Bitcoin Custody for Businesses: Strategies & Benefits

Businesses worldwide are exploring ways to integrate bitcoin into their financial strategies. This development isn't just about staying trendy; it’s grounded in solid financial reasoning.

Why would companies want to custody bitcoin, and which type of entities should be adding bitcoin to their balance sheets? This article explores these questions, accompanied by concrete examples of successful corporate bitcoin strategies.

Why Businesses Would Custody Bitcoin

Hedge Against Inflation

One popular way of thinking about bitcoin is the analogy of "digital gold." Unlike fiat currencies, which central banks can print at will, bitcoin has a fixed supply of 21 million coins.

This scarcity makes it an excellent protection against inflating fiat currencies, especially over the long term. Historical data show that when traditional currencies drop in value due to inflation, bitcoin tends to hold its ground:

Bitcoin can act as a protective shield against the eroding value of fiat money. In other words, bitcoin is an invaluable tool for companies that want to exist for the long term. 

Portfolio Diversification

Diversification isn’t just for personal investments. It applies to corporate treasury management too. Adding bitcoin to a company's balance sheet helps businesses reduce risk by not having all their assets tied to traditional financial instruments.

Bitcoin can improve a portfolio’s Sharpe Ratio (a measure of an asset’s risk-adjusted returns) when added to a mix of other assets such as stocks, bonds, and real estate. Adding bitcoin to a firm’s balance sheet is a sound financial decision when it comes to creating a more diversified investment portfolio.

Potential for High Returns

Bitcoin's historical performance could make even Wall Street veterans nod in approval. Over the past decade, Bitcoin has consistently stood out for its higher than average returns:

Companies investing in bitcoin have the potential to experience significant returns, offering an enticing upside. However, this also assumes the company is currently profitable and has sufficient money so that the business can withstand the volatility that comes with owning bitcoin over the long run.

Technological and PR Benefits

Holding bitcoin can also give a company a modern, tech-savvy image, not unlike how adopting cutting-edge technology can enhance a brand's appeal. Plus, companies seen as innovative may attract top-notch talent and a new base of investors.

Increasing Institutional Adoption

The tide of institutional adoption is strengthening as more institutions begin opting to hold bitcoin. This is in addition to the price exposure that others can now achieve through the spot bitcoin ETFs provided by Fidelity, BlackRock, and others. Peer pressure could soon make bitcoin exposure a business norm rather than the exception.

Implementing a Bitcoin Balance Sheet Strategy

Developing a Strategy

Before diving in, companies need a solid plan approved by the board. Objectives should be crystal clear: Is the goal investment-oriented, or is Bitcoin being used for operational purposes?

Considering Custody Options

Third-Party Custody

A popular option has been to purchase and “hold” bitcoin through a third-party custodian. This reduces the business’s risk of losing the bitcoin since the business does not hold the private keys that allow the bitcoin to be moved.

This comes with a major downside, though. If the exchange where the bitcoin is held becomes insolvent, the bitcoin is lost. This is why self-custody is generally considered the best approach.

In-House Custody

For those who want full access to their bitcoin, in-house custody is a good option. For a small business, this may make sense. But there is risk involved. For instance, if a disgruntled partner or employee gets access to the private keys, the bitcoin can quickly disappear.

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Unchained removes much of the risk with their multi-sig solution for businesses. With this setup, Unchained holds one or more of the keys needed to move the bitcoin. In this case, a majority of keyholders must agree for their bitcoin to be moved.

Multi-Institutional Custody

A third option combines elements of the first two. Multi-institutional custody is provided by Unchained as well as others like Onramp that specialize in this area.

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In this scenario, the business is not required to hold any keys; rather, it selects various trusted institutions to hold keys for them. These institutions may be geographically distributed to decrease jurisdictional risk.

Who Should Add Bitcoin to Their Balance Sheet?

Any company that can hold assets on its balance sheet across a period of multiple years could benefit greatly from including bitcoin.

Bitcoin is an asset that operates without any connection to the traditional financial system. If a bank were to fail again like SVB, Signature, or Silvergate did in 2023, having one- or two-months’ worth of bitcoin for payroll and operational costs could save the company.

In addition to companies who want to have alternative savings, retail and consumer-facing companies could benefit from holding bitcoin on their balance sheet.

Such companies might benefit operationally from accepting bitcoin as payment (rather than dealing with high fees from credit card payments). In this case, a bitcoin position may be built over time through means of payment rather than procurement.

Examples of Successful Implementations

While a variety of companies have a bitcoin balance sheet strategy, here are some  of the most popular and/or recent examples:

• MicroStrategy: Former CEO and current Executive Chairman Michael Saylor has used all means of financing available to the company to purchase more than one percent of the total bitcoin supply. The stock has surged nearly 850% in the last five years.
• Tesla: Elon Musk’s Tesla holds nearly 10,000 BTC on its balance sheet.
• Block (Square): Block holds over 8,000 bitcoin and announced a plan to dollar cost average (DCA) 10% of their gross profits from bitcoin products into bitcoin purchases.
• Metaplanet: This Japanese investment and consulting firm announced plans to raise approximately $70 million, with nearly $60 million going to the purchase of bitcoin.
• Semler Scientific: This medical technology company had nearly half its market value in cash and decided to purchase over 1,000 bitcoin with this significant cash position.

Conclusion

While bitcoin is still a speculative asset in many people’s eyes, it is rapidly becoming a mainstay in corporate finance. From hedging against inflation to diversifying portfolios and enjoying substantial returns, bitcoin has proven itself over the years.

Companies eyeing future growth should seriously consider adding bitcoin to their balance sheets and follow best practices for securely taking custody of this asset. Successful and secure adoption takes some planning, but it can be rewarding and ensure a business’s financial future for years to come.