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Wall Street Takes Note
When Aswath Damodaran, NYU’s finance professor and “Dean of Valuation,” speaks, Wall Street pays attention. He recently provided a stark assessment of the increasing trend of companies adopting Bitcoin since 2020.
Most Companies Are Making a Mistake
Damodaran’s conclusion? The majority of firms jumping onto the Bitcoin bandwagon are making a significant error, though there are a few exceptions where the risk may be justified.
Cash Reserves Under Pressure
U.S. companies currently hold an extraordinary $2.4 trillion in cash—about 9% of their total book value. Globally, this figure rises to $11.4 trillion. With changing interest rates and ongoing inflation concerns, corporate treasurers are feeling compelled to find ways to make this “idle cash” work more efficiently.
MicroStrategy’s Influence
Bitcoin advocates, including MicroStrategy (NASDAQ:MSTR) Executive Chair Michael Saylor, argue for the abandonment of traditional cash in favor of digital currency. While MicroStrategy’s stock has surged since it embraced Bitcoin in 2020, Damodaran cautions that this apparent success conceals deeper underlying issues.
Risks of Corporate Bitcoin Adoption
Damodaran outlines five key reasons why Bitcoin is unsuitable for the majority of corporate balance sheets:
- Poor Shock Absorption: Bitcoin’s extreme volatility prevents it from serving as a reliable financial buffer during downturns.
- Core Business Distraction: Investments in Bitcoin may lead investors to question why funds aren’t directed toward growth or returned as dividends.
- Poor Trading Skills: Corporate executives typically struggle with market timing, a challenge exacerbated by Bitcoin’s volatility.
- Desire for Shareholder Control: Many shareholders prefer dividends, giving them the discretion to invest in Bitcoin themselves.
- Opportunity for Misconduct: Allowing managers to trade volatile assets carries risks of financial misconduct and lack of accountability.
When Bitcoin Might Make Sense
Despite his criticisms, Damodaran acknowledges four scenarios in which it might make sense for companies to hold Bitcoin:
- Expert Leadership: Companies led by trusted Bitcoin experts, similar to how Warren Buffett operates at Berkshire Hathaway.
- Operational Necessity: Firms like PayPal (NASDAQ:PYPL) that need Bitcoin for their core activities.
- Currency Stability: Companies in countries with unstable currencies, where Bitcoin provides a more reliable alternative.
- Meme Stocks: Firms that have pivoted into meme stock territory, such as AMC Entertainment (NYSE:AMC), might use Bitcoin to redefine themselves.
Consequences of Institutional Adoption
Damodaran warns that widespread institutional adoption of Bitcoin might dilute its unique qualities, as it starts to behave more like traditional equities, losing its appeal as a non-correlated asset.
Final Thoughts
For many companies, Bitcoin may serve as a risky diversion from their primary objectives. The few exceptions need explicit shareholder consent, total transparency, and stringent accounting standards. Ultimately, the debate isn’t merely about Bitcoin’s future price but whether firms should gamble shareholder money on volatile assets they may not fully comprehend.
