Crypto-Treasury Companies Face Scrutiny as Discounts to Net Asset Value Widen
A growing number of companies, inspired by Strategy Inc. (MSTR), have adopted a crypto-treasury strategy, investing corporate cash into cryptocurrencies like Bitcoin (BTCUSD). However, many of these companies are now trading at discounts to their net asset value, raising concerns about potential risks and creating opportunities for investors like Luke Cannon.
The Rise and Fall of Crypto-Treasury Strategies
The crypto-treasury trend gained momentum as companies sought easier access to crypto exposure. They often raise capital through stock and debt offerings to purchase cryptocurrencies. Some firms even merged with existing public companies to implement this strategy, expanding their holdings to include Ether (ETHUSD), Solana (SOLUSD), and Dogecoin (DOGEUSD), fueled by a perceived more favorable regulatory environment.
However, shares of several crypto-treasury companies have declined, with some trading below their net asset value. As of last week, approximately 25% of U.S. crypto-treasury companies had market capitalizations lower than their net asset value, according to K33 Research analysts.
Investor Strategies and Risks
Luke Cannon, a retail investor, capitalized on the gap between share prices and the value of crypto held by companies like ALT5 Sigma Corp. (ALTS). He invested in ALTS, which held World Liberty Financial (WLFI), a crypto linked to President Donald Trump's family. However, ALT5's discount to net asset value widened significantly after the company announced its WLFI treasury strategy. Despite this setback, Cannon found success with investments in companies that adopted HYPE, a cryptocurrency tied to the decentralized crypto exchange Hyperliquid, specifically Hyperion DeFi Inc. (HYPD) and Hyperliquid Strategies Inc. (SONN).
Cannon acknowledges the risks associated with these investments, citing limited transparency. He also recognizes that the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) are reportedly scrutinizing trading activity surrounding the adoption of crypto-treasury strategies.
Potential Consolidation and Liquidation Risks
Companies like Kindly MD Inc. (NAKA), led by Trump crypto advisor David Bailey, which adopted a bitcoin-treasury strategy, have experienced significant share price declines. Experts like Gus Galá from Monness, Crespi, Hardt & Co., and Adrian Fritz from 21Shares, suggest that share prices may continue to fall below net asset value due to "dilution fatigue" and other factors. Galá notes that many smaller crypto-treasury companies face challenges in raising capital and driving premiums.
Cosmo Jiang from Pantera anticipates consolidation within the sector. Rob Hadick from Dragonfly predicts mergers and acquisitions. Fritz warns of a potential "liquidation spiral" if crypto prices decline, forcing companies to sell their holdings, which could trigger a bear market. Investors face both crypto asset risks and business/management risks.
