Saylor has been shouting from the rooftops, that is, every podcast or CNBC interview that will have him on, about his Bitcoin strategy; if you haven’t heard of this guy or MSTR in the last 3 years, you’re probably too busy crying about trading JPEG rocks or smoking rocks.
While he seemed like a madman for the first few years, MSTR’s meteoric rise has proven Michaels’s thesis correct, and now that he’s de-risked the trade, a few companies are starting to dip their toes into the water.
The corporate adoption of Bitcoin as a treasury reserve asset has emerged as a transformative trend in financial markets. Companies that announce Bitcoin acquisitions often experience significant market premiums. This phenomenon and the growing movement towards a “Bitcoin standard” have created a compelling narrative for Bitcoin-focused ETFs and reshaped traditional corporate treasury management.
Market Premiums: Understanding the Valuation Impact
It looks like Bitcoin treasuries are the new “we’re pivoting to AI” If you’re looking to drum up interest in your company or stock, all you need do is spin up a private key, buy a whole bunch of Bitcoin and announce it to the world in a blog post on your site and boom, you’ll double your stock price overnight.
It sounds pretty crazy, but we have examples of it in Rumble Inc., Metaplanet and Klur, who are all up over 250% in 2024 off the backs of their Bitcoin purchases, while Bitcoin miner stocks haven’t done too badly this year either.
Companies that announce Bitcoin acquisitions using their cash reserves and free cash flows frequently experience substantial market premiums for several key reasons:
1. Forward-Looking Innovation Signal
When companies allocate treasury assets to Bitcoin, markets often interpret this as a signal of forward-thinking management and technological adaptability. This perception can lead to higher valuations as investors prize companies that demonstrate innovation in financial management and technological adoption.
2. Inflation Hedge Proposition
In an environment of monetary expansion and inflation concerns, Bitcoin holdings are increasingly viewed as a hedge against currency debasement. Companies that proactively address these risks through Bitcoin adoption often receive higher valuations due to perceived better positioning against inflationary pressures.
3. Asymmetric Upside Potential
The volatile but historically upward trajectory of Bitcoin creates an asymmetric return profile for corporate treasuries. Markets frequently price in this potential upside, leading to premium valuations for companies with Bitcoin exposure.
4. First-Mover Advantage
Early adopters of corporate Bitcoin treasury strategies are often rewarded with higher valuations due to perceived competitive advantages and potential network effects in the Bitcoin ecosystem.
5. Sector exposure + Bitcoin exposure
A company with a Bitcoin reserve immediately becomes interesting to the market because it’s the first company in its niche to do so; while MSTR does it in enterprise software and Tesla has done it in the auto market, another company can be the first in its file to do so, and with that attract investors who might focus on that sector but also want that Bitcoin upside.
For example, suppose your mandate is to invest in companies that focus on green energy, and there are green energy companies with a Bitcoin strategy. In that case, they immediately move to the top of your list or one that should receive a higher allocation in the portfolio.
The Transition Towards a Bitcoin Standard
The concept of a “Bitcoin standard” represents a fundamental shift in corporate treasury management, characterised by several key elements:
Strategic Asset Allocation
Companies are increasingly viewing Bitcoin as a strategic asset rather than merely a speculative investment or something they wouldn’t touch because they’re not operating in the cryptocurrency or mining industry.
This approach involves:
- Systematic allocation of free cash flows to Bitcoin
- Development of long-term holding strategies
- Integration of Bitcoin into broader corporate financial planning
Operational Integration
Progressive companies are moving beyond simple Bitcoin holdings to integrate cryptocurrency into their operations through:
- Acceptance of Bitcoin for payments
- Development of Bitcoin-related products and services
- Implementation of Bitcoin-based treasury management systems
Risk Management Evolution
The adoption of a Bitcoin standard necessitates new approaches to risk management:
- Development of sophisticated custody solutions
- Implementation of new governance frameworks
- Creation of Bitcoin-specific risk assessment models
Enhanced Institutional Credibility
Corporate Bitcoin adoption provides legitimacy to Bitcoin ETFs by demonstrating institutional acceptance and integration of Bitcoin into traditional financial frameworks.
Selling volatility
Depending on the allocation towards Bitcoin, your company is exposed to a certain amount of volatility; this is volatility that you can sell to the market via your stock, either directly or as MSTR has done via the convertible bond market.
Impact on Bitcoin ETFs
Whenever a new trade idea hits the market, it eventually matures to the point where it wants or needs passive to keep it going. So, how do you get the dumb money flowing in? You start an ETF; it’s a special, brilliant, and diversified idea. Now shut up, give us your money, and let me collect my fees.
But why the need for another ETF? We already have 10 Bitcoin Spot ETFs.
