Bitcoin Volatility Undermines Business Case for Many CFOs

Wall Street finance executives who were thinking of plunging some of their company's cash reserves into bitcoin got a heat check this week.

CFOs, not generally known as a risk-loving bunch, watched bitcoin sink more than 25 percent in a 24-hour period starting Sunday. Burning a hole of that size in the corporate rainy day fund would amount to a career-ending wipeout at virtually any S&P 500 firm.

Yet the cryptocurrency's 300 percent rally last year was hard to ignore, and a few companies dived in. MicroStrategy Inc. invested $425 million of its $500 million cash into bitcoin. In October, Square Inc., headed by longtime crypto advocate Jack Dorsey, announced that—as of the second quarter of 2020—it converted about $50 million of its total assets into the token. Proselytizers like Bill Miller of Miller Value Partners said this was just the start of what was sure to be a trend across Main Street.

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Now that bitcoin's volatility has reared its head again, the prospects that the cryptocurrency would become a regular part of corporate treasuries—never very good—look all but dead.

"It would be a red flag for investors if a corporation bought financial assets for speculation purposes unrelated to their core business," said Michael O'Rourke, chief market strategist at JonesTrading.

MicroStrategy's Michael Saylor, among the first to put cash into the cryptocurrency, said in September that the Federal Reserve's relaxing of its inflation policy helped convince him to invest the enterprise-software maker's reserves. In December, Saylor, an outspoken advocate of bitcoin, plowed another US$650 million of his company's cash, raised through convertible senior notes, into the coin. That brought MicroStrategy's holdings to approximately 70,470 bitcoins, worth about $2.5 billion as of Friday.

Bitcoin's recent pullback doesn't seem to have derailed Saylor's strategy. In a Twitter post from last Tuesday, he promoted his company's "accelerated course in #Bitcoin strategy" webinar.

In December, Tesla Inc.'s Elon Musk inquired about converting "large transactions" of the electric-car maker's balance sheet into the coin. However, industry experts warn against the tactic.

"It's a high-risk, high-reward strategy," said Robert Willens, an adjunct professor at Columbia Business School. "It might not be the greatest idea for a company to put most of its cash and cash items into an asset like that," he said. "If Bitcoin preforms poorly, it's not going to have enough to finance its working capital requirements."

Bitcoin's price volatility isn't its only risk. The coins are also vulnerable to hackers, fraud, and forgotten passwords, though institutional investors use custodial services to reduce those dangers. And the incoming administration of President-elect Joe Biden could mean more scrutiny and tighter regulations.

Certain industries, such as financial services and utilities, have disclosure requirements or covenants that could make it even more difficult to add bitcoin to their balance sheets, according to Howard Silverblatt, senior index analyst at S&P Dow Jones. "On a bank, can you imagine a bank—we're not talking about an investment in a company but just holding the bitcoin itself—how they'd have to show the risk back to the Fed? How do they do that?" he said. "Can you imagine Jamie Dimon's blood pressure?"

Still, there are plenty of bitcoin bulls. Scott Minerd of Guggenheim Investments recently said it could grow to be worth $400,000. JPMorgan Chase & Co. said bitcoin has the long-term potential of reaching $146,000. Projections like these only add to fears of missing out on the boom.

"Is it a smart strategy? It could be," Willens said about CFOs investing reserves in cryptocurrencies. "But, of course, if it's not, it would become something that could threaten the very existence of a corporation."

—With assistance from Vildana Hajric and Tom Contiliano.