Digital asset treasury companies ushered in “Darwin Hour”! Strategy (MSTR.US) impersonators face existential crisis

The Zhitong Finance App noticed that this year, digital asset balance sheet companies made great strides until Bitcoin suddenly plummeted in October. Many companies are now facing unrealized losses.

There are currently over 180 listed companies holding cryptocurrencies on their balance sheets, and about 100 of them have adopted a strategy similar to Strategy (MSTR.US) co-founder Michael Saylor pioneered in 2020: rapidly accumulating bitcoin by issuing debt and equity.

Earlier this year, as the price of Bitcoin rose, the practice was favored, and investors were betting that cryptocurrencies would see a bullish trend under the Trump administration.

But Bitcoin's recent volatility has triggered a sell-off in the digital asset balance sheet (DAT) sector. Since Bitcoin was liquidated on October 10, Strategy's stock price has dropped by about 40%.

Over the past month, investors have imposed harsher penalties on Strategy imitators. KindlyMD (NAKA .US) plummeted 39%. Eric Trump's American Bitcoin (ABTC .US) is down 60%. Anthony Pompliano's ProCap Financial (BRR .US) fell 65%.

Meanwhile, shares of balance sheet companies that hold the second-largest cryptocurrency, Ether, have also declined. Since the cryptocurrency sell-off in October, the stock price of Bitmine Immersion Technologies (BMNR.US), which is chaired by Tom Lee (Tom Lee) of Fundstrat, has fallen by more than 33%, while Ether has fallen by more than 25% during the same period.

Other balance sheet companies that hold Ether, such as sports betting company SharpLink Gaming (SBET.US) and computing company Bit Digital (BTBT .US), have plummeted about 40% in the past two months.

The key metric these companies focus on is called MNaV, which measures the ratio between their market capitalization and the value of cryptocurrency holdings on their balance sheets. MNav below 1 indicates that investors value a balance sheet company less than the value of cryptocurrencies on its balance sheet.

As far as Strategy is concerned, the indicator is approaching 1 in late November, raising concerns that the company may eventually be forced to sell some of its bitcoin to pay dividends and repay debts.

In response, earlier this month, the company announced the establishment of a $1.44 billion cash reserve fund to sustain huge dividend payments and interest on debt over the next 21 months as Bitcoin continues to fluctuate.

Strategy CEO Phong Le refuted the idea that MNAV compression would pose a threat to the company's business model during the Bitcoin downturn. He argued that Strategy is an operating company and not a passive fund like an ETF.

Le said, “Our products are Bitcoin-backed securities. In this particular case, a company's valuation should not equal the underlying asset. A company's valuation should equal the ability to increase underlying assets, increase revenue, and grow the business.”

Le added: “We look more like a 'Big Seven' tech stock than a closed-end fund or ETF.”

Strategy presented a similar argument to MSCI, challenging the index provider's decision next January: whether to exclude companies that hold 50% or more of total assets in digital assets from the global index.

Analyst Bernstein believes Strategy will be able to safely survive the crypto winter. But many companies that followed Strategy's strategy during the boom, and were boosted by soaring token prices and crypto-friendly regulation by Dongfeng, may not be spared.

Analyst Gautam Chugani wrote in a report on December 1, “Market concerns about MSTR are exaggerated, and no realistic scenario would threaten MSTR's long-term survival,” “However, several MSTR imitators may continue to trade below their net asset value (NAV) because they have no clear path to raise long-term capital.”

According to a report by data aggregator Bitcoin Treasury on Thursday, 65 of the 100 Bitcoin balance sheet companies with a measurable cost basis bought Bitcoin at a price higher than the current market price, causing them to face unrealized losses when the cryptocurrency plummeted. Last month, five of these companies sold 1,883 bitcoins during the acceleration of the cryptocurrency crash.

Matt Zhang, founder of Hivemind Capital, said, “I think a lot of DAT will become irrelevant.” Zhang said his investment company evaluated more than 100 DATs this year, but only invested in more than 10.

He added: “Like the internet bubble in 2000, many people put '.com' on their business cards hoping they would succeed, but they didn't because their underlying business model was flawed.”

Zhang believes that in the end, all S&P 500 companies will hold Bitcoin and Ethereum as value stores and balance sheet diversification tools. But that alone is not enough.

He said, “The question is, other than holding, what do you plan to do? Should you have an operating business, an operating business that drives cash flow, and can this cash flow greatly benefit your cryptocurrency balance sheet?”

Zhang said he wouldn't be surprised if an integration occurred, but added: “It depends on the circumstances. I don't think we should draw negative conclusions about all of these companies.”

Galaxy Digital's research analyst Will Owens said restructuring and stronger players acquiring weaker players are possible.

“In other words, balance sheet companies are about to enter a Darwinian phase,” Owens wrote earlier this month. The analyst said that if Bitcoin hits a record high, it could be the beginning of a new round of competition for those companies that have survived.

Owens wrote, “In principle, balance sheet companies' transactions haven't died out. But the bar seems to be higher now.”

A new entrant trying to cross this higher threshold is Twenty One Capital (XXI.US), which is supported by heavyweight players Tether and SoftBank. The company's shares fell 19% on the first day of its public listing on December 9. Its CEO, Bitcoin influencer Jack Mallers, dismissed outsiders treating it as a passive holding company and comparing it to well-known cryptocurrency players.

He told the media last week: “People want to compare us to Strategy — we're not. We'll build cash flow, business, and products. People compare us to Coinbase. Neither are we. We already have far more bitcoins than they do.”

Mahlers added, “So the point is that we're different. The market is going to have to figure it out with us, and they can spend as long as they want.”