The fate of listed companies is controlled by the capital providers, and the crypto treasury strategy is worrying

Compiled by: Felix, PANews

A host of public companies, including brewers, cannabis producers and energy storage companies, are rushing to add Bitcoin to their balance sheets, but observers say the strategy poses huge risks if the price of Bitcoin falls to a certain level or their ability to raise funds is constrained.

These companies may be forced to sell their Bitcoin holdings at a discount, or even sell off the companies themselves.

“This could be an opportunity for high-profile operating companies to consolidate the industry and buy into Bitcoin at a 10% discount if they get into trouble,” said Ben Werkman, chief investment officer at financial services firm Swan Bitcoin. “If the bear market lasts longer, this could happen.”

Experts are raising alarms as more companies build reserves based on Bitcoin and other digital assets. The practice, pioneered with great success by Strategy (formerly MicroStrategy), has been largely ignored as the price of Bitcoin has soared, and as the shares of some newly Bitcoin-focused companies have risen.

“Currently, the Bitcoin reserve strategy is adding buying pressure on Bitcoin, but we believe this could reverse over time,” Geoff Kendrick, head of digital asset research at Standard Chartered Bank, wrote in a report earlier this month.

The number of companies trying to emulate Strategy and use debt to buy more Bitcoin has surged as U.S. President Donald Trump pushes for more cryptocurrency-friendly policies. Strategy began buying Bitcoin in 2020 and over the years has financed acquisitions by issuing convertible bonds, common stock and preferred stock - a strategy that has been copied by several emerging companies.

Since Strategy's transformation from a software development company, its stock price has soared more than 2,500%, and the company currently owns approximately 582,000 bitcoins, worth more than $61 billion, accounting for 2.7% of the total supply of Bitcoin.

According to Bitcoin Treasures, no public company among 130 has more than 0.25% of the 21 million bitcoins that can ever be created. An archived version of the site shows that at the beginning of this year, only 75 public companies held bitcoins.

"If Bitcoin Reserve companies go out of business, you could lose 50% (of your principal)," said Matt Cole, CEO of Strive Asset Management. "I think there's a high probability of risk going forward. That's something to watch out for."

Today, Matt Cole believes that the risk of Bitcoin liquidation caused by the collapse of Bitcoin Reserve is low, saying that its potential damage to the market will be no greater than "a run-of-the-mill derivatives blowup over the weekend."

Matt Cole said that depending on market conditions, Strive, which manages more than $2 billion in assets, may start to see actionable investment opportunities in the future. "I'm not sitting here today saying, 'We need to be ready to acquire 10 different Bitcoin reserve companies.' It's very possible that we will hold that view in the future, and we will be ready for it when the time comes."

In a recent report, David Duong, global head of research at Coinbase, wrote that “forced selling pressure is not an issue in the short term,” and that refinancing measures could ultimately help leveraged companies avoid liquidating their Bitcoin holdings.

Fate controlled by the funders

Most public companies seek to maximize shareholder value by growing revenue, improving operating margins, or optimizing capital efficiency. However, many companies that adopt a Bitcoin reserve strategy aim to maximize shareholder value by increasing the number of Bitcoins held per share. (Shareholders have no direct claim to the Bitcoins in these companies’ reserves.)

Strategy has historically favored using convertible bonds to buy bitcoin, and the company holds $8.2 billion worth of outstanding debt that could be converted into stock in the future. Ben Werkma, chief investment officer at Swan Bitcoin, said that despite the sharp increase in demand for Strategy's tools, it may take a long time for small companies adopting bitcoin to reach that level.

For a company’s convertible bonds to gain traction on convertible arbitrage trading platforms, which tend to trade Strategy’s debt, there first needs to be a strong options market, which depends on factors such as the volume of shares traded, Werkman said.

“In the convertible bond market, you have to build scale to meaningful size, and you need to have a derivatives market in the first place so that people who buy the bonds can hedge their risk,” he said. “Not all companies have options markets in the first place.”

As another way to leverage their balance sheets, some companies are using bank term loans, but depending on certain terms, that could force them to sell, Werkman said. “If they go and borrow money from a bank, they’re putting their fate in someone else’s hands. That’s when you should be concerned about those companies.”

mNAV, or market capitalization to net asset value, has become an informal but popular metric for valuing companies with bitcoin reserves. As of Friday’s close, Strategy’s mNAV was 1.7, indicating that its $107 billion market capitalization was greater than the value of its bitcoin reserves.

However, analysts including Greg Cipolaro, head of global research at New York Digital Investment Group (NYDIG), believe that the valuation metric is not ideal as a comprehensive indicator.

“Metrics like ‘mNAV’ (market capitalization relative to Bitcoin holdings) are deeply flawed when comparing different types of Bitcoin reserve companies and fail to fully account for differences in (operating companies) and capital structures,” he wrote in a recent report.

When premium turns to discount, danger follows

Werkman said it’s easy to increase the value of each bitcoin by issuing common stock when a company’s stock price is trading at a premium to its bitcoin holdings. But he warned that if that premium turns to a discount, the company’s prospects could shift accordingly.

For an emerging Bitcoin reserve company, the value of its operating company, or its underlying business, is "very important" in the early stages. Not all companies buying Bitcoin are trying to copy Strategy's strategy. Similar to the logic behind some state-level Bitcoin bills, some companies choose to exchange cash and U.S. Treasuries for Bitcoin to maintain their purchasing power.

Ultimately, Werkman said Strategy’s Bitcoin reserve strategy revolves around volatility. As the price of the company’s common stock fluctuates, the company is able to raise capital at a premium through products such as convertible bonds, which raise capital in future value.

“They’re taking advantage of an arbitrage opportunity, and that arbitrage opportunity is what’s causing the increase in value per bitcoin for common shareholders. They’re taking advantage of the capital markets and the incentives of all these different investor groups to create lasting value.”

As more Bitcoin reserve companies emerge, Werkman believes that investors will begin to sort them into “growth” and “value” companies based on the expected growth rate of each Bitcoin share. Although the smaller companies may eventually be acquired, their ultimate development direction may evolve with Bitcoin as an asset class.

“That’s the magic of the moment,” he said. “They’re opting out of a collapsing financial system and into what they believe is the financial system of the future, where there’s a first-mover advantage.”