Why corporate treasurers are paying closer attention to cryptocurrencies
‘Digital gold’ secures a place on the corporate balance sheet
‘Digital gold’ secures a place on the corporate balance sheet
Corporate treasurers are exhibiting a growing interest in boosting returns by investing in cryptocurrencies.
Led by automaker Tesla and online analytics firm MicroStrategy, public companies increasingly view cryptocurrencies as an important element in the new frontier of cash and the quest for yield.
As of January 26, 2022, a total of 27 US publicly-listed companies held around 217,000 bitcoins in their treasuries for a total notional value of more than $8bn, according to data from tradingplatforms.com.
With holdings of bitcoin valued at more than $4.5bn, a sizeable increase on the original outlay of approximately $3.6bn, MicroStrategy boasts the largest stockpile of the cryptocurrency of any US-based company.
However, uptake among other corporates is limited. In fact, just five percent of finance executives said they planned to hold bitcoin as a corporate asset, according to a 2021 survey by Gartner.
Institutional ownership is certainly on the rise, however. Goldman Sachs now offer investment in underlying and derivatives markets for cryptocurrencies.
And Genesis Trading, a prime brokerage for digital assets, is seeing increased global interest by corporate treasurers across all its products and services.
“That’s not just in the US but in other regions like Latin America and Southeast Asia,” says Marc Yaklofsky, head of communications, citing how treasurers are engaging with the spot trading desk to get price exposure to bitcoin and other assets.
Corporate treasurers are “looking to manage price volatility through our derivatives desk in the form of collars and other strategies,” says Yaklofsky. And once they have bought assets, they regularly go through Genesis’ lending desk to loan out the assets.
“[Treasurers] often earn yield above that of traditional assets,” he adds. In 2021, the Genesis Trading executed over $130bn of loan transactions.
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But these could be dangerous waters for corporate treasurers to swim in, warns Patrick Kunz, founder and CEO of treasury consultancy Pecunia.
“Yes, treasurers are looking at cryptos because the returns are huge, but it’s often a no-go as an asset class. Treasurers are the guardians of cash and should be risk averse and prudent. Their goal is to maintain cash at a low risk – return comes second.”
Adding crypto as an asset class, he adds, would mean moving to the opposite end of the risk spectrum from AAA or AA-rated MMFs, government or other ultra-safe bonds because of the extreme volatility of digital currencies.
The allure of crypto remains however, especially when corporate cash continues to pile, with companies globally holding around $6.84trn in cash and other liquid instruments in 2021, according to data from S&P Global.
Carolyn Wilkins, an external member of the Bank of England’s Financial Policy Committee, noted in a forensic analysis of digital currencies how risk-averse treasurers have watched the crypto market explode from $16bn five years ago to about $2.6trn today, posting an annual growth rate of over 150 percent.
Even though $2.6trn is a small fraction of the $250 trillion global financial system, it’s a market that is, she says, “challenging a traditional financial ecosystem that is, in places, inefficient and exclusive.”
Crypto proponents also cite the decline of the dollar as the dominant reserve currency as a contributing factor behind bitcoin securing its place on company balance sheets.
“The value of the dollar over time is getting weaker and weaker,” argues Dave Sackett, CFO of Ulvac Technologies, the US subsidiary of a Japanese vacuum manufacturer, who is a crypto investor in an individual capacity but believes boards should embrace bitcoin sooner rather than later.
“It’s a hedge against the future right now,” said he says.
Despite growing acceptance of bitcoin by corporate treasurers, cryptocurrencies are largely unregulated, leading to financial instability and a higher degree of risk compared to other assets.
“Much of the crypto-related illicit activity has so far been made up of scams and darknet markets,” added Wilkins, citing a 300 percent jump in ransomware attacks through 2021, as well as the fact that 95 percent of crypto assets are unbacked.
“Bitcoin has no intrinsic value and lacks a credible mechanism to stabilise its value, so its price is highly volatile,” said Wilkins. “This means it is not useful as a store of value or a means of payment.”
Ultimately, says Kunz, “treasury should look at crypto for what it is meant to be – payments not an asset class,” he says.
“If a company accepts crypto as a means of payment it basically becomes a new currency for the treasury which then can be hedged into the functional currency of the company, thereby eliminating currency risk. Some fintech’s can also help with this process.”
But if the price of cryptos continues to climb, more public companies are likely to be tempted to buy. That’s certainly what Gartner has forecast, with the research firm estimating that 20 percent of large businesses will be using digital currencies for payments, stored value, or collateral by 2024.