Monday Momentum: Bitcoin Allocations

Recently, a company called Semler Scientific ($SMLR) stashed most of the cash on their balance sheet in Bitcoin. This amounted to a 581 BTC purchase worth $40 million. Their most recent reported cash holding was $62.9 million, so the $40 million purchase was a substantial chunk of this cash balance. Their stock price jumped more than 20% when they disclosed this purchase, but that is a side benefit which is separate from the main point.

So why would a company consider having BTC on its balance sheet, and have other companies managed to do this successfully in the past? Investing cash into assets or even ownership in other companies is common practice. Many companies will report these kinds of activities on their income statement; if the company has investors, finding this information is relatively easy. But what is the benefit?

Corporate Investment

The practice of a company investing some of its cash into assets or stakes in other companies is known as "corporate investment" or "strategic investment." This can take various forms, including purchasing equity stakes, acquiring other companies, or investing in other assets like bonds, real estate, or intellectual property.

You’ve likely heard of larger companies acquiring smaller ones through merger and acquisition (M&A) activity. Large tech companies like Google or Apple will often acquire new technology by purchasing established startups. This is more advantageous, and noticeably faster, than building this tech in house. Once those companies are acquired, they often retain the founders of these startups to continue leading that project with the help of more resources and a larger team.

Some of the other benefits of these types of investments include better financial returns, diversification of revenue streams, hedges against changes in economic conditions, increased market influence and control, and certain tax benefits. Corporate tax law encourages “smart” use of cash, and it is better for a company’s bottom line to put excess cash to work instead of letting it be eroded by inflation.

The ultimate inflation hedge?

Many of the proponents of Bitcoin have argued that it is an effective hedge against inflation. BTC has a fixed supply, meaning only a certain number of coins will ever be created. This leads to scarcity, much like the quantity of available gold which the US dollar was previously tied to. If an asset has a fixed amount, and more cannot be easily created, then the price of that asset will be naturally resistant to inflation.

This assumes, of course, that there are enough people who agree that the underlying asset is valuable. With gold, its value has been universally agreed upon for centuries. With BTC, this agreement is much more recent.

As we discussed last week, with institutional investors now creating products tied to the value of BTC and ETH, these cryptocurrencies are gaining more social backing and broader acceptance. In fact, BTC has often been called “digital gold” as this widespread adoption has increased. With more backing by large institutions, and a global fixed supply, BTC has started to make its case as an inflation hedge. There are still some issues, as BTC price has had some correlation with tech stocks and the broader market; it’s hard to be a hedge when you move in the same direction as the rest of the market.

All my friends are doing it

Semler Scientific is not the first company to hold BTC on its balance sheet, and it likely won’t be the last. Tesla famously purchased $1.5 billion in BTC in early 2021. While it sold off a large chunk of these holdings, it still has around $184 million worth.

On the extreme end, one can look at the investment activity of MicroStrategy, a business intelligence and software company. Heading into 2020, MicroStrategy was facing several headwinds including stagnant growth and declining stock performance. The company also held large cash reserves that were sitting idle, generating very low returns.

The executive chairman and founder of the company, Michael Saylor, announced a unique strategy at this time: he invested $250 million in BTC, representing the largest concentrated bet at the time. Since then, they have consistently added to their BTC holdings each quarter. In their most recent financial reports, MicroStrategy held 214,400 BTC at an average cost of $35,180 per coin (the current BTC trading price at the time of writing is $67,840). Their bold bet paid off, and helped bolster the stock price and overall health of the company.

Internal investment strategies

This is obviously one of several corporate investment strategies. The reason it is interesting, however, is that companies are now changing the way they think about M&A and other investments. Purchasing companies for resources, talent, or intellectual property is nothing new. Creating internal investment teams to build company stockpiles, however, is.

I’ve spoken with several successful investors who are now building mini hedge funds within larger companies. Instead of overseeing the funds of a wealthy family or series of pension funds, these firms are managing portions (or the majority) of a company’s cash reserves.

These behaviors are driven, in large part, by the current economic landscape. When money was essentially free (low or zero interest rates), taking bets on several small companies was a profitable move. Venture and Private Equity firms spent the last few decades bringing in stratospheric returns. But now interest rates are on the rise, inflation has been persistent, and the global economy is teetering on the brink on disaster.

Strategies that were once viable are no longer as safe. Hedge funds have changed in a big way (more on this next week), and now that these shops are popping up within larger companies, the landscape of investing will continue to change and evolve. I don’t know what the net effect of this will be, but it’s incredibly interesting to watch corporate investment strategies change over time. Further, it’s cool to see companies leveraging their capital in new and novel ways.

TL; DR - Corporate investment is the age-old strategy of leveraging cash reserves to grow business assets. In the past, this was typically done through M&A activity. Several companies have now purchased BTC as a hedge against inflation, and more still are creating internal investing teams to use company cash in new ways. As large companies become bigger players in the broader market, it may change market dynamics moving forward.

What I’m interested in this week

1. “Howard Marks: How Writing Helped Him Raise Billions” on the How I Write podcast

2. “Placing Multiple Bets on a ‘Mosaic of Solutions’ With Former Global Payments CEO Jeff Sloan” on A16Z’s In the Vault podcast

3. “GenAI in Financial Services: a New Era of Opportunity and Risk” on Corinium