As the pandemic and U.S. economic recession continue to drive talk around both boardroom tables and dinner tables, interest in digital assets, including cryptocurrencies like bitcoin, is on the rise. Recently, large institutional money managers such as Fidelity and Paul Tudor Jones have announced investments in bitcoin and other digital assets. And in September, we saw a publicly traded company, MicroStrategy, rotate the majority of its company treasury from fiat dollars to $425 million worth of bitcoin.
To find out what it all means for businesses, we sat down with Armanino’s own Patrick Clancy and Noah Buxton. Patrick is Armanino’s Senior Manager of Strategic Growth for Blockchain and Private Funds, and Noah leads the firm’s industry-focused Blockchain & Digital Assets practice.
What is bitcoin, and should other businesses consider holding some?
Digital assets, such as bitcoin, are the native currency of the internet. They enable low-cost, peer-to-peer transactions without the need for third parties like banks and trusts. And today, the total market capitalization of these crypto assets is about $330 billion.
There are still a lot of negative perceptions about bitcoin and other cryptocurrencies, largely due to the fact that their early years were marked by news of dark markets, well-publicized issues of online theft and exchange hacks totaling millions in customer funds. But it’s important to note, Bitcoin itself has not been hacked. And perhaps more importantly, U.S. market participants are now subject to strong regulatory oversight and reporting requirements.
Bitcoin can be a strong addition for both investment portfolios and corporate treasury strategies where long-term growth is important. Not only is it a reasonable hedge against inflation, bitcoin can provide a higher rate of return than other asset classes, with the right risk management strategies. We are likely going to see a much larger global acceptance of digital assets in the coming year and years to follow, especially as PayPal/Venmo and other large payment processors have publicly announced their future plans to support bitcoin.
Why are large corporates, traditional asset managers and public companies starting to pay attention to bitcoin?
They’re paying attention to bitcoin and digital assets for a few reasons. To diversify their assets on the balance sheet, to hedge their own currency risk, and to achieve a better return. Historically, when markets have been highly volatile or start to perform poorly, investors tend to allocate more toward hard assets such as gold, silver and real estate. In short, the fundamentals of digital assets and the opportunities they create are simply too strong to ignore.
Today, both investors and corporates are inquisitive about holding digital assets rather than cash because the U.S. dollar is losing its perceived value. In response to COVID-19, the Federal Reserve printed trillions of dollars to support our economy by increasing our money supply. They sought to encourage and ease liquidity for borrowing and create credit, all while reducing interest rates to nearly zero. While these record levels of stimulus have been critical to basic economic stability, they have also created hidden inflationary pressures.
Investors are looking at today’s markets with caution while recognizing that bitcoin cannot be devalued by manipulating supply. Bitcoin has a fixed supply governed by code. In this regard, bitcoin and similar digital assets behave much like digital commodities and can offer a safe haven from inflation of cash holdings. Similarly, where economic stimulus has propped up equities markets, investors and corporates are opening their minds to a digital commodity as a strong store of value.
Driving home the point, in the past year alone, bitcoin has outperformed all other investment asset classes, with a return of 35% so far in 2020, and a total return of 82% in 2019.
What are some of the key issues that companies should be aware of when it comes to holding digital assets?
In the traditional financial system, we are used to relying on a third party (our bank) to hold our money, and we’re okay with that because we trust them and know they are heavily regulated. Navigating the world of digital assets requires interacting with traditional financial institutions as well as new service providers. The landscape is complex but can be navigated safely with proper knowledge and support.
For example, purchasing cryptocurrency raises the issue of custody and whether one will rely on a third-party custodian or choose a self-custody system. We assist businesses with the ability to accept cryptocurrency for payment, as well as how to properly track, account and secure those assets.
If you had to boil down the state of the digital asset “union” today, what would be the most important takeaway?
Simply put, traditional finance and alternative finance are starting to collide. The writing is on the wall — all assets will become digital assets – from the dollars in our wallets to public securities. This paradigm shift will touch all industries and create opportunities for those who choose to future-proof their businesses.