Bitcoin Treasury Companies

Infinite Money Machines or Ticking Time Bombs?

Some call them infinite money machines that could propel Bitcoin to unprecedented heights. Others warn they might be the next ticking time bomb in the crypto world. We’re talking about Bitcoin treasury companies, firms stacking Bitcoin on their balance sheets, following a strategy pioneered by Michael Saylor. These companies are posting eye-popping gains, often outpacing Bitcoin itself. But could there be hidden risks in this model that might trigger the next crypto bear market? Let’s dive into the meteoric rise of Bitcoin treasury companies, their impact on Bitcoin’s price, and whether this house of cards could come crashing down.

Disclaimer: This article is for educational purposes only and not financial advice.

How Do Bitcoin Treasury Companies Work?

The strategy of holding Bitcoin as a treasury asset gained traction about five years ago. One company, which we’ll call a trailblazer, made a bold bet that paid off handsomely, amassing over 590,000 BTC, valued at many billions today. Its stock has outperformed Bitcoin, making it one of the top-performing companies globally. A significant catalyst came with a pro-crypto political shift last year, spurring a surge in companies adding Bitcoin to their balance sheets. Currently, around 130 publicly traded firms hold Bitcoin in their treasuries, and the number is climbing.

The playbook is straightforward: raise capital, buy Bitcoin, watch Bitcoin’s price rise, see the company’s stock soar, raise more capital, buy more Bitcoin, and repeat. Companies raise funds in two primary ways:

1. Issuing Shares: Selling a portion of the company to investors for cash, which is then used to buy Bitcoin.

2. Issuing Convertible Bonds: These are long-term loans that can either be repaid in cash or converted into company stock, depending on stock performance.

For example, a company might issue a $1 million convertible bond. If its stock performs well, the lender might convert the bond into shares, gaining equity in a more valuable company. If the stock underperforms, the company repays the loan in cash, like a traditional bond. Normally, issuing more shares dilutes existing shareholders, reducing their ownership stake. But with Bitcoin treasury companies, the focus is on the Bitcoin per share ratio. If this ratio increases, shareholders gain more Bitcoin exposure, even with dilution. This dynamic makes these stocks behave like leveraged Bitcoin plays, amplifying price movements beyond Bitcoin’s own volatility.

Are Bitcoin Treasury Companies a Ponzi Scheme?

The model, issuing shares or debt to buy Bitcoin, which boosts stock prices, has been dubbed an “infinite money glitch”. Some sceptics compare it to the Terra Luna collapse, but that’s misleading. Terra Luna was a circular system with no real asset backing it, imploding when confidence vanished. Bitcoin treasury companies, however, hold actual Bitcoin, a decentralized, scarce asset with real market value. This strategy resembles a currency carry trade, where investors borrow in a weaker currency to buy a stronger one, like borrowing in dollars to purchase Bitcoin.

What Happens When the Bear Market Hits?

The model thrives in a bull market, but leverage introduces risks. Most companies following this playbook haven’t faced a full crypto winter. If Bitcoin crashes, say, by 70-80%, as it has before, many could end up underwater, forced to sell Bitcoin to cover debts. This could flood the market, exacerbating a downturn. Analysts warn that newer companies, which bought Bitcoin at higher prices, are particularly vulnerable. A 22% drop from their average purchase price could trigger forced selling. However, others argue the risk is overstated, as many firms issued low-interest debt due in 2-3 years, giving them room to weather short-term volatility.

Are Bitcoin Treasury Companies' Premiums Sustainable?

Many of these companies trade at a premium, meaning their market cap exceeds the value of their Bitcoin holdings. For instance, a company with $100 million in Bitcoin might have a $150 million market cap. Investors pay this premium for future Bitcoin purchases, growth potential, and the convenience of gaining Bitcoin exposure through traditional stock markets. However, analysts argue these premiums are unsustainable long-term, especially in a bear market. As competition grows, premiums may shrink, pushing some companies to adopt riskier strategies, like using shares as collateral for loans. This isn’t theoretical. In 2022, the Grayscale Bitcoin Trust flipped from a premium to a discount, triggering margin calls for firms like BlockFi and Three Arrows Capital, which had used its shares as collateral. Their liquidations rippled through the crypto market. If even a few Bitcoin treasury companies over-leverage, the fallout could destabilize the broader ecosystem.

What Is the Effect of Corporate Adoption on Bitcoin’s Price?

For now, panic seems premature. There’s no evidence these companies are engaging in reckless practices, but the risks warrant vigilance. On the bullish side, Bitcoin treasury companies have unlocked massive capital pools that can’t directly buy Bitcoin, adding steady, non-speculative buying pressure. Retail investors can’t match this scale. Some analysts predict Bitcoin could hit $250,000 by the end of 2025 and reach $500,000 by 2028, driven partly by this corporate demand.

The Ethical Problem

A deeper concern is philosophical. Over 3% of Bitcoin’s supply is now held by public companies, and projections suggest corporations could eventually own a third of all Bitcoin. This trend clashes with Bitcoin’s ethos as a decentralized, democratizing financial system. Critics argue it risks turning Bitcoin into a reserve asset for the corporate elite, squeezing out retail investors who lack access or resources. One industry leader countered that this is just capitalism at work: companies offer services or investments that people can choose to engage with or ignore.

Outro

Like it or not, Bitcoin treasury companies are reshaping Bitcoin’s identity, from a currency for the people to an institutional asset. Their accumulation creates a strong demand base, boosting Bitcoin’s price and legitimacy. But as more firms join the fray, systemic risks grow. Are these companies a net positive for Bitcoin, or are they sowing the seeds of the next crash? Share your thoughts below.