MicroStrategy has attracted a wave of imitators, but what are the leverage risks behind the high premiums?

Written by: Weilin, PANews

Crypto treasuries have become a "trendy strategy" for publicly traded companies. According to incomplete statistics, at least 124 listed companies have incorporated Bitcoin into their financial strategies, using it as a "weapon" on their balance sheets to attract widespread attention from the crypto market. At the same time, treasury strategies involving Ethereum, Solana, and XRP altcoins have also been adopted by some listed companies.

Despite this, several industry insiders, including Nic Carter from Castle Island Ventures, have recently expressed potential concerns: these listed investment tools are likened to the Grayscale GBTC of yesteryear—a Grayscale Bitcoin Trust that traded at a long-term premium, which eventually turned into a discount and became the trigger for the collapse of several institutions.

Geoff Kendrick, head of digital asset research at Standard Chartered Bank, also issued a warning that if Bitcoin's price falls below the average purchase price of these crypto treasury strategy companies by 22%, it could trigger forced sell-offs. If Bitcoin drops below $90,000, about half of the companies' holdings may face the risk of losses.

MicroStrategy has attracted a wave of imitators, but what are the leverage risks behind the high premiums?

As of June 4, MicroStrategy holds approximately 580,955 Bitcoins, valued at about $61.05 billion, while its market capitalization is as high as $107.49 billion, with a premium close to 1.76 times.

In addition to MicroStrategy, some of the latest companies adopting Bitcoin treasury strategies also have impressive backgrounds. Twenty One, supported by SoftBank and Tether, went public through a SPAC from Cantor Fitzgerald, raising $685 million entirely for purchasing Bitcoin. Nakamoto Corp, founded by Bitcoin Magazine CEO David Bailey, merged with a listed medical company, raising $710 million to buy Bitcoin. Trump Media & Technology Group has announced plans to raise $2.44 billion to create a Bitcoin treasury.

Recently, PANews noted that MicroStrategy's Bitcoin treasury strategy has attracted a large number of imitators, including SharpLink, which plans to buy Ethereum, Upexi, which is accumulating SOL, and VivoPower, which is accumulating XRP.

However, several crypto industry insiders pointed out that the operational trajectories of these companies are structurally very similar to the arbitrage model of GBTC from back in the day. Once a bear market arrives, the risks could be concentrated and released, forming a "stampede effect," where collective panic selling by investors leads to a chain reaction of further price declines.

Lessons from Grayscale GBTC: Leverage Collapse and Institutional Failures

Looking back at history, the Grayscale Bitcoin Trust (GBTC) was once a shining star from 2020 to 2021, with premiums reaching as high as 120%. However, entering 2021, GBTC quickly turned to a negative premium, ultimately becoming a trigger for the collapse of institutions like Three Arrows Capital (3AC), BlockFi, and Voyager.

The mechanism of GBTC can be described as a "one-way trade" where investors must lock in their GBTC purchases for six months before selling them on the secondary market, with no option to redeem for Bitcoin. Due to the high entry barriers for early Bitcoin investments and heavy tax burdens on returns, GBTC became a legitimate channel for accredited investors (through 401(k) plans and other means) to enter the crypto market, which helped maintain its long-term premium in the secondary market.

However, this premium gave rise to a large-scale "leverage arbitrage game": investment institutions borrowed BTC at ultra-low costs, deposited it into Grayscale to purchase GBTC, and after holding it for six months, sold it on the premium secondary market for stable returns.

According to public documents, BlockFi and 3AC's combined GBTC holdings once accounted for 11% of the circulating shares. BlockFi converted BTC deposited by clients into GBTC and used it as collateral for loans. 3AC even utilized up to $650 million in unsecured loans to increase their GBTC holdings and pledged GBTC to DCG's lending platform Genesis to gain liquidity, enabling multiple rounds of leverage.

In a bull market, this operation worked well. However, when Canada launched a Bitcoin ETF in March 2021, demand for GBTC plummeted, and the premium turned negative, causing the flywheel structure to collapse instantly.

BlockFi and 3AC began to incur continuous losses in a negative premium environment—BlockFi was forced to sell off GBTC on a large scale but still accumulated losses exceeding $285 million in 2020 and 2021, with industry insiders estimating losses on GBTC close to $700 million. 3AC was liquidated, and Genesis ultimately announced in June 2022 that it had "disposed of the pledged assets of a large trading counterparty." Although not named, the market widely believed that this counterparty was 3AC.

This "explosion" that began with a premium, thrived on leverage, and was destroyed by a liquidity collapse became the prologue to the systemic crisis in the crypto industry in 2022.

