It all started with MicroStrategy. Now, it seems that every week a new publicly traded company announces hoarding Bitcoin or other cryptocurrencies.
But here's the problem: investors are willing to give these companies a high valuation premium just because they buy Bitcoin.
What happens if their stocks don't rise?
Take Japan's Metaplanet, which replicated Michael Saylor's Bitcoin frenzy at MicroStrategy.
10xResearch says its stock price is calculated based on a Bitcoin trading price of $596,154.
This is five times the current Bitcoin price of around $106,000.
Before fully committing to Bitcoin, Metaplanet was a budget hotel operator that later transformed into a blockchain infrastructure provider.
With the company's rebranding as a Bitcoin reserve company, these businesses have been shelved.
10xResearch wrote in a report on May 27: "Is it time to short? The signals we're seeing now are extremely similar to past turning points."
One of Many Companies
In fact, Metaplanet is one of many companies following Saylor's company, which is now renamed Strategy.
On May 27, Trump Media & Technology Group (TMT) stated plans to raise $2.5 billion to buy Bitcoin.
This week, GameStop, the video game retailer famous for being a "meme stock", purchased 4,710 Bitcoins worth approximately $513 million (at current prices).
The stock prices of both companies have fallen.
These new Bitcoin reserve companies have adopted a relatively simple strategy: raising funds through convertible bonds and then using that money to buy large amounts of Bitcoin.
Why are so many suddenly imitating Saylor? Simply put, it has been remarkably effective for companies.
Since implementing its Bitcoin purchase plan in August 2020, Strategy's stock price has risen 10-fold. The company holds over 576,000 Bitcoins, worth approximately $63 billion.
Proceed with Caution
But skeptics say there are good reasons to be cautious.
First, the idea that hoarding Bitcoin or any cryptocurrency on a company's balance sheet is a guaranteed win is nonsense.
Renowned macro analyst Noelle Acheson says those imitating Saylor's belief that this strategy is risk-free is concerning. "Especially those who enter when Bitcoin prices are high."
When Strategy first bought Bitcoin, the trading price was around $11,000, only about a tenth of the current $107,000.
As this strategy becomes more popular, analysts and seasoned investors might focus on a specific metric to cut through the noise—Net Asset Value (NAV).
NAV refers to the book value of a company's held assets.
When NAV is mismatched, it means the company's stock price is inconsistent with the actual value of its assets.
Take Metaplanet as an example.
The company holds 7,800 Bitcoins worth about $830 million. However, its market value is $5.6 billion, meaning each Bitcoin is valued at $596,154.
In other words, investors are paying five times the price of Bitcoin itself for indirect Bitcoin investment.
10xResearch analysts state, "A dangerous NAV distortion is forming in the shadows."
"We should restrain our enthusiasm for this gimmick." - Noelle Acheson
This means Metaplanet's stock price (up 233% this month) could reverse trend at any moment.
But don't forget Strategy. Its frequent premium might benefit shareholders but is also concerning.
According to Strategy Tracker data, in 2020, investors valued Strategy's stock more than six times its Bitcoin value, and last year, over three times its value.
Hedge fund experts like legendary short seller Jim Chanos have been shorting Strategy using NAV mismatches and buying more Bitcoin.
Insider Selling
Meanwhile, cryptocurrency reserve strategies are gaining massive momentum.
This week, Trump Media & Technology Group (TMT), the parent company of Trump's social media company, plans to raise $2.5 billion to invest in Bitcoin. But after disclosing the plan, its stock price plummeted 11%.
Why? Some might fear insider stock sales.
The company stated that future potential stock sales could include shares from insiders, such as a trust fund controlled by his son Donald Trump Jr., which holds 57% of the company's shares.
Meanwhile, many Saylor imitators (some not even cryptocurrency companies) have valuations entirely dependent on their Bitcoin holdings.
Semler Scientific, which produces medical equipment, saw its stock price surge 30% after purchasing 581 Bitcoins.
Strive Asset Management, founded by former presidential candidate Vivek Ramaswamy, says it has raised $750 million to buy Bitcoin, with another $750 million in preparation.
Tech company ASST announced a merger with Strive Asset Management to become a Bitcoin reserve company, with its stock rising 194%.
Twenty One, a new startup led by Bitcoin evangelist Jack Mallers and supported by Tether, SoftBank, and Cantor Fitzgerald, exists solely to accumulate as much Bitcoin as possible.
Cantor Equity Partners, the holding company established in late April, has seen its stock rise over 300%.
The company listed 76 risks related to its business model, many of which are uncommon.
Nakamoto Inc, led by David Bailey, merged with a healthcare company, raising $700 million to acquire Bitcoin.
Now, macro analyst Noelle Acheson says it's reasonable for companies to incorporate Bitcoin into their asset reserves.
But many companies making Bitcoin their sole reason for existence do raise overheating warnings.
The biggest risk for all these companies is macroeconomic risk. And during the Trump era, this is a massive factor.
Not even Michael Saylor can escape geopolitical influences.
Tariffs, rising inflation, and the Federal Reserve's uncertain rate policy are creating market tension. Persistently high government bond yields are especially concerning, as they suggest investors' confidence in the US dollar as a safe-haven asset is diminishing.
This is unfavorable for risk-appetite assets like stocks and cryptocurrencies.
All of this means that Saylor's billions in Bitcoin purchases, which once boosted this top cryptocurrency, no longer have the same effect.
If companies like Strategy or Metaplanet continue to see rising stock prices, more followers may emerge. This could further weaken the impact of such Bitcoin purchases.
Acheson wrote: "We should restrain our enthusiasm for this gimmick."
"Innovative financial engineering always initially appears as a fascinating new tool that can generate returns, but inevitably becomes fragile as interest and risks become saturated."
