What percentage of the cash on hand, after accounting for operating costs, will be assigned to alternative investments in digital assets?.Risk tolerance takes several forms and requires decisions on issues such as the following: Tolerance for risk, depending on the stake and type of digital asset, may well have to be modified and periodically adjusted. Ultimately, governance is all about monitoring and assuring that the conditions and requirements set by the organization are maintained. (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. Leaders also need to be comfortable with the characteristics and nature of the vehicle. 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. When deciding and executing on an investment in digital assets, governance is key to all activities. The main purpose of the treasury function is risk management and the preservation of capital. Additionally, note that what is stated here cannot necessarily be extrapolated to all digital assets, given that they have many different characteristics.
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. There is only painstaking effort, disciplined analysis, fresh thinking and rethinking, dedicated collaboration across competencies, and, above all, rigorous execution. In other words, our goal is to answer the question “How would you do that?” rather than “Why do it?”īefore proceeding, we want to make one point absolutely clear: There is no playbook or foolproof approach for these kinds of bold moves. 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. What follows here, then, is some guidance on what undergirds any corporate decision to invest in digital assets like Bitcoin. 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. These may provide some commercial or economic benefit to the holder.
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. Equity and derivative tokens are digital assets whose value may represent actual corporate stock or a legal right to another asset or financial instrument. Their value is derived from an actual currency in circulation, and they are issued by a central bank. These contrast with central bank digital currencies (CBDCs) and stablecoins, which are digital representations of fiat currency. Ethereum is also viewed as a store of value, with the added use of enabling transactions on Ethereum-based decentralized applications. It should be noted that there are numerous types of digital assets, each having their own unique characteristics. This paper focuses largely on Bitcoin investments, considering recent increased investments in Bitcoin, and its common reference as a store of value. 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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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. This is a new dynamic and a departure from more conventional investing by funds and others in this space. In 2020, more operating companies began allocating cash to digital assets and cryptocurrencies.
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