By Weilin, PANews
Crypto treasury has become a "trendy strategy" for public companies. According to incomplete statistics, at least 124 listed companies have included Bitcoin in their financial strategies, attracting widespread attention in the crypto market as a "weapon" on their balance sheets. At the same time, the treasury strategy of Ethereum and Sol and XRP altcoins is also adopted by some listed companies.
Still, several industry insiders, including Nic Carter, a partner at Castle Island Ventures, have recently expressed potential concerns: these listed investment vehicles have been compared to Grayscale GBTC, a long-term trading premium Grayscale Bitcoin trust, which turned into a discount and became the trigger for the collapse of many institutions.
Geoff Kendrick, head of digital asset research at Standard Chartered Bank, also warned that if the price of bitcoin falls below 22% of the average buying price of these crypto treasury strategy companies, it could trigger a forced sell-off. If Bitcoin falls back below $90,000, about half of all corporate holdings could be at risk of losing money.
Micro-strategies attract a group of imitators, but what about the leverage risk behind the high premium?
As of June 4, Strategy held about 580,955 bitcoins, with a market capitalization of about $61.05 billion, but its company had a market capitalization of $107.49 billion, a premium of nearly 1.76 times.
In addition to micro-strategies, some of the latest companies to adopt the Bitcoin Treasury strategy also have glossy backgrounds. Twenty One, backed by SoftBank and Tether, went public through Cantor Fitzgerald's SPAC and raised $685 million to buy Bitcoin. Nakamoto Corp, founded by Bitcoin Magazine CEO David Bailey, merged with a publicly traded healthcare company to raise $710 million in cryptocurrency. Trump Media & Technology Group has announced a $2.44 billion funding to build a Bitcoin treasury.
According to a recent review by PANews, Strategy's Bitcoin treasury strategy has attracted a large number of imitators, including a number of listed companies such as SharpLink, which plans to buy Ethereum, Upexi, which accumulates SOL, and VivoPower, which accumulates XRP.
However, several crypto industry insiders pointed out that the operation trajectory of these companies is very similar in structure to the GBTC arbitrage model of the year. Once a bear market comes, its risks may be released in a concentrated manner, forming a "stampede effect", that is, when the market or asset prices show signs of falling, investors collectively panic sell, triggering a chain reaction of further price plunges.
TheLesson of Grayscale GBTC: Leverage Collapses, Position Institutions Explode
Looking back on history, Grayscale Bitcoin Trust (GBTC) was in the limelight in 2020-2021, with a premium of as high as 120%. However, after entering 2021, GBTC quickly turned into a negative premium, and eventually evolved into the fuse factor for the explosion of Three Arrows Capital (3AC), BlockFi, Voyager and other institutions.
The mechanism design of GBTC can be described as a one-way transaction of "only in but not out": after investors subscribe to GBTC in the primary market, they need to lock it up for 6 months before they can sell it in the secondary market, and cannot redeem it for Bitcoin. Due to the high threshold for Bitcoin investment and the heavy tax burden of paying income tax in the early market, GBTC once became a legal channel for accredited investors (through 401(k) U.S. retirement benefit plans, etc.) to enter the crypto market, which promoted its secondary market premium to maintain for a long time.
But it is this premium that has given rise to a large-scale "leveraged arbitrage game": investment institutions borrow BTC at an ultra-low cost, deposit it in Grayscale to subscribe to GBTC, hold it for 6 months and sell it in the premium secondary market to obtain stable income.
According to public documents, the combined GBTC holdings of BlockFi and 3AC once accounted for 11% of the outstanding shares. BlockFi used to convert BTC deposited by customers into GBTC and use it as collateral for loans to pay interest. 3AC used up to US$650 million in unsecured loans to increase its position in GBTC, and pledged GBTC to DCG's lending platform Genesis to obtain liquidity and achieve multiple rounds of leverage.
In a bull market, this works well. However, after the launch of the Bitcoin ETF in Canada in March 2021, the demand for GBTC plummeted, the positive premium turned into a negative premium, and the flywheel structure collapsed instantly.
BlockFi and 3AC began to lose money in a negative premium environment - BlockFi had to sell GBTC on a large scale, but still accumulated losses of more than $285 million in 2020 and 2021, with some industry insiders estimating its losses on GBTC to be close to $700 million. 3AC was liquidated, and Genesis finally issued a statement in June 2022 that it had "disposed of the pledged assets of a large counterparty". Although not named, the consensus is that the counterparty is none other than 3AC.
This "thunder", which began with a premium, flourished on leverage, and was destroyed by the collapse of liquidity, became the prelude to the systemic crisis of the crypto industry in 2022.
