Despite concerns that the blending of cryptocurrency with more regulated products could expose sharemarkets to “systemic consequences”, the promise of quick returns is hard to ignore.
Clinical trial results analysis company Opyl bought two bitcoin for $330,000 in July via an ASX-listed DigitalX administered crypto ETF.
“We’ve already had quite a good return, it’s probably up 5 to 10 per cent since we bought a couple of months ago,” says Saurabh Jain executive chairman of the ASX-listed company, who adds that investors want management to do more with cash than just leaving it in the bank.
“Our core business isn’t crypto investment. Our core business is still the medical trial key AI platform, so this is a bit of a side treasury strategy.”
‘The integration of crypto and traditional finance could threaten the stability of our financial system.’
Professor Hilary Allen, American University
Opyl uses AI to predict the outcome of clinical trials which affect share prices of drug and biotech companies.
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Asked if the trend could have a larger effect as more companies embrace crypto, Jain says it is not something he’d be concerned about. “Obviously, the more companies that pile in, the more appreciation we’ll get of our crypto.”
And more companies are piling in, with growing corporate demand for crypto assets underpinning the demand for bitcoin. “Companies own gold, companies own land … This is just a different type of asset that companies are holding on their balance sheet,” says Pratik Kala, head of research in digital assets at Apollo Crypto.
Kala says the corporate uptake of crypto on a global basis has really taken off in the last three to four months, in the form of investment in crypto ETFs and companies holding crypto itself.
“It’s a way for a lot of the traditional finance people to get exposure to crypto because there’s a lot of interest,” in it by companies that are prohibited from directly investing in the tokens. Such digital asset companies are meeting investor demand.
Asked if the bitcoin treasury strategy masked poor performance of the companies by other metrics, Kala says: “You could say ‘masking’, you could say the companies pivoted because they realised that their existing business does not work.”
Strategy, a software company founded in 1989, has pioneered the bitcoin treasury strategy. For two decades the company’s share price languished around $US14 a share, today it’s the world’s largest corporate owner of bitcoin. It holds about 636,000 bitcoins, worth over $100 billion.
Its chief executive Michael Saylor, seeking a new path for the company – then known as MicroStrategy – decided to begin investing in bitcoin. From the beginning of 2023, Strategy began building a sizable portfolio of bitcoin. Its Nasdaq-listed stock has risen from $US14 to $US434, a gain of 3000 per cent.
Kala says that now: “Other people think they can replicate the strategy in their own physical geographies.”
Tokyo-listed Metaplanet is one such example, in one year it moved from nursing a diminished hotel business devastated by the COVID-19 pandemic to an investment vehicle for bitcoin. Its chief executive, Simon Gerovich, was inspired by Strategy. Metaplanet’s holdings of bitcoin rose from about 400 on March 3 to more than 10,000 by June 16. Its shares in that time rose from 401 yen ($4.14) to 1985 yen, an increase of 372 per cent.
Kala also points to other underlying drivers. “At some point when people spend like 10,000 hours studying bitcoin and the monetary policy of the world, they quickly realise that this entire financial system is a Ponzi scheme of sorts,” where the government and central banks print all the money they want, control rates and devalue currency.”
“People, once they get into a rabbit hole, they are very confident that currency is just going to get debased forever … There’s very little trust in institutions in the new generation, and they look for an exit and the exit is bitcoin.”
But what happens if bitcoin – the most mature and well-known crypto asset – one day falls?
Researchers from French investment bank Natixis says Nasdaq-listed Strategy’s “ability to raise capital at inflated valuations creates a feedback loop, where investor sentiment drives the premium on its shares, facilitating further bitcoin purchases”.
“Nonetheless, the sustainability of this model is contingent on several factors, including bitcoin’s price trajectory and the company’s ability to manage its financial obligations.”
Then again, cryptocurrency is more than just bitcoin.
One of the attractions of cryptocurrency as an asset is the ability for anyone to create a new token, or a new exchange. And in fact, companies overseas are buying ethereum, solana and other tokens, as well as bitcoin.
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Locate’s Orenstein sees currency issued by central banks as a devaluing asset – as opposed to crypto assets.
