Strategic Playbook:
Supercharge Your Corporate Treasury with Bitcoin
CONTENTS
I. Intended Audience
II. Executive Summary
II. Pre-Acquisition Preparation
1. Educate and Align Key Stakeholders
2. Create a Forecast
3. Establish a Bitcoin Policy, including Risk Management
III. Integration and Management
1. Statement on Self Custody
2. Set Up a Bitcoin Wallet
3. Develop an Investment Strategy
4. Implement Accounting and Tax Compliance
5. Monitoring and Reporting
6. Treasury Holdings Disclosure
7. Bitcoin Education and Training
IV. Ongoing Management and Risk Mitigation
1. Monitor Market Developments
2. Implement Robust Security Measures
3. Rebalance Your Bitcoin Treasury
V. Bitcoin As Borrowing Collateral
1. The Ultimate Arbitrage Strategy
2. Bitcoin Collateralized Loans
VI. Conclusion
I. Intended Audience
This strategic playbook, “Supercharge Your Corporate Treasury With Bitcoin,” is intended and optimized for consideration by any US domestic company, corporation, trust or non-profit organization with $1M to $5M annual revenues together with a desire to introduce bitcoin to their corporate treasury. Since 2010, bitcoin has proven to provide superior long term investment returns while also becoming a great hedge against inflation, macroeconomic fluctuations and banking system risks. Specifically, this playbook is for use by business owners or relevant executives at such companies who are in a position to create balance sheet value through smart investing.
Allocating bitcoin to your corporate balance sheet is a novel strategy to passively expand balance sheet assets, enhance your company’s shareholder value, hedge global financial and banking system risks, and serve as collateral for credit borrowing.
The strategies set forth in this playbook are quickly becoming mainstream, pioneered by MicroStrategy (Nasdaq:MSTR) who acquired more than $1Bn worth of bitcoin in 2021 and now with thousands of additional companies of all shapes and sizes following suit, some of which are listed here: https://bitcointreasuries.com. In summary, bitcoin is proving to be an apex monetary asset, which makes it an excellent candidate for a corporate treasury holding.
II. Executive Summary
Introduced in 2009, bitcoin is a standalone, open-source, totally inclusive global financial network, operating alongside our traditional government sponsored money and banking systems. Bitcoin serves as both a valuable currency as well as an uncensorable payments network, and has grown to a global market capitalization today in excess of $1 trillion.
Bitcoin is valuable. Incorporating this appreciating asset into your corporate treasury can provide a unique opportunity for your organization to position itself for exceptional long-term growth, diversify its assets, hedge against inflation, currency devaluation and systemic global banking system risks, and serve as collateral for credit lines and loans. This playbook outlines a strategic approach from our firm to help your organization navigate the process of integrating bitcoin into its treasury operations to realize these benefits. Luxolo has been successfully serving and advising thousands of cryptocurrency investment clients since 2018.
In summary, this bitcoin strategy offers three major benefits to your company:
1) Supercharge your company’s balance sheet through passive, long term asset appreciation.
2) Book long term appreciation on your balance sheet under new FASB rules for GAAP.
3) Leverage your appreciated asset in the future by pledging some of your holdings as lending collateral for credit lines or loans in traditional currency (USD).
III. Pre-Acquisition Preparation
Prior to implementing this strategy, we encourage some basic education and due diligence of your own, in addition to the strategic recommendations set forth in this playbook. Pave the way for successful implementation of this strategy by first accomplishing the following:
1. Educate and Align Key Stakeholders
Objectives: Educate ownership and/or executive management, treasury, and your accounting team on bitcoin, its benefits, and risks. Align key external stakeholders of your company, as appropriate, regarding strategic objectives and potential implications of incorporating bitcoin into your treasury.
Techniques: In addition to this Playbook, develop your own advisory documents related to bitcoin, including your rationale, and experiences. A specialty firm such as Luxolo can provide you with the tools that you need to educate your team and create the necessary buy-in from key stakeholders. This will include a pre-recorded video presentation that you may share with your colleagues, a collection of useful articles and resources that you may refer to on an ongoing basis, as well as the opportunity to schedule a conference with one of our representatives. Meet with your key stakeholders, present these materials, and encourage candid dialogue from everyone. Flush out the concerns and discuss them. It’s possible the group consensus may be “we’re not ready to do this yet.”
