In this article, we will provide an introduction to Crypto Treasury Management and discuss its Core Principles for the Longevity and Profitability of Crypto projects and DAOs.
What is the Purpose of Treasury Management?
If you wanted to go on a long adventure in a car, you would need to manage your fuel properly. You would use a map to understand the possible routes you can take. Make note of gas stations or electric charging points for refueling the car. This kind of planning of how long the fuel will last when next you can refuel, and what routes to take, is essential to ensure that you complete your journey successfully.
Now let's say that you did not start with enough money to buy all the fuel you would need throughout this journey. Then, in addition to fuel management, you would also need to plan how to earn, spend, and manage money for buying the fuel. And with this, we are getting close to the essential role of Treasury Management. We can say that money is a form of stored energy or fuel for any serious endeavor in our world. To ensure longevity and profitability in any business venture or success in personal goals, you must understand proper money management.
The 3 Big Goals of Treasury Management
We can say that without Treasury Management, a project's long-term success is impossible. Of course, someone can always get lucky somehow, but this happens very rarely, with a one-in-a-billion chance. For all intents and purposes, you need to implement a sound treasury management strategy so that your project can weather unexpected shocks and surprises and emerge successful in a planned, reliable, and systematic manner. The following are the 3 big goals of any treasury management team/strategy:
a) Return on Investment (ROI) or Income
Is the project making money? How much money can be made, when, and how? This can include funding from investors and the public/community, profits from products/services, interest/yield on long-term assets, etc.
b) Liquidity or Ongoing Cashflow
How is the project spending money? Is there enough cash at hand? For how long can that much cash last your project? As you can imagine, to keep the project running you will need to incur various expenses. This can include paying employees/members, regulatory fees/taxes, hardware/physical space rent, etc.
c) Capital Preservation or Locking Long-Term Value
How much additional money or assets do you have, so that you can put it into savings or investments? And how to manage this long-term value or capital preservation? This is all about financial planning for the project's future, ensuring that you can derive more value from your parked assets, but also that you don't take unnecessary investment risks that might lead to losses from these stored assets.
How is Treasury Management Unique for Crypto?
All kinds of organizations, corporations and banks employ Treasury Management practices. They have done so for a long time. Traditional finance or TradFi has lots of expertise with documented best practices and playbooks for proper implementation of treasury management. Treasury Management teams or Treasuries are like the guardians of cash, liquidity and capital for any firm.
You might need to spend money for ongoing regular and unexpected expenses, or need a larger amount of cash in one go for mergers & acquisitions or expansion of in-house teams. There may not always be enough cash at hand, and so you will need to tap from your illiquid or invested assets. At other times, you might realize that you have more than enough cash with you, and so it is better to convert the surplus into long-term savings. All this cannot be managed blindly or without proper planning and oversight.
When it comes to crypto, DAOs and blockchain projects, there are more challenges. Most assets for crypto projects are held in the form of crypto tokens. Their value is regularly varying wildly due to volatile crypto markets. Diversification is challenging, because most cryptoassets are highly correlated: whether Bitcoin goes up or down, other tokens usually move in the same direction, but in larger steps. The decentralized nature of teams and operations in DAOs, with the use of smart contracts and community voting, adds further novelty to the mix.
Thus, treasury management principles and best practices from TradFi need to be modified and adapted considering the uniqueness of Crypto and DeFi.
The Seven Core Principles of Crypto Treasury Management
Your strategic and tactical plans and actions will depend on your situations and goals. But the underlying principles for devising your strategy and choices will remain the same. Here we discuss the important seven principles that you must keep in mind for planning the Treasury Management strategy for your crypto project/company.
#1 Know Your Market Cycles
Crypto markets have shown to have certain long-term trends with 4-5 year cycles, with predictable bull runs and bear markets. Over the medium and shorter term though, crypto markets are highly volatile and unpredictable. The attitudes towards crypto have changed over time. Its market adoption has grown over the years, ushering in investors and traders of all inclinations. The macroeconomic situation and business cycles of the traditional world also affect the price movements in crypto. Institutional investors may use crypto as a hedge against inflation and devaluation of fiat currencies. Or they may leave the volatile crypto markets for the safer government bonds.
For a successful strategy in treasury management, you need to stay updated with how the market is moving. Is it booming with bull runs, ICOs, and great new projects? Or is it languishing with the bears dominating token liquidations and large scale panic-selling of cryptoassets? Are you in a crypto winter presently? What about the Central Bank interest rates, and the latest GDP and inflation in the larger economy? You must understand these market trends and cycles, and accordingly make treasury management plans to exploit the opportunities and safeguard against the threats from the market.
#2 Know Your Project Growth Phase
Any business project, be it crypto or traditional one, undergoes growth at different rates during it progression. It depends on the available resources, the will of the project leadership and team, and the market situation. More specifically to the project, it will depend on the specific use-case or pain-point it is addressing. How well is this goal validated by the market and userbase? How urgent is the requirement of the solution? Are the price points and feature set/utility of the product/service being welcomed by the audience/users/investors?
Based on these factors, your project will be growing at a slow and steady pace, or plateauing into a long, patience-testing marathon. Or it could be experiencing a quick growth or decline due to a critical opportunity/threat arising suddenly. Maybe the project pivoted its offering drastically, or the external market conditions changed unexpectedly. Having the situational awareness about the internal growth and health of your project will determine your next steps for the project. And based on this project growth and upcoming roadmap, you will decide and customize your treasury management strategy.
