Appold Insight: Holding Digital Assets within Corporate Treasury

9 February 2021

This week Tesla announced the acquisition of Bitcoin which will sit on its balance sheet and also be utilised for receiving Bitcoin payments in the future on Tesla’s products. The interest in this strategy has been increasing by companies over the past few months. Since November last year, we have seen an increase in enquiries from companies considering a similar approach. In many cases, companies have sought assistance in assessing market access and creating internal policies and procedures to handle these assets.

The ongoing growth of Primary digital assets (e.g. Bitcoin and Ethereum) is an additional factor that has raised further discussions on holding some digital assets on company balance sheets, as a cash management tool in parallel with cash and other liquid assets. The view being that for firms fortunate enough to hold strong cash positions, diversification outside of pure cash (including overnight money markets and short term bonds) hedges against low interest returns.

Primary digital assets are not securities, they are assets categorised differently to other assets that some firms hold on their balance sheets. Examples include real estate, foreign currency, stocks and gold. All of these can be used to hold a diversified asset portfolio with varying degrees of liquidity and capital returns. 

A well-managed company would not hold all of its free cash in, say gold. The same applies to digital assets and demand is clearly indicating that some exposure is becoming an increasingly discussed strategy.

There are other examples where companies and organisations have publicly disclosed adding some digital assets on their balance sheets. Publicly listed companies such as MicroStrategies Inc and Square Inc. have publicly disclosed holding digital assets for strategic purposes. The London based Multi-strategy asset management firm, Ruffer, openly announced in December 2020 that they had allocated 2.5% of their multi-strategies fund to Bitcoin. It was widely reported that they had bought the position “to hedge against wider market risks and viewed the position as a small but potent insurance policy against the continuing devaluation of the world’s major currencies”. To date, the position has paid off significantly, but our view is that these strategic holdings are just that, as opposed to active trading. Throughout 2020 a 2.5% holding in Bitcoin generated a significantly greater return than a 97.5% equivalent currency cash position held in a bank. Bitcoin alone generated over 330% return and a blended portfolio, such as those in the Appold Digital Return Indicator, returned over 380%. Bitcoin is over ten years old and has generated an annualised return of over 300%. We wouldn’t expect the same performance in the future, but the potential returns are significant and can be utilised with a lower risk premium strategy.

So assuming an organisation wishes to take some digital asset exposure onto its balance sheets, what are the considerations? 

Holding key digital assets in this manner, two major factors need to be considered. The first is liquidity and the second is accessibility. 

1. Liquidity

The digital asset market trades twenty-four seven, three hundred and sixty five days a year in most major currency pairs. Compare that to the public stock exchanges, where the primary markets are mainly open in the daytime, not on weekends or regional holidays.

The average daily volume in December was over $30bn. Currently, a position with a few hundred million dollars could be traded on a Saturday afternoon over a few hours. Based on that, Bitcoin certainly passes the liquidity test, even on a weekend.

2. Accessibility

We have extensively covered the issues of trading venue selection in the past but the short of it is that the market is very accessible. The caveat being, which we have very strong views on, is selecting the most appropriate venue and custodian infrastructure to protect the assets and offer a full client service.

Options available to Companies requiring Digital Asset Exposure

For an individual, it is straightforward to download a crypto platform App, deposit cash and trade away. For a Company it is not too dissimilar but do not expect to easily get voice support, a relationship manager, proactive trade and settlement support, bespoke education and an unbiased view on how the custodian, settlement and insurance cover process works.

Order execution can either be manually executed on a technology platform or via a broker, preferably one that is regulated. In the case of the larger corporations, some have been utilising third-party brokers and algorithmic focused firms to buy sizeable Bitcoin positions using Value Weighted Average Price (VWAP) algorithms. This process allows minimal market disruption where large positions are required.

An alternative to this would be to buy some of the listed Exchange Traded Products (ETP’s) that will give exposure to Bitcoin and Ethereum. The only issue here is that the ability to buy and sell the ETP is only available when the stock exchanges are open. The other downside for those buying to understand the market place is that the Company holding the assets will not be able to use digital assets for any type of payment processing. As this “alternative currency” industry becomes increasingly mainstream for goods and service transactions, owning and having control over the digital asset will be more relevant for making and taking payments.

Banking Services

One area that remains underserved is the area of corporate and investment banking facilities for this market. There is a general lack of service offerings available by banks to facilitate holding both digital assets and fiat currencies in one centralised account. 

Despite the lack of competition we are seeing this service increase in some Swiss banks for corporate and private banking customers. We also note the bank holding company, Silvergate Capital Corporation, restructuring its Silvergate Bank business model to move into this sector as a good case study for how the market is growing. SilverGate is a company listed on the New York Stock Exchange whose valuation has soared over 700% since its IPO in November 2019 and adopting a digital asset banking and payment processing service. Although some of that share price movement will have incorporated the increase in the capital appreciation of Bitcoin, the revenue and EBITDA filings are encouraging and highlight the scope of this market.  

More banking services are required in this sector to meet an increasing demand currently served by the few that adopted a “first-mover advantage”. This is underway but moving slowly as banks remain cautious in finding client solutions that are regulatory compliant and appeasing to governments bodies.

To Conclude

One final point which we have to be clear about is that nothing is without risk and digital assets have traditionally been very volatile, although volatility could be expected to decline as more institutional money enters the market. Nonetheless, risk is there to be managed and in this article, we have looked at examples of holding small positions over the longer term. A position that can afford to be lost in a worst-case scenario or at least a position that can be warehoused and held in the medium to long term should the market diminish.

Should you wish to discuss this market and our associated services in further detail, then please feel free to reach out to us at any time. Additional information can be found on our website (www.appold.com).

Rob Gaskell, Founder and Partner of Appold

Email: Info@Appold.com

LinkedIn: https://www.linkedin.com/company/appold