Photographer: Yuriko Nakao / Bloomberg
Photographer: Yuriko Nakao / Bloomberg
Wall Street financial executives who were considering investing some of their company’s cash reserves in Bitcoin underwent a preliminary check this week.
Financial directors, generally not known as a group of risk lovers, watched Bitcoin sink more than 25% in a 24-hour period starting on Sunday. Burning a hole of this size in the corporate rainy day fund would amount to an end-of-career elimination in almost any S&P 500 company.
However, the 300% rise in cryptocurrency last year was hard to ignore, and some companies have plunged into it. MicroStrategy Inc. invested $ 425 million of its $ 500 million money in Bitcoin. In October Square Inc., led by former cryptography advocate Jack Dorsey, announced that it converted about $ 50 million of its total assets in the second quarter of 2020 into the token. Proselytists like Bill Miller of Miller Value Partners said that this was just the beginning of what would certainly be a trend in Main Street.
Now that Bitcoin’s famous volatility has increased again, the prospects for cryptocurrency to become a regular part of corporate treasures – never very good – seem almost dead.
“It would be a red flag for investors if a company buys financial assets for speculation purposes unrelated to its core business,” said Michael O’Rourke, chief market strategist at JonesTrading.
Michael Saylor of MicroStrategy, one of the first to put money into the cryptocurrency, said in September that the Federal Reserve’s relaxation in its inflation policy helped convince it to invest the reserves of the enterprise software maker.
In December, Saylor, a staunch supporter of Bitcoin, plowed another $ 650 million from your company’s money, raised through senior convertible notes, in currency. This raised MicroStrategy’s holdings to approximately 70,470 Bitcoins, worth about $ 2.5 billion on Friday.
Bitcoin’s recent retreat doesn’t seem to have hindered Saylor’s strategy. In a Twitter post on Tuesday, he promoted his company’s “accelerated course in #Bitcoin strategy” webinar.
In December, Elon Musk of Tesla Inc. asked about the conversion “major transactions ”in the electricity sectorcar manufacturer balance sheet for the currency. However, industry experts warn against the tactic.
“It’s a high-risk, high-reward strategy,” said Robert Willens, associate professor at Columbia Business School. “It may not be the best idea for a company to put most of its cash and cash items in an asset like this,” he said. “If Bitcoin performs poorly, it will not have enough to finance its working capital needs.”
Blood pressure
Bitcoin price volatility is not your only risk. Currencies are vulnerable to hackers, fraud and forgotten passwords, although institutional investors use custody services to reduce these dangers. And the next administration of President-elect Joe Biden could mean more stricter scrutiny and regulations.
And certain sectors, such as finance and utilities, have disclosure requirements or covenants that can make it even more difficult to add Bitcoin to your balance sheets, according to Howard Silverblatt, senior index analyst at S&P Dow Jones.
“In a bank, you can imagine a bank – we are not talking about an investment in a company, but just holding Bitcoin itself – how would they have to show the risk back to the Fed? How did they do it? “He said.” Can you imagine Jamie Dimon’s blood pressure? “
Still, there are many Bitcoin bulls. Scott Minerd of Guggenheim Investments said recently that he can grow to worth $ 400,000. JPMorgan Chase & Co. said that Bitcoin has the long-term potential of reaching $ 146,000. Projections like these only increase the fear of losing the boom.
“Is it a smart strategy? It could be, ”said Willens of CFOs investing cryptocurrency reserves. “But, of course, if it weren’t, it would become something that could threaten the very existence of a corporation.”
– With the help of Vildana Hajric and Tom Contiliano