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Bitcoin, Currency Risk, and Shaking Up the System

In March 2021, Tesla made waves by announcing it would accept payment in Bitcoin. Not only that: Tesla said it would hold the Bitcoin rather than exchange them for fiat. As Seinfeld might say about companies that merely accept Bitcoin, “ You know how to take the [Bitcoin], you just don't know how to hold the [Bitcoin].

How did that work out?

In March 2021, Bitcoin was trading around $55,000. Today, Bitcoin is trading around $23,000 (a 58% loss), after dropping to around $16,000. Not good.

One important lesson from MBA programs is that businesses should focus on making a profit in the core business, not in currency speculation. If a company makes cars, it should focus on making cars and hedge the currency risk. If investors want to engage in currency speculation, they can do it on their own.

From an accounting perspective, if Tesla is still holding the Bitcoin, they have an unrealized loss, until Bitcoin returns to the original price. What has been the opportunity cost of holding devalued Bitcoin?

In my MBA capstone course, we simulated a global business operation with facilities in the U.S., the UK, and Germany. All revenue was in U.S. dollars, so the students were eager to sharpen their currency risk skills by financing and hedging their business activities in the UK with pound sterling and in Germany with deutsche marks.

See the problem? Just as companies shouldn’t be in the business of currency speculation, they shouldn’t be in the business of hedging for the sake of hedging.

If all the revenue was in U.S. dollars, why not issue all debt in U.S. dollars? This is called a natural hedge – aligning assets with liabilities.

U.S. Dollar ==> U.S. Dollar

Revenue Debt

If Tesla considered Bitcoin a viable option, it could have issued debt in Bitcoin, sold the Bitcoin to fund current operations, and then used Bitcoin revenue to service the debt.

Bitcoin ==> Bitcoin

Revenue Debt

A lot of the Bitcoin hype misses the point, for two reasons. First, fiat currencies like the U.S. dollar are already digital. Cash is an endangered species and Bitcoin transactions are relatively slow and expensive. Second, cash is anonymous (ideal for money laundering) but blockchain transactions are part of the permanent record.

Most people purchase Bitcoin with true name accounts and hold the Bitcoin on exchanges, which is risky. Consider FTX. For Bitcoin to serve its purpose, it should be purchased anonymously and held in private wallets.

The bottom line is Bitcoin (or any crypto) won’t go mainstream until major players use it to offset assets with liabilities. If you receive your paycheck and finance your home in U.S. dollars, all Bitcoin transactions will involve currency risk.

So why all they hype? What is really driving the Bitcoin movement? Simple: the financial system is riddled with corruption and favors insiders. As the late George Carlin said, “The game is rigged.” What to do?

Consider El Salvador. President Nayib Bukele took the critical step of making Bitcoin legal tender, with plans to sign legislation that allows for the issuance of Bitcoin debt – “Volcano Bonds.”

One motivation for the move was to address high remittance fees. In 2020, El Salvador received about $6 billion in remittances, about 23% of GDP, with about $400 million in fees paid to Western Union and MoneyGram. A hefty fee for mostly low-income people.

Whether the use of Bitcoin and Chivo wallets will gain momentum or reduce remittance fees remains to be seen.

A second motivation for the move was probably to gain some fiscal leverage. The U.S. dollar is also legal tender in El Salvador, which has pros and cons. If El Salvador can establish a viable Plan B with Bitcoin, then lenders with U.S. dollars will have to compete.

The move was bold, but the International Monetary Fund (IMF) urged El Salvador to drop Bitcoin’s legal status before negotiating a loan for $1.3 billion – perhaps for sound fiscal reasons, but perhaps to nip this Bitcoin thing in the bud. Despite multiple unfounded claims in major media outlets that El Salvador would default on its debt, due to the Bitcoin investments, El Salvador paid its most recent $800 million bond.

Big governments and central banks will never allow Bitcoin to become the backbone or operating system of global finance – Proof of work isn’t green! – but regular people can hedge the rigged game by buying things like Bitcoin, gold, or silver.

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