There’s a quiet hum in the crypto markets, a steady drumbeat of public companies gathering digital assets for their treasuries. It sounds like a smart play, doesn’t it? Use company stock to buy Bitcoin, then watch that Bitcoin grow. But a recent report from Galaxy Digital suggests we might want to tap the brakes on that enthusiasm. They see a familiar pattern, one that history has taught us can unravel with surprising speed.
- The report from Galaxy Digital warns of potential risks associated with Digital Asset Treasury Companies (DATCOs). These companies are using their stock to purchase Bitcoin.
- The growth strategy of these firms hinges on their stock trading at a premium to the value of their digital assets. If this premium disappears, the model could fail.
- The report draws parallels to the 1920s investment trusts, highlighting the potential for a “reflexive loop” driven by speculation.
These firms, often called Digital Asset Treasury Companies, or DATCOs, now hold over $100 billion in digital assets. That’s a lot of crypto. Their entire growth strategy hinges on a simple idea: their stock trades at a premium to the value of the digital assets they hold. And, of course, Bitcoin and Ethereum prices just keep climbing. What happens if that premium vanishes, or worse, turns into a discount? The model, as Galaxy points out, begins to crack.
Echoes from the Past
The idea of using a public company’s stock to buy assets isn’t new. Galaxy draws a fascinating parallel to the 1920s. Back then, investment trusts popped up everywhere, sometimes one a day. Goldman Sachs Trading Corporation was a big name, much like MicroStrategy is today.
That era saw a “reflexive loop,” a term for when rising prices encourage more buying, which pushes prices even higher. It’s a cycle that feeds itself, driven by speculation and the fear of missing out. Does that sound familiar in the crypto space? It should.
Michael Saylor’s MicroStrategy (MSTR) started buying Bitcoin in 2020. They set the standard for this kind of corporate treasury strategy. Now, other companies like Metaplanet (3350.T) and SharpLink Gaming (SBET) have joined the ranks. It’s a growing crowd.
If only a few companies went this route, it might not cause much of a stir. But Galaxy notes that ten or more firms are jumping into this trade every week. These DATCOs tend to move together. They are tied to each other, and they are tied to the crypto markets they hold. This correlation creates a shared vulnerability.
Imagine a domino effect. If many of these firms face pressure and start selling their crypto, or buying back their own stock, that could trigger a larger sell-off. Galaxy’s report puts it plainly: “By now, the playbook is clear and capital is pouring in. But this is part of the risk.”
They go on to explain the fragility. “When hundreds of firms adopt the same one-directional trade (raise equity, buy crypto, repeat), it can become structurally fragile.” It’s a house of cards, built on a few key assumptions. What are those assumptions?
First, investor sentiment needs to stay positive. Second, crypto prices need to keep rising. Third, capital markets need to remain liquid, meaning money flows easily. If any of these three falters, the whole structure could begin to unravel. It’s a simple, yet stark, warning.
The Unwind Scenario
What happens if this “unwind” begins? The impact could be significant. For a long time, the buying from these treasury companies has acted like a “persistent bid” for Bitcoin. Think of it as a constant buyer in the market, always there to scoop up coins. If that buying stops, or worse, turns into selling, the effect could be the opposite.
Digital asset prices could face real downward pressure. At the very least, the steady accumulation of crypto by these firms would halt. We’ve seen how quickly sentiment can shift in crypto. A major change in corporate buying habits would certainly be felt.
We might not be at the peak of this trend yet. However, some DATCOs are already seeing their stock prices flirt with trading below their net asset value (NAV). This means their stock is worth less than the crypto they hold. It’s a strange situation, isn’t it?
When this happens, companies might try to fix it by buying back their own stock. They could use their crypto reserves or even operational cash to do this. Bitmine, for example, has already gotten approval to buy back up to $1 billion of its shares. This is a move to arbitrage the discount, to make money from the difference between their stock price and their crypto holdings.
Galaxy predicts that an unwind could lead to consolidation in the sector. Larger players, like MicroStrategy, which still trades at a premium, might start buying up smaller DATCOs that are trading at a discount to their NAV. This would allow the bigger companies to acquire Bitcoin at a cheaper rate, using their own highly valued stock. But this strategy only works as long as the acquirer keeps its premium.
The stakes are high. Galaxy states, “As these firms continue to scale, their influence over digital asset markets grows accordingly.” They’ve become a major force. An unwind would remove what Galaxy calls “the strongest tailwind crypto has had this cycle.” That tailwind is the idea of digital assets becoming a normal part of corporate balance sheets.
An unwinding of this trade could also cool the public equity markets’ interest in crypto. This could slow down money flowing into crypto exchange-traded funds (ETFs). And if less money flows into ETFs, that would likely put downward pressure on the prices of the underlying cryptocurrencies. It’s a chain reaction, one that could affect more than just the DATCOs themselves.
So, while the corporate embrace of crypto has been a powerful story, it’s worth remembering that every story has its twists. The lessons from history often whisper warnings, if we only take the time to listen.