Even though it appeared to be leaking lately, 26-year-old retail investor Luke Cannon held his nose and invested in a recently hot segment of the cryptocurrency market.
Cannon bought shares of ALT5 Sigma Corp. (ALTS), a business that has cryptocurrencies listed on its balance sheet, in August. Cannon wasn’t a fan of the firm or the token; instead, he was interested in the discrepancy between the value of the cryptocurrency held by the company’s treasury and the price at which its shares were trading. He made the wager that the deficit would close.
Even though many of these companies had no prior connection to digital assets, ATL5 Sigma is one of more than 200 publicly traded companies that this year announced a crypto-treasury strategy, which means that their corporate balance-sheet strategies would be dependent on owning and purchasing cryptocurrency. Only a small number of businesses had done so prior to this year, and the practice had not yet become popular.
These businesses frequently offer debt and equity assets to raise money, which they subsequently use to purchase cryptocurrency. In the hopes that the shares would rise in value above the tokens they own, investors can purchase the stock as a simpler way to gain exposure to the cryptocurrency market.
However, over the last several weeks, shares of a number of these businesses have dropped to levels that are closer to or even lower than their net asset value. A fund’s net asset value is typically calculated by deducting its obligations from its assets. According to researchers at the crypto-research firm K33 Research, roughly 25% of crypto-treasury companies in the U.S. had market capitalizations below their net asset worth as of last week. Investors consider a company’s cryptocurrency holdings.
Investors like Cannon are betting that some of these equities are now a good deal because of the decline. But, if prices continue to decline, they might also be a trap that leaves latecomers carrying the bag.
The software firm Strategy Inc. (MSTR), formerly known as MicroStrategy, was the first of the wave of new crypto-treasury firms to enter the market. It started investing corporate funds in bitcoin (BTCUSD) in 2020 and is currently primarily seen as a leveraged bitcoin bet.
This year, the tendency intensified as some cryptocurrency corporations expanded their investments to lesser tokens like ether (ETHUSD), solana (SOLUSD), or dogecoin (DOGEUSD), or merged with already-existing public companies to implement the same approach. The Trump administration’s perceived more pro-crypto regulatory climate has been beneficial.
Additionally, Cannon’s ALT5 Sigma wager held a cryptocurrency known as World Liberty Financial, or WLFI, which is associated with the family of President Donald Trump. However, according to his calculations, the company’s discount to net asset value has expanded further from the 25% at which Cannon initially invested. When ALT5 unveiled its WLFI treasury strategy on August 11, its shares reached an intraday high of $9.76, but finished Friday’s trading at $3.10, down more than 68%.
But that wasn’t the only move Cannon made in the industry. Gains from two other businesses that used the approach of purchasing HYPE, a cryptocurrency connected to the decentralized cryptocurrency exchange Hyperliquid, have so far compensated for his loss in ALT5. Account statements seen by MarketWatch show that he has made a total profit on his investments in crypto-treasury companies. Hyperliquid Strategies Inc. (SONN) and Hyperion DeFi Inc. (HYPD) were both initially involved in biotechnology.
Cannon, whose primary source of income is cryptocurrency trading, stated that he limited his investments in crypto-treasury firms to a “very small part” of his portfolio of digital assets. “I think there are a lot of risks that you take when you’re investing in these,” he stated.
Additionally, Cannon cautioned that cryptocurrency businesses still function with little transparency, which he believes presents chances for investors.
According to a Wall Street Journal report, the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority have reportedly started looking into unusually high trading volumes and significant stock-price gains in the days leading up to some companies’ announcements of their adoption of crypto-treasury strategies.
According to an SEC representative, the agency does not comment on whether a potential inquiry is underway or not. Finra remained silent.
Plunge on?
Kindly MD Inc. (NAKA), a healthcare organization that implemented a bitcoin-treasury approach in May and is currently run by Trump crypto advisor David Bailey, is a noteworthy example of a crypto-treasury company that is currently trading at a discount to its net asset value. Shares of the corporation fell more than 96% from their peak in May. According to K33, the company’s enterprise value to net asset value ratio dropped from 75 in May to just 0.7 last week.
Kindly MD announced in May that it has secured $200 million through convertible notes and $51.5 million through a private share sale to build a bitcoin treasury.
Requests for comment on this article were not answered by representatives of KindlyMD or ALT5 Sigma.
Similar trends were also observed by a number of businesses who owned lesser cryptocurrencies, including Ether and Solana. According to statistics from StrategyTracker, even Strategy, the first and biggest crypto-treasury corporation, saw its premium over net asset value drop to roughly 1.4 on Friday from over 8 in 2020 when including all diluted shares.
Gus Galá, a senior equities research analyst at Monness, Crespi, Hardt & Co., predicts that the share prices of Strategy and numerous other crypto-treasury companies would likely continue to decline near or even below their net asset values.
Galá pointed out that “dilution fatigue” and the company’s difficulties in maintaining a consistent funding strategy between debt and equity are the reasons behind Strategy’s premium narrowing.
For starters, Strategy has obtained money on several occasions by issuing convertible notes, which are debt instruments that may be converted into equity, and new shares. Existing shareholders’ shareholding will decrease and become diluted when new shares are issued or convertible notes are turned into equity.
The majority of the balance now leans toward equity-like products, such as common stock and preferred stock, even though Strategy previously offered a combination of debt and equity, according to Galá.
Additionally, there is now more competition in the crypto-treasury market. “At a certain point, there are too many strategies pursuing the same promised land and a finite amount of investor demand for similar exposures,” Galá said in a phone interview with MarketWatch.
According to Galá, a lot of smaller crypto-treasury businesses use a similar approach and so deal with a similar issue. “We would further argue this is magnified for smaller issuers given subscale nature – they are likely to struggle more as it relates to raising capital, marketing the name [and] driving premiums to the multiple,” he stated.
According to Adrian Fritz, global head of research at crypto-asset manager 21Shares, the bottom line is that certain companies’ share prices might never come to parity and instead stay below their net asset value.
This is due to the fact that investors in these companies are exposed to business and management risks in addition to the risks associated with crypto assets. Fritz stated in an interview that the first operations of a number of these businesses were already failing.
According to Cosmo Jiang, general partner at cryptocurrency venture firm and asset manager Pantera, who has examined more than 150 such deals and invested in a number of them, “if you are buying some of these treasury companies below [net asset value], there probably isn’t as much downside anymore, but there may also not be a ton of upside either if you don’t think this treasury company is going to be the winner, or the one or two winners, in that category.”
Jiang anticipates that crypto-treasury firms will consolidate. “We predict that each of the major coins will have two or three prominent leaders. In a phone conversation, Jiang stated, “I wouldn’t be shocked if everyone else trades at a discount to their net asset value.”
Risks of liquidation
According to Rob Hadick, general partner at cryptocurrency venture firm Dragonfly, which invested in a public company that purchases and holds ENA, a cryptocurrency connected to stablecoin project Ethena, there may be more mergers and acquisitions in the space, where a company trading at a higher multiple may buy another company at a lower multiple.
“I’d be shocked if we didn’t see some M&A over the next 12 to 18 months,” said Hadick.
According to Hadick, a firm may be tempted to sell its cryptocurrency and repurchase its shares if its share price keeps falling in comparison to the value of its cryptocurrency holdings.
If cryptocurrency prices begin to decline, things might get really complicated. There may be more negative pressure on cryptocurrency values if some businesses are compelled to shut down and sell off their holdings, which may lead to a “liquidation spiral,” according to Fritz of 21Shares.
According to Fritz, it might even serve as the impetus for the next cryptocurrency bear market.
