Why are troubled companies buying Bitcoin?

Author: Nikou Asgari Article compiled by: Block unicorn

Three months ago, George Karam never considered that his semiconductor company would start buying Bitcoin.

His New York-listed company's stock price had long been sluggish, and Karam became interested in Bitcoin after reading about a healthcare company's stock price surge after purchasing the digital currency. He said that after a failed deal scared off investors, "I was looking for ways to unlock the value of the company."

Karam decided to launch a Bitcoin strategy after consulting with his board of directors and some investors. Sequans Communications raised $384 million from debt and equity markets to purchase the world's most popular cryptocurrency. Its stock price soared 160% after the announcement. "I wouldn't have said that last year, but today I'm a complete believer... I'm 100% certain that Bitcoin is here to stay," Karam said. The crypto newbie has much to thank for his conversion: Bitcoin evangelist Michael Saylor. Since 2020, the American cryptocurrency tycoon has been spending billions of dollars on Bitcoin almost weekly and hosting conferences to encourage others to follow suit. Saylor's software company turned Bitcoin hoarder, Strategy Analytics, is now valued at approximately $115 billion, nearly double the value of its holdings, as investors have piled in. Last week, Strategy bought $2.5 billion in Bitcoin, its third-largest purchase on record. Its stock price has soared more than 3,000% in five years. This success, coupled with U.S. President Donald Trump’s full support for the digital asset industry, has inspired a surge in the number of so-called “cryptocurrency treasuries” around the world. Biotechnology companies, mining firms, hoteliers, electric vehicle companies, and e-cigarette manufacturers are among those rushing to buy cryptocurrencies, supported by investors who want to share in the market’s dividends without directly exposure to digital assets. According to data from cryptocurrency consulting firm Architect Partners, in the year ending August 5, approximately 154 publicly listed companies had raised or pledged to raise a total of $98.4 billion to purchase cryptocurrencies. Prior to that, just 10 companies had raised $33.6 billion. Some companies have followed Strategy's lead, changing their website colors to Bitcoin's orange hue and providing data showing how much cryptocurrency they hold, its value, and other metrics important to investors. Even Trump himself has gotten in on the action—his family media company raised $2 billion in July to buy Bitcoin and related assets. In a year that has seen Bitcoin and benchmark stock indices reach new highs, the rush to accumulate cryptocurrencies has sprung as traditional investment institutions grapple with how best to participate in the new world of digital assets. But many question whether the trend can last. The rapid growth has led some investors to worry about overheating the market. Brian Estes, CEO of Off The Chain Capital, which has invested in several bitcoin vault companies, said: "This is similar to the dot-com bubble of 1998," when companies rushed to reposition themselves as web-first businesses to attract attention.

The surge in new companies has also raised concerns about falling cryptocurrency prices and the knock-on effects. Companies that have borrowed billions of dollars to buy cryptocurrencies may soon find themselves unable to repay creditors.

"The risk is that Bitcoin crashes," said Eric Benoist, an investment banking technology and data expert at Natixis CIB. In this case, the stock price would also fall, and if the company cannot pay its bondholders, investors will suffer losses. "This could have systemic effects on the Bitcoin ecosystem," he added. “Every time there’s a mini-panic in the market, the whole market goes down.” Kevin de Patour, CEO of cryptocurrency market maker Keyrock, said investors should be realistic about this. “You’re injecting a lot of risk into a system that ultimately has very little backing other than the continued appreciation of the asset.” For struggling companies, buying cryptocurrencies can seem like a surefire way to attract investor attention and boost their share prices—at least temporarily. “If we hadn’t gone down this path, we would have struggled to raise future funding; we were like a dying company,” said Aidan Bishop, founder of London-listed Bluebird Mining Ventures, which raised £2 million in June to buy Bitcoin. Before then, “to raise money, I was knocking on doors,” he added. Cryptocurrency evangelist Michael Saylor has spent billions of dollars buying Bitcoin since 2020 and held conferences to encourage others to follow suit. Shares of his company, Strategy, have soared over 3,000% in five years. Source: Travis P Ball/Sipa/Reuters Most of the new entrants are ordinary businesses with no prior cryptocurrency experience, but the value of their digital assets far exceeds their actual revenue. For example, US thermal energy company KULR Technology has a market capitalization of approximately $211 million, despite an operating loss of $9.4 million in the first three months of this year. But it holds about $118 million worth of Bitcoin. In the UK, website design firm The Smarter Web Company made only £93,000 in net profit in the six months to April, but its market capitalization is around £560 million thanks to its £238 million worth of Bitcoin holdings. The premium investors are willing to pay underscores the value they place on companies holding cryptocurrencies. Companies that demonstrate their commitment to continuing to raise funds to buy cryptocurrency are rewarded by investors, who value their shares at a premium to the value of the company's Bitcoin holdings. To actually purchase these tokens, companies typically raise funds by issuing debt or equity, then invest the money in buying cryptocurrencies through exchanges like Coinbase. Speed is crucial. "It comes down to speed," Estes said. "The goal is to increase the number of Bitcoins per share, and the companies that can do that fastest are going to get a high premium." For investors, "per Bitcoin"—the number of Bitcoins a company holds—is the measure of success. If a company quickly buys more tokens, equity investors indirectly hold more cryptocurrency per share—which is why investors are willing to pay a premium early on, hoping to hold more Bitcoins per share in the future. Most companies buying Bitcoin also operate other businesses, but a new wave of deals involves shell companies that are buying or promising to buy large quantities of cryptocurrency. These companies operate as special purpose acquisition companies (SPACs), raising funds to buy or merge with existing businesses. Rob Haddick, general partner at venture capital firm Dragonfly Capital, said operational risk “actually tends to be higher” when a company with an actual business buys Bitcoin: “You have an existing management team whose goals may change over time and may have conflicting priorities with the operating business.” Executives are now buying other tokens as the trend expands beyond Bitcoin. These vehicles also offer people who hold large amounts of cryptocurrency a way to capture value without selling. ReserveOne, a $1 billion deal funded by investors including exchanges Kraken and Blockchain.com, plans to buy Bitcoin and other crypto tokens like Ethereum and Solana. Ether Machine raised $1.5 billion, which it plans to use to buy Ethereum. Former Barclays CEO Bob Diamond raised $888 million through a SpacY deal with a biotech company to buy HYPE tokens. Crypto billionaire Changpeng Zhao’s venture capital firm led a $500 million deal for a Canadian e-cigarette maker to buy BNB, the token of the Binance exchange co-founded by Zhao. “We’re clearly witnessing a gold rush that’s not entirely rational,” Hardick said. “There doesn’t feel a need to have [investment vehicles] for all these different tokens.” For retail and institutional investors, cryptocurrency treasuries offer an alternative way to gain exposure to tokens without directly holding them. Some investors choose to do so through U.S. exchange-traded funds (ETFs) offered by major asset managers like BlackRock, Fidelity, and Invesco. These regulated products have amassed over $100 billion in investments. But others can’t. Cryptocurrency ETFs have been banned in countries like the U.K. and Japan as regulators seek to protect investors from the volatility of digital assets. Thus, treasuries act as a proxy vehicle, providing investors with indirect exposure to cryptocurrencies through tradable instruments. "A lot of institutional [investors] simply can't invest in ETFs or hold [cryptocurrencies] directly," said Tyler Evans, co-founder of UTXO Management. "We think Bitcoin Treasuries fill that gap by issuing securities that meet investment mandates," he said. His $430 million firm invests 95% of its investments in Bitcoin Treasuries. Investors are also taking advantage of tax arbitrage opportunities between holding crypto assets and stocks in some countries. In Japan, cryptocurrency gains are taxed at a high 55%, compared to 20% for stocks. In Brazil, cryptocurrency gains are taxed at 17.5%, compared to 15% for stocks traded on a stock exchange.

