One of the hottest topics of innovation in the financial world today is decentralized cryptocurrency housed on the blockchain. In light of the shifting financial forecast brought on by COVID-19, many public companies are holding Bitcoin (BTC) and other cryptocurrencies as a percentage of corporate treasury. (For non-savvy cryptocurrency newbies, Bitcoin is the first and most successful “coin” stored on the blockchain.)
Companies have begun to focus on investing in crypto for two main reasons: many companies wish to appear innovative to their shareholders, and they are hoping to get a quick cash windfall should cryptocurrencies continue to grow in popularity.
In this post, we will be sharing some best practices to help keep your business ahead of the curve for both cryptocurrency and financial literacy.
The Rise of BTC
Bitcoin (BTC) was invented in 2008, however, it wasn’t until late 2017 that many fintech companies started to really take notice. Nearly a decade after its creation, Bitcoin rose to nearly $20,000 per BTC in 2017, only to plummet and lead many holders to cash out in 2018.
In 2021, the price soared to over $50,000 in early May of 2021. Weeks later it plummeted again, suffering a major crash towards the end of the month. The recent ups and downs of BTC prove that cryptocurrency can be a high-risk investment strategy. Still, with the promise of rising prices on the horizon, many companies and investors are looking to own cryptocurrency, even despite the risk it poses.
However, Bitcoin and other cryptocurrencies remain confusing to many business owners. SMBs need to be careful because in some cases, cryptocurrency is incorrectly represented as a replacement for cash, which it has not evolved to become yet. There is also a steep learning curve associated with understanding the potential risks and rewards associated with investing in cryptocurrency.
May Produce Short-Term Cash Windfalls or Losses
What’s important to understand is that any cryptocurrency is essentially considered an asset hold. To make it easy, you can think of cryptocurrency like gold. It is an asset on your balance sheet, and it is not very liquid. With cryptocurrency, you don’t realize a gain or loss until you convert to cash.
What many people don’t realize is that cryptocurrency is incredibly volatile, due to the fact that it fluctuates with very long swings, as evidenced by the peaks and valleys in the aforementioned Bitcoin example.
Unintended Consequences of Converting Cryptocurrencies
Startups and investors are currently putting money into crypto because they want to quickly increase the value of the investments they’ve received from their investor funding rounds. While this may seem like a quick way to add to your supply of available money on hand, it can be a risky approach.
Going all-in on cryptocurrency may be a very trendy thing to talk about as a startup owner, but most companies don’t realize that investing in cryptocurrency can be a complicated recipe for success, that may have some unintended consequences.
Keeping Liquid Cash
When a business is in its infancy you need to keep as much cash as possible. Having liquid assets in your business is a responsible business move because it allows you to finance unexpected needs that commonly arise in the business’s early stages.
This ensures you always have cash available to pay vendors and to fund the development of your product. As budgets and startup costs fluctuate, having cash on hand is a sound investment in your business’s growth.
Keep in mind that most of your vendors will not accept cryptocurrency as a viable payment method. Instead, you will need to go through the process of converting your hard-earned (fluctuating) cryptocurrency into cash.
When you take this necessary step to liquidate your crypto, this sale could subject you to costly capital gains taxes, making it much more expensive than having cash on hand to pay your vendors.
Complicated Tax Preparation
If you sell a cryptocurrency to convert to cash, and you generate a profit as a result of the sale, you are subject to Capital Gains taxes. When you file your taxes you will need to disclose whether you bought or sold cryptocurrency.
This can significantly complicate your tax preparation for the year, especially if you are operating a startup. Having a Capital Gains tax liability is also a quick way to run into unforeseen surprises when tax season comes around, and it could lead to a spike in your overall tax liability that you weren’t anticipating.
Focus on Long-Term Growth over Quick Short-Term Gains
Depending on where you are at in your entrepreneurial journey, BTC and other cryptocurrencies may not be the right thing for most SMBs. While it can be prudent to stay up on the latest trends in the financial sector, it is always best to adopt a proven strategy that isn’t subject to high amounts of volatility.
Disruptors in the emergent financial technology sector will come and go, and some will likely continue to innovate. If you are a company looking to better manage cash flow or get the highest return on investor money through properly structuring business operations and finances, we can help by providing trend-proof strategy and expert advisory services.
Tentho Can Help
Tentho is a team of highly skilled financial experts who excel in helping clients navigate changing financial innovations. Tentho works with clients to create a sustainable, long-term approach to money management, investing, and business finances. Their team of trusted experts is up-to-speed on all the latest technological advancements in the financial sector and are happy to pass along their expert industry-leading knowledge to you. Tentho encourages business owners to seek high-yield, low-risk solutions to managing their business finances.
If you are ready for a dedicated financial team to help you navigate your business finances in 2021, schedule your free consultation today.
Disclaimer: this financial advice is the personal opinion of Giuseppe Salamone and is not endorsed by the FDIC.