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It all started with MicroStrategy. Now, it seems a new publicly traded company announces its accumulation of Bitcoin or other cryptocurrencies every week.
But here’s the problem: Investors are willing to give these companies a high valuation premium simply because they are buying Bitcoin.
What happens if their stock doesn’t rise because of this?
Take Japan's Metaplanet as an example; it replicated Michael Saylor's Bitcoin frenzy at MicroStrategy.
10xResearch stated that its stock price is calculated based on a Bitcoin trading price of $596,154.
This is five times the current price of Bitcoin, which is about $106,000.
Before the company fully committed to Bitcoin, Metaplanet was an economy hotel operator that later transformed into a blockchain infrastructure provider.
As the company rebrands itself to become a Bitcoin reserve company, these businesses have been put on hold.
10xResearch wrote in a report on May 27: "Is it time to short? The signals we are seeing now are very similar to past turning points."
One of many companies
In fact, Metaplanet is one of many companies following in the footsteps of Saylor's company, which is now renamed Strategy.
On May 27, Trump Media & Technology Group (TMT) announced plans to raise $2.5 billion to purchase Bitcoin.
This week, GameStop, the video game retailer that became famous for being a 'meme stock,' purchased 4,710 Bitcoins worth about $513 million (at current prices).
The stock prices of both companies have fallen.
These new Bitcoin reserve companies have adopted a relatively simple strategy: raising funds by issuing convertible bonds and then using that money to buy large amounts of Bitcoin.
Why have so many followers of Saylor suddenly emerged? In short, it has proven effective for companies.
Since implementing its Bitcoin purchase plan in August 2020, Strategy's stock price has increased tenfold. The company holds over 576,000 Bitcoins, worth about $63 billion.
Proceed with caution
But skeptics say there are good reasons to remain cautious.
First of all, the idea that accumulating Bitcoin or any other cryptocurrency on a company's balance sheet is a guaranteed profit is simply absurd.
Noted macro analyst Noelle Acheson states that those emulating Saylor firmly believe this strategy is risk-free, which is concerning. "Especially those who enter the market when Bitcoin prices are high."
When Strategy first purchased Bitcoin, the trading price was about $11,000, only about one-tenth of the current $107,000.
As this strategy becomes popular, analysts and seasoned investors may focus on a specific indicator to eliminate noise—namely, net asset value (NAV).
NAV refers to the book value of the assets held by the company.
When NAV mismatches occur, it means that the company's stock price is inconsistent with the actual value of its held assets.
Take Metaplanet as an example.
The company holds about 7,800 Bitcoins worth approximately $830 million. However, the company's market capitalization is $5.6 billion, which represents a price of $596,154 per Bitcoin.
In other words, the price investors pay for indirect exposure to Bitcoin is five times the price of Bitcoin itself.
10xResearch analysts say, "A dangerous NAV distortion is forming quietly."
"We should restrain our enthusiasm for this hype." — Noelle Acheson
This represents that Metaplanet's stock price (which has risen by 233% this month) could reverse at any time.
But let’s not forget Strategy. Its frequent premiums may benefit shareholders, but they are also concerning.
According to Strategy Tracker data, in 2020, investors valued Strategy's stock at more than six times its Bitcoin value, and last year it exceeded three times its value.
Hedge fund experts like legendary short-seller Jim Chanos have been shorting Strategy by exploiting the phenomenon of NAV mismatch and buying more Bitcoin.
Insider Sell-off
Meanwhile, cryptocurrency reserve strategies are gaining significant momentum.
Just this week, the parent company of Trump's social media company, Trump Media & Technology Group (TMT), planned to raise $2.5 billion for Bitcoin investment. However, after disclosing the plan, its stock price plummeted by 11%.
Why? Some people may worry that insiders will sell their shares.
The company stated that future stock sales may include some insider shares, such as those held by the trust fund controlled by its son Donald Trump, which holds 57% of the company.
Meanwhile, many companies emulating Saylor (some of which are not even cryptocurrency companies) have valuations that entirely depend on the amount of Bitcoin they hold.
Semler Scientific produces medical equipment. After purchasing 581 Bitcoins, its stock price soared by 30%.
Strive Asset Management, founded by former presidential candidate Vivek Ramaswamy, has raised $750 million for purchasing Bitcoin, with another $750 million in preparation.
Tech company ASST announced its merger with Strive Asset Management to transform into a Bitcoin reserve company, causing its stock price to surge by 194%.
Led by Bitcoin evangelist Jack Mallers and backed by Tether, SoftBank, and Cantor Fitzgerald, a startup called Twenty One has emerged solely to accumulate as much Bitcoin as possible.
The holding company called Cantor Equity Partners has seen its stock price rise by over 300% since its establishment at the end of April.
The company listed 76 risks related to its business model, many of which are uncommon.
Nakamoto Inc, led by David Bailey, merged with a healthcare company to raise $700 million to acquire Bitcoins.
Today, macro analyst Noelle Acheson says it's reasonable for companies to include Bitcoin in their asset reserves.
However, the fact that many companies are using Bitcoin as the sole reason for their existence has indeed raised warnings of some over-exuberance.
The biggest risk all these companies face is macroeconomic risk. And during the Trump era, this has been a huge factor.
Even Michael Saylor cannot escape the influence of geopolitics.
Tariffs, rising inflation, and the Fed's uncertain interest rate policy are causing market unease. Treasury yields remain high, which is particularly concerning as it suggests that investors' confidence in the dollar as a safe haven asset may be waning.
This is detrimental to risk assets like stocks and cryptocurrencies.
All of this means that Saylor's billions of dollars in Bitcoin purchases, which previously boosted this top cryptocurrency, no longer have the same effect.
If the stock prices of companies like Strategy or Metaplanet continue to rise, other followers may emerge continuously. This could further weaken the influence of such Bitcoin purchases.
Acheson wrote: "We should restrain our enthusiasm for this hype."
"Innovative financial engineering always appears as an alluring new tool that brings returns, but as interest and risk saturate, it inevitably becomes fragile."
This article is collaboratively reproduced from: PANews
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