Will Ethereum be the next “value reserve asset” for listed companies?

Source: Yahoo Finance, Original author: Noelle Acheson

Translator: Odaily Planet Daily Moni

MicroStrategy, Tesla, Square, these industry giants have added Bitcoin to their company balance sheets. Although the market appears calm, there are undercurrents beneath the surface, and more and more companies are beginning to try to allocate part of their assets to cryptocurrencies.

What followed was a rush by consulting firms and cryptocurrency companies to launch crypto services for businesses to help them navigate the cryptocurrency trading process, a trend that has also attracted media attention. However, today, the vast majority of companies are still focused on Bitcoin and rarely get involved in other cryptocurrencies. Although every investment decision is made by the company's financial director, we have begun to hear a voice: When will it be Ethereum (ETH)?

Will ETH, the native token of the Ethereum blockchain, become a premium reserve asset for businesses?

To answer this question, let’s first look at why companies would add Bitcoin to their balance sheets. There are several main reasons:

1. Risk-return asymmetry;

2. Part of the company's "future first" strategy;

3. Be prepared to accept Bitcoin as a means of payment;

4. Compared with the US dollar, Bitcoin will be better at preserving its value in the future.

This last point is important because the main role of a company’s treasury function is to preserve assets/capital, and Bitcoin’s value proposition – a store of value – comes into play first. Of course, there are critics who point out that Bitcoin is too volatile to be a true store of value, but this is short-sighted. Yes, Bitcoin may be more volatile than fiat currencies over the next week, month, or even year, but in the long run, in a market environment where the Federal Reserve is frantically “spending money” to increase the money supply, “anonymous and fixed supply” assets such as Bitcoin will actually increase in value relative to assets without a fixed supply (such as the US dollar). As investment guru Paul Tudor Jones pointed out, even a 2% inflation rate will significantly devalue your cash and make it a “wasted asset.”

So, can the same argument be made for Ethereum?

At present, it seems that the support is not enough, but this does not mean that Ethereum will not appear on corporate balance sheets. Let's analyze it together with Planet Jun (ID: o-daily):

Is ETH a good store of value?

First of all, there is no limit on the supply of ETH, but the growth rate of ETH token supply is very moderate (the current growth rate is about 4%, which is expected to decline gradually over time), which may be far lower than the growth of market demand in the future. Therefore, ETH can still be regarded as a store of value.

But for now, the value narrative is not the main driving force behind corporate investment in ETH, especially in the eyes of institutional investors, Ethereum is seen more as a "technical game". More importantly, Ethereum is more like one of the experimental technologies that investors are chasing for greater liquidity. Unlike making faster rockets or optimizing dental technology, Ethereum aims to "reinvent" a way to automatically run applications, with the ultimate goal of building the foundation layer of the global digital economy. As well-known macro analyst Jim Bianco said earlier this week, decentralized finance "is reshaping the entire financial system." Ethereum-based applications may also affect the market, and governance, energy, public services, and even the way personal identity is managed will also change.

Not only that, but this happens on a network that can connect to anywhere, including public networks.

Bitcoin itself is actually a "technological bet". In fact, one of the greatest significances of Bitcoin is that it has released a new way of value transfer to the world. However, many basic parameters were added when Bitcoin was conceived, and the upgrade and iteration of Bitcoin itself may take several years to complete.

For Ethereum, it not only "bets" on the growth of the decentralized economy, but also "bets" on new connectivity and innovation, but the relevant technology has not yet been fully formed. We can see that Ethereum represents a radical innovation, and the risk of "early bets" is even higher than that of Bitcoin. This can actually be seen from the volatility of ETH prices (as shown in the figure below):

If Bitcoin’s volatility makes corporate finance managers feel risky, Ethereum is even more so.

Rather than using ETH as a corporate reserve asset, it is better to treat ETH as liquid capital

Although ETH seems to have "quite a few problems", this does not mean that it will not appear on the company's balance sheet - instead of treating ETH as a corporate reserve asset, it is better to treat it as liquid capital.

All applications deployed on the Ethereum blockchain require ETH support, which can be used as liquidity and transaction fees. For enterprises, if they want to use the Ethereum platform to handle internal processes (such as contract management, collateral allocation or optimizing returns) and provide customer-facing services (such as processing transactions, lending or insurance, etc.), they must hold ETH.

Earlier this year, CME launched Ethereum futures contracts, which will undoubtedly encourage more companies to hold ETH and use it as a tool to reduce volatility risk. As ETH options become more mature, Ethereum will also be able to further provide risk management support for companies.

In fact, some companies have already begun to accumulate ETH and use it as working capital. On March 8, according to the Hong Kong Economic Journal, Meitu, a software and social media application company listed on the Hong Kong Stock Exchange, had purchased 15,000 units of Ethereum and 379.12 units of Bitcoin in open market transactions on March 5, 2021. The total consideration of these two cryptocurrencies was approximately US$22.1 million and US$17.9 million, respectively. These purchases were made in accordance with a cryptocurrency investment plan previously approved by the board of directors, under which the group can purchase cryptocurrencies for a net amount of no more than US$100 million, with funds coming from the company's existing cash reserves (but not the remaining proceeds from the company's initial public offering). The announcement stated that the board of directors believes that cryptocurrencies have sufficient room for appreciation, and that by allocating part of its cash reserves to cryptocurrencies at this time, it can be used as a way to diversify the risks of holding cash in fund management.

Although it is still in its early stages of development, there are not many companies that have integrated Ethereum applications except for the crypto industry. However, there are signs that more and more companies are beginning to take an interest in Ethereum. For example, last Wednesday (March 3), Aon, the world's second-largest insurance intermediary, entered the DeFi industry. The company has launched a pilot project with insurance technology platform Nayms to provide decentralized insurance services to cryptocurrency holders to protect them from losses caused by hackers and virus software.

Summarize

As more and more cryptocurrency companies using decentralized applications grow to a certain scale and Ethereum use cases begin to affect traditional businesses, it is expected that more companies will be willing to add ETH to their balance sheets, at least the topic has attracted attention.

ETH can also play a huge role in promoting enterprises to optimize digital transformation processes, which will bring more advantages to its value proposition. As we mentioned above, Ethereum is a technology and a store of value. For these reasons, institutional investors are becoming more and more interested in Ethereum.

Many people call Bitcoin "digital gold". If we want, we can call Ethereum "digital oil"