2. Create a Forecast
Objectives: Create a financial forecast model illustrating how this strategy will look on your balance sheet.
Techniques: Develop an illustrative model showing an initial investment tranche into bitcoin, possibly including additional monthly investments to leverage the proven effective dollar cost averaging strategy. Create conservative, moderate and liberal price forecasts for 1, 2 and 3 year holding periods showing your appreciated asset values for those periods. Include in your model a provision to sell portion(s) of your holdings along the way as the bitcoin price appreciates to certain predetermined percentage increases or dollar amounts. Show before and after tax returns. Remember, the IRS treats bitcoin as property, subject to prevailing short- and long-term capital gains rates. This forecast is a fun, educational exercise and even your conservative forecast will illustrate the immense power of this strategy.
Two popular models to consider referencing during this exercise include the bitcoin stock-to-flow model, and the Bitcoin Power Law.
The Stock To Flow model is defined as the number of years required to produce the current supply of a scarce item. Commodities such as gold and silver can be evaluated with this model, as can bitcoin. With bitcoin, the future supply can be precisely calculated based on the “halving” model that is inherent to the bitcoin protocol. This means that every 210,000 confirmed blocks, the supply of new bitcoin halves. We’re currently down to 450 bitcoins per day being “mined” through block rewards. The model then uses the future halvings together with other metrics to predicts future price plateaus, illustrated in the below graph which can be found at https://charts.bitbo.io/stock-to-flow.
Bitcoin Stock-To-Flow Chart (2010-2030)
For the next model, power laws are natural and often reliable stochastic guides to display and forecast growth trends. Below is an illustrative Bitcoin Power Law graph for the period July 2014 through July 2024. This graph illustrates the overall long term bitcoin price movement trend.
3.Establish a Bitcoin Policy, including Risk Management
Objectives: Develop, document and obtain “buy-in” from key stakeholders regarding a clear policy outlining the organization's approach to bitcoin, including its role in treasury, investment objectives, and risk tolerance. Define the percentage of treasury or maximum dollar amount to be allocated to bitcoin. Identify potential risks and develop risk management strategies to mitigate these risks, including diversification and hedging strategies.
Techniques: Your bitcoin policy should be incorporated into your Financial Accounting Controls. Define in simple terms your company’s objectives of investing in bitcoin, its role and classification in your treasury [see Section III(3) below], its target weighting range among your treasury assets, and which officers will hold wallet keys to authorize withdrawals. You can have as many keys as desired, but many companies utilize a two-of-three key policy, for example. This key strategy is further discussed below in Section III below.
Be sure to also identify risk factors associated with holding this asset in your corporate treasury. Such risks might include but are not limited to economic considerations including short term price volatility, lack of liquidity on certain exchanges during peak trading periods, technology risks with storing credentials to your digital wallet(s), and the learning curve associated with training yourself and team about how to properly store, handle and use your new asset. Please also don’t forget to include bitcoin considerations in your existing disaster recovery plan, applicable in the event that your company’s digital IT infrastructure or physical facility experiences a catastrophic failure or hack.
IV. Integration and Management
1. Statement on Self Custody
Importantly, this Playbook considers only direct ownership of your bitcoin. This means self-custody of your bitcoin, which is also known as self custody of your private keys, in an appropriate on-chain wallet that is fully under your company’s control. This is widely recognized as the most robust and beneficial method of holding bitcoin, for myriad reasons, some of which are outlined herein.
This Playbook does not consider synthetic bitcoin ownership scenarios, including (i) securitized bitcoin products like Exchange Traded Funds (ETFs), or buying stock in publicly traded companies heavily weighted in bitcoin; (ii) acquiring and then leaving your bitcoins in a custodial exchange account; or (iii) otherwise relying on various third party custodians to hold your bitcoins for you.
LUXOLO SPECIFICALLY ADVISES AGAINST THESE STRATEGIES, which in our direct experience violate the core ethos of bitcoin, which also introducting outsized third party risks that have proven to be fatal to bitcoin investors.