Will the crypto treasury flywheel of publicly traded companies lead to the next systemic industry crisis?

Following MicroStrategy, more and more companies are forming their own "Bitcoin treasury flywheel," with the main logic being: rising stock prices → additional financing → purchasing BTC → boosting market confidence → stock prices continue to rise. This treasury flywheel mechanism may accelerate in the future as institutions gradually accept cryptocurrency ETFs and crypto holdings as collateral for loans.

On June 4, it was reported that JPMorgan plans to allow its trading and wealth management clients to use some crypto-linked assets as collateral for loans. According to insiders, the company will begin providing financing secured by cryptocurrency ETFs in the coming weeks, starting with BlackRock's iShares Bitcoin Trust. Insiders also stated that in certain cases, JPMorgan will begin to consider clients' cryptocurrency holdings when assessing their overall net worth and liquid assets. This means that cryptocurrencies will be treated similarly to stocks, cars, or artworks when calculating clients' available asset collateral limits.

However, some bears argue that the treasury flywheel model may seem self-consistent in a bull market, but in essence, it directly links traditional financial instruments (such as convertible bonds, corporate bonds, and ATM issuances) to crypto asset prices. Once the market turns bearish, the chain could potentially break.

If cryptocurrency prices plummet, the financial assets of these companies will quickly shrink, affecting their valuations. Investor confidence collapses, stock prices fall, limiting the companies' financing capabilities. If there is debt or margin call pressure, companies will be forced to liquidate BTC to cope. A large amount of BTC sell pressure could be released, forming a "sell wall," further driving down prices.

More seriously, when these companies' stocks are accepted as collateral by lending institutions or centralized exchanges, their volatility will further transmit to traditional finance or DeFi systems, amplifying the risk chain. This is precisely the script that Grayscale GBTC experienced.

A few weeks ago, renowned short-seller Jim Chanos announced that he was shorting MicroStrategy and going long on Bitcoin, based on his negative view of its leverage. Although MicroStrategy's stock has risen 3,500% over the past five years, Chanos believes its valuation has significantly deviated from its fundamentals.

Some crypto treasury advisors point out that the current trend of "equity tokenization" may exacerbate risks, especially if these tokenized stocks are also accepted as collateral by centralized or DeFi protocols, which could trigger uncontrollable chain reactions. However, some market analysts believe that it is still in the early stages, as most trading institutions have yet to accept Bitcoin ETFs as margin collateral—even issuers like BlackRock or Fidelity.

On June 4, Standard Chartered Bank's Geoff Kendrick warned that 61 listed companies collectively hold 673,800 Bitcoins, accounting for 3.2% of the total supply. If Bitcoin's price falls below the average purchase price of these companies by 22%, it could trigger forced sell-offs. Referring to the case of Core Scientific, which sold 7,202 Bitcoins when the price fell below its cost by 22%, if Bitcoin drops below $90,000, about half of the companies' holdings may face the risk of losses.

What is the actual risk of MicroStrategy's explosion? Recently, the Web3 101 podcast "Bitcoin Whale MicroStrategy and Its Capital Game" sparked market interest. The discussion mentioned that although MicroStrategy has been referred to as "leverage Bitcoin" in recent years, its capital structure is not a traditional high-risk leverage model, but rather a highly controllable "quasi-ETF + leverage flywheel" system. The company raises funds to purchase Bitcoin through issuing convertible bonds, perpetual preferred shares, and at-the-market (ATM) offerings, creating a volatility logic that continuously attracts market attention. More importantly, the maturity dates of these debt instruments are mostly concentrated in 2028 and beyond, meaning there is almost no short-term repayment pressure during cyclical pullbacks.

The core of this model is not merely hoarding coins, but rather forming a self-reinforcing flywheel mechanism in the capital market through dynamically adjusting financing methods, with a strategy of "leveraging at low premiums and selling stocks at high premiums." Michael Saylor positions MicroStrategy as a financial proxy for Bitcoin volatility, allowing institutional investors who cannot directly hold crypto assets to hold a Bitcoin asset with option attributes in the form of traditional stocks "without barriers." Because of this, MicroStrategy has not only built strong financing and anti-fragility capabilities but has also become a "long-term stable variable" in the volatility structure of the Bitcoin market.

Currently, the crypto treasury strategies of publicly traded companies are continuously becoming the focus of attention in the crypto market, also sparking debates about their structural risks. Although MicroStrategy has constructed a relatively robust financial model through flexible financing methods and periodic adjustments, whether the overall industry can maintain stability amid market volatility remains to be seen. Whether this wave of "crypto treasury frenzy" will replicate the risk path of GBTC is a question full of uncertainties and unresolved issues.

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