The concept of crypto treasury companies has gained significant attention in recent times, with many considering them as a means to leverage crypto exposure to digital assets. These companies aim to achieve increased returns by strategically accumulating and managing digital assets in their balance sheets. However, the use of leverage can be a double-edged sword, and a downturn in the market could significantly influence prices, causing considerable infections in broader markets, similar to the last crypto winter.
Understanding Crypto Treasury Companies
Crypto treasury companies are not a single entity, but rather a collection of financial instruments with different compromises, each with its own risks and considerations. The central goal of these strategies is to increase the crypto stocks per share and effectively generate a “return” for shareholders, since each share collects more tokens that support it with the company’s financial technology.
A notable example of a company that has popularized this strategy is Strategy, which, according to Strategy Investor Relations, holds over 600,000 BTC. The game book for these companies involves using various financial instruments, such as issuing preferred shares, debts in the form of convertible bonds, and assets for baking or defi strategies, to achieve additional returns for shareholders.
The Risks Associated with Crypto Treasury Companies
The main source of risk in a downturn lies in the use of debt and preferred stocks, since both impose future cash liabilities. These non-dilutive capital procurement instruments can increase the risk depending on their scale in relation to the company’s assets. For instance, Strategy holds around 630,000 BTC and has around $8.2 billion of convertible debts between 2028 and 2032, which could restrict refinancing options if the Bitcoin price drops significantly.
Furthermore, the preferred shares of $3.95 billion pay a dividend of 8-10% and generate annual cash losses of almost $395 million. In a bear market, where share prices are near or under NAV, the increase in capital through stock emissions becomes difficult, and may force the turnover of BTC or the watering down of shareholders, both of which continue to risk down.
The Recursive Nature of Crypto and Financial Markets
When markets rise, leverage reinforces volumes and ratings, enabling more leverage. This dynamic underpins the risk and reward profile of financial vehicles. While these vehicles generally arrive for the ecosystem, a large amount of short-term speculative capital chases their shares, which can lead to abrupt drains when the market mood shifts.
Crypto treasury strategies can be effective with careful risk management, avoiding bubbles. However, if crypto prices rise, the leverage effect becomes more attractive, and an aggressive issuance of debt and preferred stocks in a race to dominate financial assets could lead to significantly systemic risk. Many financial companies are currently working with zero or modest leverage, supported by significant balance sheets, but if the lever trends higher and become unstable, the fallout is certainly catastrophic.
For more information on crypto treasury companies and their potential risks and rewards, readers can refer to the original article on Cryptoslate.