With regard to third party custodians, distinct risks include bitcoin service provider bankruptcies [such as Three Arrows, Celsius, FTX, BlockFi], unethical business operators, abrupt and unfavorable new demands from regulators, commingling or undisclosed use of customer funds, and the inability or unwillingness to approve customer withdrawal requests, to name a few.
With regard to securitized and synthetic bitcoin ‘products,’ risks include the unfavorable nature of not actually ‘owning’ your bitcoins. Chief among these risks is that your investment returns are entirely contingent upon the performance of a third party (the ETF provider, broker-dealer, or publicly traded company that actually owns the underlying bitcoins). Moreover, US securities are generally structured such that during an adverse financial event at the individual company or within the marketplace at large, secured party creditors and bondholders are fully entitled to collateral, ahead of shareholders’ subordinated and unsecured claims. In a sufficiently detrimental economic event, such as Lehman Brothers, FTX, Celsius, etc., shareholders find themselves pleading with lawyers in a bankruptcy court in an attempt to recoup some, if any, of their original investment capital.
Instead, please consider the vast features and risk mitigation benefits of self custody, which are recommended in this Playbook and described in detail below.
2. Set Up a Bitcoin Wallet
Objective: Create a secure bitcoin wallet or wallets to store your organization's bitcoin holdings. Implement robust security measures, such as multi-signature wallet(s) and/or cold storage. Again, an experienced specialty firm such as Luxolo can easily guide you through the wallet(s) selection and setup process.
Background: It is important to recognize the difference between an ‘Account’ and a ‘Wallet.’ In order to acquire bitcoin, your company will need an Account at a licensed exchange, such as Luxolo In your account you could see the balance of your bitcoin holdings, transaction history documenting the time and quantity of your purchases and/or sales, as well as any movement of the acquired asset. An account can look like a wallet because you may see your bitcoin ‘stored’ there, but it is not a wallet because the exchange account is not part of the bitcoin blockchain and you do not have your cryptographic keys. The exchange owns your keys and your account is a display of a glorified spreadsheet. Accounts are necessary and useful but they are not wallets.
Bitcoin Wallets are a safe place to protect your private keys. Private key cryptography is the foundation of bitcoin and other blockchain protocols. It is complex and arcane, but it is not necessary to understand the code structure in order to use it properly. What you must understand is that your private keys are your access to your bitcoin, they grant you unilateral and unimpeachable rights over your bitcoin. These must be protected, and ‘wallets’ provide that function.
Techniques: After years of research, use and testing, Luxolo currently offers two (2) wallet options for its clients, including a single signature physical cold storage Vault, or a multi-signature hosted software wallet. Both options involve storing your bitcoin “on chain”, the highest standard of wallet storage. This also means their balances and transactions (but not the owner or user’s names) are publicly visible and auditable.
OPTION 1: The Vault wallet is a physical metal card containing both your public key (for deposits and balance checks), as well as your private key (for spending/withdrawing). This wallet is integrated into the Luxolo App via our partnership with Ballet Global to provide our best-in-class cold storage wallet solution. ‘Cold storage’ means that the private keys are removed from the internet at all times. There are several ways to accomplish this, ours is physical and analog. Our wallet takes the form of a metal card that contains a QR code and a separate 16 character pass-phrase. When these two components are combined using our app, the private key is generated algorithmically in that instant. You can read more about Ballet’s proprietary technology here.
Your Luxolo Vault card must be stored in a secure location with protocols in place to manage and track access. This solution is simple and familiar. You may consider the card to be valuable, like precious metal, keep it safe because it is a bearer instrument; physical possession of the card grants the possessor access and ownership over the bitcoin controlled by the card’s private keys. For smaller organizations, the Luxolo Vault is an ideal solution. For enhanced security, you may consider requiring multiple people to have control over the treasury, which is called establishing multi-access control.
The purpose of multi-access controls is to prevent any one actor from having control over the private keys. This could be as simple as keeping your Vault card in a safe that requires two separate combinations held by two different individuals. A company could also use a log book to record each time anyone accesses the vault card, including security cameras in position to record the activity. Ideally, spending from your Vault wallet will be an infrequent occurrence and there is no need to access the vault card to receive bitcoin, only to spend.
