The hidden risks of listed companies' crypto treasury strategies strangled by fund providers
TechFlow Selected TechFlow Selected
The hidden risks of listed companies' crypto treasury strategies strangled by fund providers
If the market cools down, some companies may be forced to sell their bitcoin at a discount, or even face acquisition by other companies.
Navigating Web3 tides with focused insightsBy: André Beganski, Decrypt
Translation: Felix, PANews
Publicly traded companies such as brewers, cannabis producers, and energy storage firms are increasingly adding Bitcoin to their balance sheets. However, observers warn this strategy carries significant risks if Bitcoin’s price falls below certain levels or if these companies lose access to funding.
These companies may be forced to sell their Bitcoin holdings at a discount—or even sell the entire company.
"This could present an opportunity for high-credit-quality operating companies to consolidate the industry and buy Bitcoin at a 10% discount if others get into trouble," said Ben Werkman, Chief Investment Officer at Swan Bitcoin. "If the bear market lasts long enough, this scenario is certainly possible."
As more companies build reserves based on Bitcoin and other digital assets, experts are sounding cautionary notes. The approach was pioneered—and achieved remarkable success—by Strategy (formerly MicroStrategy). But with Bitcoin’s price surge and rising stock prices among newly Bitcoin-focused firms, the potential risks of this strategy have largely been overlooked.
Earlier this month, Geoff Kendrick, Head of Digital Asset Research at Standard Chartered Bank in the UK, wrote in a report: "Currently, the Bitcoin reserve strategy increases buying pressure on Bitcoin, but we believe this dynamic could reverse over time."
Against the backdrop of President Trump's policies favoring cryptocurrencies, there has been a surge in companies attempting to emulate Strategy by taking on debt to purchase more Bitcoin. Strategy began acquiring Bitcoin in 2020 and, over several years, funded its purchases through convertible bonds, common stock, and preferred shares—a strategy now being copied by several emerging firms.
Since transforming from a software development company, Strategy’s share price has surged over 2,500%. It currently holds approximately 582,000 Bitcoin worth more than $61 billion—about 2.7% of Bitcoin’s total supply.
According to Bitcoin Treasures, none of the 130 publicly listed companies holds more than 0.25% of the 21 million Bitcoin cap. An archived version of the site shows that only 75 public companies held Bitcoin at the beginning of this year.
"If Bitcoin reserve companies start collapsing, we could see up to 50% losses in principal," said Matt Cole, CEO of Strive Asset Management. "I think the likelihood of future risk is quite high. This is something we need to watch."
Today, however, Matt Cole believes the risk of Bitcoin liquidations due to failing reserve companies is low, saying its potential market impact would not exceed that of “a typical weekend derivatives liquidation event.”
Depending on market conditions, Strive—which manages over $2 billion in assets—may eventually identify actionable investment opportunities, Cole added. "I'm not sitting here today saying, 'We need to prepare to acquire 10 different Bitcoin reserve companies.' But it's very possible we'll hold that view in the future, and when we do, we’ll be ready."
In a recent report, David Duong, Global Head of Research at Coinbase, wrote: "In the short term, forced selling pressure isn't an issue," noting that refinancing options could ultimately help leveraged companies avoid liquidating their Bitcoin holdings.
Fate Controlled by Funders
Most public companies aim to maximize shareholder value by increasing revenue, improving operating margins, or optimizing capital efficiency. In contrast, many companies adopting Bitcoin reserve strategies seek to maximize shareholder value by increasing the amount of Bitcoin held per share. (Shareholders have no direct claim on the Bitcoin in these companies’ reserves.)
Strategy has historically used convertible bonds to fund Bitcoin purchases and currently holds $8.2 billion in outstanding debt that could convert into equity. While demand for Strategy’s instruments has surged, smaller firms adopting Bitcoin may take a long time to reach similar scale, said Swan Bitcoin’s Ben Werkman.
For a company’s convertible bond to gain popularity on convertible arbitrage trading desks—which tend to trade Strategy’s debt—there first needs to be a strong options market, dependent on factors like stock trading volume, Werkman explained.
"In the convertible bond market, you need to reach a meaningful scale, and you first need a derivatives market so bond buyers can hedge their risks. Not all companies start with an options market."
Werkman noted that as an alternative to leveraged balance sheets, some companies are using bank term loans—but under certain terms, this could force them to sell. "If they borrow from banks, they put their fate in someone else’s hands. That’s when you should start worrying about these companies."
When evaluating Bitcoin reserve companies, mNAV (market value relative to net asset value) has become an informal but popular metric. As of last Friday’s close, Strategy had an mNAV of 1.7, indicating its $107 billion market cap exceeds the value of its Bitcoin holdings.
However, analysts including Greg Cipolaro, Global Research Head at NYDIG, argue that this valuation metric is far from ideal as a comprehensive measure.
"Metrics like 'mNAV' (market cap versus Bitcoin holdings) are deeply flawed when comparing different types of Bitcoin reserve companies and fail to adequately account for differences in operations and capital structure," he wrote in a recent report.
Danger Emerges When Premium Turns to Discount
Werkman said it's easy for a company trading at a premium to its Bitcoin holdings to increase per-share Bitcoin value by issuing common stock. But he warned that if the premium turns into a discount, the company’s outlook could shift dramatically.
For an emerging Bitcoin reserve company, the value of its operating business—or underlying operations—is "very important" in the early stages. Not all companies buying Bitcoin aim to replicate Strategy’s model. Similar to the logic behind certain state-level Bitcoin legislation, some companies choose to exchange cash and U.S. Treasuries for Bitcoin to preserve purchasing power.
Ultimately, Werkman said, Strategy’s Bitcoin reserve strategy revolves around volatility. As the company’s common stock price fluctuates, it can raise funds at a premium using products like convertible bonds—effectively raising capital against future value.
"They’ve captured an arbitrage opportunity, which is exactly why shareholders see increasing Bitcoin per share. They leverage capital markets and the incentives of various investor groups to create lasting value."
With more Bitcoin reserve companies emerging, Werkman believes investors will begin categorizing them as either "growth" or "value" based on expected growth rates of Bitcoin per share. While smaller firms may eventually be acquired, their long-term trajectory may evolve alongside Bitcoin as an asset class.
"That’s the magic of the moment. They’re choosing to exit a financial system they believe is collapsing and move into what they see as the financial system of the future—where first-mover advantage matters."
Join TechFlow official community to stay tuned
Telegram:https://t.me/TechFlowDaily
X (Twitter):https://x.com/TechFlowPost
X (Twitter) EN:https://x.com/BlockFlow_News
Decrypt
