Encryption treasury strategies become the new favorite of listed companies, but the risks cannot be ignored.

Encryption treasuries have become a popular strategic choice for publicly listed companies. According to statistics, at least 124 listed companies have incorporated Bitcoin into their financial strategies as an important component of their balance sheets. In addition to Bitcoin, cryptocurrencies such as Ethereum, Solana, and XRP have also been adopted by some listed companies as part of their treasury strategies.

However, some industry experts have recently expressed concerns about this trend. They believe that these listed investment tools are similar to the Grayscale Bitcoin Trust (GBTC) from back in the day. GBTC once traded at a premium for a long time, but later switched to a discount, becoming the catalyst for the collapse of several institutions.

A digital asset research director at a certain bank warns 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 these enterprises. If Bitcoin drops below $90,000, about half of the corporate holdings may face the risk of losses.

MicroStrategy Leads the Trend, But the Leverage Risk Behind the High Premium Cannot Be Ignored

As of June 4, a certain company held approximately 580,955 Bitcoins, with a market value of about $61.05 billion, but its company market value reached $107.49 billion, a premium of nearly 1.76 times.

Apart from this company, some other companies that have recently adopted a Bitcoin treasury strategy also have prominent backgrounds. A company supported by a well-known investment institution went public through a SPAC, raising $685 million entirely for the purchase of Bitcoin. Another company founded by the CEO of a certain encryption media merged with a listed medical company, raising $710 million to purchase coins. Additionally, a technology group has announced plans to raise $2.44 billion to create a Bitcoin treasury.

In addition, there are plans for companies to buy Ethereum, accumulate Solana, and accumulate XRP, among others, to join this group of listed companies.

However, some industry insiders point out that the operational models of these companies are structurally very similar to the GBTC arbitrage model of the past. If a bear market arrives, the risks may be released in a concentrated manner, forming a "domino effect", where when there are signs of a decline in market or asset prices, investors panic sell collectively, triggering a chain reaction of further price crashes.

Lessons from GBTC: Leverage Collapse and Institutional Liquidations

Looking back at history, a certain Bitcoin trust was once in the spotlight from 2020 to 2021, with a premium as high as 120%. However, entering 2021, the trust quickly turned to a negative premium and ultimately evolved into a trigger factor for multiple institutional blowups.

The mechanism design of this trust can be described as a "one-way transaction with no exit": after investors subscribe in the primary market, they must lock in for 6 months before they can sell in the secondary market, and they cannot redeem it for Bitcoin. Due to the high investment threshold and heavy tax burden on payment returns for early market Bitcoin investments, this trust once became a legitimate channel for qualified investors to enter the encryption market, which has kept its secondary market premium sustained over the long term.

It is this premium that has given rise to large-scale "leverage arbitrage games": investment institutions borrow BTC at ultra-low costs, deposit it into subscription trust shares, and after holding it for 6 months, sell it in the premium secondary market to obtain stable returns.

According to public documents, the trust holdings of two large institutions once accounted for 11% of the circulating shares. One institution converted the BTC deposited by clients into trust shares and used them as collateral for loan interest payments. Another institution even utilized up to $650 million in unsecured loans to increase its positions and pledged the trust shares to a lending platform to obtain liquidity, achieving multiple rounds of leverage.

In a bull market, everything runs smoothly. However, after a certain country launched a Bitcoin ETF in March 2021, the demand for the trust plummeted, shifting from a premium to a discount, and the flywheel structure collapsed instantly.

The two institutions began to incur continuous losses in a negative premium environment. One was forced to sell trust shares on a large scale but still accumulated losses of over $285 million in 2020 and 2021, with industry insiders estimating its losses on the trust to be close to $700 million. The other was liquidated, and a lending platform eventually issued a statement in June 2022 stating that it had "disposed of the pledged assets of a large trading counterparty."

This "explosion" that began with premium, thrived on 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 round of systematic industry crisis?

