Author: Arunkumar Krishnakumar, CoinTelegraph; Compiler: Tao Zhu, Golden Finance

1. What is a corporate treasury?

The corporate treasury is the financial nerve center of the enterprise, responsible for ensuring liquidity, managing risks and optimizing returns. They are traditionally conservative, relying on fiat currencies, bonds and other stable investments. However, MicroStrategy breaks this mold by adopting Bitcoin as its primary funding reserve.

The main functions of the company's finance department include the following.

Liquidity management: ensuring that the company has enough cash to meet its obligations. This also involves ensuring that there is no liquidity mismatch between assets and liabilities. If short-term debt is expected to be financed by

long-term assets, that is a significant risk.

Risk Mitigation: Manage interest rate fluctuations, currency risk and credit risk. Typically, there are risk management teams dedicated to market risk, credit risk, operational risk and liquidity risk. Treasury works closely with these functions to ensure that its financial decisions take into account all these risk factors.

Short-term investment: Corporate finance holds the company's assets. It can be equity, debt or simply the cash flow generated by the business. The Treasury is responsible for allocating excess cash to low-risk, liquid assets to generate returns. Their role is to ensure that the yield on the company's assets is optimized while risk remains as low as possible.

Debt management: Processing loans and credit to maintain optimal leverage is an important function of the Treasury. This function is often called asset and liability management (ALM). As mentioned earlier, this function is not only responsible for managing the company's liabilities but is also critical to ensuring that there is no maturity mismatch between assets and liabilities. A company cannot plan to use assets due in one month to fund liabilities (interest payments on debt) due in one week.

Strategic planning: Supporting long-term goals through effective capital allocation is one of the strategic functions of corporate finance.

Therefore, the goal of money managers is to strike a delicate balance between risk and reward. Their main goal is to protect the company's assets from market downturns or liquidity crises.impact while ensuring they manage the best return on the company's remaining capital. They should also conduct risk management for periods of market volatility and stressful conditions.

This is the point of MicroStrategy adding Bitcoin to its vaults, challenging traditional norms and adopting a high-risk, high-reward strategy. As a result, this bold strategy transformed not only its balance sheet but also its stock performance, solidifying the company's position as a pioneer in cryptocurrency adoption.

Other companies that have adopted or are considering Bitcoin as a treasury reserve asset include Metaplanet, Semler Scientific, DeFi Technologies, Solidion Technology, Nano Labs and Cosmos Health.

2. MicroStrategy: A Visionary Bet on Bitcoin

MicroStrategy was once the darling of the dot-com bubble, but suffered a major blow after 2000, but was driven by innovative financial management under Michael Saylor Significant transformation has been achieved under his leadership.

By 2002, MicroStrategy's stock price was hovering between $1 and $2, reflecting market disillusionment and internal challenges. Over the next two decades, the company regained influence with its data analysis tools. However, its groundbreaking transformation began in 2020 when it adopted Bitcoin as its treasury reserve.

Bitcoin Adoption

MicroStrategy co-founder and executive chairman Michael Saylor sees Bitcoin as the antidote to fiat inflation. He believes that the purchasing power of the U.S. dollar is rapidly eroding, while Bitcoin has an excellent ability to maintain value due to its limited supply. This strategy transformed MicroStrategy into a hybrid software company and cryptocurrency investment vehicle.

MicroStrategy’s Bitcoin Accumulation Journey

As of November 24, 2024, MicroStrategy held 226,500 Bitcoins, solidifying its position as the world’s largest corporate Bitcoin holder.

MicroStrategy utilizes various financing strategies to fuel its Bitcoin purchases. Its strategy needs to be in line with mainstream financial services norms while ensuring it can handle volatile assets such as Bitcoin.

Equity Issuance: A company raises funds by issuing new shares, benefiting from rising stock prices as Bitcoin is accepted. Rising Bitcoin prices have eased the risk of selling pressure from new share offerings. This strategy requires timing.

Debt Financing: Offers low interest rates and future conversion optionsConvertible bonds became a key instrument. Additionally, senior secured notes help fund purchases during Bitcoin declines.

Free Cash Flow: Operating profits are redirected to grow Bitcoin reserves.

Bitcoin-backed loans: Leverage existing Bitcoin holdings, allowing companies to obtain additional liquidity without diluting equity.

By using a combination of the above strategies, MicroStrategy built a vault holding $22 billion worth of Bitcoin.

3. Timetable for MicroStrategy’s acquisition of Bitcoin

MicroStrategy’s bold Bitcoin acquisition strategy, using convertible notes and dollar-cost averaging, transformed it from a troubled software company into a Bitcoin agency. Pushing its stock price more than 1,000 times and redefining its market image.

