Author: Jeff Dorman, CFA
Translated by: TechFlow
Crypto Treasury Companies: Facts and Misconceptions
After six consecutive weeks of gains, the Bloomberg Galaxy Crypto Index (BGCI) finally pulled back last week, while stocks and US Treasuries both rose. Despite ongoing discussions about the "dysfunction" of the US Treasury market, it's worth noting that over the past two years, the US 10-year Treasury yield has actually been fluctuating within a 100 basis point range, which is another typical example of narrative dominating facts.
Speaking of narrative, an increasing number of US-listed companies purchasing BTC and other digital assets have undoubtedly become a market highlight. But as usual, this trend is accompanied by many misunderstandings. Therefore, we will try to clarify the facts and misconceptions behind these new digital asset buyers.
Some call these companies "Bitcoin Treasury Companies," while others refer to them as DATs (Digital Asset Treasury Companies). Regardless of the terminology, these companies are essentially new shell companies used to hold digital assets. This differs from the original Bitcoin treasury companies. For over five years, we have been discussing the phenomenon of publicly listed companies incorporating BTC into their balance sheets for various reasons.
These companies can be categorized as follows:
Some are ordinary companies that experimentally hold BTC, such as Tesla and Block;
Some are crypto-native companies like Coinbase and Galaxy, which naturally hold these assets through their core business;
Some are BTC mining companies whose core business is holding BTC.
The growth of BTC on these companies' balance sheets is easily trackable and sometimes even drives stock prices. However, in most cases, BTC holdings do not overshadow their core business. Moreover, until recently, the accounting standards from the Financial Accounting Standards Board (FASB) regarding BTC holdings posed significant downside risks to earnings per share (EPS).
Conversely, these companies' impact on BTC prices is usually limited, as they typically do not purchase large amounts through open markets. Most companies accumulate BTC through daily operations, and for those that do purchase BTC, the volume is relatively small.
Source: BitcoinTreasuries.net
Meanwhile, MicroStrategy (ticker: MSTR) has gradually become the first true "BTC company," with its sole objective as a public company being to purchase BTC. We first noticed MSTR five years ago when it announced its initial BTC purchase plan, which instantly raised its stock price by 20% and drew widespread market attention. As we wrote in August 2020:
"MSTR's stock rose 20% after last week's announcement, likely causing junior corporate finance department employees to spend a busy weekend frantically researching BTC. Remember 2017? When companies went out of their way to mention 'blockchain' in earnings calls, even without knowing how to actually use blockchain or having any plans, simply because the market would reward companies that seemed ahead of the technological curve? Get ready for BTC's replay."
MSTR's initial BTC purchase was made using cash from its balance sheet, but over the past five years, its true "brilliance" has been how easily and frequently it leverages capital markets. While MSTR still has a core business generating $50-150 million in EBITDA annually through business intelligence and enterprise software analytics services, this business has quickly been overshadowed by BTC purchases.
Unlike other listed companies trying to imitate this strategy, MSTR's existing cash flow comes from its subsidiary (formerly core) business line, which can be used to pay company expenses and debt interest. This creates a significant difference from other listed companies.
Source: ChatGPT and MicroStrategy Financial Reports
By utilizing debt, convertible bonds, preferred shares, and equity markets for new rounds of financing to purchase BTC, MSTR has opened the door for a completely new investment group, enabling them to access crypto asset investment opportunities previously unavailable.
Although I'm reluctant to delve into the specifics of each financing round (these details are not crucial to my point, as this content was generated by ChatGPT), MSTR's "magic" in capital markets is indeed admirable: over the past five years, it has demonstrated the pure sophistication of capital market operations.
Source: ChatGPT
Each new financing round and BTC purchase further drove up BTC's price due to its transaction size and signaling effect for future purchases. Simultaneously, this boosted MicroStrategy's (MSTR) stock price as the market began focusing on new metrics like "BTC per share" and "BTC yield" that previously did not exist. Essentially, MicroStrategy as a "company" has transformed to have the sole goal of increasing its BTC reserves, a process from which all participants have benefited.
Convertible and preferred shareholders are essentially playing a "cheap volatility" game, profiting from the volatility of MSTR stock and BTC prices. Direct debt holders are only concerned with fixed income returns, which seems effortless under the EBITDA support from MSTR's old core business. Meanwhile, equity investors profit from the MSTR stock premium, which is far higher than the net asset value (NAV) of BTC on its balance sheet.
Everyone wins! Of course, when everyone wins, two things typically happen:
Voices of skepticism grow louder
Critics begin angrily posting online, trying to find ways to question the feasibility of this strategy. We started responding to these ridiculous accusations as early as 2021. At the time, many market participants believed MSTR would be forced to sell BTC, completely misunderstanding how debt covenants work, not to mention confusing direct BTC holding with holding leveraged futures positions with liquidation prices.
Even today, we still often need to address claims that MSTR poses a systemic risk to BTC, though we have essentially given up fighting this endless argument. We wish Jim Chanos good luck with his recent "long BTC, short MSTR" trade (though based on the reasons we've outlined here, this strategy may also not work). "Shorting MSTR" has become the new "shorting Tether" - a seemingly low-risk, high-reward trade that actually has a very low probability of success.
Imitators emerge
Welcome to the crazy new era of crypto.
