As bitcoin and other cryptocurrencies continue to grow in user numbers and popularity, we are starting to see more businesses, institutions, and corporations adding cryptocurrency to their balance sheets. . Many large companies started buying cryptocurrency last year during the rising price of bitcoin. We will see in this article why it can be interesting, how to invest and what are the risks.
Why would a business want to buy cryptocurrency?
Cryptocurrencies can be an attractive investment for many businesses because they can diversify a business’s portfolio and create a new revenue stream that can be used to grow the company.
Investing in cryptocurrencies is also possible opening new payment channels for businessesas many cryptocurrencies, such as bitcoin, can be used as a method of payment for goods and services.
The number of businesses that accept bitcoin as a means of payment is constantly growing, because cryptocurrencies are starting to become popular with everyone.
Institutional adoption of cryptocurrencies has steadily increased over the past few years. At the end of 2021, BitcoinTreasuries reported that 34 listed companies collectively hold 213,000 bitcoinsincluding companies that do not operate in the cryptocurrency industry.
Among these companies, it seems interesting to study the situation of Tesla and MicroStrategy and the reasons for their investment in cryptocurrencies.
Prominent electric vehicle maker Tesla added bitcoin to its balance sheets in the first quarter of 2021. Tesla founder Elon Musk, CEO and cryptocurrency enthusiast said that the company holds bitcoins worth US$1.37 billion. He continues to sell bitcoins.
For a time, customers can choose to pay for their Tesla with bitcoins. Musk then announced that he would no longer accept BTC due to the environmental costs of bitcoin mining.
Tesla is starting now accepts Dogecoin payments for Tesla products available in his online store, because the cost per transaction of dogecoin is lower than bitcoins.
Meanwhile, MicroStrategy is a world-renowned trading analytics platform that adopts bitcoin as its primary reserve asset. MicroStrategy has a total of 129,218 Bitcoins but this number is subject to change as the company regularly acquires.
The company’s CEO Michael Saylor said that the reason the company added bitcoin to its balance sheet combat the effects of inflation and cut the company’s ties to money.
The reasons for a company, regardless of its size, to invest in crypto-currencies are therefore many, namely diversification, image, liquidity, access to DeFi or even the limitation of the effects of inflation.
The most common way to buy bitcoins is to buy them on a cryptocurrency exchange. Like any traditional brokerage account, they allow users to transfer funds to the account via wire transfer and place trades in their order book.
The first step you need to take to buy bitcoin as a business is register with a cryptocurrency exchange that offers dedicated business accountssuch as Binance, Kraken or Coinbase.
Opening a personal account and trading in the name of the company is not a good idea and may complicate your activities from a legislative point of view (in many countries) and open new problems in taxes regarding your crypto-assets.
In addition, in most cases, you will benefit from higher funding limits and better customer support just use a personal account.
The second step in buying bitcoins as a business is actually placing the purchase order. First, you need to transfer funds (euros, dollars, pounds, etc.) from your company’s bank account to the platform.
Some business bank accounts block transfers to and from cryptocurrenciesso that you know in advance about your bank’s position on cryptocurrencies.
When the funds arrived on the platform, you must place your order. In general, there are two types of orders. If you only want to buy at the current bitcoin price, you submit a “market order” and if you want to buy at a specific price, you submit a “limit order”.
However, the latter is preferred in all cases because it allows avoiding the risk of sudden movements and lack of order book volume which can cause a significant change in the purchase price, especially if a lot is processed.
What are the business risks of buying cryptocurrency?
Cryptocurrency is defined as a decentralized digital currency intended to be used to buy or sell goods and services or as an investment.
The risks of buying cryptocurrencies in a company exist most of the known worldwide risks of crypto-assets.
In fact, high volatility that can lead to large losses, hacks and other scam projects are the main risks of this type of asset.
However, the growing use of cryptocurrencies in businesses there is a new type of risk. In fact, companies that invest in cryptocurrencies generally do so through their available cash.
This makes it possible to provide access to a new market (decentralized finance), to combat inflation or even generate capital gains in the long term, but it involves a significant risk, especially if the percentage of cash held in crypto-currencies is high..
In fact, crypto-currencies with very high volatility, the risk of bankruptcy for the company is very present. For an individual, it is usually possible to “let the storm go” when his portfolio of crypto-assets falls by 80% while waiting for a possible increase.
However, for a company, the situation is different. If the counter value of the company’s currency suffers a significant decline, as in the case of bitcoin in the graph above, its financial health can quickly deteriorate.
The company can then find itself cannot invest, pay bills or wages. The company may also lose the trust of stakeholders (suppliers, partners, creditors, customers).
These risks should be better understood by the company to avoid putting itself at financial risk. The amount of money used for this type of investment remains the main lever for limiting these risks.
In the case of a businessman who invests in crypto-currencies through his own company (for tax or other reasons), the risks very similar to what retail investors have to bearas long as the sole purpose of the company is financial investment.
More and more businesses are using bitcoin and cryptocurrencies for investment and operational purposes.
Cryptocurrencies have the potential to deliver businesses new ways to facilitate payments and access new pools of liquidity which cannot be accessed through traditional investments.
However, it involves many risks, both classic as volatility, but also practical due to the specifics of a company’s accounting.
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