Concerns Arise Over Public Company's Crypto Assets Reserve Strategy: Will History Repeat Itself?

Crypto Assets reserves have become a popular strategy for listed companies. According to statistics, at least 124 listed companies have incorporated Bitcoin into their financial strategy as an important component of their balance sheets, attracting widespread attention from the crypto market. At the same time, some companies have also started to adopt other crypto assets such as Ethereum, Sol, and XRP as reserves.

However, some industry insiders have recently expressed potential concerns: these listed investment tools may replay the script of the Grayscale Bitcoin Trust (GBTC) from years ago. GBTC had traded at a premium for a long time, but when the premium turned to a discount, it became the catalyst for the collapse of multiple institutions.

A head of digital asset research at a bank warned that if the price of Bitcoin falls below 22% of the average purchase price for companies adopting encryption reserve strategies, it could trigger forced sell-offs by these enterprises. If Bitcoin drops below $90,000, about half of the companies' holdings may face the risk of loss.

There are many imitators, but how about the leverage risk behind the high premium?

As of June 4, a certain company holds approximately 580,955 Bitcoins, with a market value of about $61.05 billion, but its company market value is as high as $107.49 billion, with a premium close to 1.76 times.

In addition, some of the latest companies adopting Bitcoin reserve strategies also have prominent backgrounds. A company supported by a well-known investment institution went public through a special purpose acquisition company, raising $685 million entirely for the purchase of Bitcoin. Another company founded by industry-renowned figures merged with a publicly listed medical company, raising $710 million to buy coins. Additionally, a media group announced it has raised $2.44 billion to build a Bitcoin reserve.

Recent surveys show that, in addition to Bitcoin, companies are planning to purchase Ethereum and accumulate other Crypto Assets such as SOL and XRP.

However, some industry insiders point out that the operational models of these companies are structurally very similar to the GBTC arbitrage model of the past. Once the market enters a bear market, the risks may be concentrated and released, forming a "domino effect," where when the market or asset prices show signs of decline, investors collectively panic sell, triggering a chain reaction of further price drops.

Historical Lessons: Leverage Collapse, Position Institutions Explode

Looking back at history, GBTC was once dominant from 2020 to 2021, with a premium that reached as high as 120%. However, after 2021, GBTC quickly turned into a negative premium, ultimately becoming the trigger for several institutions' collapse.

The mechanism design of GBTC is a "one-way transaction with no exit": after investors subscribe in the primary market, they must lock their investments for 6 months before selling in the secondary market, and they cannot redeem it for Bitcoin. Due to the high investment threshold and heavy tax burden in the early Bitcoin market, GBTC has become a legitimate channel for qualified investors to enter the Crypto Assets market, driving its long-term premium in the secondary market.

This premium has given rise to a large-scale "leverage arbitrage game": institutions borrow BTC at low cost, deposit it to subscribe for GBTC, and sell it in the premium market after 6 months to obtain stable returns.

According to public information, the combined holdings of GBTC by two large institutions once accounted for 11% of the circulating share. One institution converted the BTC deposited by its clients into GBTC and used it as collateral for loan interest payments. Another institution even used $650 million in unsecured loans to increase its GBTC holdings and pledged it to obtain liquidity, realizing multiple rounds of leverage.

Everything was good in a bull market, but after Canada launched the Bitcoin ETF in March 2021, the demand for GBTC plummeted, flipping from premium to negative premium, and the flywheel structure collapsed instantaneously.

These institutions continued to incur losses in a negative premium environment, being forced to sell off GBTC on a large scale, resulting in significant cumulative losses. This ultimately led to liquidations and bankruptcies, marking the beginning of the systemic crisis in the Crypto Assets industry in 2022.

Will the new round of reserve strategy trigger the next systemic industry crisis?

More and more companies are forming their own "Bitcoin Reserve Flywheel", with the main logic being: stock price rises → additional financing → purchase of BTC → boost market confidence → stock price continues to rise. This mechanism may accelerate as institutions gradually accept Crypto Assets ETFs and Crypto Assets holdings as collateral for loans.

Recently, it has been reported that a large financial institution plans to allow clients to use some crypto assets as collateral for loans, and will take crypto asset holdings into account when assessing clients' assets. This means that crypto assets will be treated similarly to traditional assets.

However, critics argue that this model seems self-consistent in a bull market, but in reality, it directly links traditional financial instruments with Crypto Assets prices. Once the market turns bearish, the chain may break.

If the coin price crashes, the company's financial assets will rapidly shrink, affecting its valuation. Investor confidence collapses, stock prices fall, limiting the company's ability to raise funds. If there is debt or margin call pressure, the company will be forced to liquidate BTC to cope. A large amount of selling pressure will be concentrated and released, forming a "sell wall," further driving down the price.

More seriously, when the stocks of these companies are accepted as collateral by lending institutions or exchanges, their volatility will further transmit to traditional finance or DeFi systems, amplifying the risk chain.

Some analysis indicates that the current trend of "equity tokenization" may exacerbate risks, especially if these tokenized stocks are also accepted as collateral. However, there is also a viewpoint that we are still in the early stages, as most institutions have not yet accepted Bitcoin ETFs as margin collateral.

A research director warned that if the price of Bitcoin falls below 22% of the company's average buying price, it could trigger forced selling by the enterprise. Referring to historical cases, if Bitcoin drops below $90,000, about half of the enterprises' holdings may face the risk of loss.

However, there are also viewpoints that suggest that the capital structure of certain companies is not a traditional high-risk leverage model, but rather a controllable "ETF-like + leverage flywheel" system. Through flexible financing methods and dynamic adjustments, these companies form a self-reinforcing flywheel mechanism in the capital market under the strategy of "leveraging during low premiums and selling stocks during high premiums."

Currently, the crypto assets reserve strategy of listed companies continues to attract market attention and has sparked debate over its structural risks. Although some companies have built relatively robust financial models through flexible financing methods and periodic adjustments, whether the overall industry can maintain stability amid market fluctuations remains to be seen. Whether this round of "crypto assets reserve frenzy" will repeat historical risks is still an open question.