Corporates Investing In Digital Assets

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Corporates Investing In Digital Assets
<a href="https://pixabay.com/users/EivindPedersen/">EivindPedersen</a> / Pixabay

Deloitte publishes “How to” guide for corporates considering crypto investments such as bitcoin; myriad issues demand careful consideration and coordination

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Q4 2020 hedge fund letters, conferences and more

Introduction

In 2020, more operating companies began allocating cash to digital assets and cryptocurrencies. This is a new dynamic and a departure from more conventional investing by funds and others in this space. One telling example is MicroStrategy Inc., which announced, last December, that it had made more than $1B in total Bitcoin purchases in 2020, a move that it characterized as an investment that would “provide the opportunity for better returns and preserve the value of our capital over time compared to holding cash.”1 Some companies have followed suit, and others may now be wondering how to invest in Bitcoin and other digital assets. There are a variety of reasons for adding digital assets to a company’s balance sheet, whether it’s seeking asymmetric risk return observed over previous years or as a natural hedge against fluctuating fiat currencies; whether it’s part of a corporate strategy to embrace modern, open technologies; or as a complement to an operational strategy that includes accepting digital assets as payments.

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This paper focuses largely on Bitcoin investments, considering recent increased investments in Bitcoin, and its common reference as a store of value. It should be noted that there are numerous types of digital assets, each having their own unique characteristics. Ethereum is also viewed as a store of value, with the added use of enabling transactions on Ethereumbased decentralized applications. These contrast with central bank digital currencies (CBDCs) and stablecoins, which are digital representations of fiat currency. Their value is derived from an actual currency in circulation, and they are issued by a central bank. Equity and derivative tokens are digital assets whose value may represent actual corporate stock or a legal right to another asset or financial instrument. Some digital assets have additional attributes, such as voting rights on a protocol, or they may provide a level of access for participation in a decentralized application. These may provide some commercial or economic benefit to the holder. Prior to investing in any digital asset, it is important to understand the specific terms, conditions, and characteristics of the investment since those will affect accounting, tax, risk, controls, and legal considerations, among others.

What follows here, then, is some guidance on what undergirds any corporate decision to invest in digital assets like Bitcoin. In addition, we set out the ongoing actions that teams across a company should undertake to monitor and go forward with a long-term investment. In other words, our goal is to answer the question “How would you do that?” rather than “Why do it?”

Before proceeding, we want to make one point absolutely clear: There is no playbook or foolproof approach for these kinds of bold moves. There is only painstaking effort, disciplined analysis, fresh thinking and rethinking, dedicated collaboration across competencies, and, above all, rigorous execution. What follows, then, is not a step-by-step prescription, but instead a high-level guided tour of the wide terrain companies should cover when they are considering investing in Bitcoin. Additionally, note that what is stated here cannot necessarily be extrapolated to all digital assets, given that they have many different characteristics.

The High-Level View From Treasury

The main purpose of the treasury function is risk management and the preservation of capital. When deciding and executing on an investment in digital assets, governance is key to all activities. More than creating a policy, governance begins with understanding the types of investment the company is making and where this alternative investment vehicle—digital assets like Bitcoin—fits within the broader investment strategy. Leaders also need to be comfortable with the characteristics and nature of the vehicle. (More on this below in the discussion on controls.) Given that it’s a financial investment, it’s imperative that the treasurer, CRO, CEO, CTO, and board of directors all have a clear assessment and understanding of the asset’s risk profile, the company’s tolerance for risk, and how these two may align or diverge. Ultimately, governance is all about monitoring and assuring that the conditions and requirements set by the organization are maintained. Tolerance for risk, depending on the stake and type of digital asset, may well have to be modified and periodically adjusted. Risk tolerance takes several forms and requires decisions on issues such as the following:

  • What percentage of the cash on hand, after accounting for operating costs, will be assigned to alternative investments in digital assets?
  • What range of risk is the company comfortable with? Governing risk is rarely a matter of “set it and forget it.” Risk is a constantly moving target, and adjustments frequently need to be made within an agreed-upon band of risk tolerance.
  • With digital assets, treasury needs to consider not just the investment side, but also how these assets may figure into daily operations such as payments, debt management, raising funds, IPOs, etc.
  • How can treasury be more strategic in using these assets to advance efficiencies in payroll, vendor payment, trade, customer interactions, and cross-border transactions with subsidiaries and others? (More on this last point when we discuss accounting and tax implications, as well as controls, below.)

Of course, the first and final refrain for treasury must always be that the governance of digital assets is a living and adaptive process. It constantly follows and must adjust to market and risk realities.

“Global macroeconomic, monetary, and digital evolutions have converged, requiring all forwardthinking corporations to consider alternative assets on their balance sheet. The ecosystem and the regulatory environment for digital assets, especially Bitcoin, have matured to the point that this strategy is becoming approachable and mainstream.” - Phong Le, President and CFO, MicroStrategy, Inc.

Read the full report here by Deloitte

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver

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