Crypto treasury companies are getting a lot of attention. Things are starting to spread as more firms join the race.
This is no longer limited to just Bitcoin. Over the last few months, we saw Ethereum become a hot asset to add. In fact, the frenzy there might end up surpassing Bitcoin since many are looking past the store of value narrative. Some believe Ethereum is going to be a centerpiece of the global financial system with stablecoin and RWA creation taking place mainly on that network.
Of late we are witnessing Solana and BNB getting added to some treasuries. Companies are now looking deeper into the industry, opting for something they view as undervalued.
It is crucial to note that we are in the early stages of this entire experiment. Over the next couple years, the explosion could go nuclear. This is not without risks however.
Crypto Treasury Companies: Bridge To TradFi
Firms are bringing about mechanisms to bring more capital into the crypto space.
The last 6 months saw the on-ramps to crypto expand greatly. While the fundamental infrastructure might not have changed much, the ability for investors to gain exposure is skyrocketed.
Each time a company adds crypto to its treasury, there is an opportunity for investors to benefit. This is magnified with firms that focus heavily on filling their balance sheet with assets such as Bitcoin.
STRATEGY (formerly Microstrategy) highlights this point. It also raises questions about what people are really buying.
Michael Saylor keeps making headlines. With each Bitcoin purchase, the underlying value of the holdings grows. However, for those purchasing the stock, there might be an issue.
MSTR trades at a premium over BTC. This makes the return potentially more difficult. Ultimately, investors are left to decide what they want to accept in terms of the risk profile.
The key point is those options are out there. We also have a number of companies that do not carry as high a premium. These could be better options for some.
Each of these additions means capital is directed towards crypto-assets. The purchase of BTC and ETH is well chronicled. If we see a rush to a variety of other tokens, this could really drive the inflows.
Risks Are Increasing
Many companies are approaching the crypto markets similar to others. They are taking their treasury and investing it for added return. The methods are simple and straightforward. No leverage. No trading. Simply asset accumulation with the speculative view that things will go up over time.
This is not all firms however. Many are using debt and leveraging their positions. On the way up, naturally, this is no problem. It does become an issue if the price of an asset crashes. Having calls might mean have to sell the positions, at a loss, eroding the confidence in the stock.
With crypto-assets, volatility is a well-known trait. This means that those which are highly levered are at risk of having a serious setback if not complete implosion.
Vitalik Buterin recently commented on the risk associated with what is taking place for Ethereum regarding the treasuries.
“If you woke me up three years from now and told me that treasuries led to the downfall of ETH, then, of course, my guess for why would basically be that somehow they turned it into an overleveraged game,” Buterin noted.
The problem here is Wall Street is known for its leveraging even to the point of economic collapse. We only have to revert back to the Great Financial Crisis to see what took place there.
When that happens, the derivatives becomes near worthless while the underlying asset gets crushed. During that time, real estate collapsed.
What Vitalik is referring to is massive leverage calls that force the sale of massive amounts of Ethereum. We can use a fill in the blank with any token to see the widespread risk.
Under that situation, the price of ETH would be pushed down, further exposing other leveraged players. The selling simply snowballs to the point where ETH would be worth a fraction of where it started.
That said, many firms are going to continue to keep levering things up regardless of the risks.