In the article from the day before yesterday, I shared the history of how Evergrande's debt risks ultimately led to the company's collapse. Some readers associated this history with the potential similar risks that some listed cryptocurrency treasury companies may currently face.

A couple of days ago, Vitalik also mentioned this risk in a comment on his Twitter. This risk is indeed very worth paying attention to; even though it is not an explicit risk at the moment, I still worry that these companies' increasingly aggressive operations might trigger this risk in the future.

The book "Classic Cases of Value Investment: China Evergrande" was published at that time to prove the author's firm optimism about Evergrande.

To demonstrate this "firmness," the author detailed the various investment banks and institutions' assessments of Evergrande's debt risks at different stages, using this to substantiate his continued optimism.

Today, when I look at this book, I am not focused on its conclusions, but rather on the series of risks listed within it—these risks are actually more valuable historical clues.

All these risks can be summarized as follows:

Evergrande's approach was to finance through listing, issuing new shares, issuing perpetual bonds, and mortgaging assets, in order to prolong the payment cycle of debts and to delay payments through multiple installments.

Why do this? To pursue scale. What was the result? It led to a deep entrapment in a debt trap.

To mask this situation, Evergrande aggressively borrowed money to repurchase stocks and to boost stock prices, in an effort to stabilize investor confidence; on the other hand, it aggressively diversified and created a strong company image to showcase its strength.

This series of actions seemed to repeatedly "squeeze" short sellers and "counterattack" pessimists, mesmerizing many domestic investment banks, brokerages, and investors.

In contrast, well-known overseas investment banks (like Goldman Sachs) remained unusually clear-headed, not buying into these practices, and consistently focused on the deteriorating debt and cash flow.

Looking back at this history, it is actually quite simple to pierce through the facade of such enterprises and get to their core:

It is about using common sense to judge.

What common sense?

It is to ask whether each action they take is weakening their core business, increasing debt, reducing free cash flow, tightening operational conditions, and making it harder for the company to cope with external changes.

Any other superficial indicators (soaring stock prices, grand advertising campaigns, ubiquitous celebrity endorsements…) are all temporary and do not play a decisive role.

We can also use this set of standards to assess the situation of those listed cryptocurrency treasury companies.

The current approach of these companies is to finance the purchase of cryptocurrency assets. They primarily use three methods for financing: issuing stocks, issuing convertible bonds, or directly issuing bonds.

Among these three financing methods, issuing stocks carries relatively controllable risks, while directly borrowing carries significant risks.

Because once a company's debt cannot be covered, they will inevitably be forced to sell their held cryptocurrency assets to repay debts. And once this selling occurs, it could trigger a chain reaction in the cryptocurrency market.

Therefore, to assess whether these companies are at risk, I look at whether their free cash flow can support their operations and cover their debt risks.

For companies that purchase Bitcoin, since Bitcoin does not generate interest, this part of the business does not produce cash flow. For companies that purchase Ethereum, staking Ethereum currently provides about 3% to 4% in staking rewards, so the held Ethereum can generate some cash flow through staking.

Comparing these two types of companies, it seems that the company holding Ethereum has cash flow and lower risk. However, I actually think its hidden risks may be greater.

This is because the price of Ethereum can have a leverage effect on staking rewards: when Ethereum rises, holders enjoy fixed staking rewards while also benefiting from the appreciation of the "native currency."

This effect can easily trigger greed and complacency in operators, and if the operators are not prudent and are overly aggressive, it becomes very dangerous.

MicroStrategy currently has some debt, which indeed poses certain risks. However, among the current Ethereum treasury companies, there is one that warrants more caution. That company has been publicly declaring its goal to "hold 5% of Ethereum."

Upon seeing this goal, I recalled a saying by Duan Yongping (the essence being):

For companies that set goals like "becoming a Fortune 500 company" or "achieving revenue of XXX," he would avoid them.

Because a company's goal should not be a number, but rather serving customers and the end consumers. "Becoming a Fortune 500 company" or "achieving revenue of XXX" should naturally occur in the process of serving customers and consumers. If it can be done, then do it; if it cannot, that’s fine. Any company that does not aim to serve customers and consumers is, in his view, not a principled company.

I strongly agree with this viewpoint.

Regarding that Ethereum treasury company, I cannot currently determine whether its goal counts as serving customers, but I always feel that the goal sounds quite awkward.

For that goal, this company has been very active recently. For example, its next move is to issue stocks, with the amount it plans to raise exceeding several times its current market value.

If it were merely issuing stocks to finance the purchase of Ethereum, the risk would still be relatively controllable. However, I am very concerned that under the motivation of such an "exciting" slogan, it might become overly enthusiastic and further pursue scale, thus heading down the path of debt and continuously increasing leverage.

And when it is crushed by debt and forced to sell off its assets to repay, it would be a disaster for the entire cryptocurrency ecosystem.

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