Written by: 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 will face significant risks if Bitcoin's price falls to a certain level or its financing capabilities are limited.
These companies may be forced to sell their Bitcoin at a discount or even sell the companies themselves.
Ben Werkman, Chief Investment Officer of Swan Bitcoin, said: "For high-reputation operating companies, this could be an opportunity to consolidate the industry and purchase Bitcoin at a 10% discount if they are in trouble. This is indeed possible if the bear market lasts for a long time."
As more companies establish reserves based on Bitcoin and other digital assets, experts are cautious. This approach was pioneered by Strategy (formerly MicroStrategy) and was hugely successful. However, as Bitcoin's price soared and some new Bitcoin-focused companies' stock prices rose, the potential risks of this approach were 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 has increased buying pressure on Bitcoin, but we believe this may reverse over time."
Against the backdrop of former US President Trump's more crypto-friendly policies, the number of companies trying to emulate Strategy's approach and purchase more Bitcoin through borrowing has surged. Strategy began purchasing Bitcoin in 2020 and funded its acquisitions over several years by issuing convertible bonds, common stocks, and preferred stocks - a strategy that has been imitated by several emerging companies.
Since Strategy transformed from a software development company, its stock price has soared by over 2,500%. The company currently owns approximately 582,000 Bitcoins, valued at over $61 billion, accounting for 2.7% of Bitcoin's total supply.
According to Bitcoin Treasures, among 130 listed companies, none hold more than 0.25% of the total Bitcoin supply (21 million Bitcoins). The archived version of the website shows that at the beginning of this year, only 75 listed companies held Bitcoin.
"If Bitcoin reserve companies collapse, they could lose 50% (of principal)," said Matt Cole, CEO of Strive Asset Management. "I think the possibility of future risks is very high. This is something to pay attention to."
Today, Matt Cole believes the risk of Bitcoin liquidation due to Bitcoin reserve companies' collapse is low, saying its potential market disruption would not be greater than "an ordinary derivatives liquidation event on a weekend".
Matt Cole stated that Strive, which manages over $2 billion in assets, may start seeing actionable investment opportunities in the future depending 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 we'll hold this view in the future, and we'll be prepared for it by then."
In a recent report, David Duong, Global Research Director at Coinbase, wrote: "In the short term, the pressure to sell is not the issue," and refinancing methods may ultimately help leveraged companies avoid liquidating their Bitcoin positions.
Fate Controlled by Financiers
Most listed companies strive to maximize shareholder value by increasing revenue, improving profit margins, or optimizing capital efficiency. However, many companies adopting the Bitcoin reserve strategy aim to maximize shareholder value by increasing the number of Bitcoins held per share. (Shareholders have no direct claim on the Bitcoins in these companies' reserves.)
Strategy has traditionally used convertible bonds to purchase Bitcoin, holding $8.2 billion in unpaid debt that may be converted to stocks in the future. Ben Werkman of Swan Bitcoin said that despite the sharp increase in demand for Strategy's tools, smaller companies adopting Bitcoin may take a long time to reach this level.
Werkman stated 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 strong options market, which depends on factors like stock trading volume.
"In the convertible bond market, you must scale up to a meaningful size, and you first need a derivatives market so that bond buyers can hedge risks." "Not all companies have an options market from the start."
Werkman said that as another method of leveraging balance sheets, some companies are using bank-term loans, but under certain terms, this might force them to sell. "If they borrow bank money, they're handing their fate to others. By then, you should be worried 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 is higher than its Bitcoin reserve value.
However, analysts, including Greg Cipolaro, Global Research Director of New York Digital Investment Group (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 fully consider differences in (operating companies) and capital structures."
Danger Arrives When Premium Turns to Discount
Werkman said that when a company's stock price has a premium relative to its Bitcoin holdings, it's easy to increase the value of Bitcoin per share by issuing common stocks. But he warns that if this premium turns into a discount, the company's prospects may change accordingly.
For an emerging Bitcoin reserve company, the value of its operating company or underlying business is "very important" in the early stages. Not all companies buying Bitcoin are trying 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 said that Strategy's Bitcoin reserve strategy revolves around volatility. As the company's common stock price fluctuates, the company can raise funds at a premium through products like convertible bonds, raising funds based on future value.
"They captured arbitrage opportunities, which is why ordinary shareholders' per-share Bitcoin value increases. They use capital markets and the incentive mechanisms of all these different investor groups to create lasting value."
As more Bitcoin reserve companies emerge, Werkman believes investors will start categorizing them as "growth" and "value" companies based on the expected growth rate of Bitcoin per share. Although smaller companies may ultimately be acquired, their final development trajectory may evolve with Bitcoin as an asset class.
"That's the magic of the 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."
