Is ETH Coming to Corporate Balance Sheets?

Is ETH Coming to Corporate Balance Sheets?

MicroStrategy, Tesla and Square have done it. So have many others, although more quietly.

I’m talking about holding corporate treasury reserves in bitcoin. This trend is attracting attention even from trade press. Consultancies and crypto companies are scrambling to launch services to help businesses navigate the process. “Mad Money” host Jim Cramer thinks it’s “almost irresponsible” for companies to not do so. This week, sponsored content from Deloitte explaining the benefits and risks appeared in the Wall Street Journal.

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Whether it’s a good idea or not – that’s up to each corporate treasurer to decide – one question we’re starting to hear is: “What about ether?”

Would the native token of the Ethereum blockchain make a good corporate reserve asset?

Bitcoin on balance sheets

The main arguments for bitcoin as a corporate reserve asset are:

The asymmetric risk return

As part of a future-first strategy

In preparation for accepting bitcoin as payment

It is more likely to hold its value going forward than the dollar

This last point is key, as the main role of the corporate treasury function is the preservation of capital. Here bitcoin’s leading value proposition – as a store of value – comes into play.

Critics will point out that bitcoin is way too volatile to be a store of value. That’s a short-term view of the concept, however. Over the next week, month, perhaps even year, bitcoin’s price may fall relative to fiat currencies. Longer term, however, in an environment of money supply increasing much faster than demand, a fixed-supply bearer asset such as bitcoin is likely to appreciate in value relative to assets without a fixed supply, such as the U.S. dollar. As investor Paul Tudor Jones pointed out, even at only the 2% inflation target, cash is a “wasting asset.”

Do these arguments hold for ether?

Not so much, no. But that doesn’t mean ether won’t end up on corporate balance sheets.

Store of value

Ether’s supply has no limit. It is still considered a store of value, however, as its supply growth is modest (currently around 4%, expected to decrease over time) and likely to remain well below growth in demand.

Yet the store of value narrative is not – at this stage – the main driver behind ETH’s investment case, especially in the eyes of institutional investors.

Ethereum is seen more as a technology play. More than that, it’s one of the more liquid, experimental technology plays accessible to investors today. It’s not just trying to build a faster rocket or streamline dentistry. It’s aiming to reinvent the way automated applications of any type are run. Its goal is to build the ultimate base layer of a global digital economy. As well-known macro analyst Jim Bianco said earlier this week, decentralized finance is “recreating the entire financial system.” Ethereum-based applications are also likely to impact markets, governance, energy, public services, perhaps even how identity is managed.

What’s more, this will happen on a network that can reach anyone, anywhere, who can connect to a public network.

Bitcoin is also a technology bet – it unleashed on the world an entirely new way of transmitting value. But the basic parameters were baked in at conception. Meaningful upgrades are few and years in the making.

Ethereum is not only a bet on the growth of a decentralized economy, it’s also a bet on a whole new type of connectivity and innovation layer. And its technology is not yet fully formed.

Because it is such an early bet on such a radical innovation, the risk is even higher than with bitcoin. This can be seen in its volatility:

If bitcoin’s volatility is a deterrent for corporate treasurers, ether is understandably even more so.

Ether on balance sheets

This doesn’t mean that ether won’t end up on corporate balance sheets, however. Rather than as corporate reserves, it’s more likely to do so in working capital.

Ether is needed to power applications on Ethereum, either as an input or for the transaction fees. Any company hoping to use the Ethereum platform for internal processes such as contract management, collateral allocation or yield optimization, or for client-facing services such as trading, lending or insurance, will need a steady supply.

The launch of ETH futures on the CME earlier this year will encourage this, as it offers tools to reduce the volatility risk. The maturation of ETH options will further support risk management.

The accumulation of ether as working capital may have already started. This week, Meitu – a software and social media app company listed on the Hong Kong Stock Exchange – disclosed purchases in bitcoin and ether of approximately $18 million and $22 million respectively, and had this to say about its ether purchase:

“The Group is currently evaluating the feasibility of integrating blockchain technologies to its various overseas businesses … the ether purchased would become the gas reserve for the Group’s potential dAPP(s) to consume in the future.”

It is early days yet as few companies outside the crypto industry have integrated Ethereum-based applications. Signs are emerging that interest is awakening, however. This week, multinational insurance company Aon Mutual, whose origins go back more than 100 years, embarked on a decentralized insurance pilot. Last month we reported that Deutsche Telekom, Europe’s largest telecommunications company by revenue, was experimenting with decentralized data.

As Ethereum use cases begin to impact traditional businesses, and as even more crypto companies using decentralized applications grow to meaningful size, we will start to hear more mainstream conversations about ether on balance sheets.

