Author: André Beganski, Decrypt
Translated by: Felix, PANews
Many listed companies, including breweries, cannabis producers, and energy storage companies, are increasingly adding Bitcoin to their balance sheets. However, observers note that this strategy faces significant risks if Bitcoin's price falls to a certain level or its financing capabilities are limited.
These companies might be forced to sell their Bitcoin at a discount or even sell the entire company.
Ben Werkman, Chief Investment Officer of Swan Bitcoin, stated: "For high-credibility operating companies, this could be an opportunity to consolidate the industry and purchase Bitcoin at a 90% discount if they encounter difficulties. This scenario is indeed possible if the bear market persists for an extended period."
As more companies establish reserves based on Bitcoin and other digital assets, experts are cautious. This approach was pioneered by Strategy (formerly MicroStrategy) and achieved significant success. However, with Bitcoin's price surge and the rising stock prices of some new Bitcoin-focused companies, the potential risks have been largely overlooked.
Earlier this month, Geoff Kendrick, Head of Digital Assets Research at Standard Chartered Bank, wrote in a report: "Currently, the Bitcoin reserve strategy increases buying pressure on Bitcoin, but we believe this situation may reverse over time."
Against the backdrop of more crypto-friendly policies under former US President Trump, the number of companies attempting to emulate Strategy's approach and purchase more Bitcoin through debt has surged. Strategy began buying Bitcoin in 2020, funding acquisitions through convertible bonds, common stocks, and preferred stocks - a strategy now mimicked by several emerging companies.
Since transforming from a software development company, Strategy's stock price has soared over 2,500%, with approximately 582,000 Bitcoins valued at over $61 billion, representing 2.7% of Bitcoin's total supply.
According to Bitcoin Treasures, among 130 listed companies, none hold more than 0.25% of the 21 million Bitcoin supply. The archived version of the website shows that only 75 listed companies held Bitcoin at the beginning of the year.
"If Bitcoin reserve companies collapse, they could lose 50% of their principal," said Matt Cole, CEO of Strive Asset Management. "I believe the possibility of future risks is quite high. This is something to watch."
Today, Matt Cole believes the risk of Bitcoin liquidation due to reserve company failures is low, stating that its potential market disruption would not be greater than "an ordinary derivative liquidation event on a weekend".
Cole mentioned that Strive, managing over $2 billion in assets, might see actionable investment opportunities in the future depending on market conditions. "I'm not sitting here saying, 'We need to be ready to acquire 10 different Bitcoin reserve companies.' It's quite possible we'll hold this view in the future, and we'll be prepared for it."
In a recent report, David Duong, Global Research Director at Coinbase, wrote: "In the short term, the pressure of forced selling is not the issue," and refinancing methods may ultimately help leveraged companies avoid liquidating their Bitcoin positions.
Fate Controlled by Financiers
Most listed companies aim to maximize shareholder value by increasing revenue, improving profit margins, or optimizing capital efficiency. However, many companies adopting the Bitcoin reserve strategy seek to maximize shareholder value by increasing the number of Bitcoins held per share. (Shareholders have no direct claim on the Bitcoins in these company reserves.)
Strategy has traditionally used convertible bonds to purchase Bitcoin, holding $8.2 billion in unmatured debt that may convert to stocks in the future. Ben Werkman of Swan Bitcoin noted that while demand for Strategy's instruments has grown dramatically, smaller Bitcoin-adopting companies might take considerable time to reach this level.
Werkman explained that for a company's convertible bonds to be welcomed on convertible arbitrage trading platforms (which tend to trade Strategy's debt), they first need a robust options market, dependent on factors like stock trading volume.
"In the convertible bond market, you must scale to a meaningful size, and you first need a derivatives market so bond buyers can hedge risks. Not all companies initially have an options market."
Werkman noted that as an alternative to a leveraged balance sheet, some companies are using bank-term loans, which might force them to sell under certain terms. "If they borrow bank money, they're handing their fate to others. At that point, you should be concerned about these companies."
For assessing Bitcoin reserve companies, mNAV (market value to net asset value ratio) has become an informal but popular metric. As of last Friday's close, Strategy's mNAV was 1.7, indicating its $107 billion market value exceeds its Bitcoin reserve value.
However, analysts, including Greg Cipolaro, Global Research Director at NYDIG, believe this valuation indicator is not ideal as a comprehensive metric.
He wrote in a recent report: "Metrics like 'mNAV' (market value relative to Bitcoin holdings) have serious flaws when comparing different types of Bitcoin reserve companies, failing to adequately consider operational differences and capital structures."
Danger Emerges When Premium Turns to Discount
Werkman stated that when a company's stock price has a premium relative to its Bitcoin holdings, increasing per-share Bitcoin value through common stock issuance is easy. However, he warned that if this premium becomes a discount, the company's prospects might correspondingly change.
For an emerging Bitcoin reserve company, the value of its operating company or underlying business is "very important" in early stages. Not all Bitcoin-purchasing companies aim to replicate Strategy's strategy. Similar to the logic behind some state-level Bitcoin bills, some companies choose to exchange cash and US Treasuries for Bitcoin to maintain purchasing power.
Werkman ultimately noted that Strategy's Bitcoin reserve strategy revolves around volatility. As the company's common stock price fluctuates, they can raise funds at a premium through products like convertible bonds, raising funds based on future value.
"They've captured arbitrage opportunities, which is why ordinary shareholders see increased per-share Bitcoin value. They leverage capital markets and the incentive mechanisms of different investor groups to create lasting value."
As more Bitcoin reserve companies emerge, Werkman believes investors will begin categorizing them as "growth" or "value" companies based on expected per-share Bitcoin growth. While smaller companies might ultimately be acquired, their eventual development could evolve with Bitcoin as an asset class.
"That's the magic of the current moment." "They choose to exit the collapsing financial system and instead invest in what they believe is the future financial system, where they have a first-mover advantage."
Related Reading: Strategy's "Alchemy" Goes Viral, Can Bitcoin Price Support Stock Price?
