Shares in a number of large listed companies pursuing bitcoin treasury strategies have turned south in recent weeks, signalling investor concerns about not just a crowded market and frothy valuations, but also perhaps doubts creeping in about the viability of this approach.

The chief culprit/actor in this drama is Strategy, formerly a pretty staid software company that has turned into the world’s largest owner of bitcoins. The company’s stock has tumbled about 30% in the last two months, weighing on the sector. 

It marks a swift turnaround from a summer marked by companies rushing to raise debt and or equity to purchase bitcoin and other cryptocurrencies, mirroring the strategy pioneered by Michael Saylor’s Strategy, formerly known as MicroStrategy. 

A Strategy for the ages?

To give Saylor credit, MSTR stock has risen about 22x in the last 5 years, whilst Bitcoin has only gone up 10x.

But divergence is opening up – Bitcoin is up 42% in the last 6 months, whilst MSTR has only risen 25%, holding onto some gains after a precipitous fall since the middle of July. Of course it depends when you measure performance from – chart crimes are easily committed to show correlation or lack thereof based on a random starting date.

Nonetheless, the recent declines have been significant. And it’s not just MSTR. Metaplanet, a Japanese hotel company that has morphed itself into Asia’s biggest bitcoin owner, has tumbled 65% since a June peak. 

Why the fall from grace?

It’s all about valuations, of course. In the case of crypto hoarders, it’s pretty simple arithmetic.

Companies owning bitcoins and other cryptocurrencies often trade well above the value of the tokens due to the use of debt to finance the strategy, which favours equity owners, whilst purely speculative momentum is another key factor. In fact, without a premium the strategy doesn’t really work. 

That’s all fine on the way up as investors enjoy a virtuous cycle of raising fresh debt or equity to buy more tokens that keep going up in value. But when the stock price starts to fall, it becomes harder to raise fresh capital.

Things are looking tricky for MSTR. In July, the company said it wouldn’t issue its MSTR common stock at market-to-net asset value (mNAV) lower than 2.5x, except when financing dividend payments for its preferred stock (STRF, STRK, STRC, STRD) and paying interest on debt. This guidance didn’t last more than a fortnight, however. MSTR said it would issue common stock at below 2.5x, which didn’t go down too well with investors, even if it was entirely sensible since as the stock has fallen in value its mNAV is down to about 1.3x.

The problem is simple – it pays juicy dividends on the preferred stock, which were issued to purchase bitcoins, and its legacy software business does not generate enough free cash to cover it. Therefore, it must issue more stock, whether common or preferred.
The reason stock prices are way down is simple enough - speculative buying drove up the mNAV of companies way beyond what was sustainable and we are seeing a return to the mean. Whether that means the party is over remains to be seen - a lot will depend on what the price if bitcoin does next.

What is a crypto treasury strategy?

What’s the angle?

Recently we looked at whether you could own cryptocurrency in your ISA – indirectly was the answer, via companies like those discussed above. Many UK investors seeking some form of regulated exposure to the world of cryptocurrencies have landed on these firms and others like them.

However, October 8th sees major change in the UK crypto investor landscape - a number of crypto ETNs will become available to retail investors in the UK. 

Stay tuned for more updates as we prepare to make these available to clients.

In the meantime I've put together a Crypto Treasury Stocks screener here - showing YTD returns have been strong despite some wobbles of late.