Risk of Forced Sales and Acquisitions

If the market cools down, some companies may be forced to sell their Bitcoin at a discount, or even the companies themselves might be acquired by others.

Brewers, cannabis producers, and energy storage companies are among the many public companies that have been adding Bitcoin to their balance sheets. However, observers warn that this strategy could face significant risks if the price of Bitcoin drops to a certain level or if their fundraising capabilities are limited. These companies may be forced to sell their Bitcoin holdings at a discount or even sell the company itself.

Ben Werkman, Chief Investment Officer of Swan Bitcoin, a financial services company, said: "For high-credibility operating companies, this could be an opportunity. If they run into trouble, they could consolidate the industry and buy Bitcoin at a 10% discount. If the bear market lasts long enough, this scenario could indeed happen."

Risks of Bitcoin Reserves

As more and more companies build reserves based on Bitcoin and other digital assets, experts are increasingly cautious. This practice was pioneered by Strategy (formerly known as MicroStrategy) and has been hugely successful. However, with the surge in Bitcoin prices and the rise in stock prices of some newly Bitcoin-focused companies, the potential risks of this approach have largely been overlooked.

Earlier this month, Geoff Kendrick, Head of Digital Assets Research at Standard Chartered Bank in the UK, wrote in a report: "At present, Bitcoin reserve strategies are adding to the buying pressure on Bitcoin, but we believe that this situation may reverse over time."

Under the backdrop of President Trump's pro-crypto policies in the United States, the number of companies trying to emulate Strategy's approach by borrowing to buy more Bitcoin has surged. Strategy began purchasing Bitcoin in 2020, and over several years, it funded its acquisitions through the issuance of convertible bonds, common stock, and preferred stock—a strategy that has been emulated by several emerging companies.

Since Strategy's transformation from a software development company, its stock price has soared by over 2,500%. The company currently holds approximately 582,000 Bitcoins, valued at over $61 billion, accounting for 2.7% of the total Bitcoin supply.

According to Bitcoin Treasures data, among 130 public companies, none holds more than 0.25% of the total Bitcoin supply cap of 21 million. The website's archived version shows that at the beginning of this year, only 75 public companies held Bitcoin.

"If Bitcoin reserve companies go bust, there could be a loss of 50% (of principal)," said Matt Cole, CEO of Strive Asset Management. "I think there is a high probability of risks in the future. This is something to keep an eye on."

Now, Matt Cole believes the risk of Bitcoin reserve companies going bankrupt and triggering Bitcoin liquidation is low, stating that its potential market disruption would not be greater than a "typical derivative blow-up event on a weekend."

Matt Cole said that depending on market conditions, Strive, which manages over $2 billion in assets, might start seeing actionable investment opportunities in the future. "I'm not sitting here today saying, 'We need to be ready to acquire 10 different Bitcoin reserve companies.' It's very likely that we will hold this view in the future, and by then we will be prepared."

In a recent report, David Duong, Global Head of Research at Coinbase, wrote: "In the short term, the pressure of forced sales is not the issue," and refinancing methods may ultimately help leveraged companies avoid liquidating their Bitcoin positions.

Destiny Controlled by Funders

Most public companies strive to maximize shareholder value by increasing revenue, improving operating profit margins, or optimizing capital efficiency. However, many companies that adopt Bitcoin reserve strategies aim to maximize shareholder value by increasing the amount of Bitcoin held per share. (Shareholders do not have direct claims on the Bitcoin in these companies' treasuries.)

Strategy has historically preferred to use convertible bonds to purchase Bitcoin. The company holds $8.2 billion in outstanding debt, which may be converted into stock in the future. Ben Werkman, Chief Investment Officer of Swan Bitcoin, said that although demand for Strategy's tools has surged, smaller companies adopting Bitcoin may take a long time to reach this level.

Werkman said that for a company's convertible bonds to be popular on convertible arbitrage trading platforms (which tend to trade Strategy's debt), there first needs to be a robust options market, which depends on factors such as stock trading volume.

"In the convertible bond market, you have to scale up to a meaningful size, and you first need to have a derivatives market so that bond buyers can hedge their risks," he said. "Not all companies have an options market from the start."

Werkman said that as an alternative to leveraged balance sheets, some companies are using bank term loans, but under certain terms, this could force them to sell. "If they borrow money from banks, they are handing over their destiny to someone else. That's when you should start worrying about these companies."

