Bitcoin Treasury Firms: Innovative Approach or Hazardous Bet?

Bitcoin has consistently been a contentious subject on Wall Street. As a small yet vocal group of publicly traded companies strives to accumulate as much as possible, it is creating a greater divide among traditional financiers than ever before.

MicroStrategy (now referred to as Strategy) was a pioneer when it began incorporating BTC into its balance sheet in 2020. Its bold acquisitions have primarily been financed through debt. With Bitcoin surging nearly 700% over the past five years, the firm is now sitting on billions in unrealized gains.

Once a struggling and moderately successful business intelligence firm, its transformation into a Bitcoin treasury company has proven to be extremely profitable thus far, inspiring numerous imitators. While some view this as a positive development, it also raises significant concerns.

As of this writing, Strategy possesses over 640,000 BTC — more than 3% of the total supply of this digital asset, which is capped at 21 million. It has acquired these coins at an average price of $74,802 each, indicating that Bitcoin’s value could decline by 30% and the company would still remain profitable. However, this average price has increased significantly in recent times. In August 2024, it was only $36,821.

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Strategy’s commitment to continue purchasing BTC while it is near all-time highs means its profit margins are consistently shrinking. Consequently, when the next inevitable bear market occurs, the company’s financial situation could deteriorate rapidly. Bitcoin is notorious for severe peak-to-trough declines of up to 80%. Would executive chairman Michael Saylor be able to sustain operations if history were to repeat itself?

A similar situation unfolded in 2022, following the dramatic collapse of FTX. BTC fell from $69,000 to $16,000 within a year. Strategy managed to endure this downturn without liquidating any of its holdings, despite incurring $4 billion in paper losses. However, given that the company’s cryptocurrency reserves have quadrupled since then, margin calls may be more challenging to address next time.

Forced sell-offs could have multiple consequences. For one, it could trigger a downward spiral for Bitcoin, with investors engaging in panic selling as they process the news. The lack of liquidity compared to traditional markets means a significant sell-off from Strategy could lead to disproportionate drops in BTC’s value. Additionally, since its stock often acts as a proxy for Bitcoin’s price, shares would likely plummet as well. To complicate matters, the company joined the tech-heavy Nasdaq 100 last December, meaning millions of investors tracking this index through ETFs could experience significant losses. Everyday consumers with no interest in cryptocurrency could also be indirectly affected if the company fails.

Strategy is not alone in this regard — in fact, many of its imitators are in a considerably less favorable position. Japan’s Metaplanet, initially established to provide hotel management services, only began acquiring Bitcoin in April 2024. It has paid an average of $106,000 per coin, leaving little room for error if the bullish momentum in the crypto market wanes.

Despite Bitcoin’s limited supply and high demand — driven by a combination of treasury companies and a booming market for exchange-traded funds tracking its spot price — critics contend that Bitcoin’s value has not increased in line with the substantial influx of capital into ETFs. The situation could become problematic if this trend does not change.

Saylor has positioned himself as a Bitcoin advocate, aiming to persuade as many businesses as possible to emulate Strategy’s approach. However, his years of advocacy do not appear to have significantly influenced large-cap stocks, which still favor cash reserves over cryptocurrency.

The entrepreneur directly approached Microsoft’s board of directors last December, arguing that reallocating some of its substantial dollar reserves would “add hundreds of dollars to the stock price.” Nevertheless, an overwhelming 99.45% of MSFT shareholders voted against the proposal.

In the same month, Amazon also faced pressure to adopt BTC. A group of investors asserted that the e-commerce giant’s dollar reserves were being diminished due to inflation, resulting in billions in shareholder value not being safeguarded. The National Center for Public Policy Research even suggested that the world’s fifth-largest company might have a “fiduciary duty” to begin holding Bitcoin in reserve.

There are two fundamentally different perspectives on fiduciary duty concerning Bitcoin. Critics argue that it is highly irresponsible to expose shareholders to a volatile, immature asset that is unrelated to the company’s core industry. Conversely, proponents would counter that it is more negligent to overlook a commodity that has appreciated by 77% in just 12 months, significantly outpacing gold, bonds, cash, and the S&P 500.

Regardless of the outcome, one side will likely face criticism in the near future. If it turns out that Strategy’s “infinite money glitch” is on the wrong side of this debate, the repercussions could extend well beyond the cryptocurrency market.

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