Bitcoin treasury companies risk ignoring "lessons from history": Galaxy sounds the alarm | CoinDesk JAPAN

• Digital asset treasury company (DATCO) that holds assets such as Bitcoin currently holds over $100 billion in digital assets, and its business is established by the fact that its stock price consistently exceeds the actual value of its holdings (Net Asset Value: NAV).
• The Bitcoin treasury strategy has interesting similarities with the investment trust boom of the 1920s.

More publicly traded companies are using their own stocks to purchase digital assets. Galaxy Digital warns in a report that this situation brings to mind historical lessons that suggest a complex risk could spread throughout the financial system, dramatically leading to a collapse.

The growth model of digital asset treasury companies (DATCO) that hold over $100 billion (14.8 trillion yen) in digital assets relies on the fact that their stock prices consistently exceed the actual value of their holdings (Net Asset Value: NAV). The stock price premium over NAV is supported by the upward price trends of cryptocurrencies such as Bitcoin (BTC) and Ethereum (ETH), and should this premium collapse or turn into a discount, the model would begin to unravel.

The "FOMO (Fear of Missing Out)" regarding the Bitcoin treasury strategy has interesting similarities to the mutual fund boom seen in the 1920s. At that time, new trusts were launched at the pace of one a day, and Goldman Sachs Trading Corporation became, in a way, a presence similar to the strategies of that era.

The business model of accumulating digital assets (mainly Bitcoin) was established by Michael Saylor, who started purchasing Bitcoin in 2020, leading Strategy (then MicroStrategy). Other examples include Metaplanet and SharpLink Gaming.

Galaxy stated that while the impact on the entire ecosystem may be small if one or two companies independently adopt this strategy, currently about 10 companies are entering this strategy each week. These DATCOs are strongly correlated with each other and the underlying cryptocurrency market, and if redemptions or share buybacks spread, it could trigger a large-scale rollback.

"So far, the strategy is clear, and capital is flowing in. However, this is part of the risk. If hundreds of companies adopt the same one-way trade (raising capital through stocks → purchasing cryptocurrencies → repeating that), it will become structurally fragile. If investor sentiment, cryptocurrency prices, or the liquidity of capital markets decline, the rest will likely begin to collapse." (Report)

The rollback of transactions by DATCO could pose significant downward pressure on the prices of digital assets themselves. Just as capital inflows from treasury companies have functioned as a "sustained support" for Bitcoin, outflows due to redemptions could have the opposite effect. At the very least, Galaxy pointed out that purchases would likely cease.

The trend of DATCO may not have reached its peak yet, but the stock prices of some companies are already approaching a discount to NAV. In such cases, companies may use their digital assets and operating cash flow to buy back their own shares in an attempt to eliminate the discount. Bitmine has already obtained board approval to conduct up to $1 billion in share buybacks when management deems it appropriate.

Galaxy predicts that industry restructuring is one of the results of the rollback. Major players like Strategy, which are still trading at a premium, have capital strength and may start acquiring smaller DATCOs that are trading at NAV discounts. Such transactions mean that the acquirer can obtain Bitcoin at a bargain. However, this is only true as long as the acquirer maintains the premium.

The report states, "As DATCO expands, its influence on the digital asset market will also grow. If a rollback occurs, the biggest tailwind that has supported cryptocurrencies in this cycle, namely, 'the fact that companies are routinely purchasing digital assets,' is likely to weaken."

"The rollback of DATCO transactions will lead the stock market to become cautious about all forms of digital asset investments, slowing the influx of funds into cryptocurrency ETFs and ultimately putting downward pressure on cryptocurrency prices."

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