By Pedro Solimano, DL News; Translated by Felix, PANews
It all started with MicroStrategy. Today, it seems like every week a new public company announces it’s hoarding Bitcoin or other cryptocurrencies.
But here’s the problem: Investors are willing to give these companies a high valuation premium simply because they’re buying Bitcoin.
What happens if their stocks don’t rise as a result?
Take the case of Japan’s Metaplanet, which copied Michael Saylor’s Bitcoin frenzy at MicroStrategy.
10xResearch says its share price is based on Bitcoin trading at $596,154.
That’s five times Bitcoin’s current price of about $106,000.
Before the company went all-in on Bitcoin, Metaplanet was a budget hotel operator that later transformed into a blockchain infrastructure provider.
Those operations have been put on hold as the company rebranded and transformed into a Bitcoin reserve company.
"Is it time to short? The signals we are seeing now are very similar to past inflection points," 10xResearch wrote in a May 27 report.
One of many
In fact, Metaplanet is one of many companies following in the footsteps of Saylro's company, which has now been renamed Strategy.
On May 27, Trump Media & Technology Group (TMT) said it plans to raise $2.5 billion to buy Bitcoin.
This week, GameStop, the video game retailer of meme stock fame, bought 4,710 bitcoins, worth about $513 million at current prices.
Both companies’ shares fell.
These new bitcoin reserve companies have adopted a relatively simple strategy: raise money by issuing convertible bonds and then use the money to buy a lot of bitcoin.
Why are there so many people following Saylor’s lead? In short, it’s working out for the company.
Since the start of its bitcoin purchase program in August 2020, Strategy’s stock price has risen 10 times. The company holds more than 576,000 bitcoins, worth about $63 billion.
Proceed with caution
But skeptics say there are good reasons to be cautious.
For one, the idea that hoarding Bitcoin or any other cryptocurrency on a company’s balance sheet is a sure win is simply nonsense.
The belief that those who follow Saylor’s lead are risk-free is worrisome, said Noelle Acheson, a prominent macro analyst. “Especially those who bought into Bitcoin when the price was high.”
When the Strategy first bought Bitcoin, it was trading at about $11,000, about a tenth of its current price of $107,000.
As the strategy becomes more popular, analysts and sophisticated investors may focus on one particular metric to cut through the noise — net asset value, or NAV.
NAV refers to the book value of a company's holdings.
When there is a mismatch in NAV, it means that the company's stock price is inconsistent with the actual value of its holdings.
Take Metaplanet as an example.
The company holds 7,800 bitcoins worth about $830 million. However, the company's market capitalization is $5.6 billion, which means that one bitcoin is worth $596,154.
In other words, investors are paying five times the price of bitcoin itself for indirect exposure to bitcoin.
Analysts at 10xResearch said, "A dangerous NAV distortion is secretly forming."
“We should curb our enthusiasm for this kind of gimmick.” — Noelle Acheson
That means Metaplanet’s stock price, up 233% this month, could reverse course at any time.
But don’t forget Strategy. Its frequent premiums may be good for shareholders, but they’re also worrisome.
In 2020, investors valued Strategy shares at more than six times the value of its bitcoin, and more than three times its value last year, according to Strategy Tracker.
Hedge fund mavens like legendary short seller Jim Chanos have been taking advantage of the NAV mismatch to short Strategy and buy more bitcoin.
Insider Selling
Meanwhile, the cryptocurrency reserve strategy is gaining momentum.
Just this week, Trump Media & Technology (TMT), the parent company of Trump's social media company, planned to raise $2.5 billion to invest in Bitcoin. But its stock price plummeted 11% after the plan was disclosed.
Why? Some may be worried that insiders will sell their shares.
The company said that possible future stock sales would include shares from some insiders, such as a trust controlled by his son Donald Trump Jr., which owns 57% of the company.
Meanwhile, many companies that have followed Saylor's lead (some of which are not even cryptocurrency companies) have their valuations based entirely on the amount of Bitcoin they hold.
Semler Scientific makes medical equipment. Its shares surged 30% after it bought 581 bitcoins.
Strive Asset Management, founded by former presidential candidate Vivek Ramaswamy, said it had raised $750 million to buy bitcoins, with another $750 million in the works.
Technology company ASST jumped 194% after announcing a merger with Strive Asset Management to become a bitcoin reserve company.
Twenty One, a new startup led by bitcoin evangelist Jack Mallers and backed by Tether, SoftBank and Cantor Fitzgerald, emerged with the sole purpose of absorbing as many bitcoins as possible.
The holding company, Cantor Equity Partners, has seen its shares rise more than 300% since it was founded in late April.
The firm lists 76 risks associated with its business model, many of which are uncommon.
Nakamoto Inc, led by David Bailey, merged with a health-care company to raise $700 million to buy Bitcoin.
Now, macro analyst Noelle Acheson says it makes sense for companies to add Bitcoin to their asset reserves.
But the large number of companies that use Bitcoin as their sole reason for existence does raise some warnings of overhype.
The biggest risk facing all of these companies is macroeconomic risk. And in the Trump era, that's a huge factor.
Even Michael Saylor can’t escape the influence of geopolitics.
Tariffs, rising inflation, and the Federal Reserve’s uncertain interest rate policy have markets on edge. Treasury yields remain elevated, which is particularly worrying because it means investors may be losing confidence in the dollar as a safe haven asset.
That’s bad for risk-on assets like stocks and cryptocurrencies.
All of this means that Saylor’s multi-billion dollar Bitcoin purchases, which used to boost the top cryptocurrency, are no longer doing so.
If the share prices of companies like Strategy or Metaplanet continue to rise, other copycats may emerge. This could further weaken the influence of such Bitcoin purchases.
“We should temper our enthusiasm for such gimmicks,” Acheson wrote.
“Innovative financial engineering always appears at first as a fascinating new tool that can generate returns, but inevitably becomes fragile as interest and risk saturate.”
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