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StanChart cautions about possible liquidation threats for companies investing in Bitcoin at elevated prices.
An increasing number of publicly traded companies are acquiring Bitcoin (BTC) for their balance sheets, yet many may face considerable losses if prices decline, as indicated by a recent report from Standard Chartered shared with CryptoSlate.
The bank’s analysis, led by Geoffrey Kendrick, head of digital assets research, pointed out that 61 companies currently possess Bitcoin in their corporate treasuries, collectively holding 3.2% of the total Bitcoin supply that will ever be available.
This trend has accelerated in recent months, with followers of Strategy boosting their Bitcoin reserves from 50,000 BTC to 100,000 BTC within a mere two months.
High entry prices
Standard Chartered cautioned that numerous firms have entered the market at elevated valuations, frequently with net asset value (NAV) entry multiples exceeding 1, indicating a heightened exposure to price fluctuations.
Kendrick noted that for at least half of these companies, the average acquisition cost surpasses $90,000 per Bitcoin, and even a slight downturn could result in losses and reputational harm for firms attempting to replicate Strategy without comparable risk tolerances or capital structures.
He cautioned that “Bitcoin is volatile,” and such high average entry points render certain companies particularly susceptible.
According to Kendrick:
“We identify a pain level of 22% below the average purchase price as a potential liquidation level.”
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He clarified that a 22% decline from the average purchase price may represent the point at which liquidation risk becomes significant for companies holding Bitcoin in their treasuries.
Referencing past market occurrences, the report mentioned Core Scientific’s 2022 situation as a potential indicator of stress levels.
The report featured a chart illustrating a broad range of purchase prices among public companies, with many concentrated in the $90,000 to $110,000 bracket. Should markets experience a sharp reversal, firms with weaker balance sheets or facing investor pressure might be compelled to sell.
Demand rising despite risks
In spite of the risks, Bitcoin’s position as a strategic treasury asset is increasingly being recognized by corporations. Kendrick attributed this trend to NAV multiples above 1 and persistent inefficiencies in how traditional finance assesses crypto assets.
Standard Chartered’s findings imply that this wave of adoption is fueled by both long-term belief and the fear of missing out, particularly given the recent bullish trends in crypto markets.
Kendrick stated:
“While I see these multiples as justified for now (due to market inefficiencies created by regulatory and investment committee conservatism), over time that justification will fade.”
As Bitcoin trades above the $100,000 threshold, the momentum trade remains strong. However, Standard Chartered’s cautionary note emphasizes that without effective risk management, companies adopting BTC could encounter the same volatility that previously drove miners and speculators to the edge.
The post StanChart warns of potential liquidation risks for corporations adopting Bitcoin at high prices appeared first on CryptoSlate.