Well, Spot ETFs aren’t ever fund managers come of tea; some prefer a diluted exposure to Bitcoin, and if there is enough demand, you can be sure someone will file to create one.
Bitwise, one of the largest crypto asset managers globally, is set to launch the Bitcoin Standard Company ETF. This ETF will track public companies holding Bitcoin as part of their corporate treasury strategy.
The fund aims to allocate at least 80% of its assets to securities meeting strict inclusion criteria, such as:
- A minimum holding of 1,000 Bitcoins.
- The market capitalisation of at least $100 million.
- Average daily liquidity of $1 million.
- A public float of at least 10%.
While Strive Asset Management, co-founded by Republican Vivek Ramaswamy, has proposed a ‘Bitcoin Bond‘ exchange-traded fund (ETF) proposal. This fund aims to offer exposure to BTC by investing in convertible securities, primarily from firms such as Microstrategy.
As part of the EA Series Trust, the ETF prioritises bitcoin bonds—securities like swaps, options, and derivatives connected to organisations heavily invested in Bitcoin. Pending approval, the Strive Bitcoin Bond ETF plans to allocate at least 80% of its notional exposure to these specialised ‘bitcoin bonds.’ Its strategy allows for concentrated investments in individual issuers and can dedicate over 25% of its assets to the software and tech sectors.
Market Demand Always Ends up Suckering in Passive
Companies moving towards a Bitcoin standard create additional products for these ETFs to add to their prospectus; with so few currently around, they would have free reign at any capital that flows into these ETFs.
The creation of these ETFs would provide even more encouragement for companies to adopt a Bitcoin strategy so that they can get listed with these funds.
If these ETFs go through, expect every small-cap or mid-cap with a few million dollars and a dream to announce a Bitcoin reserve, but it will become tiresome, oh so tiresome.
The Bitcoin Meme Stock Trade
The premium Bitcoin-backed stocks can command could set off a frenzy; management would be encouraged to hop board the train to drive up their stock price and tap into some exit liquidity for their stock options or use this strategy to grow themselves large enough to reach those larger indexes where they can get exposure to passive index funds and the constant flow of dumb money.
On the trader and retail side, you could see a GameStop and AMC-type situation, where a hoarder of traders are scouring through balance sheets looking for companies with large cash positions relative to their market cap and still generate free cash flow and take positions hoping one of them announce a Bitcoin reserve.
Overlay that with any company CEO meeting, following or interacting with Saylor online or IRL, and you have a recipe for a rumour mill that can generate some serious speculative alpha.
If you can call the companies that pivot to his trade early enough, you could bank yourself a 1000x that actually has real exit liquidity to back it up, and that could prove to be a recipe that drives a frenzy in publicly listed stocks as we saw in 2020 with the stimmy cheque airdrops.
Valuation Framework Changes
Traditional valuation models will have to evolve as companies incorporate Bitcoin holdings, and market participants will need to:
- Development of new metrics for assessing Bitcoin-holding companies
- Integration of cryptocurrency exposure into risk assessment models
- Evolution of industry-specific valuation multiples
Traders will need to wrestle with questions like:
- At what PE should a Bitcoin company trade?
- How do we price their treasury for future growth?
- How do we value the cash flow that is converted into Bitcoin?
Will it be figured out overnight? Unlikely, the most entertaining way of finding fair value is a good old-fashioned bubble, so expect some crazy valuations for companies that will make zero sense.
Corporate Strategy Implications
Even if you can bag a juicy premium for your stock, there will always be companies that shy away from the trade, especially as it gets too frothy and valuations reach the “looking for a man in the finance” level de lulu stage.
We have already seen Microsoft shareholders take a stance of anti-Bitcoin, even with 1-2% of their cash reserves, so there will be those brave enough to sit this one out.
While MSTR has taken the 100%+ route, everything will be in between.
As for the companies looking to entertain the idea, they must consider several factors when evaluating Bitcoin treasury strategies:
- Balance sheet optimisation
- Buying out of shareholders who disagree
- Deciding on an allocation size that makes sense for their operations
- Deciding on a custody model
- Stakeholder communication strategies
- Long-term strategic positioning
Bitcoin Corporate Treasuries are Here to Stay
The market premium commanded by companies announcing Bitcoin acquisitions reflects a broader shift in corporate treasury management and institutional acceptance of Bitcoin.
As more companies move towards a Bitcoin standard, this trend is likely to accelerate, creating new opportunities and challenges for both corporate treasuries and Bitcoin-focused investment products.
Will it be an orderly process? Absolutely not!
There will be scams, there will be frauds, there will be periods of gross overvaluation, and people will lose their shirts, but that’s a bull market for you; someone has to end up holding the empty bag at the end when rationality pulls valuations back towards its fair value.
The success of these strategies will ultimately depend on careful execution, risk management, and maintaining a profitable business that can service its operational costs and debts.