After a certain company, more and more companies are forming their own "Bitcoin treasury flywheel", with the main logic being: stock price rises → 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.

On June 4, news emerged that a large bank plans to allow its trading and wealth management clients to use certain assets linked to encryption as loan collateral. According to insiders, the company will begin providing financing backed by cryptocurrency ETFs in the coming weeks, starting with a Bitcoin trust fund managed by a certain asset management company. Insiders indicated that, in some cases, the bank will also start considering clients' cryptocurrency holdings when assessing their overall net worth and liquid assets in wealth management. This means that when calculating the collateral limit for clients' available assets, cryptocurrency will be treated similarly to stocks, cars, or artworks.

However, some bears believe that the treasury flywheel model seems self-consistent in a bull market, but its essence is to directly link traditional financial instruments (such as convertible bonds, corporate bonds, and ATM issuance) with the prices of encryption assets. Once the market turns bearish, the chain could potentially break.

If the currency price plummets, the company's financial assets will rapidly shrink, affecting its valuation. Investor confidence collapses, leading to a drop in stock prices, which limits the company's financing ability. If there is debt or additional margin pressure, the company will be forced to liquidate BTC to cope. A large amount of BTC sell pressure is concentrated and released, forming a "sell wall," further driving down the price.

More seriously, when the stocks of these companies are accepted as collateral by lending institutions or centralized exchanges, their volatility will further transmit to the traditional financial or DeFi systems, amplifying the risk chain. This is exactly the script that a certain Bitcoin trust has gone through.

A few weeks ago, a well-known short seller announced that he was shorting a certain company and going long on Bitcoin, based on his negative view of its leverage. Despite the company's stock rising 3,500% over the past five years, this short seller believes its valuation is severely disconnected from fundamentals.

There are encryption treasury consultants pointing out that the trend of "equity tokenization" today may exacerbate risks, especially once these tokenized stocks are accepted as collateral by centralized or DeFi protocols, which is more likely to trigger uncontrollable chain reactions. However, some market analysts believe that it is still an early stage, as most trading institutions have not yet accepted Bitcoin ETFs as margin collateral, even large asset management companies.

On June 4th, the head of digital asset research at a certain bank issued a warning that currently 61 listed companies hold a total of 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 may trigger forced selling by the companies. Referring to the case in 2022 where a certain mining company sold 7,202 bitcoins when the price was 22% below the cost price, if bitcoin falls below $90,000, about half of the companies' holdings may face a risk of loss.

How big is the risk of a certain company's explosion? Recently, a podcast discussion has attracted market attention. The discussion mentioned that although this company has been referred to as the "leveraged version of Bitcoin" in recent years, its capital structure is not a traditional high-risk leveraged model, but rather a highly controllable "type ETF + leveraged flywheel" system. The company raises funds to purchase Bitcoin through issuing convertible bonds, perpetual preferred stocks, and at-the-market (ATM) offerings, creating a volatility logic that continually attracts market attention. More importantly, the maturity dates of these debt instruments are mostly concentrated in 2028 and beyond, which means there is almost no short-term debt 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 by dynamically adjusting financing methods under the strategy of "leveraging when there is low premium, and selling stocks when there is high premium." The company's CEO positions the company as a financial proxy for Bitcoin volatility, allowing institutional investors who cannot directly hold encryption assets to hold a high Beta (more volatile than the benchmark asset BTC) Bitcoin target in a "barrier-free" manner in the form of traditional stocks, which have option attributes. Because of this, the company 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.

Currently, the strategy of listed companies in encryption treasury is increasingly becoming the focus of attention in the encryption market, which has also sparked controversy over its structural risks. Although a certain company has built a relatively robust financial model through flexible financing means and periodic adjustments, whether the overall industry can maintain stability amid market fluctuations still needs to be verified over time. Whether this wave of "encryption treasury craze" will replicate the risk path of a certain Bitcoin trust is an uncertain and unresolved question.