Crypto Treasury Companies Are the New SPACs

Publicly traded companies like Trump Media & Technology Group and Tesla own billions of dollars worth of Bitcoin. (Dreamstime)

About the author: Elizabeth Menke is an investment banker and accounting professor. Her current research examines how crypto holdings affect valuation, transparency and capital formation.

Many public companies are attracting attention for the ballooning cryptocurrency holdings on their balance sheets. These firms were originally gaming companies, data center providers, or crypto miners. But they are now routinely being referred to as “crypto treasuries,” and they collectively hold more than $100 billion of Bitcoin and Ethereum.

At its core, a crypto treasury company is a firm dedicated to accumulating digital assets, regardless of whether that was the business’s original intent. In the past two years, almost all the largest traded crypto-holders have said amassing and holding crypto is now their primary strategic objective. Digital asset holdings sometimes represent more than 30% or even 50% of these firms’ total assets. Their performance in the market often moves closely with the value of their crypto holdings.

This can create powerful growth cycles—but also painful reversals. Like with the SPAC craze of the early 2020s, crypto treasuries are vulnerable to a boom and bust cycle that could be catastrophic for investors.

One way to understand the dynamics behind these crypto treasury companies is to look at the relationship between their market price and net asset value, using the reflexivity model. The investor-turned-political donor George Soros has written extensively about reflexivity. The basic principle is that perception influences fundamentals. That in turn changes perceptions, again shaping fundamentals, and so on—creating a self-reinforcing feedback loop.

An oft-cited example of the reflexivity model is that of a popular restaurant. Suppose it is considered the place to be. More people decide to eat there, making it difficult to secure a reservation. This makes the restaurant look even more popular. This perception is thus reinforced, and the reality becomes that more people will visit it.

Apply the reflexivity model to crypto treasury companies. Digital asset prices can raise NAV per share—sometimes disproportionately—which in turn may increase share prices of the underlying company. This would make capital raising easier for the company, enabling it to buy more crypto with the proceeds, increasing NAV further, and so on.

This enables investors to place long-term, high-conviction bets on the future appreciation of specific cryptocurrencies. The stock can trade at a significant premium to its NAV, meaning that the market thinks that the value of the stock is higher than the underlying crypto the company owns.

That process can reverse during periods of declining crypto prices. As crypto prices fall, NAV per share may decrease, creating downward pressure on the stock price. This, in turn, could make capital raising more difficult. In a liquidity squeeze, a company could be forced to sell crypto at lower prices, further exacerbating a fall in crypto assets and share price. Such a company could also increasingly turn to debt markets for financing. Taken to an extreme bankruptcy scenario, equity holders are potentially left with nothing.

Market structures with reflexive characteristics have appeared in other contexts, including mortgage-backed securities collapse in 2007-08 and, more recently, SPACs.

SPACs are shell companies created to raise money through an IPO, the proceeds of which are then used to acquire or merge with an existing private business. Market enthusiasm for SPACs in the early 2020s popped their share prices by as much as 30%. Rising valuations made it easier for them to attract targets. High-profile mergers validated the model, boosting their IPOs.

In 2022, the upward cycle reversed. Investor sentiment soured as companies that were listed through SPAC acquisitions missed projections, fueling doubt about underlying asset values. Rising interest rates increased discount rates, which lowered previous valuations that SPAC deals relied on. Investors sought safer returns elsewhere. As SPAC share prices declined, it became harder for them to attract new targets. Investors increased redemptions. Many companies that went through the SPAC process turned out not to be the significant investments they were modeled out to be. More than 20 de-SPAC’d companies out of several hundred filed bankruptcy in 2023 alone.

Crypto treasuries may be vulnerable to the same cycle. The number of crypto treasury firms is skyrocketing: More than 20 made its debut in public markets over the past 24 months, and many more are in the formation process. Many public crypto treasury companies have access to, or plan to access, public markets through the SPAC process.

The central thesis of these companies is straightforward: accumulate and hold large amounts of digital assets and watch their balance sheets grow when prices rise. Raise additional capital and invest in more crypto, increasing the value of the underlying and share price. The result is a feedback loop that can be as punishing in a bear market as it is exhilarating in a bull market.

Meanwhile, the legal framework, regulatory environment, and accounting rules surrounding digital assets are all in flux. The details of exactly how legislation will translate into regulations and accounting guidelines are still being worked out. Lawmakers, regulators, accounting professionals, investors, and others must work quickly and diligently to understand these companies and how they work.

This includes taking a closer look at these firms’ business models, management, the value of their underlying assets, capital structures, access to information, transparency, and more. The corporate treasury company might not be the novel archetype some say it is. The past can show us the risks, and the future may show us better tools. Blockchain’s built-in transparency could make real-time audit trails on on-chain disclosures a standard, not a novelty.

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