Crypto treasury companies are starting to look like highly risky and speculative bets on crypto. Short-sellers are starting to actively target them, and prominent crypto companies are starting to openly debate the merits of the crypto treasury business model.
So, are there any crypto treasury companies worth buying right now? Or are the risks simply too great?
Look for "pure-play" crypto treasury companies
Broadly speaking, there are now dozens of publicly traded companies that purport to be crypto treasury companies. In some cases, these companies were specifically created to invest in a specific cryptocurrency such as Bitcoin (BTC +0.45%). These can be thought of as "pure-play" crypto treasury companies. The best example here is Strategy (MSTR +1.46%), the company formerly known as MicroStrategy that pioneered the concept of the Bitcoin treasury company.
In other cases, though, crypto treasury companies have rapidly transformed themselves from one business or industry to become a crypto-focused company within the past few months. For example, one of the top Ethereum (ETH 0.53%) treasury companies is SharpLink Gaming (SBET +3.07%), a company that once provided affiliate marketing services for online gambling sites.
There are now Bitcoin treasury companies that started off life in industries ranging from healthcare to media and entertainment. Notably, one of these companies now includes Trump Media & Technology Group (DJT 0.38%), which holds 15,000 BTC on its balance sheet and currently ranks among the top 10 Bitcoin treasury companies in the world. The overall mantra of these companies appears to be: "If you can't beat Bitcoin, then you have to buy it."
And that's what really concerns me. Many of these companies are attempting to shed money-losing or struggling businesses and reinvent themselves for the brave new world of crypto. Most of them have no experience buying and selling crypto, and they may not understand all the risks involved in the crypto treasury business model.
So, if you're thinking of investing in a crypto treasury company, I'd suggest sticking with a "pure-play" crypto treasury company. These are companies that have deep domain expertise and understand how cryptocurrency works. The best in class, of course, are those that only buy Bitcoin. But there are now "pure-play" crypto treasury companies for Ethereum, Solana, and XRP.
Look for companies trading above the value of their crypto holdings
A major complaint of short-sellers is that most -- if not all -- crypto treasury companies do not deserve to trade for more than the value of their crypto holdings. If a company like Strategy holds $71 billion worth of Bitcoin on its balance sheet, and it is now doing nothing else except accumulating Bitcoin, shouldn't the company be valued at $71 billion?
NASDAQ: MSTR
Key Data Points
So, not surprisingly, one notable trend over the past few months has been the tendency for crypto treasury companies to trade at or below the value of their crypto holdings. Only a handful of the top crypto treasury companies have been able to maintain their lofty premiums. The most notable here is Strategy, which is currently valued at $86 billion. Roughly speaking, it now trades at a multiple of 1.2 times its core Bitcoin holdings.
When choosing between different crypto treasury companies, it's important to understand which companies are still holding on to their premium. These are the companies worth investing in. But, alas, those companies are getting harder and harder to find. For example, K33 Research recently highlighted that 25% of Bitcoin treasury companies now trade below their net asset value (NAV).
A speculative bubble in crypto?
The recent flash crash in the crypto market highlights how risky these companies can be. Depending on the leverage being used, investors could really take a hit if a cryptocurrency such as Bitcoin or Ethereum falls 10% in one day.
Keep in mind: Most of these crypto treasury companies are not purchasing cryptocurrency with cash from ongoing operations. Instead, they are raising capital from outside investors to finance their crypto purchases. Often, this involves debt. And that creates the potential for a massive, debt-fueled speculative bubble.
That being said, my interest in crypto treasury companies is now limited to the best-in-class companies that are laser-focused on buying Bitcoin and using as little leverage as possible. But even then, prudent investors might be better served simply buying a spot Bitcoin exchange-traded fund (ETF) to get their exposure to crypto.
