As I wrote recently, Bitcoin fans face a hurdle in justifying its soaring price: The lead cryptocurrency so far offers practically no practical uses. Still, many believe that the celebrated purchases by Elon Musk’s Tesla and Michael Saylor’s MicroStrategy foretell a rush to park corporate cash in this careening vehicle that out-zigzags stocks, gold, currencies, or just about any asset on the planet.
As Musk and Tesla CFO Zach Kirkhorn explain, Bitcoin’s a great vessel for garnering strong returns on war chests that typically generate puny yields. On the Q1 earnings call, Kirkhorn lauded the gambit as “a good decision,” noting that Bitcoin’s “a good place to place some of our cash that’s not being used…and get some return on that.” Tesla has feasted on its investment so far, gaining $1 billion in just three months from selling coins at a big profit and via the strong appreciation of the stash still on its balance sheet. For Bitcoin believers, where the business world’s top trendsetter goes, venturesome corporate captains will follow.
But is investing corporate cash in Bitcoin really a movement in the making? I asked Jerry Klein, managing director of Treasury Partners, a firm that manages fixed-income portfolios for dozens of companies. “I’ve been working with CFOs and treasurers for 25 years and reviewed hundreds of investment policies,” says Klein. “Virtually all emphasize safety and liquidity as the top priority. Very few companies will accept even modest risk with corporate cash.” Is the Bitcoin craze altering that ultraconservative mindset? Not at all, says Klein. “Not one of our clients has expressed interest in Bitcoin,” he notes. “I don’t see Bitcoin being widely adopted as an investment vehicle for corporate cash.”
Clients, almost without exception, says Klein, place their liquid funds in portfolios that comprise three types of investments: government bonds, including munis; money-market funds; and investment-grade corporates. “The allocations depend on their liquidity needs,” he says. Companies that do lots of M&A, for example, generally tilt more to money-markets, since they provide the quickest source of funding. On the other hand, biotech players that burn lots of cash but spend at a steady, predictable rate often rely more on “laddered” bond portfolios. “They don’t need lots of cash on short notice,” says Klein.
What all his clients share is an extreme aversion to risk. “The priorities are safety, liquidity, and yield, with yield a distant third,” he says. This approach applies not just to companies that use all their cash to fund inventories and accounts receivable, but those that prefer holding a large cushion. This is revealing, since Musk rejects that orthodoxy, asserting that cash not needed for everyday operations is cash ripe for buying Bitcoin.
That swashbuckling posture is the antithesis of the safety-first mindset of CFOs and treasurers Klein advises daily. “I’ve worked with many clients with excess cash balances,” he says. “They don’t seek to invest that extra cash in a way that would risk principal for a higher return.” Klein adds that many companies keep a big balance to fund R&D projects or merger opportunities that may arise unexpectedly, or “just for a rainy day.” Large cash holdings, conservatively invested, provide protection from another pandemic, a sudden drop in sales, or another unforeseen storm.
Above all, says Klein, companies want to avoid owning assets that risk even the slightest decline in value. “In 2016, when the regulations changed and prime money-market funds were forced to convert from fixed to floating net asset value, assets in prime funds decreased by approximately 90%. And that was due to fear of even tiny losses. This is just an example of how conservative corporate investors are.”
Prior to the financial crisis, a few companies risked their cash chasing big yields, chiefly by purchasing such structured products as auction-rate notes and mortgage-backed securities. Bristol Myers Squibb and others took a flier, and when the hurricane struck they suffered steep losses. Their daunting example provided a lesson that has helped keep almost every major U.S. company on the most cautious of paths. All the profits Tesla typically makes in a quarter could easily disappear if its Bitcoin holdings tank. Almost nobody else wants to pile a potential time bomb on their balance sheet. As usual, Elon Musk is going his own way. This time, it looks like few are following.