#3 Know Your Risk Tolerance
How much risk are you willing to take? How much assets are you willing to lose? What are the different risk thresholds for the survivability and growth of your project? What is the minimum funding and cashflow you need to barely keep functioning? At what point might your project fail and die without any chance of reversibility? And what are the risks that you want to avoid at all costs? Thinking deeply about the project team's preferences for these questions reveals your risk tolerance.
Any business is like hunting and survival in the wild. There is no single strategy for sureshot success. Move too fast, and you might extinguish your energy and self-destruct. Move too slow, and you get overtaken by competition and become obsolete. Taking calculated risks within your thresholds is essential. However, being driven into recklessness by greed or hubris can invite unwanted trouble. So, it is very important that your crypto project leadership introspects on these aspects of risk. And they should make sound rules that the project team will follow objectively at all costs to avoid falling prey to unnecessary risk taking in the heat of the moment. You must adjust the treasury management strategy to support this premeditated and calculated risk tolerance of the project.
#4 Know Your Cash Flow Situation
Now we are entering the core realm of the treasury management team. Based on the external and internal factors around the project discussed above, there will be a specific nature of the cashflow in the project. How much cash is flowing in, when is the next influx expected, what are the regular/predictable inflows and one-time or surprise inflows? Similarly, you also need to know and predict the patterns for the cash outflows.
You need to quantify, measure, monitor and predict the answers to the above cashflow questions. You can document this in a spreadsheet, or using a cashflow, financial or treasury mangement software package. It is essential to have accurate and updated figures at your fingertips. You must use appropriate graphs and data visualizations so that all team members can understand the cashflow situation intuitively, at a glance. By being in constant touch with the pulse of cashflow in your project, you will have the wisdom and knowledge to make tactical and strategic choices in allocating your assets to different project goals.
#5 Ensure Portfolio Diversification
What is the cardinal sin of crypto treasury management? In other words, what is the most common and easily avoidable mistake in treasury management made by crypto projects? They don't follow the oft-repeated and cliched investment advice of diversifying your asset portfolio. Crypto projects commonly keep most of their cash and assets in their native crypto tokens. This exposes them to excessive market volatility and risks. Now, this can bring in big and quick profits during successful ICOs, funding rounds, project milestones or larger market bull-runs. But crypto project teams often forget to book profits and store the newly earned wealth into safer assets. And the huge losses experienced during crypto market downturns can be simply ruthless devastating!
Hence, capital preservation or long-term value locking is one of the big goals of treasury management. And diversifying the value of the project by allocating your funds into safer and healthy assets is of prime importance. You must choose stablecoins whose reserves are audited regularly, have good reputation in the market, and good, strong banking partners. Crypto stablecoins store value of the local fiat currency in crypto tokens, and provide the convenience of instant transfers at low fees. They also support programmability with APIs and smart contracts which is great for cashflow automation. Similarly, you should also consider other safer investment instruments outside the crypto world, like fixed deposits, government bonds and money market funds, for safeguarding the long-term value of your crypto project funds.
#6 Maintain Excellent Communication
Are you announcing in advance when you make big transfers to crypto wallets for official project purposes? Do you regularly report the cashflows, capital allocation and other financial health information to your stakeholders? Are the crypto project governance policies and proposals openly discussed and voted on by the community? Do you follow the local financial and tax regulations, undergo audits and attestations with reputed auditors/accounting firms/banking partners? And do you make sure to document and communicate all these ongoings with your project team, investors and community?
Excellent communication is essential for building trust and reputation. It is how you can assert and enforce your promises of transparency and accountability to your stakeholders. While communication is generally important for any business, it has ten-fold or even hundred-fold more criticality for crypto projects. This is because the crypto world is full of scams, rug-pulls, pump-and-dump schemes. So keeping a clean track record and proving your trustiworthiness on an ongoing basis is central to the health of your project. You cannot expect people to put faith in you blindly, you must earn it through the transparency of your financial transactions and excellent communication policies.
#7 Choose Your Investors & Partners Wisely
How tempting it is to accept investments from excited investors! A lot of entities will beg you to take their money during the hype and buzz phase of your project, or during the euphoria in crypto/DeFi/NFTs. But such people or institutions who invest with a get-rich-quick mindset are also the ones who withdraw and run away first thing when bad news or rumor hits the grapevine. Now, you can certainly allocate a conservative amount of your project funding to such hype-based investors. But the major foundation of your project requires investors and supporters with long-term interest in your project and faith in your vision.
As with your investors, you should also choose the partners in the crypto ecosystem for their long-term commitment to innovating in the Web3 and DeFi space. Such investors and partners will stand by you and work along during all the ups and downs in global economy and crypto markets alike. They understand the value you are seeking to create, and the benefits these decentralized and transparent systems will create for the future generations to come. And they are doing the same with their own projects and other investments. By creating such a strong ecosystem and support system of likeminded thinkers, you are investing in the longevity and success of your crypto project.
Closing Remarks on Crypto Treasury Management Principles
Thanks to the huge growth opportunities and buzz in crypto, project teams can experience exciting challenges and successes. If they don't maintain a conscious and well-planned management strategy for their cashflow and investments, crypto projects can suffer unexpected and premature failures. Hence, treasury management plays a prime role for ensuring that crypto projects can survive through the volatile market cycles in crypto as well as the recession and inflation in the broader economy.
While keeping an eye on the central goals of income, liquidity and capital preservation, a treasury management strategy should follow the seven core principles discussed above. These principles serve as critical reminders of what questions to answer, what information to have, and what best practices to follow. Using them, you will make wise choices with the cashflow and assets portfolio of your crypto project, and succeed in both the short and long term.