Bitcoin as a business asset

Simon Cain, a guest contributor for Bitcoms and Bitcoin Policy UK, argues that UK business needs to take note of how Bitcoin is evolving 

 

UK business holds hundreds of billions of pounds in cash. But with sterling inflation over the past five years of between 25% (per official rates) and almost 40% (per unofficial but more accurate rates), all this cash loses purchasing power like a leaky bucket loses water. 

 

One emerging tactic to stem such losses is to switch just a few of those inflation-prone pounds into Bitcoin, an alternative decentralised money better at storing and growing value over time. For example, a business which converted a mere 2% (or 3%) of its GBP into Bitcoin in January 2020 would have successfully protected its entire cash pile from the ravages of that official (or unofficial) 5-year inflation.

 

If you think this sounds risky or irresponsible, you’re probably unaware that institutions as conservative as pension funds around the world (and even in the UK) are already adopting a similar tactic by making small allocations to Bitcoin, as are many US university endowments. If such professional and cautious money managers are doing this, why is it that ordinary UK companies are not following suit? 

 

The short answer is: some are, they’re just not shouting about it. “I can’t give you our exact number,” says Danny Scott, CEO of Coincorner, just one of several fully regulated exchanges where British businesses can buy Bitcoin. “But we have a new report with a sample of 100 businesses holding Bitcoin with us. The mass majority do not publicise it.. It is such a range of companies, from retail shops, building companies, software companies to nursing homes.”

 

Robin Thatcher, Managing Director of By The Book Accountancy, is seeing similar developments. “I’ve worked with several UK businesses that hold Bitcoin, including SMEs and investment firms,” he says. “Some use it as a strategic reserve asset, similar to a hedge against inflation, while others accumulate Bitcoin as part of their treasury diversification. I am seeing a much higher uptake of this more recently.”

 

But while some businesses are going beyond the tactical and using Bitcoin as a strategic asset, there are others for which Bitcoin may be entirely unsuitable - it depends on specific circumstances. “These vary so much that the balance of judgement for any individual business could vary from having its balance sheet in Bitcoin as a strategic asset to holding no bitcoin at all,” says James Dewar, a Bitcoin-focused educational writer and corporate adviser. “The real win for a business is to have sufficient education and advice on the issue”.

 

Are cash reserves consistently high enough, and the business sufficiently profitable, for it to be able to hold some Bitcoin over the medium-term? Must all profits be distributed annually to owners, or can some be retained? These are just some of the questions to consider. 

 

Businesses also need to understand wider financial implications such as tax and accounting. “Bitcoin is recorded at cost and tested for impairment rather than marked to market,” says Thatcher on accounting treatment. “Gains or losses on disposal are subject to corporation tax. But if Bitcoin is used for trading purposes rather than long-term holding, different tax rules may apply,” he continues. “In summary businesses need to ensure their accountant or tax adviser understands Bitcoin.”

 

Aside from fighting run-of-the-mill inflation, Bitcoin also offers protection from (surprisingly frequent) sterling crises or the pound suddenly falling. It could also help when banks run into trouble: many businesses hold more cash than their FSCS-insured £85,000 limit, which in any case could take months to recover. Bitcoin held on standby can be tapped straight away to help keep payments to creditors and employees flowing.

 

But there are a few key things to know up front. First, institutions holding Bitcoin on a business’s behalf may be FCA regulated, but they are currently excluded from the FSCS scheme. One way for businesses to deal with this is to take Bitcoin into their own self-custody, meaning new internal processes, controls and technical skills will need to be considered.

 

Second, the sterling value of Bitcoin can be volatile (although this is reducing), and as well as big price rises, large drops can occur. With this in mind, businesses should be prepared to hold onto Bitcoin for extended periods if they find they have bought at a price peak (historically, holders for up to 5 years have always seen significant appreciation). One way to manage this is to build up a Bitcoin holding gradually over time, rather than buying all at once. Starting small also helps build knowledge and confidence with minimal investment. 

 

If there is one key takeaway, it is: be informed. Ignoring Bitcoin actually means you have a Bitcoin strategy, but maybe the wrong one. As Dewar outlines, most “UK businesses are completely unaware and are thus in an accidentally extreme position, with all the unevaluated risks and missed opportunities that come with that.” 

 

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Simon Cain is a guest contributor for Bitcoms and Bitcoin Policy UK

 

Main image courtesy of iStockPhoto.com and spawns