Once stock prices turn to discounts, companies will face difficulties in refinancing, while also exacerbating the linkage risks between traditional stock markets and the crypto market.
(Background: Crypto investment company Parataxis plans to go public via SPAC to create an aggressive Bitcoin reserve enterprise)
(Background Supplement: Why spend $2 to buy $1 worth of BTC?)
This model poses risks; once stock prices turn to discounts, companies will face difficulties in refinancing, while also exacerbating the linkage risks between traditional stock markets and the crypto market. The “reserve company” model, which involves the public listing entity holding a substantial amount of cryptocurrency, is showing signs of fatigue after the frenzy in the first half of the year, as the high premium of its stock relative to its held crypto assets is shrinking.
Recent developments indicate that MicroStrategy, a pioneer in this field, has seen its stock price premium significantly decline. In May of this year, its stock price reached twice the value of its held Bitcoin, but this premium has now dropped to 1.75 times. Other followers, including Bitcoin holder Semler Scientific and Solana holder Upexi, have experienced a general decline in their stock price premiums over the past few weeks, with some companies even losing their premiums as stock prices fell below the value of their crypto assets.
Despite the cooling market sentiment, “treasury companies” still wield significant influence in the capital markets. According to data from crypto consulting firm Architect Partners, U.S. public companies have announced plans to raise over $91 billion this year for the purchase of cryptocurrencies. According to Dealogic data, this figure far exceeds the total financing amount of $38 billion in the traditional U.S. IPO market during the same period.
However, subtle changes in the market cannot be ignored. Some companies holding non-mainstream tokens have seen their stock prices drop below their net asset values, highlighting a divergence in investor sentiment. This model poses risks; once stock prices turn to discounts, companies will face difficulties in refinancing, while also exacerbating the linkage risks between traditional stock markets and the crypto market.
Financing frenzy overshadows IPOs, but market shows signs of fatigue
“Crypto treasury stocks” have become a label for over 160 publicly listed companies worldwide, providing investors with a way to gain exposure to cryptocurrencies without directly purchasing tokens, functioning similarly to cryptocurrency exchange-traded funds (ETFs). Strategy has been buying Bitcoin for years, and the soaring cryptocurrency prices this year have triggered a new issuance frenzy.
Cosmo Jiang, a general partner at crypto fund Pantera, stated: “These digital asset instruments have almost sucked all the oxygen out of the market; this is the only thing people are talking about.” Pantera has already invested hundreds of millions of dollars in more than ten crypto treasury stocks this year.
However, signs of market cooling are becoming clear. Josh Solesbury, vice president of ParaFi, noted that decreased trading volume over the summer and an increasing number of available options in the market are the main reasons for the decline in stock price premiums. Steve Kurz, global head of asset management at Galaxy Digital, believes: “The market is showing some fatigue, but I don’t think this craze has lost its momentum. The market will see differentiation, with winners-take-all scenarios across different verticals.”
Mainstream and alternative token holding companies show stark performance divergence
The market cooling is not uniform, but rather displays significant structural divergence. Companies holding mainstream tokens are performing far better than those betting on niche, high-risk tokens. Data from Architect Partners shows that crypto treasury stocks holding mainstream tokens like Bitcoin, Ethereum, or Solana have a median return rate of 92.8% since announcing their holding strategies.
In contrast, a group of crypto treasury stocks investing in lesser-known tokens has a median return rate of -24% since their announcements. A typical example is Hyperion DeFi, a company formerly known as the biopharmaceutical firm Eyenovia, which began acquiring hyperliquid tokens in June of this year. Despite its held tokens currently valued at nearly $60 million, the company’s market value is only $30.5 million. Over the past month, its stock price has plummeted by 30%.
Enhanced correlation increases market volatility risk
The inherent risks of the “treasure hoarding” model are becoming apparent. When a company’s stock price is at a premium relative to its assets, raising funds through issuing new shares to purchase more cryptocurrencies is relatively easy. However, once stock prices turn to discounts, this virtuous cycle can reverse, making it difficult for companies to raise new funds. At the same time, the decline in the value of the underlying tokens further suppresses stock prices, creating a negative feedback loop.
The rise of this model has also deepened the correlation between the traditional stock market and the crypto market, potentially introducing new sources of volatility to the stock market. Matt Zhang, founder of Hivemind, warns: “As this integration deepens, traditional stock investors will face many unprecedented risks. They may not be accustomed to certain tokens dropping 15% in one day, which can happen in the crypto realm.”
Some venture capital firms are adopting a cautious approach to such investments. Nic Carter, founding partner of crypto venture capital firm Castle Island Ventures, stated that they have been avoiding crypto treasury stocks. He believes: “These businesses are largely zero-sum games, with returns mainly coming from increasing leverage or allowing retail investors to buy in at unfavorable prices, which we believe carries a certain reputational risk.”
