Bitcoin corporate balance sheet strategies

Block, Inc (formerly Square) is known as one of the largest companies holding Bitcoin on balance sheet. With the news that the payments giant is now ramping up its Bitcoin treasury holdings via dollar cost averaging, let’s look at its “blueprint” to see what other corporations could learn from it.

Block’s Bitcoin strategy to date

Block, led by Twitter co-founder Jack Dorsey, has historically made large lump-sum purchases of Bitcoin (BTC). Per a recent statement, as of March 31, 2024, they hold 8,038 Bitcoins on their balance sheet, approximately 9% their total cash, cash equivalents, and marketable securities.

In a letter to shareholders in April 2024, Dorsey announced the company will be starting a program of investing in Bitcoin on a monthly basis via dollar cost averaging. Each month, Block will invest 10% of its gross profit from Bitcoin products into BTC.

Its Bitcoin products include Bitcoin mining hardware, the Bitpay self-custody Bitcoin wallet and the Bitcoin exchange service within its Cash App mobile payments platform.

What does DCA mean in Bitcoin?

Dollar cost averaging (DCA) is a strategy of buying or acquiring small amounts of an investment at frequent, regular intervals.

Instead of “timing the market”, which can be challenging with an asset like Bitcoin that has a reputation for volatility, an individual or entity can instead commit to frequent, incremental purchases that are planned in advance.

The idea is that over time, any swings in the Bitcoin exchange rate will level out (hence the use of the term “averaging”).

alt A line graph showing Bitcoin symbols at a series of high and low points on thr graph. A dotted line across the graph shows the average change in BTC value over time.

As Block puts it, “We believe this approach enables us to optimize our long-term investment position while minimizing the price risks associated with attempting to aggregate less frequent, larger purchases.”

From a practical point of view, the strategy is similar to consumer banking apps which give customers the option of “rounding up” the small change in their purchases in order to make savings, or – in a payroll context – employees who choose to receive a small proportion of their monthly salaries in Bitcoin or some other asset class.

Equally, regular pension contributions that are made on a monthly basis can be understood as a kind of DCA.

Analyzing the Block blueprint

Along with the announcement of its DCA strategy, Block released a blueprint that outlines their purchase and storage strategy. What can other companies learn from this? First, here’s a summary of the key points.

  1. The monthly Bitcoin purchases will be made using TWAP orders (time-weighted average price) via a liquidity provider. This is a similar approach to their previous execution of larger lump-sum payments, but in a narrower time frame, in accordance with the lower value of the transactions and improved Bitcoin liquidity versus 2020 and 2021.

  2. The private keys that are used to access and move the Bitcoin will be held offline in cold storage using a solution that Block themselves developed, called SubZero. To understand more about digital asset custody in general, see our series of articles on the basics of custody and considerations for enterprise business.

  3. Block has insurance policies to protect against internal or external theft of Bitcoin from hot (online) or cold wallets.

  4. With regards to accounting considerations, Block notes that guidance in this area continues to evolve. The latest update from the Financial Accounting Standards Board is that Bitcoin can be accounted for using a fair value treatment (read our detailed coverage of this here), and Block has chosen to adopt this early.

The bigger picture: Bitcoin corporate treasury adoption

Where does this move by Block fit within recent trends in Bitcoin corporate treasury?

As Reuters reports in its coverage of the Block announcement, 2024 has seen Bitcoin “come closer to the mainstream” following the approval of several Bitcoin ETFs (exchange-traded funds) by the United States Securities and Exchange Commission earlier in the year.

According to a recent cryptocurrency sentiment survey, awareness and ownership of Bitcoin could rise significantly as a result of the ETFs.

Meanwhile, crypto regulation continues to develop in the background, with examples such as the European Markets in Crypto-Assets Regulation (MiCA) aiming to improve the transparency and traceability of crypto transfers, prevent money laundering and establish common rules for consumer protection.

While Bitcoin remains an emerging asset class, there are signs that institutions and corporations alike are beginning to follow in the footsteps of the retail market.

The latest company to make headlines for its Bitcoin corporate treasury strategy is medical technology firm Semler Scientific. In May 2024 Semler’s chairman, Eric Semler, announced it was adopting Bitcoin as its primary treasury reserve asset, seeing it as a reliable store of value and a compelling investment.

Practical considerations for corporations

Block has a track record of both investing in Bitcoin as a balance sheet asset and contributing to growth of the wider Bitcoin ecosystem as a developer of Bitcoin infrastructure and products. It can be considered a Bitcoin-native company in this regard.

But what about companies that wish to explore holding Bitcoin on balance sheet, with no previous exposure to the asset class? At this stage, Block and companies like MicroStrategy, which pioneered holding large amounts of Bitcoin as a treasury reserve asset, are still outliers.

Dollar cost averaging may present a more accessible entry point for corporations wishing to diversify into Bitcoin, but there are a number of factors that must be taken into consideration when adding any degree of Bitcoin to balance sheet.

These include, but are not limited to:

Storage and custody options: As mentioned above, the storage of Bitcoin private keys is a crucial consideration. Key storage falls into two broad categories: custodial, which relies on a trusted third party, and self-custody, in which the responsibility is taken in-house, sometimes with help from an infrastructure provider.

Both approaches have their pros and cons, and depending on the circumstances, a combination of the two may best suit a corporation’s operating requirements.

Scalable internal controls: With no central authority acting as arbitrator, Bitcoin transactions are irreversible, which means the authority to create and approve transactions must be carefully controlled (and recorded). One of the key challenges for corporations moving into Bitcoin is adapting what was originally created to be a peer-to-peer system of exchange into a scalable operation that aligns exactly with existing hierarchies across the business.

Systems integrations: Many treasurers and their teams will face a steep learning curve when first contemplating digital assets such as Bitcoin. Knowledge of how the technology behind Bitcoin works can help understanding, but an easier approach is one which seamlessly integrates Bitcoin into existing back-office systems, such as the Fortris approach to treasury operations.

Compliance and reporting: While Bitcoin regulations continue to evolve, all the signs point to the importance of tracking and recording transaction data at a granular level, and ensuring that a clear off-chain record exists of any on-chain transaction. This way, finance teams can be confident they are meeting their compliance obligations in exactly the same way as for traditional currency transactions.

The Bitcoin Toolkit

The essential resource for corporate treasurers

Disclaimer: The information provided in this article is for educational purposes only and is not to be considered as financial advice.

Fortris handles digital asset treasury operations for enterprise business.

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