What could possibly go wrong when more than a hundred public companies start hoarding bitcoin (BTC) on their balance sheets in hopes of boosting their stock prices? That is the question posed by London-based Standard Chartered Bank’s digital assets research team in a report published on Tuesday.
Five years ago, few in the Bitcoin community knew nor cared about Michael Saylor and his software analytics company Microstrategy (now renamed to just “Strategy” and trading on the Nasdaq under the ticker MSTR). Saylor and his team were trying to figure out what to do with $500 million in cash equivalents at a time when the pandemic had forced central banks around the world to drop interest rates to zero.
“We thought about buying gold…and eventually, we settled upon bitcoin…we liked it because we thought it was a better gold and it had big tech upside,” Saylor explained in a 2021 video interview. “So we opted to buy $250 million worth of bitcoin, and then we did a $250 million Dutch auction at the same time to give all of our shareholders the ability to exit their position if they didn’t like the bitcoin strategy.”
(Strategy Chairman Michael Saylor in an undated photo)
The decision single-handedly created a new trend that has since been adopted by more than a hundred public firms after MSTR became the best-performing publicly traded stock, bagging returns even higher than bitcoin itself.
“During the past five years, Microstrategy stock is up almost 2,900%,” said analyst Dominic Basulto in a recent article for The Motley Fool. “No other company even comes close. Nvidia for example, is up a little more than 1,400% during that same time period.”
But now, Standard Chartered is sounding the alarm on what appears to be a mad rush to stack balance sheets with BTC which inked its all-time high of just under $112,000 a couple of weeks ago. The bank warns that if bitcoin sheds 22% of its value relative to a firm’s average BTC purchase price or if bitcoin dips below $90,000, half of a subset of sixty one public companies currently employing a BTC treasury strategy will go “underwater,” in other words, the market value of company shares will be less than the value of bitcoin held.
“ Bitcoin price volatility in and of itself may drive the BTC price below the average purchase prices of many new treasuries; half of these would be underwater if prices fell below USD 90,000,” the report explains. “Based on the 2022 example of Core Scientific, we estimate that prices more than 22% below average purchase prices could lead to liquidations.”
Core Scientific (Nasdaq: CORZ) is the second largest bitcoin mining company in the world based on market capitalization. In 2021, the firm decided to employ a bitcoin treasury strategy, but with a slight twist. Instead of buying the cryptocurrency, the company would simply keep all of the BTC it mined while issuing debt to finance day-to-day operations.
The approach worked for a while, turning CORZ into a profitable bitcoin proxy. But in June 2022, BTC tanked, sending CORZ underwater, and forcing the firm to sell all of its bitcoin at a price 22% lower than the company’s cost of mining the cryptocurrency. The firm eventually filed for bankruptcy in December 2022.
(Core Scientific filed for bankruptcy in December 2022, but successfully emerged out of Chapter 11 in January 2024 / Core Scientific)
“Core Scientific sold 7,202 bitcoins at an average price of USD 23,000 in June 2022,” the report explains. “At that time, we calculate that Core Scientific was mining bitcoins at an average cash cost of USD 29,600.”
Standard Chartered estimates that today’s bitcoin treasury firms will be forced to liquidate their BTC holdings in the face of a similar price decline.
“For new entrants to the bitcoin treasury business, we see a similar pain point – if bitcoin prices were to fall 22% below average purchase prices, they may become forced sellers.”
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