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Bitcoin as collateral ── Read the news of Tesla, Chair Powell, Genesis


I would like to combine the three seemingly irrelevant stories of late April to highlight the overlooked trends.

First, Tesla’s first-quarter earnings report revealed that the company sold $ 272 million worth of Bitcoin (BTC) in the same period. According to CEO Elon Musk, it was to test the liquidity of the market. In addition, $ 101 million was added to the quarterly profit.

Secondly, Genesis Trading (owned by DCG, the parent company of CoinDesk in the US), a crypto asset (virtual currency) lending company, also announced its first quarter financial results, and the loan balance is 9 billion dollars (about 98 billion yen) It was revealed that it exceeded. This is an increase of 136% compared to the previous quarter.

Third, Federal Reserve Board of Governors (FRB) Chair Powell spoke of macroeconomic conditions and maintained an average inflation outlook of 2% over the next few years.

What is the relationship between these three stories? There are three things you need to think about to get the answer. One is the increasing use of Bitcoin as a reserve asset in corporate balance sheets. The second reason is that companies are currently using Bitcoin. And third, companies are likely to want it in the future.

Bitcoin on balance sheet

First, let’s look back at the story as an asset on the balance sheet.

Companies that invest in Bitcoin as reserve assets usually cite value protection as their primary reason. While the value of fiat currency inevitably declines, Bitcoin claims to retain its purchasing power.

A priority for a company’s finance department is to secure the funds it needs now and in the future for its business and strategic investments. Some Bitcoin supporters argue that Bitcoin is an ideal financial asset, despite concerns about liquidity.

Software company MicroStrategy kicked off this trend in August last year by revealing a financial strategy to hold a portion of its money in Bitcoin.

The company continued to increase its Bitcoin holdings and even raised funds for it. In February, an event was held to inform other companies about its benefits and how to do it, and it was reported that more than 8,000 participants were interested.

Other companies that hold Bitcoin as reserve assets include Square, Aker, and Meitu, and Korean and Japanese game company Nexon is $ 100 million (about 10.9 billion yen). Announced that it bought a considerable amount of Bitcoin. This is about 2% of the company’s cash and cash equivalents.

The aim of Tesla who sold Bitcoin

And Tesla. After Tesla and MicroStrategy CEOs Musk and Sailor communicated publicly on Twitter, expectations were raised that Tesla would soon start investing in Bitcoin.

And that expectation was not betrayed. In February, it announced that it had invested $ 1.5 billion (about 163.7 billion yen) in Bitcoin. And according to the 2021 Q1 earnings report, about 10% of that, Bitcoin, was sold for $ 272 million. Musk tweeted that it was to “test the liquidity of the market.”

For many reasons, this was a smart move. First of all, liquidity when investing. The $ 1.5 billion investment is estimated to have been carefully carried out over the course of several weeks. And apart from that, there is also liquidity when selling. A company’s finance department needs to be reassured that its reserve assets can be converted into working capital immediately. With this move from Tesla, other companies can rest assured that they don’t have to worry too much about liquidity risk.

The sale added $ 101 million to revenue, which also gives a strong message. Liquidation of traditional “cash equivalents” usually does not significantly affect net income.

With this move, Tesla reports that there are “cash equivalents” that perform the dual function of maintaining value and potential profits. By holding a large amount of Bitcoin and supporting crypto assets, MicroStrategy has transformed its value proposition from a software company to a publicly traded Bitcoin advocate.

But companies don’t have to go that far. By investing a few assets in Bitcoin, you can maintain your core business while still having the potential to act as a buffer when profits are unacceptable.

Borrowing loan growth

Next, looking at Genesis’ loan books, US dollar (USD) and stable coin loans more than doubled in the first quarter. Demand for this type of loan is currently largely supported by ongoing opportunities for basis trading in the Bitcoin futures market. The future will be supported by a growing understanding of the efficiency of Bitcoin as collateral and an increase in the number of Bitcoins that can be used as collateral.

