Bitcoin can threaten the health of corporate balance sheets, as evidenced by MicroStrategy and Tesla’s second-quarter earnings reports. Their latest findings shed light on the issue of corporate cryptocurrency strategy and their balance sheet risks.
The relatively small impact on the titanic Tesla compared to the massive impact on the comparatively tiny MicroStrategy is a cautionary tale.
MicroStrategy and Tesla illustrate the two polar extremes of crypto asset allocation.
- MicroStrategy’s massive exposure under soon-to-be former CEO Michael Saylor resulted in a nearly $1 billion impairment in Q2, nearly 10 times Q2 revenue.
- Tesla, under the rule of corporate Buccaneer CEO Elon Musk, is also a player at the crypto casino table, but plays for much lower stakes relative to revenue. It, too, suffered a hit, but to a much lesser extent than MicroStrategy, particularly relative to revenue: $170 million, which for a company that reported nearly $17 billion in revenue in the second quarter, was just 1% of the total sales.
One takeaway from this history of two companies is that size matters. Chief Financial Officers (CFOs) looking to dabble in the cryptoverse are well advised to scale their positions in proportion to revenue and reserves.
Another consideration is timing. The tried and tested trading maxim of “buy low, sell high” applies, raising the question of whether CFOs should actually become amateur commodities or securities traders, or rather prudent stewards of corporate money, employing more traditional, time-tested strategies. Cryptocurrency can hardly be considered a strategic investment in the sense of mergers and acquisitions (M&A) nor does it have the same shareholder value as stock buybacks.
Perhaps the greatest strategic risk is that overexposure to a commodity will result in a company’s shares trading like that commodity, which is the last thing a company looking to maximize shareholder value wants to be. Saylor’s leveraged crypto bet is a showcase for this scenario. The massive impairment MicroStrategy suffered is a striking disparity to the company’s relatively modest $122 million in second-quarter revenue. As such, the stock trades much like the cryptocurrency itself — it’s down 50% year-to-date, as is bitcoin.
To avoid this fate when a small crypto position grows large, position management is required. One of the differences between MicroStrategy and Tesla is that MicroStrategy was a “Holdr” with “diamond hands” – holding on to all of its bitcoins. Tesla had softer hands – it reported selling a significant number of bitcoins at an opportune time.
As prudent stewards of corporate money, the prospect of startling volatility hardly sounds great from the CFO’s perspective. While Saylor likes to say that “volatility is vitality,” CFOs see it more as an existential threat, especially in large doses.
Krypton or not Krypton?
The fundamental question is whether to play at all. There are several environmental analyzes to consider.
Crypto can be another asset to hedge from a CFO suite perspective and a purely financial asset with no intrinsic relationship to the core businesses of non-financial firms.
The current regulatory outlook, while bleak, points in that direction. Depending on which government agency regulates the space, crypto can be treated as a commodity. There are compelling arguments for such a classification, and the crypto industry supports the Commodity Futures Trading Commission (CFTC) in the long-standing federal agency turf wars over crypto oversight. Crypto is now in a regulatory white space.
US regulation clarity could be bullish for crypto. From a technical perspective, blue-chip crypto names appear to have found support at the $20,000 level. Crypto is traded alongside low-to-no revenue growth companies in the technology space (including FinTech), and it’s arguable that all of these assets have more upsides than downsides. However, this has traditionally been the domain of speculators, not financial managers.
The era of risk-free de minimis rates is clearly over. Today’s Blowout Jobs report will likely embolden the Fed to continue its march to hike rates, make risk-free government bonds a much more attractive cash management option, and undercut the case for crypto exposure.
There are clear signs that inflation has peaked. Commodity prices in several sectors, notably energy and construction, have fallen significantly, which is particularly reflected in the futures markets. Now that the Fed has the green light to use its most powerful tool, the Federal Funds Rate, to dampen inflation, along with the powerful but often underappreciated quantitative tightening initiative, inflation may well be tamed.
In any case, the recent catastrophic crypto cratering has discredited cryptocurrency’s purported utility as an inflation hedge, to say the least.
It’s hard to think of crypto as a tool to tackle the digital streamlining of the payments ecosystem. The US dollar remains the most important currency of world trade in all major sectors, especially energy. While geopolitical tensions may be an opening for crypto-denominated transactions, it is far from certain that the major trading powers that could trigger such a transition (mainly China and Russia) are willing participants.
Conclusion: The crypto misadventures of the behemoth Tesla and relatively tiny MicroStrategy will have a chilling effect on corporate appetites for crypto risk unless and until currencies stabilize and a US regulatory regime is in place.
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