Does Bitcoin belong in corporate treasuries?

By Zain Jaffer

Is 2024 going to be the year that Bitcoin makes it to your corporate treasury? Perhaps not yet in your case, but this may soon be a possibility given the approvals of more than twelve spot Bitcoin Exchange Traded Funds (ETF) set to be done in early January. The investment advisors from the fund issuers like Blackrock, Fidelity, Van Eck, Ark Invest 21 Shares, Bitwise, and others are now allowed to legally offer these to their clients since they are already approved and regulated by the SEC. Here are a few reasons why Bitcoin may soon join the roster of common assets in corporate treasuries.

The SEC prefers that people not handle Bitcoin directly

In late 2023 the major stumbling block was the phrase “cash create” meaning that once the ETF is redeemed, the bearer will get cash in US dollars and not the underlying Bitcoin digital asset. This has tax implications of course that the IRS will need to clarify, but at the moment the fact that a spot Bitcoin ETF is approved is a major milestone in US investment history, ranking up there with the approval of the first Gold spot ETF.

Favorable accounting rules for digital assets in balance sheets

The 2023 approval by the US Financial Accounting Standards Board (FASB) to allow digital assets to use fair value “mark to market” accounting is also a significant development that makes it even more attractive to put these assets in corporate books. Before, if the price of the underlying digital asset falls, you would need to mark this loss of value in the balance sheet. However, if the price of the digital asset rose, you were not allowed to reflect this. Now the FASB has agreed to let this price appreciation be reflected.

This makes Bitcoin and the spot ETF a good hedge since it does not follow the movement of stocks and bonds. In technical terms it is decorrelated, or not correlated, to those traditional assets. Although Bitcoin is still considered a risk-on asset, the price volatility (or beta) is more a function of who the current buyers and sellers are. Retail investors are generally a jumpy sort, although the so-called “diamond hand” buyers who buy Bitcoin and do not sell are a significant number. It is hoped that when the big funds, especially the pension and sovereign wealth funds come in, the price will stabilize further.

With the entry of giant funds who will buy into these spot ETFs, the issuers will need to buy Bitcoin and have their approved partner (for many issuers it is Coinbase) custody this on the client’s behalf.

A perpetually scarce asset

One of the new things about Bitcoin is the fixed 21 million number. Unlike most other assets, the rules of this new asset ensure that no new Bitcoin can be created beyond 21 million. Hence the popular price curve that you studied in Economics 101 should be applied with the supply held at a constant. In reality, as more Bitcoin is removed from exchanges by long term holders (also called “hodl”ers) or lost because of forgotten passcodes, the available supply is actually shrinking.

This fixed supply feature is also what makes Bitcoin an inflation hedge, considering how much the Fed has printed a large amount of US dollars these past few years because of the pandemic. Adjusted for inflation, those outsized returns from the stock market or higher yields on certain treasury bonds may not seem as large if the currency supply has inflated significantly.

Most people cannot imagine logarithmic or exponential price movements because their frame of mind is in a linear mode. However, when something becomes popular, it is like sharks arriving at a feeding frenzy where there is little food to go by. It becomes crazy.

Price fluctuations vs. long-term growth

Probably most sane corporate treasurers do not want to see their balance sheets fluctuate to dangerous levels, hence most experts recommend a tiny percentage of around one percent just to take advantage of the alpha (the excess return to the S&P) and minimize the beta (volatility relative to the S&P).

It will be interesting to see how this plays out. We probably should assume that with the entry of Wall Street, their practices of being able to move markets if they want to will be at play. Hopefully to keep prices more stable and grow long term, instead of simply short-term plays that put everyone’s perception of the asset at risk.

Maybe there is room for a little uncorrelated Bitcoin in your corporate treasury. Not enough to disturb the stability of your balance sheet, but just enough to hopefully offset any loss that other traditional assets may take over the next few years as it goes off in another direction from others.

Author Bio

Zain Jaffer is an accomplished entrepreneur and investor, actively involved in a range of investments including real estate, technology start-ups, private equity, and digital assets through his family office, Zain Ventures. He also supports underrepresented causes and underserved communities through the Zain Jaffer Foundation.