MicroStrategy’s huge $59 billion bet on Bitcoin has already attracted a lot of controversy. This bold approach offers tremendous promise, but also a very real risk of failure. Understanding the benefits, pitfalls, and larger impacts of such an undertaking is paramount for other companies looking to follow suit.

The Allure of Bitcoin: Potential Rewards

Bitcoin's potential for long-term growth is a primary driver behind MicroStrategy's strategy. The implications are tremendous Bitcoin is more likely than not to be worth more tomorrow than it is today. Its supply is fixed, which ultimately makes it scarce and over time increases demand and presumably price as a result. For corporations, following the example of Tesla and MicroStrategy—U.S.…while more nations and corporations start to see Bitcoin as a reserve asset. Early investors will be the ones who benefit first from this increased demand.

Many companies are reaping the rewards of embracing Bitcoin as part of their long-term plans. Meta Planet, for instance, was named Japan’s best performing stock in 2024 after using Bitcoin as a treasury asset. Eric Semler of Semler Scientific displayed the power of a $350 million Bitcoin treasury. This savvy pivot transformed the trajectory of the company’s future and positioned it to grow for decades to come. Furthermore, Jay Wood Capital Advisors highlights Bitcoin's transformative role in the traditional finance convertible debt market, offering cost-effective financing options.

The potential upside of Bitcoin is mind-boggling. It’s not surprising when you consider that countless businesses are more than happy to put a portion of their assets to work in it. It’s key to keep in mind that it’s not the solution for everybody.

Navigating the Risks: A Volatile Landscape

Even with these potential profits, Bitcoin’s extreme volatility creates serious risks. Bitcoin’s implied volatility is still high at 3.9 and 4.6 times that of gold and global equities, respectively. This can result in significant and irreversible losses. Since 2014, Bitcoin has drawn down more than 50% a total of four times, with the drawdown of the three largest averages an 80% drop. Although patient investors were eventually rewarded, recovery periods frequently lasted close to three years.

The extreme volatility that characterizes Bitcoin’s price swings creates significant obstacles as well. It’s quite common for Bitcoin to experience a $2,500 price movement in a single day. This type of swing isn’t surprising in the least. This volatility complicates the process of liquidating assets in time to avoid incurring material losses. Liquidity constraints on most exchanges limited liquidity to around $50,000 per day at most, which means that such potential impacts would be even worse.

In addition to market volatility, security risks and regulatory uncertainty contributes to a complicated landscape. Unusual risks for investors unlike traditional U.S. bank deposits, online “wallets” where investors keep cryptocurrencies are not insured, making them more susceptible to hacking and theft. The rapidly-changing, murky regulatory landscape around cryptocurrencies creates additional risks for corporations with significant Bitcoin holdings.

Risk Mitigation Strategies

Corporations can learn a lot from adopting an active strategy to controlling Bitcoin investments. As Javier Rodriguez Alarcon of XBTO recently wrote Turning Volatility into Value Just Requires Smart Risk Management, making the most of this disruptive time. Ming Shao leads the charge on State efforts on crypto regulation. He explains stablecoin policy, SEC initiatives, and Bitcoin’s growing position as a reserve asset, while emphasizing the imperative of regulatory compliance.

  • Diversification: Limiting cryptocurrency exposure to less than 5% of the total portfolio is a sound approach.
  • Risk Management: Only invest an amount of capital that you are fully prepared to lose should the market take a downturn.
  • Flexibility: Remaining flexible and open to new information, rather than rigidly adhering to a single system, is essential.

MicroStrategy’s Bitcoin bet — and the story behind it — will be a great case study for other corporations thinking about following in its footsteps. It underscores the need to prudently balance the possible benefits with the risks that are always present with such undertakings. Before diving too deep into Bitcoin, companies need to conduct rigorous risk assessments. In addition, they must develop robust risk management policies and practices and stay ahead of the rapidly evolving regulatory environment.

Implications for Other Corporations

Ultimately, whether or not to invest in Bitcoin is a question for any given company based on its unique situation, risk tolerance, and long-term financial objectives. Despite the chance for huge returns, Bitcoin’s volatile and speculative behavior requires a careful, educated, and prudent approach.

Ultimately, the decision to invest in Bitcoin depends on a company's specific circumstances, risk tolerance, and long-term financial goals. While the potential for significant returns exists, the volatile nature of Bitcoin demands a cautious and well-informed approach.