Listed companies follow the trend of micro-strategy and are questioned. Financing to buy Bitcoin may become a high-risk move

By Pedro Solimano , DL News

Compiled by: Felix, PANews

It all started with MicroStrategy. These days, it seems like every week a new public company announces it’s hoarding Bitcoin or another cryptocurrency.

But here’s the problem: investors are willing to give these companies a huge valuation premium simply because they’re buying Bitcoin.

What happens if their stock doesn’t go up as a result?

Take Japan's Metaplanet, which has copied Michael Saylor's bitcoin frenzy at MicroStrategy.

10xResearch said its share price was calculated based on Bitcoin’s trading price of $596,154.

That’s five times bitcoin’s current price of around $106,000.

Before the company went all-in on Bitcoin, Metaplanet was a budget hotel operator turned blockchain infrastructure provider.

Those operations have been put on hold as the company rebrands itself as a bitcoin reserve company.

“Is it time to short? The signals we are seeing now are very similar to past inflection points,” 10xResearch wrote in a May 27 report.

One of many companies

In fact, Metaplanet is one of many companies following in the footsteps of Saylro, now known as Strategy.

On May 27, Trump Media & Technology Group (TMT) said it plans to raise $2.5 billion to purchase Bitcoin.

This week, GameStop, the video game retailer that gained fame for becoming a “meme stock,” purchased 4,710 bitcoins, worth about $513 million at current prices.

Shares of both companies fell.

These new Bitcoin reserve companies have adopted a relatively simple strategy: raise funds by issuing convertible bonds and then use the money to buy large amounts of Bitcoin.

Why are there so many Saylor imitators all of a sudden? In short, it works out great for the company.

Strategy's stock price has risen 10 times since it began its Bitcoin purchase plan in August 2020. The company holds more than 576,000 Bitcoins, worth about $63 billion.

Proceed with caution

But skeptics say there are good reasons to be cautious.

First, the idea that hoarding Bitcoin or any other cryptocurrency on a company’s balance sheet is a sure win is sheer nonsense.

Noelle Acheson, a well-known macro analyst, said that those who follow Saylor's lead are convinced that this strategy is risk-free, which is worrying. "Especially those who entered the market when the price of Bitcoin was high."

When Strategy first bought Bitcoin, it was trading at around $11,000, only about one-tenth of its current price of $107,000.

As this strategy grows in popularity, analysts and sophisticated investors may focus on one particular metric to cut through the noise — net asset value (NAV).

NAV refers to the book value of assets held by a company.

When there is a mismatch in NAV, it means that the company's stock price is inconsistent with the actual value of its assets.

Take Metaplanet as an example.

The company holds 7,800 bitcoins worth about $830 million. However, the company’s market cap is $5.6 billion, meaning one bitcoin is worth $596,154.

In other words, investors are paying five times the price of Bitcoin itself for indirect exposure to it.

Analysts at 10xResearch said that "a dangerous NAV distortion is secretly forming."

"We should temper our enthusiasm for this kind of gimmick." - Noelle Acheson

That means Metaplanet's stock price, which has risen 233% this month, could reverse course at any time.

But don't forget Strategy. Its frequent premiums may be good for shareholders, but they are also worrying.

In 2020, investors valued Strategy shares at more than six times the value of its bitcoin, and more than three times its value last year, according to Strategy Tracker data.

Hedge fund experts like legendary short seller Jim Chanos have been using the NAV mismatch phenomenon to short Strategy and buy more Bitcoin.

Insider selling

Meanwhile, cryptocurrency reserve strategies are gaining significant momentum.

Just this week, Trump Media & Technology Group (TMT), the parent company of Trump's social media company, planned to raise $2.5 billion to invest in Bitcoin. But its stock price plummeted 11% after the plan was disclosed.

Why? Some people might be concerned that insiders might sell off their shares.

The company said possible future stock sales would include shares from some insiders, such as a trust controlled by his son Donald Trump Jr., which owns 57% of the company.

Meanwhile, many of the companies that have followed Saylor’s lead (some of which aren’t even cryptocurrency companies) have their valuations based entirely on the amount of Bitcoin they hold.

Semler Scientific, which makes medical equipment, saw its shares surge 30% after it bought 581 bitcoins.

Strive Asset Management, founded by former presidential candidate Vivek Ramaswamy, said it has raised $750 million to buy Bitcoin and has another $750 million in the pipeline.

Technology company ASST announced a merger with Strive Asset Management to transform into a Bitcoin reserve company, and its stock price immediately rose 194%.

Twenty One, a new startup led by Bitcoin evangelist Jack Mallers and backed by Tether, SoftBank, and Cantor Fitzgerald, has emerged with the sole purpose of absorbing as much Bitcoin as possible.

The holding company, Cantor Equity Partners, has seen its shares rise more than 300% since it was formed in late April.

The company listed 76 risks associated with 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 says it makes sense for companies to include Bitcoin in their asset reserves.

But the large number of businesses that use Bitcoin as their sole reason for existence does raise some warnings of overhype.

The biggest risk facing all of these businesses is macroeconomic risk. And in the Trump era, that's a huge factor.

Even Michael Saylor is not immune to geopolitics.

Tariffs, rising inflation and the Federal Reserve’s uncertain interest rate policy have kept markets on edge. Treasury yields remain elevated, which is particularly worrisome because it means investors may be losing confidence in the dollar as a safe-haven asset.

This is bad news for risk-on assets like stocks and cryptocurrencies.

All of this means that Saylor’s multibillion-dollar Bitcoin purchases, which used to boost the top cryptocurrency, no longer have that effect.

If the share prices of companies like Strategy or Metaplanet continue to rise, other copycats may emerge. This could further weaken the impact of such purchases.

“We should curb our enthusiasm for such gimmicks,” Acheson wrote.

“Innovative financial engineering always appears initially as a fascinating new tool that can generate returns, but inevitably becomes fragile as interest and risk saturate.”

Related reading: Viewpoint: Raising funds for listed companies to buy Bitcoin is a "toxic" leverage