Examining the Role of Cryptoassets in Corporate Treasury Management
Over the past several months, there has been a growing narrative within parts of the crypto industry that Bitcoin (BTC) could be increasingly adopted by corporations as an alternative to cash in light of worsening macroeconomic conditions and dovish central bank policy worldwide. Major BTC acquisitions by MicroStrategy ($425 million) and Square ($50 million) since August have fueled this thesis.
In a recent article, James Butterfill, an Investment Strategist at CoinShares, makes the case that corporate treasury management departments may and should look towards BTC as an alternative reserve asset. The author argues that global central bank policy over the past decade, which has been directed at both increasing the global money supply and suppressing interest rates, both of which have accelerated since the economic and financial fallout from the COVID pandemic, has driven yields on cash and fixed-income assets ever-lower, and, in some areas, such as the Eurozone, into negative territory, thus eroding the purchasing power of any balances.
Yield Differential Between US & European Banks Interest Rates
As such, Butterfill suggests that corporate treasurers are being forced into exploring alternative liquid asset classes, beyond cash and low-risk bonds, that protect purchasing power while also ideally providing a yield on investment. While BTC does not by default provide investors with a yield, the author does suggest that BTC’s has three main properties that should make it attractive to treasurers:
- Store-of-Value (Limited Supply & Disinflationary Issuance)
- Liquidity (Liquid markets available 24/7/365 across all major fiat currencies)
- Weak or Negative Correlation with Fixed-Income Assets (Provides risk management benefits)
While the notion of corporate treasurers exploring an asset as volatile and immature as BTC could easily be dismissed, the severe dislocation in the global monetary system does make conventional treasury decision-making much more fraught than in previous years. A treasurer is principally tasked with managing a company’s financial risk, in relation to liquidity, credit, currency exposure, interest rates, and operations and is responsible for conservatively managing a firm’s surplus cash. For companies in high growth sectors, particularly the technology field, large excess cash balances are not atypical, meaning that any changes in safe-haven yields can have disproportionate impacts on their treasuries’ value.
S&P 500 Companies With The Most Net Cash (March 2020)
|Company||Net Cash ($ Billions)||Sector|
|Cisco Systems||$10.0||Information Technology|
Source: Investor’s Business Daily
Although corporate treasurers are conservative in their allocations, with the risk of emergent price inflation and yields trending negative, justifying allocations in cash or government bonds may become increasingly difficult and force a reconsideration within the industry about which asset classes may be suitable for storing surplus cash. One of the core tenets of corporate treasury management is to produce returns above that of current inflation, or, in other words, maintain or grow the treasury’s purchasing power. Although inflation in the US as measured by the consumer price index (CPI) is low at just 1.2%, alternative inflation measurements suggest that the purchasing power of cash may be deteriorating faster than official numbers suggest, while asset inflation in the equity and bond markets may be pointing to future inflation in the broader economy. Furthermore, with the rapid expansion in the M2 money supply since 2008, and since the onset of the COVID economic fallout, price inflation has arguably only been kept at bay by falling velocity, as economic confidence and spending decrease. Were velocity to increase, the purchasing power of cash would likely begin to decrease substantially.
10-Year M2 Supply vs M2 Velocity
In these conditions, alternative assets that theoretically offer store-of-value properties, such as BTC and gold, may become tenable alternatives to cash and fixed-income assets for treasurers, even if they do not natively provide yields; the protection of purchasing power may prove sufficient.
Given BTC’s volatility and relative nascency, few corporations are likely to allocate significant portions of their treasury balances to cryptoassets. However, even a 1% allocation, as per Square’s allocation, would be a major bullish tailwind to BTC. With the emergence of centralized borrowing/lending platforms such as Genesis, BlockFi, Nexo, and others, allocators may in the future also be able to generate yields on any BTC allocation, just as they would with cash via traditional money markets, albeit the former examples, for now, focus on far higher risk/return models than the latter.
It is also worth considering whether any of the aforementioned arguments for BTC’s emergent role in corporate treasury management will only apply to BTC and not the wider offering of monetary-focused cryptoassets with similar supply models. While BTC undoubtedly has far greater buy-in, adoption, and usage than similar assets such as LTC, BCH, BSV, XMR & ZEC (as measured by hash power, active addresses, and transactions), their valuation difference arguably reflects these differences. With similar store of value properties, i.e. limited supply and disinflationary issuance models, such assets may also eventually be considered by corporations looking to diversify their holdings, albeit ones even further out on the risk curve than Bitcoin.