There are hidden concerns about the cryptographic treasury strategy of listed companies. Will the script of Grayscale GBTC "explosion" repeat?

Author: Weilin, PANews

Encrypting the treasury has become the "fashionable strategy" of listed companies. According to incomplete statistics, at least 124 listed companies have included Bitcoin in their company's financial strategy, as a "weapon" on the balance sheet to attract widespread attention from the crypto market. At the same time, the treasury strategies of Ethereum, Sol and XRP altcoins are also adopted by some listed companies.

Despite this, several industry insiders, including Nic Carter, a partner at Castle Island Ventures, recently expressed potential concerns: these listed investment tools were compared to the Grayscale GBTC of that year - a Grayscale Bitcoin Trust Fund with a long-term trading premium. The premium turned into a discount that year, becoming the fuse for the collapse of multiple 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 purchase price of these crypto-treasury strategy companies, it may trigger companies to be forced to sell. If Bitcoin falls below $90,000, about half of the companies' positions may face the risk of losing money.

Micro-strategy has attracted a group of imitators, but what is the risk

of leverage behind the high premium?

As of June 4, Strategy held about 580,955 bitcoins with a market value of about US$61.05 billion, but its company's market value was as high as US$107.49 billion, with a premium of nearly 1.76 times.

In addition to micro-strategy, some of the latest companies that adopt the Bitcoin treasury strategy also have a glamorous background. Twenty One, supported by SoftBank and Tether, was listed through Cantor Fitzgerald's SPAC, raising $685 million to purchase all of it. Nakamoto Corp, founded by Bitcoin Magazine CEO David Bailey, merged with a listed medical company to raise US$710 million in purchases. Trump Media & Technology Group has announced a $2.44 billion fund to build a Bitcoin treasury.

PANews recently recorded that Strategy's Bitcoin treasury strategy has attracted a large number of imitators, including a group of listed companies such as SharpLink, Upexi, which plans to buy Ethereum, and VivoPower, which accumulates XRP.

However, several crypto industry insiders pointed out that the operating trajectory of these companies is very similar in structure to the GBTC arbitrage model of that year. Once a bear market comes, its risks may be released in a concentrated manner, forming a "stampage effect", that is, when market or asset prices show signs of decline, investors will collectively sell in panic, triggering a chain reaction of further price plunge .

Lessons from Grayscale GBTC: Leverage collapses, holding institutions

explode

Looking back on history, Grayscale Bitcoin Trust (GBTC) was once a hit from 2020 to 2021, with a premium of up to 120%. But after entering 2021, GBTC quickly turned to a negative premium and eventually evolved into the fuse for the explosion of institutions such as SanArrow Capital (3AC), BlockFi, and Voyager.

The mechanism design of GBTC can be said to be a one-way transaction that "only enter but not exit": after investors subscribe to GBTC in the primary market, they need to lock in for 6 months before they can be sold in the secondary market, and cannot be redeemed as Bitcoin. Due to the high threshold for Bitcoin investment in the early market and the heavy tax burden of paying income taxes, GBTC once became a legal channel for qualified investors (through the 401(k) US retirement benefit plan, etc.) to enter the crypto market, which promoted the long-term maintenance of its secondary market premium.

But it is this premium that has spawned a large-scale "leveraged arbitrage game": investment institutions borrow BTC at ultra-low costs, deposit it into Grayscale to subscribe to GBTC, and sell it in the premium secondary market after holding it for 6 months, obtaining stable returns.

According to public documents, BlockFi and 3AC's GBTC combined positions once accounted for 11% of the circulation share. BlockFi once converted BTC deposited by customers into GBTC and used as collateral for interest payment. 3AC even used up to US$650 million of unsecured loans to increase its holdings in GBTC and mortgaged GBTC to DCG's lending platform Genesis to obtain liquidity and achieve multiple rounds of leverage.

In a bull market, everything works well. But when Canada launched Bitcoin ETF in March 2021, GBTC demand plummeted, positive premium turned negative premium, and the flywheel structure collapsed instantly.

BlockFi and 3AC began to continue to lose money in a negative premium environment - BlockFi had to sell GBTC on a large scale, but still had a cumulative loss of more than US$285 million in 2020 and 2021. Some industry insiders estimated that its loss on GBTC was close to US$700 million. 3AC was liquidated, and Genesis finally issued a statement in June 2022 saying that it had "dispose of a large counterparty's pledged assets." Although not named, the market generally believes that the counterparty is exactly 3AC.

