Adding Crypto Assets To Treasury Management Can Spur Higher Profits

:::info The following text is reproduced from Agile Dynamics research and is being published on HackerNoon with permission from Mr. Paul Lalovich, Managing Partner, Agile Dynamics.

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\ The traditional world of treasury management stands to be benefit from the emerging trend of decentralized finance and digital assets. If done well, crypto-based treasury moves could spur higher profits, write Agile Dynamics managing partner Paul Lalovich and Smooth chief executive Patrick Poirier.

\ Treasury management is often overlooked by Chief Financial Officers as only a tool to protect acquired capital rather than an active significant revenue stream unrelated to the core of the business activities. Not only can corporations use a buy-and-hold strategy, but they can also use these digital assets to generate additional revenue streams if they acquire the talent to manage this process.

\ Microstrategy served as a classical example. Microstrategy’s innovative approach to treasury management of crypto assets has shown potential to significantly boost financial performance (and act as a hedge against other developments). Over the last four years, Microstrategy’s stocks have outperformed the stocks of tech giants like Nvidia, Google, Microsoft, Apple, Meta, and Amazon.

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\ Before its Bitcoin-based treasury management model, Microstrategy was selling business intelligence products and services. Since adopting Bitcoin as an investment strategy and treasury management model, the company’s share price has boomed. Another example of a success story of treasury management with crypto is Tether, the creator of USDT, the most popular stablecoin that is traded 1-1 with US currency.

\ Last quarter, $5 billion of profit was generated with less than 100 employees. All through treasury management of approximately $100 billion of assets under management, mostly in US government T-Bills with over collateralized excess in Bitcoin.

\ Microstrategy earns more money with cryto treasury management than with its core business

These success stories can be replicated. For many organizations, crypto-enhanced treasury management could turn out to become a greater source of revenues than the primary core revenue stream. However, proper risk management is critical to avoid getting caught into the bear market, which typically sees most participants lose all their massive gains accumulated in bull cycles.

\ One key consideration is diversification of the crypto treasury portfolio, which is essential for mitigating risks and capitalizing on market opportunities, similar to strategies used in traditional finance. It is important to diversify across different cryptocurrencies and include stablecoins, real-world assets, and alternative assets like commodities or tokenized real estate. This approach helps to reduce exposure to any single market or sector, ensuring a more balanced risk profile.

\ Another key strategy is incorporating a mix of assets with low or negative correlations. This means that when one asset class experiences a downturn, another might remain stable or even appreciate, thus cushioning the impact of market volatility. For example, combining volatile cryptocurrencies with more stable assets like government bonds or high-quality corporate bonds can provide a buffer during market downturns. Assets managers would have to rotate their portfolios depending on the market cycle phase.

\ Sector and geographic diversification also play a critical role. Just as in equity markets where holding stocks across various sectors (e.g. technology, healthcare, finance) and regions (e.g. North America, Europe, Asia) can spread risk, a crypto treasury should consider diversifying across different blockchain sectors and including digital assets from various parts of the world.

\ Regular rebalancing is essential to maintain the desired allocation as market conditions change. This practice involves periodically adjusting the portfolio to align with the organization’s risk tolerance and financial goals. Monitoring and adjusting the portfolio based on performance metrics and evolving market conditions ensures that the treasury remains optimized for both stability and growth.

\ A robust diversification strategy also considers distributing assets across different exchanges, as recent times have demonstrated that cryptocurrency exchanges can go bankrupt due to fraud and other factors.

\ Whatever strategy is followed, deep understanding of market fundamentals and developments is essential to continuously finetune the right strategy. For example, this current crypto cycle is somewhat different from the previous cycle because there are now very large entities, such as pension plans, that are getting into crypto. Note however that they only allocate funds to ETF’s, which currently only span Bitcoin and Ethereum.

\ For this reason, these two assets are likely to outperform most other assets on a risk-adjusted basis. Other assets that are currently in a position of strength versus Bitcoin are Solana, Toncoin, Kaspa, and a few others, but there is a very limited list of those, which makes it even more difficult to build a proper diversified portfolio.