Evaluating Bitcoin Reserve Companies

When it comes to evaluating Bitcoin reserve companies, mNAV (the ratio of market capitalization to net asset value) has become an informal but popular metric. As of last Friday's close, Strategy's mNAV was 1.7, indicating that its $107 billion market cap is higher than the value of its Bitcoin reserves.

However, analysts, including Greg Cipolaro, Global Head of Research at NYDIG, believe that this valuation metric is not ideal as a comprehensive indicator.

He wrote in a recent report: "Metrics like 'mNAV' (market cap compared to Bitcoin holdings) have serious flaws when comparing different types of Bitcoin reserve companies and do not fully account for differences in (operating companies) and capital structure."

Danger When Premium Turns to Discount

Werkman said that when a company's stock price trades at a premium to its Bitcoin holdings, it is easy to increase the value of Bitcoin per share by issuing common stock. But he warned that if this premium turns into a discount, the company's prospects could change accordingly.

For an emerging Bitcoin reserve company, the value of its operating company, or its underlying business, is "very important" in the early stages. Not all companies that buy Bitcoin are trying to replicate Strategy's strategy. Similar to the logic behind some state-level Bitcoin bills, some companies choose to exchange cash and US Treasuries for Bitcoin to maintain their purchasing power.

Werkman ultimately said that Strategy's Bitcoin reserve strategy revolves around volatility. As the company's common stock price fluctuates, it can raise funds at a premium through products like convertible bonds, essentially raising money based on future value.

"They captured the arbitrage opportunity, and this arbitrage is precisely the reason for the increase in Bitcoin value per share for common stockholders. They used the capital markets and the incentives of all these different investor groups to create lasting value."

As more and more Bitcoin reserve companies emerge, Werkman believes that investors will begin to categorize them into "growth" and "value" companies based on the expected growth rate of Bitcoin per share. Although smaller companies may ultimately be acquired, their ultimate direction may evolve into an asset class along with Bitcoin.

"This is the magic of the moment." "They chose to exit the collapsing financial system and instead embraced what they believe to be the future financial system, where there is a first-mover advantage."

Risk of Forced Sales and Acquisitions

If the market cools down, some companies may be forced to sell their Bitcoin at a discount, or even the companies themselves might be acquired by others.

Brewers, cannabis producers, and energy storage companies are among the many public companies that have been adding Bitcoin to their balance sheets. However, observers warn that this strategy could face significant risks if the price of Bitcoin drops to a certain level or if their fundraising capabilities are limited. These companies may be forced to sell their Bitcoin holdings at a discount or even sell the company itself.

Ben Werkman, Chief Investment Officer of Swan Bitcoin, a financial services company, said: "For high-credibility operating companies, this could be an opportunity. If they run into trouble, they could consolidate the industry and buy Bitcoin at a 10% discount. If the bear market lasts long enough, this scenario could indeed happen."

Risks of Bitcoin Reserves

As more and more companies build reserves based on Bitcoin and other digital assets, experts are increasingly cautious. This practice was pioneered by Strategy (formerly known as MicroStrategy) and has been hugely successful. However, with the surge in Bitcoin prices and the rise in stock prices of some newly Bitcoin-focused companies, the potential risks of this approach have largely been overlooked.

Earlier this month, Geoff Kendrick, Head of Digital Assets Research at Standard Chartered Bank in the UK, wrote in a report: "At present, Bitcoin reserve strategies are adding to the buying pressure on Bitcoin, but we believe that this situation may reverse over time."

Under the backdrop of President Trump's pro-crypto policies in the United States, the number of companies trying to emulate Strategy's approach by borrowing to buy more Bitcoin has surged. Strategy began purchasing Bitcoin in 2020, and over several years, it funded its acquisitions through the issuance of convertible bonds, common stock, and preferred stock—a strategy that has been emulated by several emerging companies.

Since Strategy's transformation from a software development company, its stock price has soared by over 2,500%. The company currently holds approximately 582,000 Bitcoins, valued at over $61 billion, accounting for 2.7% of the total Bitcoin supply.

According to Bitcoin Treasures data, among 130 public companies, none holds more than 0.25% of the total Bitcoin supply cap of 21 million. The website's archived version shows that at the beginning of this year, only 75 public companies held Bitcoin.