US President Donald Trump’s full support for the digital asset industry has encouraged the rapid development of “cryptocurrency treasury companies” around the world. Source: May James/SOPA/Getty Images

Therefore, investing in companies that hold large amounts of cryptocurrencies may be more efficient in terms of taxation than holding cryptocurrencies directly. Eager investors are scouring the globe for new countries with similar tax structures to capitalize on. "The U.S. market is now saturated... We're looking for opportunities outside the U.S.," Estes said. Cryptocurrency's newfound alignment with capital markets is ironic, given its original mission to disrupt traditional financial markets and stay away from the prying eyes of large institutions. Raising debt and equity from investors is central to its strategy and essential to keeping it afloat. Companies that haven't bought cryptocurrency quickly enough have seen their share prices fall. While Sequans Communications saw its stock surge 160% after it began buying Bitcoin, its share price has now fallen to pre-purchase levels, reflecting investor dissatisfaction with the pace of its purchases. "You're combining Wall Street and crypto, and you need the market to be able to support that kind of harvest," Estes said. To scale, many of these companies are planning to move beyond simply being cryptocurrency pools listed on global stock exchanges. Diamond said his investment vehicle, which focuses on the HYPE token, may acquire other cryptocurrency treasury companies. "If they get into trouble, we can acquire them and rebuild them," he said. "That will create opportunities for the strongest to, frankly, snap up companies that are poorly managed or underfunded." Meanwhile, Japan's Metaplanet, the world's fifth-largest corporate bitcoin buyer, plans to borrow against its massive coin reserves and transform itself into a cryptocurrency financial services company.

US thermal energy company KULR is also exploring "bitcoin-backed financial services" such as lending, while Darren Hazlewood, CEO of mining company Panther Metals, said it plans to use its bitcoin holdings to fund future exploration projects.

Natixis CIB's Benoist said: "The natural evolution is financial services because you can back your financial commitments with a whole bunch of bitcoin."

Attendees pose for a photo after US Vice President J.D. Vance delivered a keynote speech at the Bitcoin Conference in Las Vegas. Companies that haven't purchased cryptocurrency quickly enough have seen their share prices fall. Source: Ethan Miller/Getty Images

But cryptocurrency lending is a risky business. In 2022, the lending market collapsed as falling prices triggered a rash of defaults, leading to the collapse of the exchange FTX. Benoist added: "My main problem with this strategy is that I don't quite understand how it ends. Companies get caught in a cycle where they have to keep buying more to sustain the cycle, then return to the market to buy more—and this cycle has to continue to justify the premium."

The biggest risk is how deep the damage would be if—or when—cryptocurrency prices crash. Inevitably, a cryptocurrency market downturn means that companies whose share prices are pegged to their tokens will also decline. Companies that take on debt face greater risks because they need to pay interest to investors and may be forced to raise more funds or sell their cryptocurrency holdings to meet debt obligations. "If you're raising debt to repay existing debt, that's a very unhealthy structure and it makes me very uneasy," said one cryptocurrency hedge fund head. "You could face systemic risk because there are so many of these fragile structures that need to be fully or partially unwound, which would put pressure on the market," he added. "I hope regulators will regulate this instead of everyone building up vaults assuming the market will go up forever," he said. Investors say they are aware of the risks but are eager to make money during the boom. UTXO Management's Evans, who serves on the boards of several cryptocurrency treasury companies, said he is pushing CEOs to "generate cash through operating their businesses in a down market and to generate returns on Bitcoin in ways other than raising capital." However, even industry stakeholders are growing skeptical. "This is going to end in a bubble," Estes said. "As fast as they went up, they can come down just as fast."