Visionary Strategy or Risky Gamble?

Bitcoin has long been a controversial topic on Wall Street. And as a small but vocal number of publicly listed companies race to amass as much as they can, it’s dividing traditional financiers more than ever before.

MicroStrategy (now known as Strategy) was ahead of the curve when it began adding BTC to its balance sheet in 2020. Its aggressive purchases have mainly been funded by debt. With Bitcoin rallying by close to 700% over five years, the firm’s now sitting on billions of dollars in unrealized profits.

Once a struggling and modestly successful business intelligence firm, its rebirth as a Bitcoin treasury company has proven hugely lucrative so far, and inspired no shortage of copycats. While some see this as something to celebrate, it also creates deep cause for concern.

At the time of writing, Strategy holds more than 640,000 BTC — over 3% of this digital asset’s total supply of 21 million. It has paid an average price of $74,802 per coin, meaning Bitcoin’s value could fall by 30% and the company would still be in the black. That being said, this average price has shot up dramatically of late. Back in August 2024, it stood at just $36,821.

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Strategy’s determination to continue buying BTC as it sits near record highs means its margins are continually diminishing. As a result, when the next inevitable bear market hits, the company’s financial position may deteriorate quickly. Bitcoin is famed for painful peak-to-trough crashes of up to 80%. Would executive chairman Michael Saylor be able to keep the lights on if history ends up repeating itself?

Such a scenario played out in 2022, following on from FTX’s spectacular collapse. BTC contracted from $69,000 to $16,000 within 12 months. Strategy managed to persevere through this downturn without offloading any of its holdings — despite racking up $4 billion in paper losses. But given the company’s crypto stash has quadrupled since then, margin calls may be harder to ignore the next time around.

Forced selloffs could have ramifications in multiple ways. For one, it could send Bitcoin into a death spiral, with investors panic selling as they digest the news. A lack of liquidity compared with traditional markets means a large dump from Strategy could cause outsized declines in BTC’s value. And given its stock often serves as a proxy for Bitcoin’s price, shares would plummet too. To make matters worse, the company joined the tech-heavy Nasdaq 100 last December, meaning millions of savers who track this index through ETFs could see their portfolios take a battering. Everyday consumers with no interest in crypto could indirectly suffer if the company implodes.

Strategy isn’t alone here — indeed, many of its copycats are in a much less advantageous position. Japan’s Metaplanet, which was initially launched to provide hotel management, only started acquiring Bitcoin in April 2024. It’s paid an average of $106,000 per coin, leaving little breathing room if the crypto market’s bullish momentum runs out of steam.

Despite BTC’s limited supply and high demand — through a blend of treasury companies and a roaring trade in exchange-traded funds tracking its spot price — critics argue that Bitcoin’s value hasn’t risen in line with the huge jump in inflows to ETFs. Things could get messy if that doesn’t happen.

Saylor has positioned himself as a Bitcoin evangelist, someone on a mission to get as many businesses as possible to follow in Strategy’s footsteps. Yet his years of campaigning don’t seem to have moved the needle all that much, with large-cap stocks still preferring cash piles over crypto.

The entrepreneur pitched directly to Microsoft’s board of directors last December, and argued that diverting some of its vast dollar reserves would “add hundreds of dollars to the stock price.” But a staggering 99.45% of MSFT shareholders voted against the move.

That same month, Amazon also faced calls to embrace BTC. A group of investors claimed that the e-commerce giant’s dollar stockpile was being eroded because of inflation, meaning billions in shareholder value wasn’t being protected. The National Center for Public Policy Research even went on to claim the world’s fifth-largest company may have a “fiduciary duty” to start holding Bitcoin in reserve.

There are two radically different ways of looking at fiduciary duty when it comes to Bitcoin. Critics insist it’s incredibly reckless to expose shareholders to an erratic, immature asset that has nothing to do with the company’s main industry. Yet proponents would shoot back by saying it’s more irresponsible to neglect a commodity that’s appreciated by 77% in just 12 months, far outpacing gold, bonds, cash and the S&P 500.

Whatever happens, one side is going to have egg on their face at some point in the not-too-distant future. And if it’s Strategy’s “infinite money glitch” that turns out to be on the wrong side of this argument, contagion could spread well beyond the crypto market.

Read original story Bitcoin Treasury Companies: Visionary Strategy or Risky Gamble? by Connor Sephton at Cryptonews.com