The Origin of Everything
This all started with MicroStrategy. Nowadays, it seems like every week a new publicly traded company emerges announcing the hoarding of Bitcoin or other cryptocurrencies.
But here’s the question: are investors willing to give these companies high valuation premiums just because they buy Bitcoin?
What happens if their stocks don’t rise because of this?
Taking the example of the Japanese company Metaplanet, which copied Michael Saylor’s Bitcoin frenzy at MicroStrategy.
10xResearch stated that its stock price was calculated based on a trading price of $596,154 for Bitcoin.
This is five times the current price of about $106,000 for Bitcoin.
Before fully committing to Bitcoin, Metaplanet was an economy hotel operator that later transitioned into a blockchain infrastructure provider.
With the company’s rebranding as a Bitcoin reserve company, these operations have been put on hold.
In a report on May 27, 10xResearch wrote: “Is it time to short? The signals we are seeing now are strikingly similar to past turning points.”
One of Many Companies
In fact, Metaplanet is one of many companies following in Saylor’s footsteps, with Saylor’s company now renamed Strategy.
On May 27, Trump Media and Technology Group (TMT) announced plans to raise $2.5 billion to buy Bitcoin.
This week, GameStop, the video game retailer that became famous for being a “meme stock,” bought 4,710 Bitcoins, worth about $513 million at current prices.
Both companies experienced a decline in their stock prices.
These new Bitcoin reserve companies have adopted a relatively simple strategy: raising funds by issuing convertible bonds, then using that money to buy large amounts of Bitcoin.
Why are there suddenly so many Saylor imitators?
In short, it is significantly effective for companies.
Since implementing the Bitcoin purchase plan in August 2020, Strategy’s stock price has increased tenfold. The company holds over 576,000 Bitcoins, worth about $63 billion.
Proceed with Caution
However, skeptics argue that there are ample reasons to be cautious.
Firstly, the idea that hoarding Bitcoin or any cryptocurrency on a company’s balance sheet is a guaranteed profit is simply absurd.
Renowned macro analyst Noelle Acheson stated that those imitating Saylor firmly believe this strategy is risk-free, which is worrisome. “Especially those who entered the scene when Bitcoin prices were high.”
When Strategy first bought Bitcoin, the trading price was around $11,000, only about a tenth of the current $107,000.
As this strategy becomes more popular, analysts and seasoned investors may focus on a specific indicator to eliminate noise – net asset value (NAV).
NAV refers to the book value of assets a company holds.
When NAV is mismatched, it means the company’s stock price does not align with the actual value of its assets.
Take Metaplanet, for example.
The company holds around 7,800 Bitcoins worth $830 million. However, the company’s market value is $5.6 billion, meaning one Bitcoin is valued at $596,154.
In other words, investors are paying five times the price of Bitcoin for indirect exposure to it.
Analysts at 10xResearch stated, “A dangerous NAV distortion is quietly forming.”
“We should temper our enthusiasm for this gimmick.” – Noelle Acheson
This means that Metaplanet’s stock price (which has already risen 233% this month) could reverse at any moment.
But don’t forget Strategy. Its frequent premiums may benefit shareholders, but they are also concerning.
According to Strategy Tracker data, investors valued Strategy’s stock more than six times its Bitcoin value in 2020, exceeding its value by more than three times last year.
Hedge fund experts like legendary short seller Jim Chanos have been shorting Strategy by exploiting NAV mismatches and buying more Bitcoin.
Insider Selling
Meanwhile, cryptocurrency reserve strategies are gaining tremendous momentum.
Just this week, Trump’s social media company’s parent company, Trump Media and Technology Group (TMT), announced plans to raise $2.5 billion for Bitcoin investments. However, after disclosing the plan, its stock price plummeted by 11%.
Why? Some may be concerned about insider selling.
The company stated that future stock sales would include some shares of insiders, such as the trust fund controlled by his son, Donald Trump Jr., which holds 57% of the company’s shares.
At the same time, many companies imitating Saylor (some of which are not even cryptocurrency companies) have valuations entirely dependent on the amount of Bitcoin they hold.
Semler Scientific produces medical equipment. After buying 581 Bitcoins, its stock price soared by 30%.
Strive Asset Management, founded by former presidential candidate Vivek Ramaswamy, stated that it had raised $750 million for Bitcoin purchases, with another $750 million in preparation.
Tech company ASST announced a merger with Strive Asset Management and transformed into a Bitcoin reserve company, leading to a 194% increase in its stock price.
Led by Bitcoin evangelist Jack Mallers and backed by Tether, SoftBank, and Cantor Fitzgerald, a startup called Twenty One has emerged with the sole purpose of absorbing as much Bitcoin as possible.
Cantor Equity Partners, established since the end of April, has seen its stock price rise by over 300%.
The company listed 76 risks related to its business model, many of which are uncommon.
Nakamoto Inc, led by David Bailey, merged with a healthcare company to raise $700 million to acquire Bitcoin.
Now, macro analyst Noelle Acheson states that it is reasonable for companies to include Bitcoin in their asset reserves.
However, the warning of excessive speculation has been raised by companies that solely exist for the sake of holding Bitcoin.
The biggest risk all these companies face is macroeconomic risk, which was a huge factor in the Trump era.
Even Michael Saylor cannot escape the influence of geopolitics.
Tariffs, rising inflation, and the uncertain interest rate policies of the Federal Reserve are causing market unrest. The high yields on government bonds are particularly worrying, as it indicates weakening investor confidence in the US dollar as a safe-haven asset.
This is unfavorable for risk appetite assets like stocks and cryptocurrencies.
All of this means that Saylor’s billion-dollar Bitcoin buying behavior, which used to boost top cryptocurrencies, no longer has the same impact.
If companies like Strategy or Metaplanet continue to see their stock prices rise, more imitators may emerge. This could further weaken the influence of such Bitcoin buying behavior.
Acheson wrote, “We should temper our enthusiasm for this gimmick.”
“Innovative financial engineering always starts as a fascinating new tool that can bring profits, but as interest and risk saturation increase, it inevitably becomes fragile.”
Collaborative reprint from: PANews