"If Bitcoin reserve companies go bust, there could be a loss of 50% (of principal)," said Matt Cole, CEO of Strive Asset Management. "I think there is a high probability of risks in the future. This is something to keep an eye on."

Now, Matt Cole believes the risk of Bitcoin reserve companies going bankrupt and triggering Bitcoin liquidation is low, stating that its potential market disruption would not be greater than a "typical derivative blow-up event on a weekend."

Matt Cole said that depending on market conditions, Strive, which manages over $2 billion in assets, might start seeing actionable investment opportunities in the future. "I'm not sitting here today saying, 'We need to be ready to acquire 10 different Bitcoin reserve companies.' It's very likely that we will hold this view in the future, and by then we will be prepared."

In a recent report, David Duong, Global Head of Research at Coinbase, wrote: "In the short term, the pressure of forced sales is not the issue," and refinancing methods may ultimately help leveraged companies avoid liquidating their Bitcoin positions.

Destiny Controlled by Funders

Most public companies strive to maximize shareholder value by increasing revenue, improving operating profit margins, or optimizing capital efficiency. However, many companies that adopt Bitcoin reserve strategies aim to maximize shareholder value by increasing the amount of Bitcoin held per share. (Shareholders do not have direct claims on the Bitcoin in these companies' treasuries.)

Strategy has historically preferred to use convertible bonds to purchase Bitcoin. The company holds $8.2 billion in outstanding debt, which may be converted into stock in the future. Ben Werkman, Chief Investment Officer of Swan Bitcoin, said that although demand for Strategy's tools has surged, smaller companies adopting Bitcoin may take a long time to reach this level.

Werkman said that for a company's convertible bonds to be popular on convertible arbitrage trading platforms (which tend to trade Strategy's debt), there first needs to be a robust options market, which depends on factors such as stock trading volume.

"In the convertible bond market, you have to scale up to a meaningful size, and you first need to have a derivatives market so that bond buyers can hedge their risks," he said. "Not all companies have an options market from the start."

Werkman said that as an alternative to leveraged balance sheets, some companies are using bank term loans, but under certain terms, this could force them to sell. "If they borrow money from banks, they are handing over their destiny to someone else. That's when you should start worrying about these companies."

Evaluating Bitcoin Reserve Companies

When it comes to evaluating Bitcoin reserve companies, mNAV (the ratio of market capitalization to net asset value) has become an informal but popular metric. As of last Friday's close, Strategy's mNAV was 1.7, indicating that its $107 billion market cap is higher than the value of its Bitcoin reserves.

However, analysts, including Greg Cipolaro, Global Head of Research at NYDIG, believe that this valuation metric is not ideal as a comprehensive indicator.

He wrote in a recent report: "Metrics like 'mNAV' (market cap compared to Bitcoin holdings) have serious flaws when comparing different types of Bitcoin reserve companies and do not fully account for differences in (operating companies) and capital structure."

Danger When Premium Turns to Discount

Werkman said that when a company's stock price trades at a premium to its Bitcoin holdings, it is easy to increase the value of Bitcoin per share by issuing common stock. But he warned that if this premium turns into a discount, the company's prospects could change accordingly.

For an emerging Bitcoin reserve company, the value of its operating company, or its underlying business, is "very important" in the early stages. Not all companies that buy Bitcoin are trying to replicate Strategy's strategy. Similar to the logic behind some state-level Bitcoin bills, some companies choose to exchange cash and US Treasuries for Bitcoin to maintain their purchasing power.

Werkman ultimately said that Strategy's Bitcoin reserve strategy revolves around volatility. As the company's common stock price fluctuates, it can raise funds at a premium through products like convertible bonds, essentially raising money based on future value.

"They captured the arbitrage opportunity, and this arbitrage is precisely the reason for the increase in Bitcoin value per share for common stockholders. They used the capital markets and the incentives of all these different investor groups to create lasting value."

As more and more Bitcoin reserve companies emerge, Werkman believes that investors will begin to categorize them into "growth" and "value" companies based on the expected growth rate of Bitcoin per share. Although smaller companies may ultimately be acquired, their ultimate direction may evolve into an asset class along with Bitcoin.

"This is the magic of the moment." "They chose to exit the collapsing financial system and instead embraced what they believe to be the future financial system, where there is a first-mover advantage."