Source: Galaxy Research; Compiled by BitpushNews

Cryptocurrency treasury trend

The trend of publicly traded companies establishing cryptocurrency treasuries is expanding from Bitcoin to more crypto tokens, with the scale of allocations continuing to increase.

Just in the past week, two publicly traded companies announced they would purchase XRP as part of their treasury holdings, and another company stated it is acquiring ETH as reserves.

Bitcoin treasury companies have been in the headlines for most of this year, with Strategy (formerly Microstrategy) leading the way. VivoPower and Nasdaq-listed Webus announced intentions to launch $100 million and $300 million XRP treasuries, respectively, while SharpLink announced the establishment of a $425 million ETH treasury.

Including these companies, Galaxy Research has compiled a list of 28 cryptocurrency treasury companies:

20 companies focus on BTC, 4 on SOL, 2 on ETH, and 2 on XRP.

Our view

Given the momentum of existing companies and the market's apparent strong interest in funding these companies at considerable scale and with various assets, the trend of cryptocurrency treasuries is expected to continue to develop.

However, as more cryptocurrency treasury companies go online, skepticism continues to grow.

The main concern lies in the source of funding for part of the purchases: debt.

Some companies rely on borrowed funds, mainly zero-interest and low-interest convertible notes, to purchase treasury assets.

At maturity, these notes can be converted into company equity by investors, provided the notes are 'in the money' (i.e., when the company's share price exceeds the conversion price, making the conversion of equity economically favorable). However, if the maturity date arrives and the notes are 'out of the money,' additional funds will be needed to cover liabilities — this is the root of the concerns regarding treasury company strategies.

Additionally, although less frequently mentioned, there is also the risk that these companies may lack sufficient cash to pay their debt interest.

Regardless of the situation, treasury companies have four main options. They can:

  • Sell their cryptocurrency reserves to supplement cash, which could harm asset prices and potentially affect other treasury companies holding the same assets.

  • Issue new debt to cover old liabilities, effectively refinancing their debt.

  • Issue new shares to cover liabilities, which is similar in nature to how they currently fund treasury asset purchases through equity financing.

  • Enter into default if the value of their cryptocurrency reserves fails to fully cover liabilities.

In the worst-case scenario, the path each company takes will depend on the specific circumstances and market conditions at that time; for example, treasury companies can only refinance when market conditions allow.

In contrast to treasury funding sources, equity sales involve treasury companies issuing stock to fund asset purchases. Equity sales used to supplement asset purchases are less concerning from a broader perspective, as under this method, companies do not have default obligations nor incur liabilities for asset purchases.

In a recent report on the cryptocurrency leverage landscape, we studied the scale and maturity schedule of the debt issued by some Bitcoin treasury companies.

Based on our findings, we believe that there is not an imminent threat as widely perceived in the market, as most of the debt matures between June 2027 and September 2028.

Given the industry's historical issues with leverage, concerns over debt-driven strategies of treasury companies are not unreasonable, but currently, we believe this approach does not pose significant risks.

However, as debts mature and more companies adopt this strategy, there may be a tendency to take higher risks and issue shorter maturity debt, which may not remain unchanged.

Even in the worst-case scenario, these companies will have a range of traditional financial options to extricate themselves, which may not end with the sale of treasury assets.

– Galaxy on-chain analyst @ZackPokorny_