“We’re a technology company, we’re always forward-looking, we see bitcoin as an asset that’s going to be very important to hold for any individual or any company into the future, as money transitions from the fiat world into the digital world.
“And we believe that bitcoin will be the asset to store your value into the future.”
More than 100 public companies worldwide hold over one million bitcoin worth about $US109.3 billion, according to Coingecko. Corporate BTC treasuries continue to expand sharply, with 116 public companies now holding 809,000 bitcoin, up from 312,200 a year ago.
However, crypto assets aren’t known for their stability. If the asset class underperformed, a company deeply invested in it could be faced “with significant debt and eroding investor confidence”, warns Natixis.
If the adoption of crypto as a tool to augment a company’s finances helps drive stock prices – and becomes entrenched – the vulnerability it brings could spread widely.
Professor Hilary Allen says the trend of struggling companies loading up on cryptocurrencies is fraught with risk, and could cause “systemic consequences” should a crypto “bubble” collapse.
Hilary, an Australian-American academic based at American University in Washington, believes, “the integration of crypto and traditional finance could threaten the stability of our financial system”.
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The ASX market regulator has warned companies dipping into crypto-assets could alter the risk profile of their companies, requiring new disclosures.
The Australian Securities and Investments Commission “is aware that several companies domestically and overseas are acquiring bitcoin or other crypto-assets and holding them on their balance sheets”, a spokesperson said.
“We understand that they are doing so as an investment and hoping that their crypto asset holdings will increase in value over time, and as a result provide a return to their shareholders.”
These holdings will “generally be” considered an asset in the company’s statements.
“If the holdings over time amount to a significant change in the nature or scale of an entity’s activities, this may require member approval under the listing rules.”
That is to say, if the crypto holdings outshine the value of the company itself, it may have to seek new approvals from regulators.
Given the volatile, mutable quality of crypto – it’s digital, it’s viral, and there is no scarcity and little centralising constraint, new outcomes are possible.
“The crypto markets are becoming increasingly intertwined with the rest of our financial system,” says Allen, a process which began in 2018 when US Commodity Futures Trading Commission allowed bitcoin-based products to be traded on commodity exchanges back in 2018.
“But the disintegration of barriers between crypto and the rest of our financial system has accelerated significantly during the second Trump administration” when banks and US retirement funds have been given the OK to increase their exposures to crypto, she says.
The 2007-08 financial crisis occurred in part by creation of an asset class not fully understood, that was onsold to banks and investors, which placed the risk in areas that were unknown until the balances began to fall.
Alternatively, during the dotcom bubble, non-internet companies rebranded themselves as internet companies to enjoy inflated valuations, until the bubble burst.
A BitBase cryptocurrency exchange in Barcelona.Credit: Bloomberg
Layering cryptocurrency – which in theory is designed to supplant central banks and defy government regulation – through the more regulated financial system could present its own risks.
When the financial crisis occurred, overnight the public learned terms like “subprime mortgages”, “mortgage backed securities”, and “collateralised debt obligations”.
In retrospect, a big portion of the blame for the banking crisis of 2007 and 2008 lay with banks for creating exotic and difficult-to-regulate products.
Indeed, Binance Research says the bitcoin treasury strategy carries structural risks: “Equity valuations for many firms have become heavily tied to crypto holdings, often trading at significant premiums.”
The drivers of crypto’s rise are complex and not simply demand from corporates, but a growing distrust of the economic system to deliver prosperity.
Both Orenstein and Kala point to the failures and inequalities of a central-bank based monetary system, including runaway housing prices as sowing doubt about conventional currency and finance.
“Property in the 1980s versus the ability to buy a property today on a reasonable wage is very, very difficult,” says Orenstein. “This has occurred because money has been devalued.”
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One of the features of cryptocurrency, which has proliferated in a viral age, is that it carries a unique vocabulary (“fiat currency”, “blockchain”, “decentralisation”), with its own justifications, and in fact its own ideology.
And that vocabulary, based on a world view that holds that central bank-issued currency is doomed, shapes expectations around the future of cryptocurrency, which may make it harder for businesses to set realistic expectations for bitcoin purchases.
For now, bitcoin treasury strategy remains an intriguing way to increase the value of a company. The chances of it one day throwing global markets into turmoil are slim, but anything is possible when crypto is involved.
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