OPTION 2: Luxolo also offers a multi-signature software wallet architecture powered by BitGo, the industry leader in this technology. ‘Multi-sig’ refers to the fact that multiple individuals will be required to use the wallet’s private key to spend/withdraw, and only through their combined participation may the bitcoin be moved, or ‘spent.’ This design is similar to secure bank vaults where at least two individuals must provide independent keys to access the vault, thus ensuring that no one individual could pose a security threat to the organization.
A multi-sig wallet is designed to accommodate M of N signatures. M is the minimum number of signatures required to control the private keys and N is the total number of signatures distributed to a group. 2 of 3 is a common version of this strategy; while 3 people, or entities, have signatures to the wallet, only 2 of them are required to spend from it. Larger organizations may consider 3 of 5, but be wary of using too many signatures as it would get cumbersome, and keep in mind that the actual numbers for M and N are user defined.
It is important that your company establish well defined roles for the team members that have access to the Luxolo Business Account. This should include multi-factor authentication for each user to access the wallet. It may be prudent to have a corporate password management software system that enables individuals discrete access but also serves as a backup if something unforeseen should happen to a member like a sudden departure.
3. Develop an Investment Strategy
Objectives: Determine your investment approach, which may include both dollar-cost averaging and/or lump sum investments. Establish a clear investment strategy, including buy and sell rules, to manage your bitcoin holdings.
Techniques: Generally speaking, HODL’ing (also known as long term holding) has repeatedly proven to be the best strategy for bitcoin investments. Attempting to “time” buying and selling transactions may initially seem appealing, exciting and popular - but alas, this strategy is very intensive, usually produces inferior returns and therefore is not advisable. Time and again, dollar cost average purchases have produced consistent, superior returns with far fewer headaches. Consider an initial lump sum investment with ongoing regular additional investments, sized proportionately to your intended treasury balance size and risk tolerance.
4. Implement Accounting and Tax Compliance
Objectives: Develop a plan for your bitcoin treasury bookkeeping, accounting and tax compliance. Clearly track and document your company’s transaction history and cost basis. You may do so manually, or use specialty software to calculate gains, losses and tax liability and then use that data to make journal entries into your existing bookkeeping enterprise. This clear record keeping will make you look great in front of your team, and also put a smile on your accountant’s face.
Techniques: Depending on how many transactions you plan to do each year, your company could either track your bitcoin transaction data and calculate gains/losses manually on a spreadsheet, or you could leverage basic software tools to accomplish the same. Remember that for tax purposes, the IRS considers bitcoin property, subject to short- or long-term capital gains treatment. And that the Federal Accounting Standards Board [FASB] recently issued Rule 2023-8 for Generally Accepted Accounting Practices [GAAP] that includes a number of clear accounting standards for cryptocurrency, including the favorable new recommendation to mark crypto assets on your balance sheet to market prices - whether that’s an upward or downward adjustment - whereas in the past we were only allowed to book impairments. FASB further guides us to use the first in, first out [FIFO] method for cost basis calculations. Because these calculations can quickly become complex, we recommend using inexpensive speciality software to track your wallet(s) and perform these calculations for you.
Consider our favorite provider, Ledgible, which links any number of wallets and can generate numerous wallet reports including Profit & Loss Statements, Cost Basis, and Net Profit. Consider ZenLedger, Bitwave or TaxBit for analyzing your wallet(s) transactions and automatically generating your year end 1099-MISC forms. Additionally, virtually every cryptocurrency exchange and wallet provider, including LUXOLO’s exchange app, offer .CSV data file downloads of all transaction data for your reference. Importantly, note that under new IRS rules starting in 2025, crypto providers will need to begin sending customers the newly created Form 1099-DA showing their net taxable gains/losses.
Select a process and software that work for your company’s needs. In any event, good record keeping is critical to a successful accounting and tax compliance regime for your bitcoin treasury holdings.
5. Monitoring and Reporting
Objectives: Establish regular reporting and monitoring processes to track the performance of your bitcoin holdings. Provide transparent and timely reporting to stakeholders regarding your company’s bitcoin investments.
Techniques: Determine the level of financial reporting detail that is warranted for your company’s bitcoin treasury. Perhaps you have a short format for interim reporting, and a more comprehensive annual report. You and/or your bookkeeper should experiment with the various reports that are available from the above software tools, and start with a format that is basic, easy to understand and can be generated without much trouble - perhaps even automatically emailed to you. Your bitcoin treasury is a passive investment vehicle, and routine reporting should not be a chore.
