Bitcoin is known to be volatile. However, a growing number of public companies have started to buy and hold the digital asset on their balance sheets, as bitcoin reached a new high last week.
It raises the question of how investors should respond. Those looking for ways to speculate on crypto may choose to ride along, but existing shareholders who were focused on the companies’ core operations may have reservations.
Some recent examples of companies buying bitcoin include Trump Media & Technology Group Corp., owner of President Donald Trump’s media platform Truth Social, which said on Tuesday that it planned to sell $1.5 billion in common stock and issue another $1 billion in convertible notes and use the proceeds to create a bitcoin treasury. Videogame retailer GameStop Corp. on Wednesday also announced its first purchase of bitcoin. The company bought 4,710 of the crypto, worth $500.9 million based on bitcoin’s current price.
Investors should carefully weigh their decision to invest or stay invested in the companies, as the bitcoin addition introduced a mix of opportunities and risks, Wall Street watchers said.
In particular, bitcoin is much more volatile than the assets typically held in corporate accounts, which manage a pool of cash and financial assets to support companies’ operations, manage risks and drive growth.
A company typically holds cash and cash equivalents — including U.S. Treasurys — and short-term investments such as commercial paper and certificates of deposit on its books. Such assets are considered low-risk. Some companies with international operations may also hold foreign currency reserves to facilitate global transactions and mitigate foreign exchange risks.
What are the reasons to add bitcoin? Some companies cited the crypto’s potential to eventually serve as a store of value and a hedge against inflation, though bitcoin has been mostly trading in tandem with other risk assets for the past few years. Others mentioned the potential to benefit from expectations for bitcoin prices to rise.
The largest cryptocurrency rose 56.4% for the past 12 months to around $105,679 on Friday, up 13.1% so far this year, according to the Dow Jones Market Data. Bitcoin also hit a record high at $111,986 last week. In comparison, the S&P 500 was up 11.6% over the past 12 months, and up 0.1% year to date.
While more companies have started buying bitcoin, the number remains relatively small. A total of 79 public companies across the globe held bitcoin as of March 31, according to a report by crypto asset manager Bitwise. There were 58,200 public companies in the world as of 2022, according to data from the World Federation of Exchanges.
The top five companies with the most bitcoin holdings were Strategy Inc., formerly known as MicroStrategy, Mara Holdings Inc., Riot Platforms Inc., CleanSpark Inc. and Tesla Inc., according to Bitwise. Mara, Riot and CleanSpark are all bitcoin-mining companies that use specialized computers to validate transactions on the Bitcoin blockchain and earn some of the crypto as rewards.
There’s a distinction among companies holding bitcoin. For some of them, such as Tesla, the crypto was only a small part of their corporate books. However, for others, most notably Strategy, the company’s bitcoin purchase strategy has outshone its original business as a business intelligence software developer.
In particular, Tesla held 11,509 bitcoins as of March 31, which were worth $1.2 billion based on bitcoin’s current price, according to regulatory filings. In comparison, the electric-car maker held $37 billion in cash and cash equivalents and short-term investments as of March 31.
However, for Strategy, the bitcoin holdings accounted for the vast majority of its holdings, as the company repeatedly issued stocks and convertible notes and used the proceeds to buy bitcoin. Strategy held over 580,000 bitcoins as of Friday, which were worth $61 billion based on the crypto’s current price. The company held $60.3 million in cash and cash equivalents as of March 31.
When investors evaluate companies holding bitcoin, they should first consider the size of such investment versus that of their corporate reserves, according to Tim Davis, the Risk & Financial Advisory leader of Deloitte’s blockchain and digital assets practice.
For companies buying bitcoin “in a moderate fashion,” allocating 5% to 10% of assets to crypto, the core business remains intact while the crypto purchase is considered an alternative investment, Davis noted.
However, “if you have the vast majority of all the funds [on a company’s balance sheet] committed to crypto, then it obviously changes the nature of the company, right?” Davis said. “It’s then more of like a crypto fund than it is, say, a software company,” noted Davis.
It leads to the question of what existing investors should do if a company in their portfolio decides to go on the Strategy route.
Such a change shouldn’t take investors by surprise, said Seoyoung Kim, a professor in finance at Santa Clara University. As public companies are required to disclose material information that may impact investors’ decisions, investors could immediately reassess whether they’d like to stay invested once a company starts purchasing crypto.
“Of course, investors are going to say, wait, I was investing in a software company, and now suddenly, they are investing in crypto,” Kim said in a phone interview. “But those are all covered by disclosures, and those investors can be like, look, we didn’t mean to invest in bitcoin. We’re out,” she added.
That said, a rush to bitcoin underlines concerns regarding how an operating company, which produces goods or provides services as its main source of revenue, is differentiated from an investment company, whose primary business is investing in securities under current laws.
As bitcoin is generally considered by regulators as a commodity rather than a security, current securities laws classify MicroStrategy-like companies as operating companies, though investors mostly see them as bitcoin vehicles.
The classification matters. Compared with an operating company, an investment company faces stricter oversight and many more reporting requirements to the Securities and Exchange Commission.
For now, securities law states that if more than 40% of a company’s total assets, excluding government bonds and cash equivalents, are comprised of securities, and if the company’s primary business involves investing, reinvesting, or trading these securities, then the company must be classified as an investment company.
There may be a need for newer rules on how investment companies should be classified, as more companies joined Strategy’s playbook, Kim said.
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