Venture Capitalists Chase 424% Premiums in Crypto-Treasury Companies

Venture capitalists are increasingly backing companies that hold bitcoin and altcoins as part of their treasury strategies, mimicking the approach of Strategy, which has been following this model since 2020. These firms are set up to hold various cryptocurrencies on their balance sheets, either in addition to or in place of their original business models. The market is currently rewarding these companies, with many trading above the value of their crypto holdings, creating a premium that investors are chasing.

Companies like Strategy and Metaplanet are trading at significant premiums to their crypto reserves. Strategy trades at 1.69 times the value of its bitcoin holdings, while Metaplanet trades at 4.24 times. These premiums, known as MNAV multiples, are a core pitch for these companies. The higher a firm trades above its net asset value (NAV), the easier it is to raise capital and buy more crypto, creating a self-reinforcing loop. This reflexive nature of the treasury strategies is a key driver for venture capitalists.

Investors are drawn to these companies because the model allows them to grow faster and offers more than just direct exposure to crypto. Cosmo Jiang, general partner at Pantera Capital, noted that it is possible to own more bitcoin per share over time through a company like Strategy than by buying spot. If an investor buys Strategy at 2x NAV, they effectively get 0.5 BTC. If Strategy raises capital and grows bitcoin per share by 50% annually, by year two, that stake could be worth 1.1 BTC, more than buying and holding 1 bitcoin directly. This fundamental bull case has led Pantera to invest in three such companies: Twenty One Capital, DeFi Development Corp, and SharpLink Gaming.

Some of the premium also comes from access. Institutional funds that can't hold crypto directly are turning to these public equities as a proxy. This is similar to the Grayscale Bitcoin Trust trades seen years ago, but in a more liquid manner with more retail exposure. The shift from bitcoin to altcoin treasuries is driven by factors including access, new ways to earn, and more volatility. Altcoins offer new ways to earn through staking, locked-token discounts, and DeFi yield strategies. However, the underlying token must have sufficient liquidity and market cap to support a scalable and responsible public company treasury strategy.

Altcoins are also more volatile than Bitcoin, which can make it cheaper for these companies to raise funds. The convertible debt markets pay more for higher realized volatility, effectively lowering the cost of capital for these strategies. While many VCs are backing these companies to capture the premium, not everyone is convinced. Some view these as speculative trades rather than long-term, fundamentals-driven venture bets. They believe that these companies do not fit within their investment thesis and are simply a trade on the sustainability of the premium continuing to exist for long enough for investors to trade out of them.

These companies look like big winners when markets are up, but cracks may show in a downturn. Most VCs agree that only a handful of these companies will endure. One of the biggest concerns is leverage. Several companies use convertible debt or other forms of financing to buy crypto, which can backfire if token prices fall. In a sharp correction, companies may be forced to sell assets, triggering a downward spiral in both token prices and stock prices. The risk isn't just market-related; it's structural. If a crypto treasury company trades below the value of its holdings (NAV), confidence can erode fast, drying up capital and pushing the stock further down.

Some believe strong teams and disciplined execution can withstand a downturn. The key to surviving a prolonged market downturn is betting on management teams that have a plan for the inevitable next crypto bear market. This includes raising capital on accretive terms, avoiding mark-to-market debt, and preparing for stress scenarios while times are still good. Upexi, for example, has minimal debt and a pristine capital structure, positioning it well to weather any market environment. However, some warn that the entire trend is showing signs of overcrowding and hype, with risks of too much leverage, poorer-quality assets, and overmarketing.

Financial analysts predict that the crypto treasury boom mirrors past manias and will die a relatively quick death. There will be another crypto bear market, whether it starts tomorrow or in five years, and it will be similar to the dot-com bubble burst, where most companies fail and the survivors go on to enjoy significant success. Most agree that while more companies will try this strategy, only a few tokens and even fewer teams will emerge as long-term winners.