6.Treasury Holdings Disclosure
Background: If applicable, you may need to develop a standard shareholder disclosure regarding your organization's bitcoin treasury holdings. Include boilerplate language regarding certain risks and benefits. Consider incorporating bitcoin-specific footnotes on your Balance Sheet and other financial reports.
7. Bitcoin Education and Training
Background: As the financial controls person at your company executing the Bitcoin Strategy, you will become the expert to whom many questions are directed. Take this opportunity to provide shareholders and relevant employees with ongoing contemporary news, education and training regarding bitcoin, its benefits, and risks, and its role in the treasury. Ensure that employees understand the organization's bitcoin strategy and its implications.
IV. Ongoing Management and Risk Mitigation
1.Monitor Market Developments
Objectives: Stay informed about market trends, regulatory changes, and industry developments affecting bitcoin. Adjust your investment strategy and risk management approach as needed.
Techniques: Consider subscribing to one or two high quality cryptocurrency email newsletters to keep you apprised of the latest industry news highlights. Schedule quarterly or annual discussions with your bitcoin service provider. Luxolo is totally abreast of all relevant industry happenings and will gladly invest time in such conversations with you in connection with our high touch concierge service.
2. Implement Robust Security Measures
Objectives: Monitor and update your security protocols to protect your bitcoin holdings from potential threats. Implement additional security measures, such as two-factor authentication and regular security audits.
3. Rebalance Your Bitcoin Treasury
Objectives: Ensure that your organization's treasury remains diversified, with a balanced allocation of assets. Periodically review your bitcoin allocation, and consider rebalancing.
Techniques: As your bitcoin treasury holdings expand over time, interesting options will emerge for your consideration. You might continue holding, marking your bitcoin treasury to market value at each reporting period, revealing the expansion of your balance sheet. You might sell some appreciated bitcoin in connection with rebalancing your allocation, which would result in realizing a gain.
And finally, you might consider the immense power of pledging your bitcoin as borrowing collateral while still enjoying appreciation, which strategy is covered in the next section.
V. Bitcoin As Borrowing Collateral
1. The Ultimate Arbitrage Strategy
Background: Perhaps the ultimate contemporary strategy for bitcoin is to leverage the bitcoin to US dollar currency arbitration opportunity. In other words, benefitting from the ever widening gap of bitcoin price against the dollar. Even better, incorporating a strategy of borrowing dollars against your ever expanding bitcoin collateral. As your bitcoin collateral expands in value, your loan-to-value ratio which is expressed in US dollars shrinks, allowing for an iterative process of periodically refinancing your loan in order to receive increasing dollar loan proceeds. This strategy works best during the finite period of time when bitcoin is meaningfully expanding in value, which by countless analysts’ accounts is now through 2030.
2. Bitcoin Collateralized Loans
Background: Enter bitcoin collateralized loans, a relatively new product that is emerging both domestically and abroad. This is an opportunity for an individual or company to obtain a US dollar loan by pledging bitcoin as collateral. There is no traditional underwriting that would consider the loan purpose, a financial or business plan, or the borrower’s creditworthiness. Instead, it’s strictly a collateral based loan with a prescribed loan-to-value [LTV], annual percentage interest rate [APR], liquidation price in the case of a sharp decline in the bitcoin collateral value, and maturity term [Years].
The power and elegance of this novel strategy cannot be understated.
Objective: Use appreciated or appreciating bitcoin as collateral to borrow US dollars for use in growing or operating your business. Unlock the equity of your bitcoin corporate treasury while still enjoying the appreciation of the collateralized asset! An ideal use case is a Commercial Line of Credit that is intended for short term cash needs and that you anticipate to revolve [pay off] periodically or annually with business revenue cash flows. Refinance your loan annually forever to take advantage of an increased loan amount based on your appreciated value of your bitcoin collateral. Future use cases that will theoretically work just as well are longer term financing instruments such as vehicle loans, commercial & industrial (“C&I”) business and equipment loans or even real estate loans.
