The encryption treasury strategy of listed companies hides risks. Will it replay historical tragedies?

Encryption treasury has become a popular strategy for listed companies. According to statistics, at least 124 listed companies have incorporated Bitcoin into their financial strategies as an important component on their balance sheets, attracting widespread attention from the encryption market. At the same time, some listed companies have also adopted treasury strategies involving other cryptocurrencies such as Ethereum, Sol, and XRP.

However, some industry insiders have recently expressed potential concerns: these listed investment tools may repeat the mistakes of Grayscale's GBTC from years ago. GBTC was trading at a premium for a long time, but later the premium turned into a discount, which became the trigger for the collapse of several institutions.

A digital asset research director at a certain bank also issued a warning that if the price of Bitcoin falls below 22% of the average purchase price of companies adopting encryption treasury strategies, it could trigger forced selling by enterprises. If Bitcoin drops below $90,000, about half of the enterprise holdings may face the risk of losses.

There are many imitators, but the leverage risks behind the high premiums cannot be ignored.

As of June 4, a certain company holds approximately 580,955 bitcoins, with a market value of about $61.05 billion, but its company market value reaches $107.49 billion, with a premium close to 1.76 times.

In addition, some companies that have adopted the Bitcoin treasury strategy also have impressive backgrounds. One company went public through a SPAC, raising $685 million solely for the purpose of purchasing Bitcoin. Another company merged with a publicly listed healthcare company, raising $710 million to buy Bitcoin. There is also a company that announced plans to raise $2.44 billion to build a Bitcoin treasury.

Recent reviews show that a company's Bitcoin treasury strategy has attracted numerous imitators, including several listed companies planning to buy Ethereum, accumulate SOL, and XRP.

However, industry insiders point out that the operating trajectories of these companies are structurally very similar to the GBTC arbitrage model from back in the day. Once a bear market arrives, its risks may be concentrated and released, forming a "stampede effect," where a sign of market or asset price decline leads to collective panic selling by investors, triggering a chain reaction of further price plummets.

Historical Lessons: Leverage Collapse, Positioning Institutions Blow Up

Looking back at history, a certain Bitcoin trust was once in the limelight during 2020-2021, with a premium reaching as high as 120%. However, after 2021, this trust quickly turned to a negative premium, ultimately becoming the catalyst for the explosion of multiple institutions.

The mechanism design of this trust is a "one-way transaction with only inflow and no outflow": after investors subscribe in the primary market, they must lock their investment for 6 months before being able to sell it in the secondary market, and they cannot redeem it for Bitcoin. Due to the high entry threshold and heavy tax burden for early market Bitcoin investments, this trust once became a legal channel for qualified investors to enter the encryption market, which helped maintain its secondary market premium for a long time.

This premium has given rise to large-scale "leverage arbitrage games": investment institutions borrow BTC at low cost, deposit it for subscription, and after holding it for 6 months, sell it in the premium secondary market to obtain stable returns.

According to public documents, the holdings of the trust from two large institutions once accounted for 11% of the circulating shares. One institution converted the BTC deposited by its clients into shares of the trust and used it as collateral for loans to pay interest. The other institution utilized up to $650 million in unsecured loans to increase its position and pledged the shares to obtain liquidity, achieving multiple rounds of leverage.

Everything is good in a bull market, but after Canada launched its Bitcoin ETF in March 2021, the demand for the trust plummeted, shifting from a premium to a negative premium, and the flywheel structure collapsed instantly.

Many institutions have started to incur continuous losses in a negative premium environment, forcing them to sell off large amounts of assets, resulting in significant cumulative losses. Some institutions have been liquidated, and others have no choice but to dispose of their staked assets.

This "explosion" that began with premiums, flourished with leverage, and was destroyed by the collapse of liquidity, became the prologue to the systemic crisis in the encryption industry in 2022.

Will the public company's encryption treasury flywheel trigger the next systemic industry crisis?

More and more companies are forming their own "Bitcoin treasury flywheel", with the main logic being: rising stock prices → additional financing → purchasing BTC → boosting market confidence → continued rise in stock prices. This treasury flywheel mechanism may accelerate in the future as institutions gradually accept cryptocurrency ETFs and cryptocurrency holdings as collateral for loans.

Recently, there have been reports that a large financial institution plans to allow its clients to use some assets linked to encryption as loan collateral and will consider their encryption holdings when assessing clients' assets.

However, some bears argue that the treasury flywheel model seems self-consistent in a bull market, but in reality links traditional financial instruments directly to encryption asset prices. Once the market turns bearish, the chain may break.

If the price of the currency plummets, the company's financial assets will quickly shrink, affecting its valuation. Investor confidence collapses, stock prices drop, limiting the company's ability to raise funds. If there is debt or margin call pressure, the company will be forced to liquidate BTC to cope. A large amount of BTC selling pressure concentrates and releases, forming a "sell wall," further driving down prices.

More seriously, when the stocks of these companies are accepted as collateral by lending institutions or exchanges, their volatility will further transmit to the traditional financial or DeFi systems, amplifying the risk chain.

Advisors from the encryption treasury have pointed out that the trend of "equity tokenization" may exacerbate risks, especially if these tokenized stocks are accepted as collateral, which could trigger an uncontrollable chain reaction. However, some market analysts believe that we are still in the early stages, as most trading institutions have yet to accept Bitcoin ETFs as margin collateral.

A digital asset research director at a bank warned that currently 61 listed companies collectively hold 673,800 bitcoins, accounting for 3.2% of the total supply. If the price of Bitcoin falls below 22% of these companies' average purchase price, it could trigger forced selling by the companies. Referring to a case in 2022 where a company sold 7,202 bitcoins when the price was 22% below its cost, if Bitcoin falls back below $90,000, about half of the companies' holdings may face a risk of loss.

However, there are also views that the capital structure of certain companies is not a traditional high-risk leverage model, but rather a highly controllable "ETF-like + leverage flywheel" system. By issuing convertible bonds, perpetual preferred shares, and conducting market price increases to raise funds for purchasing Bitcoin, they construct a volatility logic that continues to attract market attention. More importantly, the maturity dates of these debt instruments are mostly concentrated in 2028 and beyond, which means they have almost no short-term repayment pressure during cyclical corrections.

The core of this model is not simply hoarding coins, but rather forming a self-reinforcing flywheel mechanism in the capital market through dynamically adjusting financing methods, with the strategy of "leveraging during low premiums and selling stocks during high premiums." Some companies position themselves as financial proxy tools for Bitcoin volatility, allowing institutional investors who cannot directly hold encryption assets to hold a Bitcoin target with options properties in a "barrier-free" manner in the form of traditional stocks, which has a high beta (more volatile than the benchmark asset BTC).

Currently, the strategy of listed companies' encryption treasury is becoming the focus of attention in the encryption market, which has also sparked debates about its structural risks. Although some companies have constructed relatively robust financial models through flexible financing methods and periodic adjustments, whether the overall industry can maintain stability amidst market fluctuations remains to be seen. Whether this round of "encryption treasury craze" will replicate historical risk paths is still an unresolved question.