Under the unprecedented economic situation, enterprises need an unprecedented response, that is Bitcoin.
Written by: Ria Bhutoria and Tess McCurdy, both from Fidelity Digital Assets Compiler: Zhan Juan
This year, we have witnessed a new trend in corporate treasury configured Bitcoin. MicroStrategy Incorporated (MSTR) uses Bitcoin as its main asset reserve and bought 38,250 Bitcoins for $425 million between August and September 2020.
Square , Inc. (SQ), which supports the buying and selling of bitcoins through the Cash App, also has a similar move. This company purchased US$50 million worth of bitcoins (approximately 4,709 bitcoins) in October 2020. In addition, Stone Ridge, Mode Global Holdings PLC and Tudor Investment Corporation and other companies and institutional investors also announced configured Bitcoin year.
One of the main responsibilities of corporate treasury is to manage corporate cash and liquidity. According to the scale of the balance sheet and the nature of the business, corporate treasury can hold a series of assets to manage risks and increase returns. In order to find a balance between risk and return, they must be considered the short-term and long-term liquidity needs, changes in the exchange rate factor of their business, changes in interest rates may affect the macroeconomic environment. Traditionally, corporate treasury cash management is more conservative capital allocation will mostly on low-risk assets (such as bank deposits, money market funds, treasury bills, commercial paper and repurchase agreements), but the changing economic environment may Will prompt financial staff to reconsider the feasibility of these strategies.
In this article, we examined the risk of corporate treasury due to new virus outbreaks and crown historic expansion of fiscal and monetary policy faces, and they might consider the reasons Bitcoin configuration in the balance sheet.
Economic environment and its impact on corporate finances
Blockade to curb the epidemic and the implementation of economic and shut down due to unemployment, resulting in a variety of industries to reduce the company’s cash flow. At the same time, central banks and governments have cut interest rates to zero interest rates (interest rates even below zero), and injected trillions of dollars in stimulus funds global economy. These developments have led to reduced corporate profits, low excess cash yields, and potential depreciation of cash and cash equivalents. Therefore, the common corporate treasury functions of cash and liquidity management, operational risk management and capital optimization is facing some challenges.
Cash flow and profitability
Epidemic resulting in a blow to consumer demand, thereby undermining the balance sheet, cash flow and profitability of enterprises, the financial position precarious. In the second quarter of 2020, the net profit margins of all 11 industries in the S&P 500 index were lower than expected, and the net profit margins of 9 industries were lower than the 5-year average. The epidemic has led to a decline in cash flow, which makes it particularly important to have excess funds and liquidity on hand. At the same time, it is also necessary to have ” irrelevant ” investments that can withstand recessions to better withstand the crisis.
interest rate
The world’s largest number of countries have cut interest rates to try to boost the economy in 2020 by cheap credit. In the United States, the Federal Open Market Committee (FOMC) lowered the federal funds rate 150 basis points to 0-25 basis points, the full rate cut. In the UK, the Bank of England cut interest rates twice in the second to cut its key lending rate from 75 basis points to 10 basis points. The European Central Bank sets three key interest rates-the main refinancing operation interest rate, the marginal loan arrangement interest rate and the deposit arrangement interest rate, which are 0 basis points, 25 basis points and -50 basis points respectively.
Corporate finance sector, low interest rates may be a double-edged sword. On the one hand, companies may borrow new debt or lower interest rates to refinance existing debt. On the other hand, companies with excess cash will be affected because they cannot obtain attractive yields through traditional income-generating investments. In addition, companies sitting on large amounts of excess cash and low-yield financial instruments may face shareholder pressure due to holding unproductive funds. In the interest rates at record lows, printing a record high level of environment, over time, sitting on huge cash could undermine the real value of capital, thereby destroying shareholder value, which is set aside funds for future crises Conflicting needs.
Even those countries that do not interest rates below zero, may also face negative real interest rates (that is, the nominal interest rate minus inflation) situation. For example, the daily real yield curve of all US Treasury bonds is currently negative. Even as of mid-November 2020, the actual yield of the Bloomberg Barclays Investment Grade Corporate Bond Index was only 0.2% .
