CoinDesk: "How Bitcoin Treasuries Will Cause The Next Bear Market" episode now live in partnership with @blockspacepod.

CoinDesk: "How Bitcoin Treasuries Will Cause The Next Bear Market" episode now live in partnership with @blockspacepod.

Bitcoin treasuries, a strategy popularized by MicroStrategy (now known as Strategy©), have gained significant traction in the financial markets. By accumulating Bitcoin and leveraging capital markets to fund their purchases, companies like Strategy© have demonstrated impressive returns. However, the sustainability and potential risks of this strategy are increasingly coming under scrutiny.

Strategy©, initially a business intelligence software company, shifted its focus to Bitcoin in 2020. By raising funds through equity and debt markets and using those funds to buy and hold Bitcoin, Strategy© has seen its Bitcoin holdings grow from $250 million to over $70 billion, with the company's value surging from $1.2 billion to $128 billion [1]. The company's strategy involves leveraging the low cost of capital from Wall Street to purchase Bitcoin, assuming a continued upward trend in its price.

Investors in Strategy© believe the company should trade at a premium to its net asset value (NAV), which is the value of the Bitcoin it holds on its balance sheet. This premium reflects the company's ability to raise money cheaply and invest it in Bitcoin, generating returns that exceed the cost of capital [1]. However, this strategy is not without risks.

The most significant risk is a prolonged Bitcoin bear market. In 2022, Strategy© faced a non-cash digital impairment charge of $1.28 billion due to a 75% drawdown in the value of its Bitcoin holdings [1]. While the company did not have to sell any Bitcoin during this period, it faced the potential for significant dilution of its shareholder base due to the need to raise funds to pay off debt and dividends.

Notable short seller Jim Chanos has expressed concern that the massive share dilution required to continue accumulating Bitcoin and paying dividends on preferred shares could lead to a significant underperformance of Strategy©'s shares relative to Bitcoin [1]. If Bitcoin fails to grow faster than the cost of financing, this could result in value destruction or capital misallocation.

The potential for Bitcoin treasuries to cause the next bear market lies in their ability to drive up Bitcoin prices through increased demand. As more companies adopt this strategy, they may collectively drive up the price of Bitcoin, only to see it crash when the strategy fails to deliver the expected returns. This could lead to a sell-off in Bitcoin and other cryptocurrencies, potentially triggering a broader market downturn.

In conclusion, while Bitcoin treasuries have proven to be a successful strategy for some companies, the risks associated with this approach are significant. As more companies adopt this strategy, the potential for a market-wide bear market increases. Investors should carefully consider the risks and potential rewards before allocating capital to Bitcoin treasuries.

References:
[1] https://www.crosbyadvisory.com/blog-01/microstrategys-macro-strategy-how-strategyc-uses-wall-street-stack-bitcoin