Bitcoin’s latest surge in price has captivated the market once again, awaking from its bear market slumber since its previous rally in 2017. For those of you who have followed the bitcoin story, this shouldn’t be too unfamiliar to you.
Every four years, the supply of bitcoin is cut in half — known as the bitcoin halving, which results in less bitcoin being mined. This supply shock eventually works its way through the system, and bitcoin runs up in price. And, this is what we’re experiencing right now.
The 2017 rally saw bitcoin top out at around $20,000 before pulling back more than 70%, and this time around, we’ve already seen bitcoin print a new all-time high of around $62,000.
In his first-quarter letter to investors of Greenlight Capital, David Einhorn lashed out at regulators. He claimed that the market is "fractured and possibly in the process of breaking completely." Q1 2021 hedge fund letters, conferences and more Einhorn claimed that many market participants and policymakers have effectively succeeded in "defunding the regulators." He pointed Read More
Bitcoin has traditionally been a retail-driven phenomenon, but over the last four years, corporations, hedge funds, venture funds, and even startups have begun entering the space at an unprecedented rate.
A technological base
It sounds strange to think that only a few years ago, that online shopping was seen as a fad and how quickly these trends become normalized. In the space of a decade, we’ve gone from niche “eCommerce” players to every store needing an online presence to survive.
It’s truly remarkable how quickly businesses and consumers adapt to new technology, especially when we think of how apprehensive we were during those awkward introductory phases of eCommerce. Now it looks like we’re going through a similar phase with bitcoin — Metcalfe’s law kicks in — as more people adopt it, then the demand for bitcoin increases exponentially.
In every new market, there will be early adopters willing to take risks on new technology to improve their products and services, increase market share or capture increased productivity or lower operational costs. So how are businesses leveraging bitcoin in 2021?
Bitcoin as a treasury reserve asset
Bitcoin has established a store of value narrative around it, with many seeing it as a hedge against inflation both in retail and with corporations. If you are a company with retained earnings on your balance sheet, traditionally, your corporate treasurer would look to not only maintain your coffers above inflation but look to generate additional income on your holdings.
Capital not marked for operational costs or R&D could sit as cash and get no yield or be used to purchase bonds or stocks to try and capture a return using your capital.
Since bond yields which were always seen as the risk-free return, have had record low-interest rates, corporate treasurers have had to go further out the risk curve. Some have headed into stocks, others have repurchased the companies shares, and now many are looking at bitcoin.
The idea has been floating around for some time, and there have been reports of private companies acquiring bitcoin for this reason. Still, in 2020 the publicly listed company play came into media attention.
Micheal Saylor may not have been the first, but he sure was the loudest when he purchased $500 million in bitcoin and has even created the playbook for it. Since then, companies like Square, PayPal, and even Elon Musk’s Tesla have added bitcoin as a reserve asset on their balance sheet to the tune of billions of dollars.
Borrowing against your bitcoin
Businesses run into liquidity issues all the time due to late settlement of invoices or failure of funds to clear through the various payment rails your business uses. If you’re running short on operating capital, you have several options, such as:
- An overdraft facility with your bank.
- Taking out a short-term loan with a financial institution.
- Selling off assets on your balance sheet to access capital.
Bitcoin gives you a fourth option and allows you to borrow fiat against your bitcoin. Businesses can leverage their bitcoin position with market makers or fintech companies like BlockFi, Nexo, and the Celsius Network or borrow peer-to-peer with services like Hodl Hodl.
Borrowing against your bitcoin is an over-collateralized loan, so if you’re looking to borrow $100,000 on a short-term basis, you will need to supply $200,000 worth of bitcoin to secure the funds. Depending on market rates, you could get more favorable loans should you require short-term capital.
Bitcoin as a global remittance mechanism
The internet has made the global economy a vastly more efficient and also competitive arena, with businesses looking to secure stock, supplies, raw materials, and labor from across the world. Waiting days or even weeks for payments to clear can have a far-reaching impact on supply chains and business operations.
Bitcoin transactions are settled on-chain, funds can clear in a matter of minutes so orders can be processed faster and work can be completed on time.
Instead of trading your currency for US dollars or another fiat currency and losing on the various forex pairs, you can settle your payment with one transaction. Depending on the size of your forex purchases, switching over to bitcoin could not only reduce complexity but operational costs, too, as you cut down on fees and currency pair losses.
Earning bitcoin interest
Bitcoin isn’t only a way to park your money for the long haul if you’re afraid of inflation and don’t see any good opportunities to deploy your capital. Your stored bitcoin can generate an income for your business.
Bitcoin, unlike other tradable assets, has no market open or market close; the asset trades 24/7 with daily volumes of around $63,118,906,335, according to CoinGecko. Traders and funds are willing to pay you a premium interest rate to borrow your bitcoin to perform these short-term trades and return your capital to you once trades are completed.
So depending on the size of your bitcoin position and how much you’re willing to risk in the open market, you could leverage your bitcoin as an additional income stream for your business.
Bitcoin as a payment option
Bitcoin is not only a store of value but also a medium of exchange, and as it grows in value, we should see many early investors will be willing to part with it for goods and services. Instead of having to convert to fiat and add an additional tax liability, bitcoin holders would find paying directly for goods and services as a more attractive proposition.
PayPal and Square already allow for bitcoin transactions via their payment applications, and Tesla has already announced that they are planning to accept bitcoin as payment for their vehicles.
Bitcoin developers have also launched a second-layer solution known as the lightning network, which allows anyone to send and receive bitcoin in a matter of seconds — making bitcoin an easier medium of exchange that rivals that of your traditional digital payment options.
Opening up bitcoin as a payment method allows you to instantly expand your business up to new customers both locally and internationally, as well as provide new avenues for revenue.
Bitcoin as insurance
Running a business always carries risk, be it a local business or an international business that holds value in fiat currencies. In the last decade, we’ve seen the devaluation of the Venezuelan Bolivar, the Argentine Peso, and the Lebanese Lira.
These currency devaluations make it harder for businesses to operate in these regions. Depending on the geopolitical landscape and local banking regulation, you may not be able to acquire foreign currency to secure foreign currency as capital gains these devaluations.
Securing bitcoin on a business’s balance sheet can act as insurance against currency devaluations and provide you with some level of protection for your retained earnings.
Bitcoin as a loyalty reward
As the world faces one of the biggest global recessions, consumers are tightening their belts, and it’s going to be harder to convince them to spend. Traditional loyalty programs are used to encourage spending by offering a convoluted points system that leaves customers no better off than if they had never signed up for the program.
As bitcoin’s value increases, so does the motivation to acquire it. If you’re offering customers bitcoin rewards, it could be a way to unlock additional expenditure from your customer base.
Fintech companies like Crypto.com and BlockFi have already released cards that can be used to earn bitcoin on your purchases. Rewards programs like Lolli and the Fold App are also offering consumers bitcoin as a reward for purchases.
Career risk has been flipped on its head
Bitcoin has moved on from being an internet side project and is starting to mature into a global asset class with real macroeconomic influence. If you’re going to prepare your business for the next wave of digital information, then perhaps having a non-zero position in bitcoin could prove to be riskier than not having one.
Before bitcoin was considered “a career risk” for a traditional company to add bitcoin to its balance sheet. Today, this risk has been flipped on its head. At this moment in time, it has become a career risk not to be involved in the bitcoin ecosystem with institutional demand being higher than ever.