This "explosion" that began with premium, over leverage, and destroyed by liquidity collapse has become the prelude to the systemic crisis in the crypto industry in 2022.

Will the encrypted 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: stock price rise → additional financing → purchase of BTC → boost market confidence → stock price continues to rise. This treasury flywheel mechanism may accelerate in the future as institutions gradually accept cryptocurrency ETFs and cryptocurrency holdings as loan collateral.

JPMorgan Chase plans to allow its trading and wealth management clients to use some assets pegged to cryptocurrencies as collateral for loans. According to people familiar with the matter, the company will start financing collateral with cryptocurrency ETFs in the coming weeks, starting with BlackRock’s iShares Bitcoin Trust. In some cases, JPMorgan will also begin taking its cryptocurrency holdings into consideration when evaluating the overall net assets and current assets of wealth management clients, people familiar with the matter said. This means that when calculating the amount of assets available to customers, cryptocurrencies will receive similar treatments as stocks, cars or artworks.

However, some bears believe that the treasury flywheel model seems self-consistent in the bull market, but its essence is to directly link traditional financial means (such as convertible bonds, corporate bonds, and ATM additional issuance) with the price of crypto asset. 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 financing capabilities. If there is debt or margin pressure, the company will be forced to cash in on BTC to deal with it. A large amount of BTC selling pressure is released in a concentrated manner, forming a "selling wall" and further reducing prices.

What's more serious is that when the stocks of these companies are accepted as collateral by lending institutions or centralized exchanges, their volatility will be further transmitted to traditional finance or DeFi systems, amplifying the risk chain. And this is the script that Grayscale GBTC has experienced.

A few weeks ago, famous short seller Jim Chanos announced that he was shorting Strategy and longing Bitcoin, also based on a negative view of its leverage. Although MicroStrategy stock has risen 3,500% over the past five years, Chanos believes its valuation has been severely deviated from fundamentals.

Some crypto treasury advisers pointed out that the trend of "equity tokenization" today may exacerbate risks, especially once these tokenized stocks 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 it is still in the early stages because most trading institutions have not yet accepted Bitcoin ETFs as margin collateral—even issuers like BlackRock or Fidelity.

On June 4, Geoff Kendrick, head of digital asset research at Standard Chartered Bank, issued a warning 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 may trigger companies to be forced to sell. Referring to the case where Core Scientific sells 7,202 bitcoins when the price is 22% below the cost price, if Bitcoin falls below $90,000, about half of the companies' holdings may face the risk of loss.

How big is the risk of explosion of micro-strategy? Recently, the discussion on Web3 101's podcast "Bitcoin Giant Whale Micro Strategy and Its Capital Game" has attracted market attention. The discussion mentioned that although micro-strategy has been called "leveraged Bitcoin" in recent years, its capital structure is not a high-risk leverage model in the traditional sense, but a highly controllable "ETF+leveraged flywheel" system. The company raises funds to purchase Bitcoin by issuing convertible bonds, perpetual preferred shares, and market-price additional issuance (ATM), to build a volatility logic that continues to attract market attention. More importantly, the maturity time of these debt instruments is mostly concentrated in 2028 and after, making it almost impossible to have short-term debt repayment pressure during periodic pullbacks.

The core of this model is not simply hoarding coins, but through dynamic adjustment of financing methods, forming a flywheel mechanism for self-enhanced capital markets under the strategy of "adding leverage at low premiums and selling stocks at high premiums". Michael Saylor positioned micro-strategy as a financial proxy tool for Bitcoin volatility, allowing institutional investors who cannot directly hold crypto assets to hold a Bitcoin target with high beta with options attributes (more violently than benchmark asset BTC) in the form of traditional stocks. Because of this, micro-strategy not only builds strong financing and anti-fragility capabilities, but also becomes a "long-term stable variable" in the volatility structure of the Bitcoin market.

At present, the cryptographic treasury strategy of listed companies has been constantly becoming the focus of attention in the crypto market, and has also caused controversy over its structural risks. Although micro-strategy has built a relatively robust financial model through flexible financing means and cyclical adjustments, whether the overall industry can remain stable in market fluctuations remains to be verified. Whether this round of "crypto-treasury boom" will replicate the GBTC-style risk path is a question full of unknowns and unresolved.