Bitcoin craze, an inevitable choice for future corporate balance sheets?

Bitcoin has seen an unprecedented rise in early 2021, reaching a high of $61,800, nearly three times the peak during the 2017-2018 craze. We are entering an era where institutions are beginning to use Bitcoin, as many countries around the world are already printing unprecedented amounts of money to pay off their growing debts. To make matters worse, they are also facing the risk of uncontrollable inflation. This perfect storm of macro conditions means that institutions such as pension funds, hedge funds, and high net worth individuals with trillions of dollars in total assets are starting to pay attention to and learn about Bitcoin for the first time.

Unlike the bull run in 2017, this bull run is driven less by hype and more by Bitcoin’s acceptance as a scarce asset class by the traditional financial world. Corporate and institutional adoption of crypto assets has been a hugely influential theme in 2021, with Tesla’s $1.5 billion investment in Bitcoin being one of the most prominent examples of corporate adoption to date.

In addition, large institutions have also recognized the importance of Bitcoin as a means of storing value. Many institutions, including Goldman Sachs, Standard Chartered Bank, Square, BlackRock, Fidelity Investments, MicroStrategy, etc., have added millions of dollars of Bitcoin assets to their balance sheets.

However, the crypto space needs to change to truly allow Bitcoin to enter the traditional world. Institutions cannot use private keys that are easily lost, cannot use long strings of letters and numbers to make transactions, and cannot store funds on exchanges where counterparty risk is high.

Regulatory issues

New cryptocurrency regulations in the United States make it easier and more acceptable to hold cryptocurrencies by providing greater certainty in different jurisdictions. Just last month in the United States, the Office of the Comptroller of the Currency provided much-needed regulatory certainty for cryptocurrency activities. Former Acting Comptroller of the Currency Brian Brooks said that it is permissible to use blockchains such as Bitcoin or Ethereum, hold tokens directly or on behalf of customers, and allow nodes to be run for public blockchains. In other words, this allows banks to actively participate - a big step towards improving the convenience of institutions interested in holding cryptocurrencies.

We are also seeing more developments in the custody and management of digital assets, which is allowing more institutional and corporate players to enter the space. Goldman Sachs recently issued a request for information to explore its digital asset custody plans as part of a broader strategy to enter the stablecoin market. Although the details are still uncertain, these major moves by key institutions are adding fuel to the fire.

The next generation of cryptocurrency

While these institutions have large teams to manage and oversee their new cryptocurrency holdings, smaller companies are also beginning to experiment with adding Bitcoin and other cryptocurrencies to their balance sheets. As companies large and small begin to hold cryptocurrencies, it is becoming increasingly clear that the next generation of companies will be more like investors who hold and balance funds across multiple asset classes.

This includes companies that do not have cryptocurrencies and blockchain as their core business, which reshapes the value proposition of companies: now everyone is a fund, and its returns may be decoupled from the core business. Now investors may worry about the liquidity of small companies that only hold cash. In the emerging field of decentralized finance, the complexity of asset management is unlimited; you can buy and sell derivatives, borrow and lend, and so on.

I envision a future where all companies have crypto on their balance sheets and every company is an investor, whether it is their core business or not. But this future depends on user experience and regulation. Some companies and institutions holding crypto are willing to take the risk and figure out their own operational and financial security measures to manage their crypto, while for others, this is not possible. The traditional world will need custody solutions, traditional user experience for trading, crypto wealth management, etc.

My advice to small companies starting to experiment with holding cryptocurrencies is to adopt a simple strategy and not be distracted by all the volatility and noise of cryptocurrencies. The current cryptocurrency rally brings great excitement and growth opportunities, but companies need to do what makes sense for them. Maintaining a basic index approach to managing your company's cryptocurrency funds - for example, holding 5% of funds in Bitcoin and 95% in cash and equivalents, and rebalancing when prices rise or fall - allows you to use cash and funds wisely while gaining market exposure.

Overall, as institutions begin to take Bitcoin seriously, and a combination of regulation and user experience helps make cryptocurrency a more accessible and accepted asset class, the traditional world of financial management will evolve.