Author: Cheshire Capital
Translation: TechFlow
I would like to speculate on the possible development paths for Bitcoin Treasury Companies (BTC Treasury Companies, or TCs) over the next 6 to 12 months:
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Initial Stage: 10 different treasury companies hold bitcoin and trade at different mNAV (market value to net asset value multiples), ranging from 1.0x to 5.0x, with the bitcoin price at $120,000. The quality of these companies varies (quality is defined by the size of the treasury and the conviction and marketing ability of the leadership).
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Low-Quality Companies Begin to Sell: Some low-quality bitcoin treasury companies start to trade below 1.0x mNAV. For companies whose leaders are not staunch bitcoin believers (like Michael Saylor), the logical choice is to sell bitcoin to buy back shares, which has a short-term accretive effect (the proportion of shares reduced exceeds the decline in net assets). These companies are able to sell some bitcoin at the $120,000 price.
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Bitcoin Price Drops to $115,000 (Now Fluctuating Around $90,000): Due to the selling in step 2, the bitcoin price starts to drop to $115,000. Some other bitcoin treasury companies, including those that previously conducted share buybacks, begin to trade at even lower mNAVs due to the negative correlation between bitcoin price and mNAV. Another 4 to 5 companies choose to sell bitcoin to buy back shares, able to sell at $115,000.
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Market Confidence Shaken: The market realizes that 8 or 9 out of these 10 bitcoin treasury companies are actually short-term capital, more focused on near-term shareholder interests than long-term bitcoin accumulation. The market starts to anticipate that these companies may need to sell 30%-50% of their bitcoin reserves (after all, even MicroStrategy dropped to about 0.5x mNAV at the 2022 lows). Bitcoin price quickly adjusts to $100,000, and most bitcoin treasury companies' mNAVs fall below 1.0x.
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Pressure Increases on Medium-Quality Companies: Medium-quality crypto treasury companies that previously hesitated to sell bitcoin come under pressure from the market and shareholders, and begin to take action to maintain their mNAV. Selling accelerates, with about $500 million to $1 billion worth of bitcoin sell orders entering the market each week. Even high-quality companies (such as MicroStrategy, 3350, XXI) find it difficult to support the price with buy orders, and bitcoin drops to $90,000.
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Total Collapse: The entire bitcoin treasury company system, including high-quality companies, now trades below 1.0x mNAV. MicroStrategy preferred stock price drops to 70 cents on the dollar, and there are market rumors that Saylor may suspend dividends. Some companies once thought to be steadfast bitcoin holders (such as 3350, XXI) begin to sell bitcoin to cover operating costs, and bitcoin price plunges to $80,000.
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Low-Quality Companies Exit, Selling Intensifies: At this point, most low-quality bitcoin treasury companies have almost completely emptied their bitcoin reserves, and early "catching the falling knife" behavior appears in the market. However, the danger of this reflexive cycle is that as the scale and speed of selling accelerate, even medium- and high-quality companies begin to capitulate. The largest bitcoin holdings start to hit the market, with weekly sales reaching $1.5 billion to $3 billion. Note that non-MicroStrategy BTC treasury companies collectively hold about 350,000 BTC, worth about $40 billion at current prices. If MicroStrategy is forced to participate, this selling could last for quite some time and be even more brutal. Bitcoin price eventually drops to $70,000.
If the above scenario occurs, the following results may ensue:
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Low-Quality Bitcoin Treasury Companies May Actually Profit the Most: Because they are "forced" to sell bitcoin the earliest. In reality, selling bitcoin means these companies have stopped playing the iterative game of being a treasury company and have shifted to a one-off game of maximizing the next round's value. However, even a single sale will destroy their reputation as a "diamond hands" treasury company and significantly reduce future capital inflows.
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Bitcoin Treasury Companies That Hold Firmly May Ultimately Prevail: If you believe bitcoin is still an asset with a 30-40% annual compound growth rate (I do!), those companies that hold on through market turmoil will eventually come out fine. Currently, I think only Michael Saylor will do everything possible to hold onto his bitcoin, but there may be other candidates (such as 3350, NAKA). Nevertheless, until the large-scale selling is over, no treasury company is worth long-term optimism.
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Mid-Tier Players May Suffer the Most Losses: These companies are usually neither "sharks" in the market nor have strong enough conviction, but at the same time are not true bitcoin believers (such as MARA, RIOT, SMLR). In the above scenario, they may sell bitcoin in stages (6) to (7), at an average price of about $75,000.
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Situation for Other Asset Treasury Companies: The above logic also applies to treasury companies of other assets, with one exception: some asset markets have duopolies or oligopolies. For example, Ethereum (ETH) currently fits this condition, with BMNR and SBET holding 75% of the ETH owned by treasury companies (if DYNX and BTBT are included, this rises to 90%). This concentration allows for a certain degree of coordination or "collusion" to avoid price crashes caused by selling. While such agreements may ultimately be hard to maintain, the higher the asset concentration, the greater the possibility of maintaining coordination.
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Similar Cases in Traditional Finance: The clearest traditional finance analogy is the behavior of banking syndicates in handling Bill Hwang's Archegos blowup. Those aggressive companies that acted quickly (such as Goldman Sachs, Deutsche Bank) performed far better than laggards who tried to coordinate an orderly liquidation (such as Credit Suisse, Nomura Securities).
It should be noted that my target price for bitcoin is not $70,000; the prices in the article are for illustrative purposes only.