Here is the timeline for their Bitcoin acquisitions:

As you can see, MicroStrategy uses a consistent dollar-cost averaging methodology across different Buy Bitcoin during market conditions to mitigate price fluctuations. The company also partners with institutional-grade custodians to ensure secure storage.

MicroStrategy’s transformation from a troubled software company to a Bitcoin proxy has seen its stock surge. Starting at $2 in 2002, the price exploded more than 1,000 times, peaking at over $2,000, largely due to Bitcoin's rapid rise and investors' belief that MicroStrategy was a way to gain access to Bitcoin investments without purchasing the cryptocurrency directly. way.

Bitcoin as an asset has historically outperformed traditional investments such as bonds or cash equivalents. MicroStrategy has followed this trend, significantly increasing its market capitalization and giving it a new role in the technology and financial world. While this may seem like a very aggressive money management strategy to many, most moves to achieve exponential growth in the capital markets initially look like abnormal decisions.

4. Returns from using Bitcoin as treasury reserves

MicroStrategy’s Bitcoin strategy has significant advantages. While financial strength is certainly an important aspect of this strategy, MicroStrategy has also successfully built brand equity through this financial management strategy.

Similar to gold, Bitcoin acts as a hedge against currency devaluation. This bold strategy has attracted forward-thinking investors looking to participate in Bitcoin's growth. Banks have traditionally relied on fractional-reserve banking, which can leave businesses vulnerable in times of crisis, as the collapse of Silicon Valley Bank showed.

Unlike banks, Bitcoin provides liquidity at any time through a decentralized global market, allowing businesses to quickly access funds without relying on centralized institutions.. By maintaining a Bitcoin vault, companies can reduce operational risk and ensure timely access to liquidity.

MicroStrategy has positioned itself as a thought leader in financial innovation, often mentioned alongside Tesla and Nvidia—not for its business fundamentals, but for its groundbreaking financial management strategies.

Bitcoin’s limited supply and growing adoption has generated huge returns for MicroStrategy investors compared to traditional financial assets. Despite all these positives for MicroStrategy, risks remain for them and those who want to draw inspiration from this strategy.

5. Risks and challenges of using Bitcoin as a treasury reserve

Although Bitcoin has many advantages, it also brings challenges and potential pitfalls as a financial asset. Building business finances on assets that can lose up to 75% in value during a bear market requires a lot of planning.

Volatility Risk

Bitcoin price fluctuations could significantly impact a company's balance sheet, causing fluctuations in reported earnings and shareholder sentiment. As prices and sentiment decline, the company may be forced to sell Bitcoin, which further leads to negative price action and sentiment.

In a market stress situation, the price of Bitcoin falls, causing the company's stock price to fall, and if the debt matures at the same time, the company's balance sheet may experience a systemic collapse. Additionally, bondholders may not convert the bonds into stock, resulting in cash repayments, which could exacerbate MicroStrategy's financial condition.

For its part, MicroStrategy has successfully mitigated this risk by setting a record for one of the deepest managed Bitcoin bear markets. The newly issued debt will mature in 2029, giving its core business ample time to generate additional cash flow, ensuring the Bitcoin-powered coffers are resilient during potential downturns.

MicroStrategy's last convertible note, issued in 2020, matures in 2025 and was purchased with additional capital raised by the company in 2024. This indicates planning for the next five years.

Liquidity Risk

The need to liquidate Bitcoin during a market downturn could exacerbate losses and destabilize the market. This would create a vicious cycle, like Terra, where the size of the balance sheet shrinks exponentially as Bitcoin must be sold to build cash positions, and the price of Bitcoin continues to fall in the process of obtaining cash.

If the corporate finance department falls into this vicious liquidity crisis, it will also be difficult to raise more funds.

Regulatory Risk

Regulatory risk for cryptocurrencies has been reduced in 2024 with the approval of a Bitcoin exchange-traded fund (ETF). However, there is still a lack of clarity around the accounting treatment of companies holding cryptocurrencies on their balance sheets.sex.

Regulatory shifts such as capital gains taxes or outright bans could devalue Bitcoin holdings.

MicroStrategy’s example may inspire other companies to overinvest in volatile assets. While diversification is critical, the trend toward excessive Bitcoin adoption could destabilize the broader corporate finance ecosystem, amplifying the risks of an economic downturn.

Ultimately, companies considering adding Bitcoin to their vaults must weigh Bitcoin's promise against its risks to determine whether it fits their financial goals and risk appetite.