In the article the day before yesterday, I shared the history of Evergrande's collapse triggered by debt risk. Some readers associated this history with similar risks that some currently listed crypto treasury companies might face.
A couple of days ago, Vitalik also mentioned this risk in a comment on his Twitter. This risk is indeed very worth paying attention to, even though it is not an explicit risk at the moment, I always worry that these companies' increasingly aggressive operations might trigger this risk in the future.
(A classic case of value investing: China Evergrande) This book was published at that time to prove the author's firm optimism about Evergrande.
To prove this 'firmness', the author detailed the debt risks of Evergrande at various stages as assessed by various investment banks and institutions at that time, and used this to justify his continued optimism.
Today, as I read this book, I am not focused on its conclusions, but rather the series of risks listed in the book—these risks are actually more valuable historical clues.
All these risks can be summarized as:
Evergrande's approach is to finance through going public, issuing new shares, issuing perpetual bonds, and mortgaging assets to extend the payment cycle and delay payments through multiple installments.
Why do this? To pursue scale. What is the result? It traps them in a debt pit from which they cannot extricate themselves.
To cover up this situation, Evergrande has aggressively borrowed money to repurchase stocks and boost stock prices to stabilize investor confidence; on the other hand, it is aggressively diversifying and creating a corporate image to showcase its strength.
This series of actions appears to have repeatedly 'burst' the shorts and 'countered' the pessimists, enchanting a large number of domestic investment banks, brokerages, and investors.
On the contrary, well-known overseas investment banks (like Goldman Sachs) seem exceptionally clear-headed, completely unimpressed by these practices, and always focused on their deteriorating debts and cash flow.
Looking back at this history, it is actually very simple to pierce through the facade of such enterprises and get to their core.
It is to use common sense to judge.
What common sense?
Is each of its actions weakening its core business? Is it increasing debt? Is it reducing free cash flow? Is it making the company's operations increasingly tense? Is it making it harder for the company to cope with changes in the external environment?
Other superficial things (soaring stock prices, grand advertisements, ubiquitous celebrity effects...) are all just temporary and do not play a decisive role.
We can also use this set of standards to assess the situation of those listed crypto treasury companies.
These companies currently finance their acquisition of crypto assets through funding. The methods they use to finance are basically three: issuing stocks, issuing convertible bonds, or directly issuing bonds.
Among these three financing methods, issuing stocks has relatively controllable risks, while direct borrowing is worth paying close attention to.
Because once a company's debt cannot be covered, they will inevitably be forced to liquidate their held crypto assets to repay debts. Once this liquidation occurs, it may trigger a chain reaction in the crypto assets.
So to assess whether these companies are at risk, I look at whether their free cash flow can support their operations and cover their debt risks.
For companies purchasing Bitcoin, since Bitcoin does not generate interest, this part of the business does not produce cash flow. For companies purchasing Ethereum, staking Ethereum currently provides about 3% to 4% staking returns, so the held Ethereum can generate some cash flow through staking.
Compared to these two types of companies, those holding Ethereum seem to have cash flow and lower risk. But I actually feel their hidden risks may be greater.
Because the price of Ethereum will have a leveraged effect on staking returns: when Ethereum rises, holders enjoy fixed staking returns while also benefiting from the appreciation of the 'native currency.'
This effect itself can easily trigger the operator's greed and complacency, and if the operator is not principled and very aggressive, that becomes very dangerous.
MicroStrategy currently has some debt and indeed carries a certain amount of risk. But among the current Ethereum treasury companies, there is one that is even more concerning. That company publicly declares its goal is 'to hold 5% of Ethereum.'
Seeing this goal, I am reminded of a saying by Duan Yongping (the essence is):
He would avoid companies that take 'becoming one of the Fortune 500' and 'achieving revenue of XXX' as their goals.
Because the company's goal is not numbers, but serving customers and serving the end consumers. 'Becoming one of the Fortune 500' and 'achieving revenue of XXX' are all naturally accomplished in the process of serving customers and consumers. If it can be done, do it; if not, that's fine. Any company that does not aim to serve customers and consumers, in his view, is an unprincipled company.
I completely agree with this viewpoint.
For that Ethereum treasury company, I cannot judge whether its goal counts as serving customers, but I always feel that goal sounds a bit awkward.
To achieve that goal, this company has been very active recently. For example, its upcoming action is to issue stocks, preparing to raise an amount that exceeds several times its current market value.
If it were just issuing stocks to finance the purchase of Ethereum, the risk would be relatively controllable, but I am very concerned that under the excitement of such 'exciting' slogans, it might lose its head and further pursue scale, thus following the path of debt and continuously increasing leverage.
When it is crushed by debt and forced to sell off assets to repay debts, it would be a disaster for the entire crypto ecosystem.
