Institutional DeFi platform Sentora recently published a new report, arguing that the corporate adoption of bitcoin as a treasury asset, while popular, resembles “balance sheet roulette.” The report goes on to suggest that bitcoin’s scarcity and programmability make it an unprecedented corporate asset. But, without scalable yield and durable financing, this is a dangerous game.
The bitcoin accumulation strategy is based on a centuries-old wealth-building playbook that is structured to borrow fiat to acquire a scarce, hard asset. Unfortunately, the critical flaw in the strategy of accumulating coins with borrowed money is a negative carry trade, as bitcoin is a zero-yielding asset like gold. Unlike productive assets, bitcoin does not generate income or cash flow on its own. It just sits on the balance sheet. Therefore, the cost of borrowing money to buy bitcoin is a direct, ongoing expense.
The return from the bitcoin strategy is wholly dependent on capital gains, presumably stemming from continued price appreciation. If the market price of bitcoin declines, or just stagnates, the pressure on the collateral backing the debt puts the entire company at risk.
Investors should always understand a company’s financial structure, but for those situations involving a significant bitcoin strategy, it is particularly important to understand the implications of a deterioration in bitcoin prices.
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA
