WHY STRUGGLING COMPANIES ARE LOADING UP ON BITCOIN / THE FINANCIAL TIMES BIG READ

Why struggling companies are loading up on bitcoin

Biotechs, miners and hoteliers are snapping up crypto to boost their share prices, but experts warn of a crisis if markets crash

Nikou Asgari in London

© FT montage/Unsplash

Three months ago, Georges Karam had never considered for a moment that his semiconductor company might start buying bitcoin.

Shares of his New York-listed business had been struggling for some time when Karam read about a healthcare company that had bought the digital currency and seen its stock price soar. 

The French chief executive says he began reading about bitcoin and became “intrigued”. 

After a failed deal spooked investors, he says, “I was looking for ways to unlock the value of the company.”

Karam spoke to his board and some investors, and decided to launch a bitcoin strategy. 

Sequans Communications raised $384mn from debt and equity markets to spend on buying the world’s most popular token. 

Its share price surged 160 per cent on the news. 

“I could not say this last year but today I’m a big believer . . . I’m 100 per cent convinced today that bitcoin is here to stay,” Karam says.

In large part the crypto newbie has bitcoin evangelist Michael Saylor to thank for his conversion. 

Since 2020, the US crypto magnate has spent billions of dollars buying the token almost weekly and running conferences encouraging others to do the same. 

Saylor’s software company-turned-bitcoin-hoarder Strategy is now valued at about $115bn, nearly double the value of the bitcoin it holds, as investors pile in. 

Last week, Strategy bought $2.5bn worth of bitcoin, its third-largest purchase ever. 

Its shares have rocketed more than 3,000 per cent in five years.

This success, along with US President Donald Trump’s full-throated support for the digital asset industry, has encouraged booming numbers of so-called crypto treasury companies to launch worldwide.

Biotechs, gold miners, hoteliers, an electric vehicle company and a vape maker are among those rushing to buy crypto tokens, backed by investors who see an opportunity to grab a slice of the crypto pie without risking touching digital assets directly. 

In the year to August 5, some 154 public companies have either raised or committed to raise a combined total of $98.4bn in order to buy crypto, according to crypto advisory firm Architect Partners. 

Before this year, $33.6bn had been raised by just 10 companies.

Some have copied Strategy by changing their website colours to bitcoin’s orange hue, and providing data dashboards showing how many coins they hold, their value, and other important metrics for investors.

Even Trump himself is getting in on the action — his family media company raised $2bn in July to buy bitcoin and related assets.

The rush to hoard crypto comes in a year that both bitcoin and benchmark stock indices have hit repeated record highs, and at a time when traditional investment players are trying to figure out how best to participate in the new world of digital assets.

But many doubt this trend will be long-lived. 

The rapid growth already has some investors concerned about over saturation. 

“It’s comparable to the internet bubble back in 1998,” says Brian Estes, chief executive at Off The Chain Capital, an investor in several bitcoin treasury companies, recalling the time when companies rushed to rebrand themselves as web-first businesses in order to grab attention.

The multiplicity of new companies in the space also raises worries about what happens if, or when, the price of these tokens tumbles, and how deep the spillover effects will be. 

Companies that are taking on billions of dollars in debt to fund their purchases could quickly find themselves unable to repay creditors.

“The risk is that bitcoin crashes,” says Eric Benoist, a tech and data specialist at investment bank Natixis CIB. 

In this scenario, stock prices will also fall and if companies cannot pay their bondholders, leaving investors losing money, “it could be systemic for the bitcoin ecosystem”, he adds. 

“Every time there’s a small panic in the market, the whole thing drops.”

Kevin de Patoul, chief executive of crypto market maker Keyrock, says investors should be realistic about what this is. 

“You’re injecting a huge amount of risk into a system that, in the end, has almost nothing backing it except the continued appreciation of the asset.”

For struggling companies, buying crypto tokens appears to be a sure-fire way to grab investors’ attention and lift their share prices — at least temporarily. 

“If we hadn’t embarked on this course, we would struggle to raise future capital; we were a company on life support,” says Aidan Bishop, founder of London-listed Bluebird Mining Ventures, which raised £2mn in June to spend on bitcoin. 

Before this, “to go and raise money I’d have to go and knock down doors and beg”, he adds.

Crypto evangelist Michael Saylor has, since 2020, spent billions of dollars buying the bitcoin and running conferences encouraging others to do the same. Shares in his company, Strategy, have rocketed more than 3,000 per cent in five years © Travis P Ball/Sipa/Reuters

Most of the newcomers are ordinary businesses with no previous experience in crypto, but whose digital asset holdings are worth substantially more than any money the company actually makes.

US thermal energy company KULR Technology, for example, has a market value of about $211mn, despite making a $9.4mn operating loss in the first three months of this year. 

It holds about $118mn worth of bitcoin. 

In the UK, website designer The Smarter Web Company made a net profit of just £93,000 in the six months to April, but its market capitalisation is about £560mn, thanks to the £238mn worth of bitcoin it owns.

The premium investors are willing to pay underlines the value they believe lies in these crypto-owning companies. 

Companies that prove they are committed to continue raising money to buy crypto are rewarded by investors, who value the company’s shares more highly than the value of the bitcoin they hold. 

To actually buy the tokens, companies typically raise debt or equity and plough that money into buying crypto through an exchange such as Coinbase. 

Speed is essential. 

“It boils down to the velocity,” says Estes. 

“The goal is to grow your bitcoin per share and the companies that can do that the fastest are the ones that are getting the big premiums.”

For investors, “bitcoin per share”, or how many bitcoins they hold per share of the company, is the metric of success. 

If the company buys more tokens quickly, the equity investors therefore indirectly hold more crypto per share of the company they own — a reason why investors are paying premiums early on, in the hope of cashing in on more bitcoins per share in the future.

The majority of companies buying bitcoin are simultaneously running separate businesses, but a new wave of deals involves shell companies that are loading up on or committing to buy crypto tokens. 

These operate as special-purpose acquisition companies (Spacs) that raise capital to buy or merge with existing corporations.

Rob Hadick, general partner at venture capital firm Dragonfly Capital, says the operational risk is “actually often higher” when a company with a real business buys bitcoin: “You have an existing management team [whose] goals might change over time, there may be competing priorities with the operating business.”

Executives are now branching out to buy other tokens, as the trend spreads beyond bitcoin. 

The vehicles also offer a way for owners of large sums of crypto to obtain value from it without selling it.

ReserveOne is a $1bn deal funded by investors including exchanges Kraken and Blockchain.com, which plans to buy bitcoin as well as other crypto tokens ether and solana. 

The Ether Machine raised $1.5bn, which it plans to spend on ether. 

Former Barclays chief executive Bob Diamond raised $888mn in a Spac deal with a biotech company to buy HYPE tokens. 

The venture business of crypto billionaire Changpeng Zhao led a $500mn deal for a Canadian vape maker to buy BNB, the token of the Binance exchange Zhao co-founded.

“We’re obviously seeing a bit of a gold rush right now that doesn’t make a ton of sense,” says Hadick. 

“It doesn’t strike me that there’s a need for [vehicles] for all of these different tokens.”

For retail and institutional investors, crypto treasury companies are an alternative way to gain exposure to tokens without holding them directly.

Some investors choose to do that with the US exchange traded funds launched by big name asset managers including BlackRock, Fidelity and Invesco, regulated products that have amassed more than $100bn of investment. 

But others cannot. 

In countries like the UK and Japan, crypto ETFs have been banned, as regulators try to shield investors from the risk of volatility in digital assets. 

Therefore, treasury companies act as a proxy, giving investors indirect access to crypto via a vehicle that they are allowed to trade. 

“There’s a lot of institutional [investors] who can’t allocate to ETFs period, or they can’t own [cryptocurrencies] outright,” says Tyler Evans, co-founder of investment firm UTXO Management. 

“We see the bitcoin treasury companies as filling that gap where they’re issuing these types of securities that fit in the mandates,” he says. 

