Bitcoin treasury companies: visionary strategy or risky bet?

Bitcoin has long been a controversial topic on Wall Street. And as a small but vocal number of publicly traded companies race to accumulate as much as they can, it is dividing traditional financiers more than ever.

MicroStrategy (now known as Strategy) was ahead of the curve when it began adding BTC to its balance sheet in 2020. Its aggressive purchases have been primarily funded with debt. With Bitcoin recovering nearly 700% in five years, the company is now sitting on billions of dollars in unrealized profits.

Once a struggling and modestly successful business intelligence company, its rebirth as a Bitcoin treasury company has proven hugely lucrative so far and has inspired many imitators. While some see this as something to celebrate, it also creates deep cause for concern.

At the time of writing, Strategy holds over 640,000 BTC, over 3% of the total 21 million supply of this digital asset. It has paid an average price of $74,802 per coin, meaning the value of Bitcoin could drop 30% and the company would still be in the black. That said, this average price has skyrocketed dramatically lately. In August 2024, it cost only $36,821.

Bitcoin (BTC)24h7d30d1yAll the time

Strategy’s determination to continue buying BTC as it is near all-time highs means its margins are continually declining. As a result, when the next inevitable bear market arrives, the company’s financial position can quickly deteriorate. Bitcoin is famous for suffering painful drops of up to 80%. Will CEO Michael Saylor be able to keep the lights on if history ends up repeating itself?

This scenario played out in 2022, after the spectacular collapse of FTX. BTC shrank from $69,000 to $16,000 in 12 months. Strategy managed to persevere through this crisis without dumping any of its holdings, despite racking up $4 billion in paper losses. But since the company’s cryptocurrency stock has quadrupled since then, margin calls may be harder to ignore next time.

Forced liquidations could have ramifications in multiple ways. For one thing, it could send Bitcoin into a death spiral, with investors panic-selling as they digest the news. The lack of liquidity compared to traditional markets means that a large drop in Strategy could cause huge drops in the value of BTC. And since its shares often serve as an indicator of the price of Bitcoin, the shares would also plummet. To make matters worse, the company joined the tech-heavy Nasdaq 100 last December, meaning millions of savers who track this index through ETFs could see their portfolios take a hit. Everyday consumers who are not interested in cryptocurrencies could suffer indirectly if the company implodes.

The strategy is not alone here; in fact, many of its imitators are in a much less advantageous position. Japan’s Metaplanet, which was initially launched to provide hotel management, only began acquiring Bitcoin in April 2024. It has paid an average of $106,000 per coin, leaving little breathing room if the cryptocurrency market’s bullish momentum loses steam.

Despite limited supply and high demand for BTC (through a combination of treasury companies and heavy trading in exchange-traded funds that track its spot price), critics argue that Bitcoin’s value has not risen in line with the huge increase in inflows into ETFs. Things could get complicated if that doesn’t happen.

Saylor has positioned himself as a Bitcoin evangelist, someone with a mission to get as many companies as possible to follow in Strategy’s footsteps. However, his years of campaigning don’t appear to have moved the needle much, as large-cap stocks continue to prefer piles of cash over cryptocurrencies.

The businessman spoke directly to Microsoft’s board of directors last December and argued that diverting some of its vast dollar reserves would “add hundreds of dollars to the stock price.” But a staggering 99.45% of MSFT shareholders voted against the move.

That same month, Amazon also faced calls to adopt BTC. A group of investors claimed the e-commerce giant’s dollar reserves were being eroded due to inflation, meaning billions in shareholder value were not being protected. The National Center for Public Policy Research even went so far as to claim that the world’s fifth-largest company could have a “fiduciary duty” to start holding Bitcoin in reserve.

There are two radically different ways to look at fiduciary duty when it comes to Bitcoin. Critics insist it is incredibly reckless to expose shareholders to an erratic and immature asset that has nothing to do with the company’s core industry. However, its defenders would respond by saying that it is more irresponsible to neglect a commodity that has appreciated 77% in just 12 months, far outperforming gold, bonds, cash and the S&P 500.

Whatever happens, one side will have egg on their face at some point in the not-too-distant future. And if it is Strategy’s “infinite money glitch” that turns out to be on the wrong side of this argument, the contagion could spread far beyond the cryptocurrency market.

Read original story Bitcoin treasury companies: Visionary strategy or risky bet? by Connor Sephton at Cryptonews.com