Companies Adopt Bitcoin for Treasury Strategies Amid Risks

Publicly traded companies across various sectors, including distillers, cannabis producers, and energy storage firms, are increasingly adopting Bitcoin as a key component of their treasury strategies. This trend, popularized by Strategy, formerly known as MicroStrategy, involves companies loading their balance sheets with Bitcoin. However, experts warn that this strategy carries significant risks, particularly if the price of Bitcoin falls or if these companies face constraints in raising cash. In such scenarios, these firms might be forced to sell their Bitcoin holdings, potentially at a discount, or even face the risk of being acquired.

Ben Werkman, chief investment officer at a financial services firm, highlighted the potential for highly credit-worthy operating companies to consolidate the industry by acquiring distressed Bitcoin firms at a discount. He noted that during a prolonged bear market, this scenario could become a reality. Geoff Kendrick, head of digital asset research at a U.K.-based bank, also expressed concerns, stating that while Bitcoin treasuries are currently adding to buying pressure, there is a risk that this trend could reverse over time.

Strategy, which began purchasing Bitcoin in 2020, has seen its share price skyrocket over 2,500% since pivoting away from software development. The company now owns roughly 582,000 Bitcoin, worth just over $61 billion, accounting for 2.7% of the asset’s total possible supply. This makes Strategy the largest holder of Bitcoin among public companies, with no other company owning more than 0.25% of the 21 million Bitcoin that advocates say will ever be mined. At the beginning of this year, only 75 public companies held Bitcoin, indicating a rapid increase in adoption.

Matt Cole, CEO of Strive Asset Management, a firm co-founded by a former Republican presidential candidate, sees the risk of Bitcoin liquidations from Bitcoin treasury firms collapsing as low at present. However, he acknowledges the potential for future opportunities, stating that Strive could start to see actionable opportunities depending on market conditions. Cole believes that there is a good chance that the risk of Bitcoin liquidations will increase in the future, making it something to watch closely.

David Duong, Global Head of Research at a major cryptocurrency exchange, wrote in a report that forced selling pressure is not a concern in the very short-term. He suggested that refinancing methods may ultimately help leveraged firms avoid liquidating their Bitcoin holdings. Most public companies aim to maximize shareholder value by growing revenue, increasing operating margin, or honing capital efficiency. However, many firms engaged in a Bitcoin treasury strategy aim to maximize shareholder value by growing the Bitcoin they own per share.

Strategy has historically leaned on convertible bonds to fund its Bitcoin acquisitions, with $8.2 billion worth of debt outstanding that could one day be converted into shares. Smaller companies adopting Bitcoin may need a significant period of time to achieve similar scale, according to Werkman. For a company’s convertible bonds to become popular among convertible arbitrage desks, a firm needs robust options markets, which can be contingent on factors like an equity’s trading volume. Werkman noted that some firms are using bank term loans, which under certain provisions, could turn them into forced sellers.

Werkman warned that if a company takes on bank debt, it has taken its destiny out of its own hands, making it vulnerable to market conditions. He also highlighted that the valuation metric mNAV, or multiple-to-net asset value, has become an informal yet popular standard for assessing Bitcoin treasury companies. 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. However, analysts have argued that this metric is lackluster as a comprehensive gauge, failing to account for operating company and capital structure differences.

Werkman emphasized that a fledgling Bitcoin treasury firm’s operating company matters a lot in the early days. He noted that not all companies buying Bitcoin are trying to replicate Strategy’s playbook. Some firms are electing to swap cash and U.S. Treasuries for Bitcoin to preserve their purchasing power. Werkman said that Strategy’s Bitcoin treasury strategy revolves around volatility, allowing the company to raise capital at a premium through products like convertible bonds, collecting money at a future value. He posited that as more Bitcoin treasury companies emerge, investors will start to segment them into “growth” plays and “value” plays, depending on how fast their Bitcoin per share is expected to grow.

Werkman believes that smaller players may ultimately be acquired, but their endgame will likely evolve alongside Bitcoin as an asset class. He described the current trend as part of the magic, where companies are opting out of the collapsing financial system and moving towards what they think the future financial system is, with a first-mover advantage. As the landscape of Bitcoin treasury companies continues to evolve, the risks and opportunities associated with this strategy will remain a critical area of focus for investors and analysts alike.