Digital asset treasuries experienced significant growth earlier this year, but a sudden crash in bitcoin prices this October has left many companies grappling with unrealized losses. Currently, over 180 public companies have cryptocurrency holdings on their balance sheets. Approximately 100 of these companies have adopted strategies similar to that of Michael Saylor, co-founder of Strategy (MSTR), who pioneered an aggressive approach to accumulating bitcoin by issuing debt and equity.
This strategy gained momentum earlier this year as bitcoin values surged, with investors optimistic about favorable trends in the crypto market, particularly during the Trump administration. However, the recent volatility in bitcoin prices has led to a widespread sell-off in the digital asset treasury (DAT) sector. Since the liquidation on October 10, Strategy’s stock has plummeted around 40%. Other companies that mirrored its approach have experienced even steeper declines, with KindlyMD (NAKA) down 39%, American Bitcoin (ABTC) falling 60%, and ProCap Financial (BRR) dropping 65%.
Ether, the second-largest cryptocurrency, has similarly affected firms holding it. Bitmine Immersion Technologies (BMNR), led by Fundstrat’s Tom Lee, has seen its shares decrease by over 33% post-sell-off, while other ether-focused companies, such as SharpLink Gaming (SBET) and Bit Digital (BTBT), reported stock declines of about 40% over the past couple of months.
A critical measure for these firms is the mNAV (market Net Asset Value), which compares their market capitalization to the value of the cryptocurrency on their balance sheets. An mNAV below 1 suggests that investors value these companies less than the cryptocurrency they hold. In Strategy’s case, this ratio approached 1x in late November, raising alarms that the company might be compelled to liquidate some bitcoin to manage dividends and debt obligations.
In a bid to alleviate these concerns, Strategy recently announced a $1.44 billion cash reserve fund intended to sustain its dividend payouts and cover interest on debts for the next 21 months, provided bitcoin volatility continues. CEO Phong Le has downplayed fears regarding a compressed mNAV, emphasizing that Strategy operates as a business, rather than a passive fund or ETF. He posits that the company’s valuation should stem from its ability to manage and grow its assets rather than a direct correlation with its underlying assets’ value.
Bernstein analysts remain optimistic about Strategy’s resilience through the current crypto downturn. They caution, however, that many firms emulating Strategy during the crypto boom, buoyed by soaring token prices and supportive regulatory conditions, could struggle. According to analyst Gautam Chhugani, while there’s no viable scenario threatening Strategy’s longevity, many competitors may find it challenging to secure long-term capital, trading below their net asset values.
The situation is further complicated as statistics reveal that 65 out of 100 bitcoin treasury companies have purchasing costs above the current market rate, resulting in unrealized losses. During last month’s crypto decline, some firms resorted to selling a total of 1,883 bitcoins to alleviate pressures.
Investors are bracing for a potential shakeup in the DAT space, with predictions of consolidations and stronger players potentially acquiring weaker firms. This “Darwinian phase” may force companies to adapt or falter as analysts suggest the bar has been raised for treasury companies to thrive in a transformed market landscape.
One company attempting to differentiate itself is Twenty One Capital (XXI), backed by notable entities like Tether and SoftBank. Despite a 19% drop following its public debut, CEO Jack Mallers insists the firm has ambitions beyond mere asset holding. He argues that unlike other firms, Twenty One Capital aims to generate cash flow through diverse business ventures.
As the cryptocurrency landscape evolves, companies must prove their business models are sustainable and robust enough to weather future market fluctuations. The push for operational viability could reshape the digital asset treasury space in the months to come.
