The cryptocurrency boom has cooled significantly, with the leveraged nature of treasury stocks amplifying losses. The market value of Strategy, a major player, has nearly halved. Notable short sellers have closed their positions and exited, while some investors have added to their holdings on the dip.
This year's hottest cryptocurrency trade has abruptly cooled. Some investors have candidly remarked, "We saw it coming," while others have opted to double down on their bets.
For the better part of this year, this was the "go-to trade": selling stocks or borrowing funds to aggressively invest in Bitcoin, Ethereum, and other cryptocurrencies. Investors drove up the stock prices of these "crypto treasury companies," viewing them as tools to amplify returns from the highly volatile cryptocurrency markets.
Michael Saylor pioneered this model in 2020 when he transformed a small software company named MicroStrategy into what is now Strategy, a major player in the Bitcoin space. However, with the sharp decline in Bitcoin and Ethereum prices, the stock prices of Strategy and its imitators have also plummeted. The company’s market capitalization peaked at approximately $128 billion in July but has since shrunk to around $70 billion.
This sell-off has impacted high-profile investors, including renowned venture capitalist Peter Thiel, who backed several crypto treasury companies, as well as ordinary investors who followed the "evangelists" in purchasing these stocks.
Saylor himself remains consistently bullish, proclaiming on social media that Bitcoin is currently in a "discount sale" phase. Skeptics had long anticipated this pullback, as the stock prices of crypto treasury companies typically carry a premium over the intrinsic value of the tokens they hold.
"The entire concept strikes me as nonsensical—akin to paying $2 for a $1 bill," said Brent Donnelly, President of Spectra Markets. "These premiums will eventually compress."
When these crypto treasury companies first emerged, they provided institutional investors, who previously had difficulty accessing cryptocurrencies directly, with an investment avenue. However, cryptocurrency exchange-traded funds (ETFs) launched over the past two years now offer similar solutions.
BitMine Immersion Technologies, a major Ethereum treasury company supported by Thiel and operated by veteran Wall Street strategist Tom Lee, has seen its stock price fall more than 30% over the past month.
ETHZilla, which transformed from a biotech company into an Ethereum treasury firm, also counts Peter Thiel among its investors. The company’s stock price fell 23% in one month.
For much of this year, cryptocurrency prices continued to rise, driven by the crypto-friendly Trump administration. The frenzy surrounding cryptocurrency treasury firms further fueled token price increases. However, this rally abruptly ended on October 10, when uncertainties in the U.S.-China trade situation triggered a market sell-off. Record-length government shutdowns and uncertainties surrounding the Federal Reserve's monetary policy also put downward pressure on prices.
The price of Bitcoin has fallen 15% over the past month. During the same period, Strategy’s stock price dropped 26%, while MSTU, an ETF managed by Matthew Tuttle, Chief Investment Officer of Tuttle Capital Management, which aims to achieve twice the return of Strategy, plunged 50%.
“Digital asset treasury firms are essentially leveraged crypto assets, so when cryptocurrencies decline, their losses are magnified,” said Tuttle. “Bitcoin has proven that it is here to stay, and buying the dip will be rewarded.”
What’s Next for Cryptocurrency Treasury Stocks?
At least one high-profile investor adjusted their portfolio after these stocks plummeted. Jim Chanos, a globally renowned short-seller hedge fund manager, closed his hedge fund in 2023 but continues to trade personally and advise clients. He had been shorting Strategy while buying Bitcoin, arguing that it made no sense for investors to pay a premium for Saylor’s company when they could directly purchase Bitcoin. Last Friday, he informed clients it was time to close out this trade.
In an interview last Sunday, he stated that cryptocurrency treasury stocks remain overvalued — partly because their share prices still exceed the value of the cryptocurrencies they hold, though they are no longer outrageously so. “This investment thesis has largely played out,” he wrote in a letter to clients.
As long as their cryptocurrency holdings retain value, most companies that financed cryptocurrency purchases are unlikely to face crises in the short term. Some have raised substantial funds and therefore still hold ample cash, enabling them to buy more cryptocurrencies at lower prices or even acquire competitors.
However, analysts noted that companies facing losses will find it difficult to issue new shares to purchase more cryptocurrencies, which could pressure cryptocurrency prices and raise questions about the viability of these companies’ business models.
"Many companies are in trouble," said Matt Cole, CEO of Strive, a Bitcoin treasury company. Strive raised funds earlier this year to buy Bitcoin at an average price more than 10% higher than the current price.
Strive’s stock price has fallen by 28% over the past month. He stated that Strive is in a strong position to "withstand volatility" as the company recently raised funds through preferred shares rather than debt.
Cole Grinde, a 29-year-old Seattle-based investor and beverage industry salesperson, purchased approximately $100,000 worth of BitMine stock at around $45 per share earlier this year when the company began accumulating Ethereum. To date, this investment has incurred a loss of approximately $10,000.
Nevertheless, Grinde said he is increasing his holdings. He offsets some of the losses by selling options on BitMine. His confidence in BitMine stems from the growing popularity of the Ethereum blockchain (the network that issues Ethereum) and Li’s influence.
"I think his connections and charisma have helped the stock soar since he took over," Grinde said of Li, who worked at JPMorgan for 15 years and is a managing partner at Fundstrat Global Advisors as well as a frequent commentator on business television programs.