Will the crypto treasury flywheel of listed companies bring about the next systemic industry crisis?
After Strategy, more and more companies are forming their own "Bitcoin Treasury Flywheel", the main logic is: the stock price rises → additional issuance financing → the purchase of BTC → boosts market confidence → the stock price continues to rise. This treasury flywheel mechanism is likely to accelerate in the future as institutions gradually accept crypto ETFs and crypto holdings as collateral for loans.
On June 4, JPMorgan Chase & Co. plans to allow its trading and wealth management clients to use some assets linked to cryptocurrencies as collateral for loans. According to people familiar with the matter, the company will begin providing funding secured by crypto ETFs in the coming weeks, starting with BlackRock's iShares Bitcoin Trust. In some cases, JPMorgan will also begin to take into account wealth management clients' overall net worth and liquid assets when assessing their overall net worth, the people said. This means that cryptocurrencies will receive similar treatment to stocks, cars, or art when calculating the amount of collateral available to a customer's assets.
However, some bears believe that the treasury flywheel model seems to be self-consistent in a bull market, but its essence is to directly link traditional financial means (such as convertible bonds, corporate bonds, and ATM issuance) to the price of crypto assets, and once the market turns bearish, the chain may break.
If the currency price plummets, the company's financial assets will shrink rapidly, affecting its valuation. Investor confidence collapsed and stock prices fell, limiting the company's ability to raise funds. If there is debt or margin call pressure, the company will be forced to liquidate BTC in response. A large amount of BTC selling pressure was released in a concentrated manner, forming a "selling wall" and further depressing the price.
What's more, when the shares of these companies are accepted as collateral by lending institutions or centralized exchanges, their volatility will be further transmitted to traditional financial or DeFi systems, amplifying the risk chain. And this is exactly the script that Grayscale GBTC has experienced.
A few weeks ago, the famous short seller Jim Chanos announced that he was shorting Strategy and going long Bitcoin, also based on a negative perception of its leverage. Although MicroStrategy stock is up 3,500% over the past five years, Chanos believes its valuation has fallen seriously out of fundamentals.
Some crypto treasury advisors pointed out that today's trend of "equity tokenization" may exacerbate the risk, especially once these tokenized shares are also accepted as collateral by centralized or DeFi protocols, it is more likely to trigger an uncontrollable chain reaction. However, some market analysts believe that this is still early stage, as most trading institutions have not yet accepted Bitcoin ETFs as collateral – even for issuers like BlackRock or Fidelity.
On June 4, Geoff Kendrick, head of digital asset research at Standard Chartered Bank, warned that 61 listed companies currently hold a total of 673,800 bitcoins, accounting for 3.2% of the total supply. If the price of bitcoin falls below 22% of the average buying price of these companies, it could trigger a forced sell-off. Referring to the case of Core Scientific selling 7,202 BTC in 2022 when the price was 22% below cost, if Bitcoin falls back below $90,000, about half of the company's holdings may be at risk of loss.
How big is the risk of micro-strategy? Recently, the discussion of Web3 101's podcast "Bitcoin Whale Microstrategy and Its Capital Game" has attracted market attention. The discussion mentioned that although microstrategy has been called a "leveraged version of Bitcoin" in recent years, its capital structure is not a high-risk leverage model in the traditional sense, but a highly controllable "ETF-like + leveraged flywheel" system. The company raised funds to purchase bitcoin through the issuance of convertible bonds, perpetual preferred shares, and mark-to-market (ATM) offerings, etc., building a volatility logic that continues to attract market attention. What's more, the maturities of these debt instruments are mostly concentrated in 2028 and beyond, making short-term debt service pressure almost non-existent in the midst of cyclical corrections.
The core of this model is not simply hoarding coins, but through the dynamic adjustment of financing methods, under the strategy of "increasing leverage when the premium is low and selling stocks at the high premium", forming a self-reinforcing flywheel mechanism in the capital market. Michael Saylor positions MicroStrategy as a financial proxy tool for Bitcoin volatility, allowing institutional investors who cannot directly hold crypto assets to hold a high-beta (more volatile than the benchmark asset BTC) Bitcoin underlying with option attributes in the form of traditional stocks. Because of this, microstrategy not only builds strong financing and anti-fragility capabilities, but also becomes a "long-term stability variable" in the volatile structure of the Bitcoin market.
At present, the crypto treasury strategy of listed companies has continuously become the focus of attention in the crypto market, which has also caused controversy about their structural risks. Although MicroStrategy has built a relatively stable financial model through flexible financing means and cyclical adjustments, it remains to be verified whether the overall industry can remain stable in the face of market volatility. Whether this "crypto treasury boom" will replicate the GBTC-style risk path is an uncertain and unanswered question.