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Bitcoin-backed corporate treasuries are here to stay. MicroStrategy, Tesla, Square and a handful of other publicly traded tech companies now all hold some Bitcoin. While flat interest rates certainly sparked the trend, it’s hardly a fad.
In the early days, many cryptocurrency enthusiasts saw Bitcoin as a means to disintermediate the use of fiat currencies for direct, peer-to-peer payments. Certainly it has done this to a degree with large companies, from Overstock, to Tesla, to the Kessler Collection, and a growing number of small-medium enterprises accepting Bitcoin payments. More interestingly, with companies looking for liquid alternatives to cash holding, Bitcoin has found a place in the stores of corporate treasuries. This trend will only grow, with altcoins coming into play soon, for three reasons the rise of DeFi, the influence and validation of centralized finance and the broader impact of blockchain technology capabilities on markets and trading.
Decentralized finance helps mature the market
Thanks in part to decentralized finance, the volatile nature of cryptocurrency markets is changing. DeFi first exploited a small group of Bitcoin diehards yield farming opportunities to interest-bearing crypto-savings accounts. Ultimately, all this has resulted in digital currencies’ ability to materially impact mainstream markets as an alternative to holding bonds or treasury bills.“HODLers.” In doing so, DeFi tools attracted more investors willing and interested in holding cryptocurrency. This increased the ability of Bitcoin, and ultimately other cryptocurrencies, to drive passive returns for investors from more complex
Many crypto enthusiasts say the current bull run feels different than before. It does and with good reason. In the three short years between Bitcoin’s early heyday and today, DeFi grew to a market of just over $40 billion. The value of Bitcoin was once based on a holder’s ability to sell it at a higher price. Today, a holder can enjoy compensation for owning Bitcoin without relying on price appreciation.
Welcoming institutional players to the table
With DeFi in play, Bitcoin and the leading altcoins, have a store of value beyond their potential to trade for a higher price tomorrow. Add to this pandemic-driven fiscal easing and fears about inflation, and you get Michael Saylor in the headlines with debt-backed bond issuances underpinned by a treasury policy featuring Bitcoin. A myriad of other CEOs and corporations even insurance companies have added Bitcoin to their ledgers. Goldman Sachs named a new head of digital assets last summer. JP Morgan recently announced its intention to offer a weighted basket of companies with cryptocurrency exposure. And Visa-backed Anchorage just got a federal bank charter.
Those who want to see a revolution through the disintermediation of large and traditional financial institutions may not relish this reality. However, the participation of large players not only validates the abilities of DeFi to offer investors and corporations alternatives, it also helps fuel the market of alternative investments. While there remain questions about how well these two worlds can play together in the near term, the trajectory is positive for the longer term role of not only Bitcoin but also altcoins in financial portfolios and corporate treasuries.
Can cryptocurrency play nicely with central finance?
It’s not a panacea but blockchain technology, from ETF wrappers, to AMMs, to issuance platforms, will largely solve many of the interoperability challenges DeFi and central finance will face. Look at automated market makers (AMMs) as an example. This tool is one of DeFi’s core features, relying on algorithms to set prices based on actual supply and demand of each crypto asset in a given market. AMMs are simpler and more transparent than order books used by NYSE and NASDAQ. They also handle all order sizes equally well and may well influence or unseat order books one day.
A variety of other tools have emerged to help facilitate compliant, secure transactionssuch as issuances at the corporate level when cryptocurrency is in play. These technologies will mature rapidly, especially given the open-source nature of the foundational platforms, allowing for solution providers to build software that plays nicely with both worlds, reduces risk and therefore, encourages a wider variety of companies to leverage crypto-financial instruments.
Will big corporate finally take Bitcoin mainstream?
For high-growth companies, digital currencies offer one of the only opportunities to diversify holdings using assets that grow at higher rates than bonds or gold and track with their stock or equity valuations. Saylor goes so far as to argue that Bitcoin hit its “escape velocity” and therefore offers an opportunity for companies to de-risk their valuations. A company that puts half its money into BTC treasury ties profit and loss into Bitcoin, which has he argues a better chance at succeeding than most companies.
Perhaps Saylor’s right. Earlier this year, MicroStrategy announced a private offering of $600 million of convertible senior notes. The company announced it closed the offering at $1.05 billion and will use the sale of these unsecured notes, which offer no interest, to acquire additional Bitcoins. These types of BTC-backed securities will doubtlessly appeal to other high-growth companies.
What seemed avant-garde last year has the Association of Corporate Treasuries talking. In the absence of optionality, blue chip companies with slower, consistent, long-term growth saw global currencies as the logical long-term bet. The difference between the looming inflation of today and periods of inflation in the past is quite simply the existence of Bitcoin and a maturing DeFi market. Companies in every class, even traditionally risk-averse laggards, may see a crypto-friendly treasury policy as a means for relief from inevitable monetary inflation.
Cryptocurrency’s new home
During Bitcoin’s bear market years, cryptocurrencies, their offerings and the related financial tools evolved, largely away from public conversation. Even with Elon Musk’s tweets aimed at the subject, Google Trends shows general interest in the terms “Bitcoin” and “blockchain” at about half of what they were in late 2017 and early 2018. Yet the number of blockchain-related patents is accelerating due largely to demand for better tools to integrate with and manage cryptoassets. Cryptocurrency has finally found its home in financial services, and just in time for high-growth companies to offset today’s dreary returns from traditional cash holdings. Add to this the new technologies available to facilitate compliant and secure transactions across the traditional and cryptographic worlds and we will doubtless see a steady increase in fundraising of this kind.
Shawn Owen, founder and CEO of Equa, is a serial entrepreneur and trailblazer in the blockchain world with over 25 years business operations experience. A Bitcoin advocate since early 2011, Shawn pioneered cryptocurrency-backed lending with the launch of SALT, where he remains involved as a board member. In 2019, he started Equa to bring company formation and governance solutions into the future by leveraging his expertise in corporate structure and crypto-backed technology solutions. Shawn envisions a world of frictionless, self-evident and transparent truths, beginning with corporations and extending into the daily lives of shareholders.
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