Many of such Bitcoins will be held on the company’s balance sheet.

Tesla has shown that it is possible to liquidate a fairly large BTC position. Genesis has shown that by acting as collateral for fiat loans, it is possible to raise working capital in a BTC position without creating taxable events.

This further enhances the legitimacy of holding Bitcoin as a corporate reserve asset. The first reason of interest may be concerns over the long-term value of cash and cash equivalents. And the fact that it’s relatively easy to raise money with assets that aren’t tied to the economic cycle will make it even more interesting.

Inflation outlook

Fed Chair Powell’s remarks also help. Inflation is allowed to temporarily exceed that level as inflation consistently falls below the target of 2%, Powell admitted. In fact, the 10-year break-even rate of inflation outlook for the market exceeded 2.4% for the first time in eight years.

This is a worrying prospect in that it lowers the actual value of the currency more than the market is accustomed to expecting. With inflation expected to exceed 2% over the next few years, corporate finance will be eager to find a way to protect assets from what MicroStrategy CEO Sailor calls the “melting ice” effect.

And Powell’s admission that the quantitative easing policy will continue for the foreseeable future will raise concerns about the depreciation of fiat currencies.

These trends will eventually encourage more companies’ finance departments to invest at least some of their reserve assets in Bitcoin. And the pool of Bitcoins that can be used as collateral will expand further.

Bitcoin as collateral

And more importantly, the use of Bitcoin as collateral has just begun.

We have already seen significant growth in the crypto-backed lending industry, as typically shown in the Genesis earnings report above. I don’t have a breakdown of how much of that collateral is Bitcoin, but most of it can be thought of as Bitcoin.

The same goes for the growing use of crypto assets as collateral in the booming, leveraged derivatives market. As reported by Brady Dale of CoinDesk, the total market capitalization of tokens for decentralized finance (DeFi), a loan and other financial application, exceeds $ 120 billion. , Reached a record high.

WBTC (Wrapped Bitcoin), a 100% Bitcoin-backed Ethereum-based token created to use Bitcoin as collateral in DeFi applications, also reached a record high of $ 9.5 billion two weeks ago. 103.7 billion yen) was recorded.

But all of this can also be hazy before the use of Bitcoin as a collateral asset in bilateral repo transactions.

Companies use their current assets to borrow cash in the short term to fund their operations. The repo market backed by “safe” securities such as US Treasuries was estimated to be about $ 4.1 trillion at the end of last year, of which about $ 1.3 trillion (about 142 trillion yen). ) Is believed to be due to non-banking and non-securities dealer companies.

Of course, Bitcoin will not be as liquid as the US Treasury market in the near future. And volatility will always remain much higher. But in overnight lending to companies operating in various currencies, Bitcoin may begin to be seen as an attractive alternative collateral with the potential to boost profits when needed.

And lenders may be attracted to the nature of bearer assets, which are easy to move as collateral, not to mention good yields. In addition, there is the merit of holding assets whose value does not decline due to an increase in the money supply and an increase in the inflation rate.

The market infrastructure for this is already being built by major lending service companies in the crypto asset industry. Decentralized lending service companies are even beginning to offer repo-like mechanisms. Banks, a traditional major participant in the repo market, are already increasingly involved in crypto assets. To regulators, the transparency of blockchain-based collateral will look fresh in contrast to the opaque and complex ownership entanglements inherent in the current market.

But crypto assets do pose different types of risks in volatile and complex situations. There are many hurdles that must be overcome before the concept of Bitcoin as collateral can make a meaningful difference in the current financial ecosystem.

Changes are already underway in many aspects of the market, with signs pointing to Bitcoin’s broader financial role, not just assets on the balance sheet.

| Translation / Editing: Akiko Yamaguchi, Shigeru Sato
| Image: Shutterstock
| Original: Crypto Long & Short: Bitcoin’s Potential as a Collateral Class

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