Greater focus on the asset’s role in powering digital processes will add another layer to its value proposition. As we saw above, ether is a technology play. It is also a store of value. Institutional investors are increasingly interested in ETH for these reasons. Going forward, ETH is likely to also benefit from a growing recognition of its role as a consumable commodity.

“Digital oil,” if you will, to bitcoin’s “digital gold.”

CHAIN LINKS

According to sources, Goldman Sachs has relaunched its cryptocurrency trading desk after a three-year hiatus and plans to once again support bitcoin futures trading. TAKEAWAY: By this stage, we don’t actually need further proof that the “institutions are here,” but here it is anyway. Goldman wouldn’t be doing this if its clients weren’t asking for it. As if to emphasize the point, news came out this week about a Goldman client survey that shows that, out of 280 respondents, 40% have exposure to cryptocurrencies and 22% of respondents expect the price of bitcoin to be over $100,000 in 12 months.

Other surveys produce different results. JPMorgan surveyed 3,400 institutional investors, 78% of whom said it was unlikely their firm will invest in or offer trading services for crypto.

Galaxy Digital’s institutional-grade ether funds have raised over $32 million since their February launch, according to documents filed this week with the SEC. TAKEAWAY: The distribution is still relatively narrow, but not insignificant – five institutional investors have placed sizeable bets on the evolution of the Ethereum blockchain. (See our special report on the differences between bitcoin and ether from an institutional investment perspective.)

Crypto custodian BitGo has received approval from the New York Department of Financial Services (NYDFS) for a New York trust charter. TAKEAWAY: This brings more crypto custody services, this time from one of the longest-standing businesses in the industry, to Wall Street hedge funds and, even more intriguingly, to Wall Street banks, who just might be interested in offering this service to their clients.

Crypto exchange Kraken is contemplating a public listing in 2022, according to an interview with the CEO Jesse Powell on Bloomberg TV. TAKEAWAY: As one of the largest exchanges in the industry, a Kraken listing would give us more valuable insight into market plumbing. So far, we only have the Coinbase filing documents to go by, and – eye-opening as they were – they don’t yet paint a full picture of the industry’s potential.

Chinese app Meitu buys $40 million worth of bitcoin and ethereum

The interface of the app Meitu is displayed on a mobile phone in Yichang, central China’s Hubei province, Feb 22, 2021.

Meitu, a Chinese company that makes a photo editing app, has purchased bitcoin and ether, becoming the latest firm to buy cryptocurrencies.

The Hong Kong-listed company said on Sunday it bought $22.1 million worth of ether and $17.9 million worth of bitcoin on March 5.

Meitu follows the likes of electric car company Tesla and Square in purchasing bitcoin. But the Chinese appmaker appears to be the first major company to buy ether, a cryptocurrency that works on the ethereum blockchain.

Bitcoin is based on its own blockchain, the technology that underpins it.

Ethereum is a completely different network. It’s an open-source blockchain that allows developers to build apps on top of it. The cryptocurrency ether can be used to pay or interact with services built on top of the ethereum network. These are often called decentralized applications or dApps.

Meitu Purchases $40 Million Worth of Bitcoin and Ethereum

Meitu, a leading Chinese app developer, announced that the company has purchased $40 million worth of cryptocurrency assets, including 15,000 Ethereum and 379 Bitcoin. The company added that the recent purchases were made as a part of the cryptocurrency investment plan previously approved by the company’s board of directors.

According to the official announcement, Meitu purchased $22 million worth of Ethereum and $17.9 million worth of Bitcoin on 5 March 2021. The technology firm mentioned that it can make a net purchase of up to $100 million worth of cryptocurrency assets under its crypto investment plan.

In 2018, Cai Wensheng, Chairman and Founder of Meitu, mentioned in an open group Q&A session on WeChat, that he has achieved his goal of accruing 10,000 Bitcoin. Wensheng openly supported the use of blockchain technology and cryptocurrency assets like Bitcoin and Ethereum.

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“The Board takes the view that blockchain technology has the potential to disrupt both existing financial and technology industries. The Board believes that the blockchain industry is still in its early stage, analogous to the mobile internet industry in circa 2005. Against this backdrop, the Board believes cryptocurrencies like Bitcoin and Ethereum have ample room for appreciation in value and by allocating part of its treasury in cryptocurrencies can also serve as a diversification to holding cash in treasury management,” Meitu mentioned in the official announcement.

Institutional Buying of Bitcoin

Changpeng Zhao, CEO of cryptocurrency exchange Binance, recently mentioned in a tweet that several Asian companies are currently holding Bitcoin but they are not making it public. BTC’s institutional buying has surged in recent months as Tesla, MicroStrategy, Grayscale, Square and several other companies accumulated the world’s largest cryptocurrency in large amounts. Bitcoin received a push from the recent announcement by Meitu as the cryptocurrency jumped above $51,000 on Monday during the Asian session. As of writing, BTC is trading above $50,500 with a total market cap of more than $945 billion.