Fidelity Digital Assets Dives Into Why Institutions Are Adding Bitcoin to Treasury Reserves
Over the year, several companies have chosen to add Bitcoin to their Treasury reserves, including MicroStrategy, Square Inc., and Tudor Investment Corporation. The latest two, Canada-based BIGG Digital Assets and MassMutual, a 169-year old insurance firm, also added $3.6 million and $100 million in BTC to their reserves in 2020, respectively.
As one of the first institutional investment-focused firms on Bitcoin, Fidelity Digital Assets released a synthesis report on the growing number of institutions adding BTC as a treasury reserve asset – and crucially, why more companies will consider adding Bitcoin-backed treasuries in the future.
In our latest blog, we examine how some corporate treasuries are navigating the risks and impact of historic fiscal and monetary policy expansion during the coronavirus pandemic, and why they may consider a balance sheet allocation to bitcoin.
— Fidelity Digital Assets (@DigitalAssets) December 10, 2020
From August through October, a billion-dollar publicly traded firm, MicroStrategy, added over 40,000 Bitcoin for $475 million into its Treasury coffers. Less than three months later, Michael Saylor, MicroStrategy’s CEO, announced a doubled down bet on BTC selling $635 million of senior convertible notes to purchase the ‘digital gold.’
The huge bet paid off wonderfully across Q4 2020 for MicroStrategy’s stock (MSTR), which reached a 20-year high after the firm recorded over 50% profit on its BTC Treasury reserves. Despite CITI Bank downgrading its stock from “neutral” to “sell” in their latest report (due to “disproportionate focus on BTC), the firm looks to add even more, Saylor confirmed.
Additionally, Square Inc., founded by Twitter CEO and Bitcoin enthusiast Jack Dorsey, introduced BTC buying and selling through Cash App earlier in the year. The payments firm purchased $50 million worth of bitcoin (or 4,709 bitcoins) in October 2020, representing 1% of their Treasury reserve.
Other institutions such as Stone Ridge, Mode Global Holdings PLC, and Tudor Investment Corporation have also announced Bitcoin allocations this year.
So what is causing a sudden increase in corporations adopting Bitcoin-backed Treasury reserves?
Damaged financials, cash flows, and profitability
According to the report, three main issues affect a corporation’s decision to hold BTC in its reserves. First, the global COVID-19 pandemic “damaged corporate balance sheets, cash flows, and profitability,” which put most corporations in a precarious position. The sudden reduction in cash flows raises the importance for these institutions to put away excess cash in uncorrelated investments to fight off the recession.
Bitcoin is well-diversified from the demand shocks that health and economic crises cause on stocks, bonds, and traditional finance markets. The report further states,
“Companies may also benefit from bitcoin's diversification benefits, potential outperformance, and liquidity profile when the core business and other potential investments are disadvantaged by the state of the economy”.
Moreover, BTC offers companies the potential of a longer-term investment profile while also offering liquidity to shorter-term investors. This will help companies maintain their liquidity while diversifying their investments, providing a buffer in difficult times.
Ultra-low interest rates across the world
Secondly, interest rates across the world reached yearly lows as the pandemic struck to stimulate borrowing. However, while corporations may rejoice in having a cheaper leeway for acquiring debt or refinancing existing debt at lower rates, companies with excess cash reserves may suffer as they cannot find attractive rates, the report explains.
While safe-haven assets like gold and Bitcoin generally do not generate interest yields, having these assets in your portfolio prevents cash-filed companies from avoiding negative or ultra-low interest rates, the report also states.
Finally, there has been an increase in monetary and fiscal policies globally, with money printing reaching “unprecedented levels.” McKinsey's report showed that the top 54 economies contributing to 93% of global GDP made over $10 trillion in stimulus payments in two months – over three times more than the 2008 financial crisis. This unchecked and unbalanced economic stimulus could cause a sudden hike in asset and consumer price inflation leading to corporations having less purchasing power with cash.
Bitcoin offers a verifiable and inelastic monetary supply, which differs from the expansive monetary and fiscal currently being broadcast globally. Some companies view BTC as a wealth preserving asset that could prevent inflation risk and store value.
The entry of MicroStrategy, Home Ridge, Square Inc., and Tudor Investment Corporation signals a start of the institutional investment wave in Bitcoin – and who can predict how far it can go?