The corporate strategy that was once rewarded for hoarding cryptocurrencies is now facing punishment. Bitcoin, Ethereum, and other digital tokens are in a steep decline, and the stock prices of companies that followed the lead of Michael Saylor's firm (now renamed MSTR) by amassing cryptocurrencies have fallen in tandem. This selling wave has investors on edge, closely watching for signs that large corporations might be forced to liquidate their holdings, which could trigger a further downward spiral in digital token prices. The risks of aligning a corporate strategy around a relatively new and notoriously volatile asset class like cryptocurrency have always been present. However, last year, driven by signals from Washington suggesting a Trump administration would clear regulatory hurdles and fully integrate cryptocurrencies into the mainstream financial system, Bitcoin and other popular tokens rallied strongly. More companies emulated MSTR's approach, convinced of the long-term prospects for crypto, and their purchases of Bitcoin and other tokens further fueled the price increases. Now, that trend has reversed. Since late last year, investors have been pulling capital out of riskier assets, including tech stocks and cryptocurrencies. The sell-off has hammered the share prices of crypto-treasury companies, limiting their ability to raise fresh capital to buy more tokens. A further dimming of the market outlook has been caused by delays in passing a key piece of cryptocurrency legislation. Over the weekend, Bitcoin's price fell below $76,000, nearing the average cost at which MSTR acquired its tokens, implying the company formerly known as MicroStrategy is facing paper losses. MSTR, which holds over 700,000 Bitcoins, saw its stock fall 7% on Monday; since Bitcoin hit its all-time high on October 6th, its share price has plummeted by 61%. The price of Ethereum, the second-largest cryptocurrency, has crashed to around $2,300, leaving BitMine Immersion Technologies, which hoards Ethereum and holds nearly 4.3 million tokens, with paper losses exceeding $6 billion on its holdings. BitMine's stock fell 9% on Monday and has plunged 57% since Ethereum peaked last summer. Other crypto-treasury stocks are also struggling. BitMine Immersion Technologies Strive's stock fell 12% on Monday, while Forward Industries, which accumulates Solana tokens, saw its shares drop 11%. Since the sudden sell-off last Saturday, the prices of Bitcoin and Ethereum have stabilized somewhat. On Monday, Bitcoin traded around $78,000, down 38% from its peak of over $126,000 in early October; Ethereum hovered near $2,300, a 53% decline from its all-time high last summer. For much of last year, companies like Strategy and BitMine issued billions of dollars in new shares or bonds to purchase Bitcoin, Ethereum, and other cryptocurrencies. This strategy turned these so-called crypto-treasury stocks into leveraged proxies for the crypto tokens, attracting a wave of individual and institutional investors looking to amplify their bets on the trade. Now, the market is bracing for a potential tipping point. Investors are beginning to question the long-term solvency of crypto-treasury companies, fearing that persistently falling token prices could eventually force some firms to sell their massive holdings. This could trigger a collapse in token prices, with repercussions lasting for years in the market. "I think the original model pioneered by Strategy is probably largely unworkable for anyone else except for the largest companies that are big enough to issue preferred shares," said Alex Blume, CEO of Bitcoin investment firm Two Prime. "Everyone else needs to find a sustainable operating business, or they risk going out of business." Strategy, the pioneer of the crypto-treasury business model, began signaling warning signs as early as the end of last year. Saylor, a long-time proponent of the "never sell Bitcoin" philosophy, rattled markets by suggesting his company might sell part of its massive Bitcoin hoard or Bitcoin derivatives if its market-value-to-net-asset-value ratio (mNAV) fell below 1. Crypto-treasury companies with an mNAV above 1 trade at a share price higher than the value of their underlying cryptocurrency assets, indicating investor confidence in their ability to keep issuing shares to buy more Bitcoin. However, companies with an mNAV below 1 trade at a discount to their crypto holdings and might need to sell tokens to buy back shares. Saylor's shift coincided with Strategy's announcement of a $14.4 billion stock sale to ensure it can meet future dividend and debt interest payment obligations. The company now holds over $20 billion in cash reserves. So far, Strategy's mNAV stands at 1.1, down from over 2 a year ago. In the week ending Sunday, the company continued buying Bitcoin, acquiring 855 coins at an average price of $87,974 each, for a total outlay of approximately $75.3 million. The company recorded $174.4 billion in unrealized losses in the fourth quarter and is scheduled to report full financial results on Thursday. Its market capitalization has fallen to $40 billion from a peak of $128 billion in July. According to data from crypto analytics platform DropsTab, BitMine, a major Ethereum treasury company backed by Peter Thiel and led by Wall Street veteran Tom Lee, is sitting on roughly $6.4 billion in unrealized paper losses after acquiring $16.4 billion worth of Ethereum at an average price of $3,826 per token. BitMine purchased 41,788 Ethereum tokens in the past week. "BitMine has been steadily accumulating Ethereum, and we view this pullback as a highly attractive investment opportunity given its continuously improving fundamentals," Lee said in a statement announcing the latest purchases on Monday. Crypto investors and analysts believe that Strategy, BitMine, and other crypto-treasury firms are unlikely to sell their token holdings until their share prices fall significantly below their mNAV. Strategy holds some convertible debt that doesn't mature for several years. Furthermore, this debt is unsecured, meaning a sharp drop in Bitcoin's price wouldn't trigger forced liquidation of its holdings. BitMine has not issued any debt. "Their entire business strategy is to hoard Ethereum and build a narrative that the Ethereum price should go up," said Jeff Dorman, Chief Investment Officer at crypto asset management firm Arca. "Selling even a small portion of Ethereum, even just to buy back stock, would send an incredibly negative signal, and the damage would far outweigh any potential benefit, enough to sink both BitMine and Ethereum." However, analysts note that the real losers are the shareholders who held the token "proxy" at a premium instead of holding the tokens directly. "A $70 billion loss for BitMine is quite staggering, especially when it functions more like a closed-end fund," said Markus Thielen, CEO of cryptocurrency research firm 10x Research.
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