Believer or sceptic? Crypto divides treasurers

Published: Nov 2022

Another crypto winter has dampened the enthusiasm for cryptocurrencies such as Bitcoin, but others are still believers and are playing a long-term game. Meanwhile, many treasurers are adopting a ‘wait and see’ approach and are wary of investing in crypto.

Multiple cryptocurrency coins

Since Bitcoin was introduced back in 2009, there have been many ‘Agh, if only’ moments. Imagine you invested when one Bitcoin was worth US$1, and you’d held onto it – even through its peaks and troughs – and sold today around its current value of US$20,000. If only. Or imagine you had bought thousands in 2011 just before its first bull run when the currency increased in value by over 3,000%. Or if you had sold just at the right time when Bitcoin reached its all-time high (at the time of writing) of over US$68,000. If only.

There are many tales of people buying and selling at the right time. And, equally, there are those who did it at the wrong time and have been kicking themselves ever since. Is investing in cryptocurrencies, such as Bitcoin, the way of the future and something that all treasurers should seriously consider? Or is it all purely speculation?

When it comes to having an investment strategy, Deepali Vyas, Global Head of Fintech, Payments and Crypto at Korn Ferry, comments, “You cannot be fickle if you believe in this ideologically. If you believe in what Bitcoin stands for, you cannot be fickle of mind.”

Despite the current crypto winter, where there has been a prolonged decline in value, many are still taking a long-term view because they believe in the future of cryptocurrencies like Bitcoin. Not only are they a currency and asset class, the underlying technology is potentially game-changing as it removes the need for an intermediary – ie a financial institution – for making payments.

Vyas comments that almost everybody who is a believer in crypto ideologically is a long-term believer. They are, therefore, less likely to be fazed by its volatility and recent drops in value. For something to be so disruptive – Bitcoin is, after all, an entire currency and global payment system – there has to be a long-term view on it, Vyas comments.

There are the believers, and then there are the sceptics. These include Bob Seeman, author of ‘Bitcoin: The Mother of all Scams: Lies, Manipulation and Gambling’ who argues that investing in Bitcoin is simply unlicensed gambling and pure speculation. He also argues that crypto is not an asset because it does not have any cash flow.

Corporate treasurers are caught somewhere between the believers and the sceptics. Some companies are embracing crypto and are investing in it in a careful and considered way. Meanwhile, many of the corporate treasurers that Treasury Today spoke to are taking a wait and see approach and are steering clear of crypto for now. For those that do choose to invest, it is more likely to be in the most well-known and mainstream of the cryptocurrencies, such as Bitcoin or Ether.

The divide has been exacerbated by a number of crypto winters, where there has been a prolonged downturn in the value of the cryptocurrencies. By some estimates, since the start of 2022, the value of some cryptocurrencies has declined by more than 70%.

Despite these figures, many companies have been choosing to invest and there is institutional demand for crypto to be handled by established financial institutions. In an indication that crypto investing is becoming more mainstream, custody bank BNY Mellon announced in October 2022 that it had developed its financial infrastructure to support digital assets. This move enables certain clients to be able to hold and transfer Bitcoin and Ether.

At the time of the announcement, Robin Vince, Chief Executive Officer and President at BNY Mellon, said, “Touching more than 20% of the world’s investable assets, BNY Mellon has the scale to reimagine financial markets through blockchain technology and digital assets. We are excited to help drive the financial industry forward as we begin the next chapter in our innovation journey.”

A recent survey by BNY Mellon also pointed to this enthusiasm for crypto. The survey found that 41% of institutional investors hold cryptocurrency in their portfolio today, with an additional 15% planning to hold digital assets in their portfolios within the next two to five years.

This echoes the research of Nickel Digital Asset Management, which shows that 18 listed companies with a combined market cap of US$826bn have over US$3.1bn in digital assets. The value of those assets, however, has fallen as they originally spent US$5.9bn buying them. There was also a notable North American bias, with 11 of the 18 listed enterprises being US or Canadian.

Nickel is optimistic about companies’ appetites for investing, particularly as a diversification strategy and inflation hedge. Also, the recent crypto winter is not necessarily a negative because the prices are now looking attractive after a long period of correction.

In August 2022, Nickel surveyed professional investors from seven countries – who manage over US$2.2trn in assets – and found that more than two out of three believed at the time that the crypto winter was either over or will last less than six months. At that time, 9% of respondents believed that the crypto bear market was already over, and 58% said it would end within six months. Others were more pessimistic, however, with 7% expecting the crypto winter to last more than a year.

If you believe in what Bitcoin stands for, you cannot be fickle of mind.