Source: Bloomberg and Arca Internal Calculations
If 2024 is the year of "crypto ETFs", then 2025 will be the year of "SPACs and reverse mergers". We once described crypto ETFs as "two steps forward, one step back":
"Many believe ETFs are a victory for real-time settlement assets, but the opposite is true. BTC ETFs are actually stuffing a real-time settlement system (blockchain) into an outdated T+1 settlement product (ETF). Isn't this going backward? As an industry, we should strive to bring global assets onto the blockchain, not force chain assets into Wall Street's old systems."
Although we acknowledge this is a necessary step to drive adoption and interest, the point still stands. There is a significant difference between "blockchain technology" and "crypto assets". We are more focused on bringing the world's most popular assets (such as stocks, bonds, real estate) onto the blockchain, rather than forcibly inserting low-quality crypto assets into outdated systems. However, the trend of inserting crypto assets into stock shells will not stop. Let's look at what is happening now.
SPACs (Special Purpose Acquisition Companies) and reverse mergers have existed for a long time, but rarely been comprehensively adopted for a single purpose. However, this is the current situation. If you own a listed stock shell, it can be used to acquire crypto assets and hope to trade at a significant premium to net asset value (NAV). These new structures are usually slightly different from MicroStrategy. Some companies only hold Bitcoin, trying to completely replicate the MSTR model (though with far less brand recognition and capital market expertise); others have purchased new assets - some hold ETH, some hold SOL, some hold TAO, and more new assets are emerging. Arca currently receives 3-5 new proposal ideas from investment banks every week.
[The rest of the translation follows the same professional and accurate approach, maintaining the specific terminology translations as instructed.]This situation is very similar to the Grayscale trust fund before the ETF launch. At that time, Grayscale did not face the risk of being forced to sell its underlying crypto assets... The real risk was that the trust fund (stocks) traded below its Net Asset Value (NAV). Ultimately, this situation did occur, causing damage to equity investors but having no impact on crypto asset holders.
Today, every crypto risk investor holding a large number of high-inflation, low-demand junk tokens is discussing how to stuff these tokens into an equity shell company. However, this does not automatically create demand, just as most newly launched ETFs have failed to attract investors. Creating an investment tool and creating demand are two different things. While these investment tools will continue to be created, it is still uncertain whether these stocks will truly attract market demand.
Is there a possibility that these shell companies can maintain a premium above NAV in the long term? The answer is possible, but under strict conditions.
Perhaps one day, MicroStrategy (MSTR) will become the "Berkshire Hathaway" of the crypto field. At that time, Bitcoin might become an extremely scarce and sought-after asset, where companies would even accept lower acquisition offers from Michael Saylor, simply because he can pay with precious Bitcoin.
Another way these shell companies might maintain their premium is by becoming more creative in selecting underlying assets. For example, they could hold high-quality tokens like HYPE, which are currently not listed on any centralized exchange, thereby providing a new investor group with access to HYPE. This scarcity and uniqueness might attract investors willing to pay a premium. However, these scenarios are only long-term possibilities.
In any case, just like ETFs, some shell companies will succeed, and some will not. But if bankers want to keep the "profit train" moving, they must start becoming more creative. If they simply stuff crypto assets into an equity shell company, they will need to continuously innovate the content within the shell company—making it valuable and difficult to obtain through other means.
However, I believe these equity shell companies will not negatively impact crypto assets themselves, at least not in the short term. Without debt in the capital structure, there is no forced selling mechanism. And I think we might continue to try to eliminate misunderstandings about these shell companies for a long time, just as we have done with many crypto topics.
Tokens Can Still Be a Tool for Capital Formation
The recent trend of shifting from token financing to shell company equity financing can be seen as "two steps forward, one step back". But this does not mean token sales have stopped, just that discussions about them have decreased.
We often say: "Tokens are the greatest capital formation and user acquisition mechanism in history, capable of unifying all stakeholders and creating lifelong brand advocates and core users." The idea is simple: instead of issuing equity or debt that prevents investors from becoming product users and customers from benefiting from the company's growth, why not directly issue tokens to customers to unify all stakeholders at once? This was the direction attempted by the 2017 ICO (Initial Coin Offering), until US regulators completely halted it.
The good news is that regulatory pressure is weakening, allowing some token financing to return. The bad news is that currently, most token financing is still limited to "pure crypto" areas—crypto and blockchain-native companies that would not exist without blockchain technology. What's missing is a world where non-crypto native companies (like ordinary gyms, restaurants, and small businesses) can also start issuing tokens to finance their businesses and unify stakeholders.
"Internet Capital Markets" is a term used to describe this emerging theme. This concept is not new (in fact, we have been writing about it for seven years—my first blog post about crypto involved this concept, back when Arca didn't even have a website). But now, this idea has finally been adopted to some extent.
Launchcoin is one of the key platforms driving the new generation of token issuance. Launchcoin (which has its own token) supports Believe, a token issuance platform leading the emerging narrative of "Internet Capital Markets". On the Believe platform, tokens debut through bonding curves, then enter the Meteora platform to enhance liquidity. This platform is highly attractive because many credible Web2 enterprises have already tokenized through Believe. Although direct token value accumulation has not yet been achieved, its potential is enormous, making Launchcoin a pioneer in this narrative.
In other words, Launchcoin and Believe are working to realize a vision where every municipal institution, university, small business owner, sports team, and celebrity can issue their own token.
We have already seen many examples showing that tokens can be used to fill gaps in company balance sheets or for restructuring. For instance, Bitfinex successfully raised funds through its LEO token, and THORChain through its debt token. These token financing models are what make the crypto industry exciting, rather than pure equity shell companies.
But currently, both models coexist, and understanding the differences is crucial.
