Being held by the throat of the financial providers, the encryption treasury strategy of listed companies has hidden concerns.

Written by: André Beganski, Decrypt

Compiled by: Felix, PANews

Numerous publicly traded companies, including brewers, cannabis producers, and energy storage firms, are increasingly adding Bitcoin to their balance sheets. However, observers warn that this strategy will face significant risks if the price of Bitcoin falls to a certain level or if their fundraising capabilities are restricted.

These companies may be forced to sell their held Bitcoin at a discount, or even sell the company itself.

Ben Werkman, the Chief Investment Officer of financial services company Swan Bitcoin, stated: "For high-reputation operating companies, this could be an opportunity to consolidate the industry and purchase Bitcoin at a 10% discount if they find themselves in trouble. If the bear market lasts for a long time, this scenario is indeed possible."

As more and more companies establish reserves based on Bitcoin and other digital assets, experts are expressing caution about this practice. It was first adopted by Strategy (formerly known as MicroStrategy) and has achieved great success. However, with the surge in Bitcoin prices and the rising stock prices of some new Bitcoin-focused companies, the potential risks of this practice 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 has increased buying pressure on Bitcoin, but we believe that over time, this situation may reverse."

Against the backdrop of U.S. President Trump implementing more favorable policies for cryptocurrencies, the number of companies attempting to emulate Strategy's approach by borrowing to purchase more Bitcoin has surged. Strategy began acquiring Bitcoin in 2020, and over the years, it has funded its acquisitions through the issuance of convertible bonds, common stock, and preferred stock—this strategy has been emulated by several emerging companies.

Since Strategy transformed from a software development company, its stock price has soared over 2500%. The company currently holds approximately 582,000 Bitcoins, worth over $61 billion, accounting for 2.7% of the total Bitcoin supply.

According to Bitcoin Treasures data, among 130 listed companies, none hold more than 21 million bitcoins (0.25% of the total bitcoin supply). The archived version of the website shows that at the beginning of this year, only 75 listed companies held bitcoins.

"If Bitcoin reserve companies collapse one after another, it could result in a 50% loss (of principal)." Strive Asset Management CEO Matt Cole stated, "I think there is a high possibility of risks in the future. This is something that needs attention."

Matt Cole now believes that the risk of Bitcoin liquidation due to the collapse of Bitcoin reserve companies is low, stating that its potential destructiveness to the market is no greater than "a typical weekend derivatives liquidation event."

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

In a recently released report, Coinbase's Global Research Director David Duong wrote: "In the short term, the pressure from forced selling is not the issue," and that refinancing measures could ultimately help leveraged companies avoid liquidating their Bitcoin holdings.

The fate controlled by the financiers

Most publicly listed companies strive to maximize shareholder value by increasing revenue, improving operating profit margins, or optimizing capital efficiency. However, many companies adopting a Bitcoin reserve strategy aim to maximize shareholder value by increasing the number of Bitcoins held per share. (Shareholders do not have direct claims to the Bitcoins in these companies' reserves.)

Strategy has traditionally favored using convertible bonds to purchase Bitcoin, as the company holds $8.2 billion in outstanding debt that may convert to equity in the future. Ben Werkma, Chief Investment Officer of Swan Bitcoin, stated that despite the sharp increase in demand for Strategy tools, it may take a long time for small companies to adopt Bitcoin at this level.

Werkman stated that for a company's convertible bonds to be popular on convertible arbitrage trading platforms (which tend to trade the debt of strategies), there needs to be a strong options market, which depends on factors such as stock trading volume.

"In the convertible bond market, you must scale up to a meaningful size, and you first need to have a derivatives market so that bond purchasers can hedge their risks." "Not all companies have an options market from the beginning."

Werkman stated that as an alternative method for a leveraged balance sheet, some companies are using bank term loans, but under certain conditions, this may force them to sell. "If they go borrow money from the bank, they are handing their fate over to others. At that point, you should be worried about these companies."

In assessing Bitcoin reserve companies, mNAV (the ratio of market value to net asset value) has become an informal but popular metric. As of last Friday's closing, Strategy's mNAV was 1.7, indicating that its market value of 107 billion dollars exceeds the value of its Bitcoin reserves.

However, analysts, including Greg Cipolaro, Global Head of Research at NYDIG, believe that this valuation metric is not ideal as a comprehensive indicator.

In a recent report, he wrote: "Indicators like 'mNAV' (market value compared to Bitcoin holdings) have serious flaws when comparing different types of Bitcoin reserve companies, failing to adequately account for the differences in (operating companies) and capital structures."

When the premium turns into a discount, danger follows.

Werkman stated that when a company's stock price has a premium relative to its Bitcoin holdings, it is easy to increase the value of each share of Bitcoin by issuing common stock. However, he warned that if this premium turns into a discount, the company's prospects could change 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 that purchase Bitcoin are trying to replicate Strategy's approach. Similar to the logic behind some state-level Bitcoin legislation, some companies choose to exchange cash and U.S. Treasury bonds for Bitcoin to maintain their purchasing power.

Werkman ultimately stated that Strategy's Bitcoin reserve strategy revolves around volatility. As the company's common stock price fluctuates, the company is able to raise funds at a premium through products such as convertible bonds, raising funds for future value.

"They seized the arbitrage opportunity, which is precisely the reason why the value of each Bitcoin held by common stockholders has increased. They leveraged the capital markets and the incentive mechanisms of all these different groups of investors to create lasting value."

As more and more Bitcoin reserve companies emerge, Werkman believes that investors will begin to categorize them into "growth" companies and "value" companies based on the expected growth rate of each share of Bitcoin. Although smaller companies may ultimately be acquired, their final development direction may evolve into an asset class along with Bitcoin.

"This is the magic of the moment." "They choose to exit the collapsing financial system and instead invest in what they believe to be the future financial system, where there are first-mover advantages."