Friday, October 16, 2020

How to put Bitcoin on your Balance Sheet

The COVID-19 pandemic and the resulting economic crisis has pushed all governments around the world to print money like never before resulting in a global devaluation of cash assets. People and companies sitting on large piles of cash have struggled to invest that cash into harder assets such as gold, real estate or equities (in particular big techs that have been perceived as less immune to the COVID-19 dislocation event). 

But more and more people have been turning to Bitcoin as well. Indeed the cryptocurrency has all the characteristics of a hard currency (the supply is limited by a hard cap of 21 million coins) without the downside of existing options (lack of convenience, low liquidity, elastic inflation -- as prices increase, inflation rate increases as well along with economic incentives). As fears that government might outlaw the cryptocurrency fade away, more and more corporates are taking the plunge. This is a virtuous circle: as more and more companies hold the cryptocurrency on their balance sheet, and as governments acknowledge and regulate that behaviour, the legal risk evaporates. 

Microstrategy was the first public company to announce that they converted the majority of their Treasury into Bitcoin, a total of $425 million. Since then a number of businesses have disclosed that they had done or intended to do that as well. An employee of Coldcard has even put up a web page listing those businesses

Converting part of your Treasury into Bitcoin is more complex than converting it into another currency, especially if you don't have the resources of a large public company. But if you're ready to protect your funds with a swarm of cyber hornets, here are some of the issues and how to deal with them:

Security

As most people know, holding Bitcoin is hard. Everyone has heard of hacks or mistakes that have cost Bitcoin owners their savings. As a company putting a significant amount of your Treasury in Bitcoin, you have a fiduciary responsibility to ensure that those funds are secured properly. You have basically 3 options. 

The first option is to use a custodian. Major custodians such Bitgo, Coinbase or Gemini will not be interested by small businesses. But more and more banks are now able to custody your Bitcoins. One such bank is Swissquote based in Switzerland that will happily open a bank account for your UK business. 

Another option is to open an account at a bank or a broker and invest the cash into a tracker fund. There are a number of exchange listed funds now available in Europe that track Bitcoin performance such as those from XBT provider or ETC Group. While you don't hold the asset directly, those funds will replicate the performance of Bitcoin with very little counterparty risk. 

The last option is to self-custody. It is the preferred option for hardcore bitcoiners but it's the riskiest one as securing cryptocurrencies is very difficult especially for a novice user. Unless you know what you're doing I would not venture there. But if you really want to go this route, you should go for a multisig setup and vendors such as Casa or Unchained Capital provide products that make as painless as possible today. 

Accounting and Tax

Last year HMRC gave some clarity when it comes to accounting of cryptocurrencies. Like in most jurisdictions, the UK tax office considers cryptocurrencies in general and Bitcoin in particular to be assets and not currencies. It makes cryptocurrencies a very poor choice as a payment rail but a good option as a store of value as it makes holding volatile cryptocurrencies less risky from a tax standpoint (since there is no revaluation at year end but only upon sale). It also means that the tax treatment will be identical whether you choose to hold Bitcoin itself or a tracker fund. 

Unless you sell, the only thing that you need to do is to mark-to-market your Bitcoin position at the end of the year (your accountant will know how to do that). It has no tax impact. 

If you buy some more at some point, it will change your average purchase price and if you sell, you will realise a gain or loss that is taxed at the corporation tax rate. 

Conclusion

Converting part of your available cash into Bitcoin won't make your company profitable if it's not already profitable but it will allow you to preserve your capital as the UK government continues to print money. And you don't have to be a multinational to do it!

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