In brief

Distillers, cannabis producers, and energy storage firms are among a wave of publicly traded companies loading their balance sheets with Bitcoin, but observers say that the strategy carries great risk if the asset’s price falls to certain levels or their ability to raise cash becomes constrained. 

They might then be forced to sell their holdings, potentially at a discount, or even the firm itself. 

“There might be an opportunity for highly credit-worthy operating companies to go and consolidate this industry and go buy Bitcoin for 90 cents on the dollar if they’re distressed,” Ben Werkman, chief investment officer at financial services firm Swan Bitcoin, told Decrypt. “If you’re looking at a prolonged bear market, that could be a real possibility.”

Experts’ wariness comes as a fast-growing number of companies build treasuries based on Bitcoin and other digital assets, an approach popularized by Strategy, formerly MicroStrategy, to great success. But the possible downside has been largely overlooked as Bitcoin has soared, alongside the share price of some newly Bitcoin-focused firms.

Earlier this month, Geoff Kendrick, head of digital asset research at U.K.-based bank Standard Chartered, wrote in a note that “Bitcoin treasuries are adding to Bitcoin buying pressure for now, but we see a risk that this may reverse over time.”

The number of companies trying to follow Strategy’s path, leveraging debt as a way to buy more Bitcoin than they otherwise could, has mushroomed under the more crypto-friendly policies of U.S. President Donald Trump. Strategy began purchasing Bitcoin in 2020, and over the course of several years, it has issued convertible bonds, common stock, and preferred shares to fund acquisitions—a playbook that several nascent firms are trying to emulate.

Strategy, which has seen its share price skyrocket over 2,500% since it started pivoting away from software development, owns roughly 582,000 Bitcoin worth just over $61 billion, accounting for 2.7% of the asset’s total possible supply.

Among 130 public companies, no other owns more than 0.25% of the 21 million Bitcoin that advocates say will ever be mined, according to Bitcoin Treasures. At the beginning of this year, only 75 public companies held Bitcoin, an archived version of the website shows.

  “If Bitcoin treasury companies are blowing up, it might be 50 cents [on the dollar],” Matt Cole, CEO of Strive Asset Management, a firm co-founded by former Republican presidential candidate Vivek Ramaswamy, told Decrypt. “I think that there’s a good chance that there will be a risk in the future. It’s just something to watch.”

Today, Cole sees the risk of Bitcoin liquidations from Bitcoin treasury firms collapsing as low, describing its potential to disrupt markets as no more impactful than the “average derivatives blowup on a random weekend.”

Depending on market conditions, Cole said that Strive, which manages over $2 billion in assets, could start to see actionable opportunities in the future.

“I’m not sitting here saying today [saying], ‘We need to be prepared to acquire 10 different Bitcoin treasury companies,’” he said. “There’s a good likelihood that that could be a view that we have in the future. And when it is, we’ll prepare for it.”

In a report published Thursday, Coinbase's Global Head of Research David Duong wrote that "forced selling pressure is not a concern in the very short-term," and refinancing methods may ultimately help leveraged firms avoid liquidating their Bitcoin holdings.

‘Destiny out of their own hands’

Most public companies seek to maximize shareholder value by growing revenue, increasing operating margin, or honing capital efficiency. Many firms engaged in a Bitcoin treasury strategy, however, aim to maximize shareholder value by growing the Bitcoin they own per share. (Shareholders do not have a direct claim on the Bitcoin held in these firms’ treasuries.)

Using the proceeds to buy Bitcoin, Strategy has historically leaned on convertible bonds, with $8.2 billion worth of debt outstanding that could one day be converted into shares. Although demand for Strategy’s instruments has grown dramatically, smaller companies adopting Bitcoin may need a significant period of time to get to that point, Werkman said. 

For a company’s convertible bonds to become popular among convertible arbitrage desks, which have gravitated towards trading Strategy’s debt, Werkman said that a firm needs robust options markets first, which can be contingent on factors like an equity’s trading volume.

“In the convertible bond markets, you have to build scale to do that at meaningful size, and you need to have a derivatives market first so that the people buying the bonds can hedge against it,” he said. “Not all companies have an options market right out of the gate.”

As an alternative method of levering up their balance sheets, Werkman said some firms are using bank term loans, which under certain provisions, could turn them into forced sellers.

“If they go and take bank debt, they’ve taken their destiny out of their own hands,” he said. “That's when you need to start getting nervous about some of these companies.”

As far as assessing Bitcoin treasury companies goes, mNAV, or multiple-to-net asset value, has become an informal yet popular standard. As of Friday's close, Strategy’s mNAV was 1.7, indicating that its $107 billion market cap was above the value of its Bitcoin holdings. 

Still, analysts, including Greg Cipolaro, global head of research at Bitcoin financial services firm NYDIG, have argued that the valuation metric is lackluster as a comprehensive gauge.

“Metrics like ‘mNAV,’ the market cap to Bitcoin holdings, are woefully deficient in comparing Bitcoin treasury companies across the spectrum accounting for [operating company] and capital structure differences,” he wrote in a recent note.

‘Part of the magic’

When a company trades at a premium relative to its Bitcoin holdings, growing its Bitcoin per share by issuing common stock is easy, Werkman said. But if that premium flips to a discount, a company’s prospects could shift reflexively, he warned.

“Your ability to raise capital and the credit-worthiness of your business during a bear market where Bitcoin is not continually going up is greatly impaired,” he said. “If you can’t raise capital during that time period, investors are going to see that you don’t have an ability to operate.”

Werkman said a fledgling Bitcoin treasury firm’s operating company, or the value of the underlying business, “matters a lot” in the early days.

Not all companies buying Bitcoin are trying to replicate Strategy’s playbook, Werkman noted. Mirroring the logic behind some state-level Bitcoin bills, some firms are electing to swap cash and U.S. Treasuries for Bitcoin to preserve their purchasing power, he added.

At the end of the day, Werkman said that Strategy’s Bitcoin treasury strategy revolves around volatility. As the price of Strategy’s common stock swings, the company is able to raise capital at a premium, through products like convertible bonds, collecting money at a future value.

“They’ve captured an arbitrage there, and that arbitrage is what increases the Bitcoin per share for the common stockholders,” Werkman said. “They’re using the capital markets and the incentive structure of all these different pools of investors in capital to build lasting value.”

As more Bitcoin treasury companies pop up, Werkman posited that investors will start to segment them into “growth” plays and “value” plays, depending on how fast their Bitcoin per share is expected to grow. Although smaller players may ultimately be acquired, their endgame, he said, will likely evolve alongside Bitcoin as an asset class.

“That’s a part of the magic right now,” he said. “They’re opting out of the collapsing financial system, and they’re moving to what they think the future financial system is, and there’s a first-mover advantage to being there.”