is one of the strategic functions of a financial fund.
As a result, fund managers are always looking to balance risk and return. Their main goal is to protect the company’s assets from market or liquidity crises, while ensuring optimal management of profits from the company’s surplus funds. They also have to manage risk during periods of market volatility and stress.
This explains MicroStrategy’s decision to include Bitcoin in its corporate finance fund, which challenged traditional norms and adopted a strategy that was high risk, but also had the potential for high returns. This bold strategy not only transformed the company’s balance sheet, but also impacted its stock performance, positioning the company as a pioneer in cryptocurrency adoption.
Other companies that have adopted or are considering using Bitcoin as a reserve asset in their financial funds include: Metaplanet, Semler Scientific, DeFi Technologies, Solidion Technology, Nano Labs, and Cosmos Health.
MicroStrategy: A Bold Bet on Bitcoin
In 2002, MicroStrategy's stock price fluctuated between $1 and $2, reflecting market disappointment and internal challenges. However, over the next two decades, the company regained attention thanks to its data analytics tools. However, the company's breakthrough came in 2020 when it decided to include Bitcoin as a reserve asset in its financial fund.
Accept Bitcoin
Michael Saylor, co-founder and executive chairman of MicroStrategy, sees Bitcoin as a hedge against inflation. He argues that the purchasing power of the dollar is rapidly diminishing, while Bitcoin, with its finite supply, provides a better hedge against inflation. This strategy has transformed MicroStrategy into a hybrid of a software company and a cryptocurrency investment vehicle.
MicroStrategy's Accumulation Journey
As of November 24, 2024, MicroStrategy holds an impressive 226,500 BTC, cementing the company's position as the largest Bitcoin holder in the global corporate world.
MicroStrategy used a variety of fundraising strategies to fund its Bitcoin purchases, strategies that adhered to conventional financial standards while also being able to handle a volatile asset like Bitcoin.
Issuing shares: The company issued new shares to raise capital and capitalize on the rising share price as Bitcoin gains more market acceptance. The rising Bitcoin price has helped mitigate the risk of a sell-off from the new shares. This strategy needs to be executed at the right time.
Debt financing: Convertible bonds, with low interest rates and future conversion options, have become important tools. In addition, senior secured debt securities have also helped companies raise capital to buy Bitcoin during price drops.
Free Cash Flow: Operating profits have been redirected to bolster the Bitcoin fund.
Bitcoin-Based Borrowing: Using existing Bitcoin assets helps companies gain additional liquidity without having to dilute shares.
With the combination of the above strategies, MicroStrategy has built a financial fund with $22 billion worth of Bitcoin.
MicroStrategy's Bitcoin Purchase Process
Here's MicroStrategy's Bitcoin buying process:
Source: Cointelegraph
As you can see, MicroStrategy has adopted a dollar-cost averaging approach, which means buying Bitcoin across different market conditions to minimize price volatility. The company has also partnered with qualified custody partners to ensure safe storage.
MicroStrategy’s transformation from a struggling software company to a Bitcoin “prototype” has sent its stock soaring. From a price of just $2 in 2002, MicroStrategy’s stock has increased more than 1,000-fold, reaching over $2,000 at its peak, largely due to Bitcoin’s meteoric rise and how investors see MicroStrategy as an indirect way to gain exposure to Bitcoin without having to buy the cryptocurrency directly.
Bitcoin has historically proven to outperform traditional investments like bonds and cash. MicroStrategy’s embrace of this trend has helped the company grow its market capitalization significantly, while also giving it a new identity in the technology and finance space. While this strategy may be seen as a bold financial decision, in reality, most high-growth capital market investments seem unconventional and risky at first.
Benefits of Using Bitcoin as a Reserve Asset in Financial Funds
Bitcoin offers protection against currency devaluation, similar to gold. This bold strategy attracts forward-looking investors who seek exposure to Bitcoin’s growth. Traditional banks rely on the fractional reserve banking model, which can put businesses at risk during times of crisis, as seen with the collapse of Silicon Valley Bank.
Unlike banks, Bitcoin provides instant liquidity through global decentralized markets, allowing companies to access capital quickly without relying on central institutions. Maintaining a Bitcoin treasury helps companies reduce operational risks and ensure timely access to liquidity.
MicroStrategy has positioned itself as a leader in financial innovation, frequently mentioned alongside Tesla and Nvidia — not for its traditional business elements, but for its groundbreaking financial fund management strategy.
With its limited supply and growing adoption, Bitcoin has delivered superior returns to MicroStrategy investors compared to traditional reserve assets. Despite the many advantages MicroStrategy has achieved, there are still risks not only for them but also for those who want to learn and apply this strategy.
Risks and challenges of using Bitcoin as a reserve asset in financial funds
Price volatility risk
Bitcoin prices can be highly volatile, significantly impacting a company’s balance sheet, causing fluctuations in reported earnings and shareholder sentiment. When prices and market sentiment decline, the company may be forced to sell Bitcoin, which in turn leads to further price declines and negative sentiment.
In a market crisis, when the price of Bitcoin falls and the company's stock price falls with it, if the debts mature at the same time, there could be a systemic collapse of the balance sheet. Additionally, if creditors do not convert their bonds into shares, the company will have to pay cash instead, which could worsen the financial situation.
In MicroStrategy’s case, the company has mitigated risk by demonstrating sound financial management, even during one of Bitcoin’s sharpest downturns. The company’s newly issued debt matures in 2029, giving it enough time to continue generating cash flow from its core business, ensuring that its Bitcoin-backed treasury remains stable even in difficult markets.
The previous convertible bond issued by MicroStrategy in 2020 was due in 2025 and was redeemed through additional capital the company raised in 2024. This shows that the company has a long-term financial plan, stretching back more than half a decade.
Liquidity risk
Having to liquidate Bitcoin during a market downturn can compound losses and destabilize the market. This creates a vicious cycle, similar to what happened to Terra, where the company was forced to sell Bitcoin to raise cash, but in the process, Bitcoin’s price continued to fall, severely shrinking the company’s balance sheet.
This would also make it difficult to raise additional capital if the company's treasury is stuck in a severe liquidity crunch.
Legal Risk
Regulatory risks for cryptocurrencies have eased in 2024 thanks to the approval of Bitcoin ETFs. The US election results also suggest that a pro-crypto government could start to promote innovation in the sector from 2025. However, there is still a lack of clarity on how companies holding cryptocurrencies on their balance sheets will be treated in accounting.
Regulatory changes, such as capital gains taxes or outright bans, could devalue Bitcoin assets.
MicroStrategy’s example could serve as inspiration for other companies to invest heavily in volatile assets. While diversification is an important element of risk management, over-indulgence in Bitcoin could destabilize corporate financial systems. This could increase risk during recessions, when Bitcoin’s price volatility could negatively impact corporate finances.
Ultimately, companies considering Bitcoin as a financial asset need to carefully evaluate the potential benefits of Bitcoin and the potential risks involved. This will help them determine whether this strategy is consistent with their financial goals and risk tolerance.
