A look at potential factors indicating a possible cryptocurrency market crash in 2022.
In the financial world of 2025, the buzzword has become corporate reserves filled with cryptocurrency, specifically Bitcoin. Following in the footsteps of Michael Saylor's Strategy Inc., multiple traditional companies are jumping on the bandwagon, and the question on everyone's lips is - is it a winning strategy or is it too good to be true?
When Strategy Inc. started purchasing Bitcoin back in 2020, it coincided with a staggering 25-fold increase in the company's stock price (as of early June). However, experts like Mark Palmer, senior equity analyst at The Benchmark Company, warn of potential pitfalls that might come with this strategy.
One of the primary concerns is the temptation to use excessive leverage to stimulate growth, as funding for the Bitcoin purchases often comes from low- or zero-coupon bonds that can be exchanged for MSTR shares at a hefty premium (up to 40-50%). While Strategy Inc.'s capital structure allows it to withstand a 90% drop in Bitcoin's price for four or five years, many other companies might not be as fortunate.
Around the world, there are over 120 companies owning approximately 817,000 Bitcoins, worth around $86 billion at current prices, or around $105,000 each. Some have adopted the same investment principles as Strategy Inc., but they may have bought Bitcoin at higher prices or with less attractive debt terms.
Recent conversations revolve around a new metric – accumulating more Bitcoin per share. Take, for example, CEO Jack Mallers of Twenty One, who said in a recent Bloomberg interview, "My job... is to increase our Bitcoin per share." Some investors, like Pantera Capital, are looking at dynamic indicators such as the growth rate of cryptocurrency per share.
However, the expanding debt market for Bitcoin acquisition could create significant risk due to the increase in leverage building up in the system. The collapse of GBTC (Grayscale) shares in 2022 serves as a cautionary tale. Similar to the current trend of companies creating Bitcoin reserves, GBTC had a similar capital-raising scheme. It promised to back GBTC shares with physical Bitcoin, issuing shares a few months later. The premium of GBTC shares over Bitcoin, which had been maintained at over 40% from 2018 to 2021, eventually collapsed to negative values and remained there for several years since 2021. Companies like Genesis Trading, Three Arrows Capital, Voyager, Celsius, BlockFi, and FTX were among those involved in these speculations, leveraging GBTC.
As of early June, Grayscale (GBTC) is the third-largest capitalization fund under management after BlackRock and Fidelity, with around $20 billion. Experts point to GBTC as a clear example highlighting the risks of expanding this market.
"Crypto trading is akin to a roulette wheel," wrote Nick Carter, partner at Castle Island Ventures. "Your primary argument: 'Sometimes people will buy at $1.50 for $1 without any apparent reason. We think this can continue indefinitely.' It's like writing a blog post in 2021 saying GBTC trading will last forever," Carter commented on a crypto fund's recent message about a new type of company buying Bitcoin.
In the world of cryptocurrency, nothing is guaranteed, and the risks associated with public companies buying Bitcoin above $90,000 and using debt to fund these acquisitions are multifaceted. Be cautious and stay informed. Stay tuned to the "RBC-Crypto" Telegram channel and forum to keep up with the latest news and trends in the crypto world.
Investors like Pantera Capital are scrutinizing growth rates of cryptocurrency per share, as some CEOs, such as Jack Mallers of Twenty One, aim to increase Bitcoin holdings per share. However, the expanding debt market for Bitcoin acquisition could potentially create significant risks due to increased leverage in the system, as seen in the collapse of GBTC shares in 2022.