\ Bitcoin and Ethereum are the two largest cryptocurrencies

A step further than a buy-and-hold strategy is to put the crypto asset to work using various decentralized finance (DeFi) protocols. For example, just like owning a house can give capital gain returns, renting that house can provide an additional revenue stream on top of the capital gain itself. The same is true for most crypto assets.

\ Since market participants buy and sell the assets 24/7, it is possible to implement market making strategies or yield farming strategies to act as an intermediary between the participants trading volume. Yield farming is the process of locking two digital currency assets, for example Ethereum with USDT, to let market participants to swap between these two while the liquidity providers collect transaction fees on decentralized exchanges using a tech stack that is fully automated.

\ The returns in such a case depends on the trading volume divided by the total value locked of liquidities and a few other parameters.

Similarly, market making is the same process but typically on centralized exchange. Typically, this approach can generate roughly the same returns as yield farming, but has a number of upswing opportunities, such as utilizing leverage to significantly increase the rate of returns on the capital gain as the crypto market trends upward or downward.

\ Effective active treasury management goes beyond merely maintaining liquidity and managing cash flow; it involves strategically investing the treasury's assets to generate sustainable returns that can support the organization's long-term financial health. Organizations must actively monitor their treasury’s liquidity to ensure they can meet immediate operational needs, such as funding ongoing projects, paying vendors, and covering unexpected expenses.

\ This might require converting portions of the treasury into more liquid assets like stablecoins or fiat currencies to maintain a cash buffer. However, active treasury management also includes the strategic allocation of assets to align with both short-term and long-term financial objectives.

\ By investing a portion of the treasury in income-generating assets – similar to how an endowment fund operates – organizations can create a steady revenue stream that helps cover operational costs, potentially allowing the organization to sustain itself indefinitely. This approach requires regular assessment and adjustment of the investment portfolio to optimize returns while balancing the need for liquidity and risk management, ensuring that the right assets are available when needed for both immediate and future demands.

\ Alternatively, peer-to-peer lending allows treasuries to lend out assets directly to borrowers, generating interest income while diversifying the sources of return. Interestingly, some peer-to-peer lending protocols, like Aave, offer loans with no time limitation of the initial capital, as long as the interest payments are managed appropriately to maintain a good account health standing.

\ Meanwhile, most centralized crypto exchanges have margin accounts, which makes it possible to get a loan on the users’ crypto collateral within just a few minutes at lower rates than traditional banks which would need weeks to process the loan application.

Traditional treasury management takes a relatively risk-free approach to investments. If done well, there could be much to gain

Crypto treasury management solutions often focus heavily on the custodial side, ensuring the security and safe storage of digital assets. These solutions typically provide secure wallets, multi-signature setups, and advanced custodial services, such as multi-party computation, to mitigate the risks associated with holding large amounts of cryptocurrencies. This focus on custody is driven by the need to protect digital assets from theft, fraud, and operational errors.

\ However, such solutions are not solely limited to custody. Many platforms also incorporate features that support active treasury management, including liquidity management, asset allocation, and risk management. For instance, platforms like Zerocap and Krayon offer tools for managing on/off-ramps, enabling seamless conversion between crypto and fiat currencies, as well as bespoke services for optimizing capital efficiency and managing balance sheets.

\ Algorithmic trading bots play a significant role in crypto treasury management by automating the trading process based on pre-set parameters and market conditions. These bots continuously monitor the market and execute trades quickly, without human intervention, making them particularly effective in managing the volatile nature of cryptocurrency markets. They can hedge against risks by reacting to market fluctuations in real-time, optimizing the treasury’s exposure to potential losses or gains.

While there are obvious risks involved, the returns of crypto treasury management can far exceed the cost involved in managing these risks. Companies that take advantage of treasury management with crypto assets can significantly outperform their counterparts that do not. This is even more true for companies with seasonal cash reserves. Given the current macroeconomic climate, it would be negligent to sit on large cash reserves without at least hedging with crypto assets.

\ Even less sophisticated and easily replicated treasury management techniques with Bitcoin have shown significant financial performance. At minimum, it would be worth further investigation of the potential, risks, and perception associated with decentralized finance.

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