Techniques: Analyze your company’s short term cash needs, including the purpose and use of funds and its ability to repay a loan from routine cash flows or other liquidity events. Do you need to expand your commercial credit line(s), acquire vehicle(s) or equipment, make improvements to your commercial space, or make another asset acquisition? If so, compare a bitcoin collateralized loan with a traditional C&I loan or LOC from your TradFi banking institution. This type of loan could provide superior overall financial results, when considering the collective benefit of the (i) continued appreciation of your underlying collateral, (ii) no need for burdensome interim reporting, inspections and explanations to a lender, (iii) an equivalent or possibly lower collateralization ratio [example: bitcoin collateralized loans are generally 50% LTV whereas TradFi C&I loans are frequently 30-40% LTV], and (iv) any assets you purchase with these loan proceeds will not be encumbered with a lender lien, as they would if you had purchased them using proceeds from a TradFi loan.
Now, review contemporary loan offering terms from some trusted industry providers. In many cases, Luxolo has first hand knowledge of these platforms, having used and tested them.
Preferred Option: Obtain your loan from a next-generation financial services firm using a simple online application process. Leading, trusted, domestic providers of $USD loans include SALT, Arch Lending, LEDN.io and Unchained.com who can each provide $USD loan proceeds directly to your corporate bank account given posting of your bitcoin collateral. Loan terms available from these and other comparable providers generally include a 12-month term, 50% LTV and 12% to 15% APR interest rates. The application and loan review periods are relatively quick, in our experience approximately 1-3 business day turnaround in order to gain loan approval and wire your loan proceeds to your bank account.Advanced Users Only Option [not recommended at this time]: Alternatively, you could obtain your loan using decentralized finance [DeFi] providers via a connected wallet. Note however, this approach will require some advanced knowledge of cryptocurrency wallets, as well as the additional final step of using an exchange such as Luxolo to convert your USDC proceeds to $USD, and then finally wire them to your corporate bank account. Leading providers of USDC (the preferred tokenized dollar stablecoin*) loan proceeds include HodlHodl, Exponential.fi, CoinRabbit, and Oraichain, who can each accept your bitcoin collateral and provide USDC immediately to your designated wallet, subject to the smart contract loan agreement. Before using this strategy, considerable education is required regarding the opportunities, risks and technical details of DeFi, Wallet Connect functionality, and other considerations.
*Beyond USDC from trusted issuer Circle Financial in Boston, MA, USA, there are several other stablecoins that are pegged to the US dollar, including USDT (Tether). However, for myriad reasons Luxolo does not recommend using them due to serious concerns about liquidity limitations and regulatory risks.
As evidenced by the above loan offering terms, the current loan rates and term durations offered by the market are not yet particularly compelling. Because regulators have so heavily and intentionally punished the crypto industry*, only a very small number of bitcoin collateral lenders exist at the time of this article’s writing. Without much competition, these lenders’ rates are not yet competitive. Until a more diverse market of such lenders emerges, rates may remain high. Nevertheless, despite these high rates if you consider and calculate the four distinct listed above, this loan may still be useful for certain use cases.
*This is essentially due to the US government having taken a highly adversarial and aggressive approach to the cryptocurrency industry from 2018 through 2024. The tide is finally beginning to turn, as evidenced by a few favorable factors, including the realization that bitcoin is now mainstream, the SEC finally granting bitcoin and ethereum ETF approvals in Q1 2024, reasonable digital asset industry legislation appearing to emerge from Congress, and the banking industry finally beginning to acknowledge and chart a course to remedy major outstanding issues such as custody of bitcoin, money transmission and AML procedures. Stay tuned for future likely favorable updates on this front.
VI. Conclusion
Incorporating bitcoin into your corporate treasury can provide three distinct benefits, including supercharging your company’s balance sheet through passive, long term asset appreciation; booking long term appreciation on your balance sheet under new FASB rules for GAAP; and leverage your appreciated bitcoin as lending collateral for credit lines or loans in traditional currency. While adding bitcoin to your treasury can prove immensely beneficial, it requires careful planning, risk management, ongoing diligence and some patience. By following this strategic playbook, your organization can effectively navigate the process and position itself for potential long-term benefits. Remember to stay informed, adapt to changing market conditions, and maintain a robust risk management approach to ensure the successful integration of bitcoin into your treasury operations.