Money printing and potential inflation
The scale and coordinated nature of the monetary and fiscal policy response to the new crown epidemic is unprecedented. According to McKinsey’s research on 54 economies that account for 93% of global GDP, governments announced a $10 trillion stimulus plan within two months, three times the amount during the 2008-2009 global financial crisis. In the United States, the Fed (Federal Reserve) promised to buy unlimited amounts of government guaranteed bonds (also known as quantitative easing or QE), and for the first time committed to buy billions of dollars in corporate bonds, including the riskiest investment-grade bonds.
In addition, during the global financial crisis, the Fed and other central banks to print money to the banks, which use the money to expand the reserves, rather than creating new loan, which means that money did not enter the broad money supply, there is no flow in the real economy . This time, the bank has sufficient capital, and the government will directly issue the newly printed currency of the central bank to individuals and businesses. For example, in the United States, Congress passed the US$2 trillion CARES Act, which directly provided fiscal stimulus and promoted the growth of broad money supply (M2), from US$15 trillion in February 2020 to 190,000 in November. Billion dollars . In contrast, from January 2008 to January 2010, the growth of M2 in the two years was less than US$1 trillion. The Federal Reserve defines M2 as M1 (the sum of currency held by the public and deposits in depository institutions) plus savings deposits, small denomination ($100,000) time deposits, and retail money market mutual fund shares.
Quantitative easing itself will not cause inflation, and most of it will stay in bank reserves. However, quantitative easing and large fiscal deficits combined together, will lead to inflation, so that the supply of broad money inflows, the inflow of commercial bank deposits from the public.
——Lyn Alden, founder of Lyn Alden Investment Strategy
Although deflationary forces are at work (unemployment, blockade, supply chain disruption, population aging, and technological progress), the rapid expansion of broad money supply as measured by M2, coupled with corresponding loose monetary and fiscal policies, may cause a situation that is too many dollars chasing too few assets and (or) of goods and services – in other words, inflation, and a decline in purchasing power of money more quickly. Then, companies will face the risk of inflation, and the purchasing power of cash relative to the prices of goods, services, and investments will begin to decline.
Lynn Alden (Lyn Alden) describes three types of inflation – monetary inflation, asset inflation and consumer price inflation (CPI). After currency inflation (increase in the broad money supply as measured by M2), asset inflation (increase in investable asset prices and valuations) and consumer price inflation (increase in the price of non-financial goods and services) will not necessarily be guaranteed. , But it is usually a precursor to the latter two situations.
Depending on the type of business, companies may be affected by asset price inflation and consumer price inflation to varying degrees. For example, asset price inflation is likely to lead to increased value of the assets or businesses want to invest in the acquisition, while consumer price inflation is likely to lead to increased purchasing power relative to the cash inventory costs.
Why corporate treasury would consider using Bitcoin
Any person who has a large cash position – retail investors, institutional investors, listed companies and as of 2020 – are evaluating how to respond to the unique health and economic situation, as well as historic monetary and fiscal policy response. These stakeholders some of whom concluded that: an unprecedented economic situation requires an unprecedented response, and that is Bitcoin.
Enterprise Treasury Allocation Bitcoin
Bitcoin address the current challenges in the economic environment has unique potential, which leads to a number of companies, including Square, MicroStrategy and Stone Ridge Holdings Group, including the configuration of bitcoins on the balance sheet.
Square
Jack Dorsey , CEO of Square and Twitter, believes that Bitcoin has the potential to become the native currency of the Internet: “The world will eventually have a single currency, and the Internet will have a single currency. I personally think it will be Bitcoin.”
Square’s positioning of Bitcoin as the potential to become a more common currency in the future led the company to invest USD 50 million in Bitcoin on its balance sheet (1% of total assets in the second quarter of 2020). Square stated that this is in addition to the company’s Bitcoin service (Cash App), development work (Square Crypto) and alliance work (cryptocurrency open patent alliance). Square’s rationale is to align financially with its mission of promoting economic empowerment and achieving a more inclusive financial system.
MicroStrategy
MicroStrategy (MSTR) is the first public company to deploy a large number of bitcoins on its balance sheet. This company started from USD 250 million in August 2020 to USD 175 million in September 2020. In the most recent 2020 An additional US$50 million was added in December, which stems from its new capital allocation and financial management strategy for capital that exceeds its working capital requirements. The driving factor of this decision is that the company is looking for a new financial reserve asset to prevent asset inflation.
According to MicroStrategy CEO Michael Saylor, the company’s $500 million in cash is like ” a piece of melting ice .” This prompted Saylor and the broader company and board of directors to consider and eventually allocate a large amount of funds to Bitcoin.