Deepali Vyas, Global Head of Fintech, Payments and Crypt, Korn Ferry

Many of the companies that Treasury Today spoke to, which did not want to be identified, were much more cautious and were unwilling to even consider investing in Bitcoin. Of those companies that have chosen to invest, Anatoly Crachilov, CEO at Nickel Digital Asset Management, comments on their strategy: “Listed companies that allocated to digital assets have expressed a bold, yet perfectly sound, strategic view to this nascent asset class. Undoubtedly, such exposure ought to be the most volatile line within their portfolio. However, the asymmetric return profile associated with digital assets overcompensates for the embedded volatility in the long run,” he tells Treasury Today.

Crachilov points to analysis that shows that over a statistically-significant nine-year period between 1st January 2013 and 1st January 2022, a portfolio with a 60/40 split between equities and bonds, respectively, delivered a cumulative portfolio return of 160.2%. If an adjustment is made to that portfolio by just allocating 5% to Bitcoin, this would have increased the cumulative portfolio return to 335.7%. In effect, explains Crachilov, this small inclusion of Bitcoin into the portfolio would have been “a solid 175% performance boost”.

Crachilov argues that even though Bitcoin is inherently volatile, this would have had little impact on the portfolio’s standard deviation, even though this seems counterintuitive. He argues that the impact would have increased the standard deviation from 9.8% to 10.6%. “This is explained by the rest of the portfolio – the remaining 95% – absorbing crypto volatility in an efficient manner, softening the ultimate impact of this higher volatility portfolio component,” he explains.

On the recent price changes, Crachilov comments, “The major correction experienced by the crypto markets in 2022 did not alter the above picture – a portfolio containing crypto exposure continues to outperform traditional portfolio over the long run.”

When it comes to addressing the volatility of cryptocurrencies like Bitcoin, Crachilov argues that the correct sizing of the exposure is the main answer to deal with the concerns. One argument is that companies should at least invest a little bit as an insurance policy; if it really takes off, they will have a stake in the upturn. And if the value plummets, they won’t lose much because they only invested a small amount.

On this point, Vyas comments that this is like making a side bet when gambling: “When you’re playing blackjack, you have to take the insurance – at some point it pays off,” she says. Despite the drop in value of Bitcoin, and other cryptocurrencies, they are still appealing as an investment as an inflation hedge, comments Vyas. And although the asset is volatile, many who have already invested in it will not be concerned; they understand well the inherent volatility of the currency. “They will continue to stay in because of their long-term outlook,” says Vyas.

At the moment Bitcoin, comments Vyas, compared to other digital assets, is still fairly stable and has been hovering around the US$20,000 mark. “Crypto is much more stable than it was back in 2014 and 2017,” comments Vyas.

Many corporate treasurers, however, still perceive Bitcoin as more volatile than their companies can handle. Treasury Today was in touch with a number of corporate treasurers to understand what their attitude was to investing in cryptocurrencies. The overwhelming consensus was that it was a sensitive topic and many did not want to comment publicly because they did not want the reputational risk of associating their well-known multinational brands with assets that are still deemed risky and volatile.

None of the companies that Treasury Today spoke to – from a mix of industries and based in Europe as well as Asia – have invested in crypto. They were all keenly following the developments in the market, however, and know that this is something they need to understand – albeit from a distance. For now, these corporate treasurers – all of whom did not wish to be identified for this article – were taking a ‘wait and see’ approach to investing in crypto. For these traditional companies, it was viewed as too risky.

And that perception of riskiness hasn’t been helped by recent events in the industry, not least the failure of cryptocurrency lending platform Celsius, as well as the collapses of TerraUSD and Luna. And then there was the recent hack on Binance – the largest crypto exchange by volume – in which its BNB tokens, reportedly worth US$570m were reportedly stolen.

Events like this confirm for the sceptics all that is wrong with cryptocurrencies. For the believers, however, this is all part and parcel of a technology and phenomenon that is in its nascent stages.

And there are other reasons that companies should get involved in cryptocurrencies – not just as an asset class to invest in as part of their diversification strategy. If, as the believers argue, cryptocurrencies are the way of the future, then companies need to understand them because this is what their customers will be using. In El Salvador, for example, Bitcoin is now legal tender and for some a way of life. Depending on who you speak to, however, this move was seen as visionary, or a reckless experiment, by the country’s president.

In a world where everyone is aiming to go cashless and focus on digital payments, crypto could be just another option that is offered at the point of sale. Vyas comments that in the future there could be an obligation for companies to offer it, much in the same way that companies are expected to offer credit card payments as an option.

For now, however, many treasurers will choose to sit on the fence while the battle plays out between the believers and the sceptics. And they may be satisfied to watch the price of Bitcoin rise and fall from a distance and say to themselves, ‘if only I had invested back then…’

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