Saylor and MicroStrategy cited many factors when configuring Bitcoin, but to a large extent, their decision was driven by the belief that Bitcoin is better than precious metals such as gold (for example, it is more scarce and more lack of flexibility), can provide potential upside as the asymmetry of those 10 years ago, a large technology companies like.
MicroStrategy also initially made a takeover offer to shareholders in August 2020, intending to repurchase up to $250 million in stock through an improved Dutch auction within 12 months. Certain shareholders took advantage of this option, causing MicroStrategy to repurchase approximately 430,000 shares for approximately $60 million. After the expiration of the tender offer, MicroStrategy used $175 million in remaining funds to acquire Bitcoin.
Stone Ridge Holdings Group
Stone Ridge Holdings Group (SRHG) is the parent company of Stone Ridge Asset Management (a $10 billion asset management company) and New York Digital Investment Group (NYDIG). SRHG announced that it will hold more than 10,000 Bitcoin as a major part of its strategy of financial reserves, said because bitcoin advantages relative to cash, global printing money “out of control”, “not supported”, and the actual rate of return More and more negative.
How does Bitcoin respond to the current economic situation
Cash flow and profitability
As we “in Bitcoin role as an alternative investment has nothing to do” as discussed in the report, the impact of demand Bitcoin is usually caused by the health and economic crisis. Therefore, when the core business and other potential investors adversely affected by economic conditions, the company may also benefit from the advantages of diversification Bitcoin potential outstanding performance and liquidity situation. Bitcoin provides upside potential for long-term investments, while providing a liquidity profile for short-term investments. Therefore, the allocation of bitcoin can allow companies to maintain and grow their purchasing power over a period of time, provide a buffer during periods of low profit and cash flow, and maintain sufficient liquidity to repay short-term debt.
interest rate
Assets such as Bitcoin and gold are sometimes criticized because they do not generate revenue by themselves. However, in the case of rate of return of zero or less than zero, the opportunity cost configuration Bitcoin has decreased significantly, asymmetric risk-reward holders of non-income assets (relative to the holders of both the nominal or actual negative returns of assets The attractiveness of) has risen significantly. Just as institutional investors are reassessing their allocation in fixed income securities issuance, we see that some corporate assets are doing the same thing.
Money printing and potential inflation
Bitcoin is a scarce asset Verifiable, with clear monetary policy, which is in stark contrast to the lawful currency of the unlimited expansion of supply. The inelasticity and predictability of Bitcoin’s monetary policy, as well as the growing importance of these characteristics, have helped drive Bitcoin’s ” store of value ” argument. In other words, some institutional investors and companies have begun to view Bitcoin as an emerging store of value, which can benefit from the asset expansion of a fixed amount of assets, and/or the purchasing power of fiat currencies due to potential consumer prices In the case of inflation and decline, it provides a wealth preservation tool.
Bitcoin risk management summary
As we discussed above, treasury executives face many risks in the management of cash, many of the health risks due to the current economic situation and exacerbated. With the new method of optimizing the balance sheet of the company to find, many companies are turning to Bitcoin to offset potential losses. In this table, we have summarized the many risks faced by corporate treasury during periods of economic growth and recession, and how Bitcoin provides a potential solution.
in conclusion
The unprecedented current economic crisis is driving corporate treasury will be considered forward-looking Bitcoin into their balance sheets. Square, MicroStrategy, Stone Ridge Holdings Group and other companies represents a trend, as companies are weighing the risk of interest rates at historic lows, the new crown epidemic caused by reduced liquidity as well as monetary and fiscal stimulus policies have led to the potential loss of purchasing power of cash and so on, This trend may continue to grow.
Select Configure Bitcoin company to benefit from the recent outstanding performance, because from August to December, the value of Bitcoin rose to more than $ 19,000 from less than $ 12,000. For example, Square has about 4,709 Bitcoins (purchased in October 2020), valued at approximately US$90 million; MicroStrategy has about 40,824 Bitcoins (purchased in August, September, and December 2020), as of 2020 It was worth approximately US$780 million on December 7, 2015. On the other hand, the value of cash has depreciated this year relative to the commodities purchased by consumers and other legal currencies. According to Bloomberg’s US Dollar Spot Index, it has fallen 5% so far this year.
We expect that with different types of investors seeking returns asymmetry associated with traditional market of low investment, diversification trend Bitcoin participants will continue.