His $430mn company is 95 per cent invested in bitcoin treasury companies.

Investors are also exploiting a tax arbitrage that exists in some countries between holding crypto assets and stocks. 

In Japan, gains from crypto holdings are taxed as high as 55 per cent, while stocks are taxed at 20 per cent. 

In Brazil, crypto gains are taxed at 17.5 per cent while shares trading on the country’s stock exchange are taxed at 15 per cent.

US President Donald Trump’s full-throated support for the digital asset industry has encouraged booming numbers of ‘crypto treasury companies’ to launch worldwide © May James/SOPA/Getty Images

Investing in a company that holds a lot of crypto can therefore be more tax-efficient than holding crypto directly. 

Eager investors are scouring the globe for new countries with similar structures to make money from. 

“The US market’s saturated now . . . we’re looking outside the US,” says Estes. 

Crypto’s new alliance with capital markets is ironic, given its original mission to uproot traditional financial markets and do business away from the prying eyes of large institutions.

Raising debt and equity from investors is not only core to the strategy, but required to maintain it. 

Companies that do not increase their crypto purchases fast enough are already seeing their stock slide.

While shares in Sequans Communications surged 160 per cent after it started buying bitcoin, its stock is now trading below where it was before this, reflecting investors’ unhappiness with the pace of its purchases. 

“You take Wall Street and crypto and put them together,” says Estes. 

“You need the markets to be able to support the harvest.”

The need to scale up means many such companies are making plans beyond just being pots of crypto listed on stock exchanges across the world.

Diamond says his vehicle focused on HYPE tokens might buy other crypto treasury companies. 

“If they’re failing and in distress, we can acquire them and build them,” he says. 

“It will create opportunities for the strongest to frankly snap up some of the ones that were poorly managed or poorly financed.”

Meanwhile Japan’s Metaplanet, the world’s fifth-biggest corporate buyer of bitcoin, plans to borrow against its vast stash of tokens and become a crypto financial services company.

KULR, the American thermal energy company, is also exploring “bitcoin-backed financial services” such as lending, while mining company Panther Metals plans to leverage its bitcoin holdings for future exploration projects, chief executive Darren Hazelwood says.

“The natural evolution is financial services because you can back your financial commitments with a big pile of bitcoin,” says Benoist of Natixis CIB.

Attendees pose for photos at The Bitcoin Conference in Las Vegas after a keynote address by US vice-president JD Vance. Companies that do not increase their crypto purchases fast enough are already seeing their stock slide © Ethan Miller/Getty Images

But crypto lending is highly risky business. 

In 2022, the lending market blew up spectacularly after falling prices triggered a spiral of defaults, contributing to the collapse of exchange FTX.

“My main problem with this strategy is that I don’t really understand where it ends,” adds Benoist. 

“The company is in a loop where it has to continually feed that loop with additional purchases, go back to the market to purchase more — this cycle has to continue to justify the premium.”

The biggest risk is how deep the damage will be if — or when — the price of crypto collapses. 

Inevitably, a crypto downturn means companies whose share prices are linked to tokens will slide too. 

Those that have raised debt face greater risks as they will need to pay interest to investors, and may be forced to raise more money or then sell their crypto holdings in order to meet debt obligations. 

“Structurally this is very unhealthy if you’re paying your existing debt by raising other debt. 

That makes me very uneasy,” says the head of a crypto hedge fund, adding: “You may end up with systemic risk as there are too many of these weak structures which have to unwind fully or partially, and that creates pressure on the market.

“I’d like this to be under watch by some regulators rather than everyone building treasuries on the assumption that the market is going to rise forever,” he adds.

Investors say they are aware of the risks, but keen to make money while the boom times last. 

Evans of UTXO Management, who sits on the board of several crypto treasury companies, says he is pushing CEOs to “have ways [to be cash generative in a downturn] through your operating business and ways to generate yield on your bitcoin other than raising capital”. 

Scepticism, however, is growing even from those with a stake in the sector. 

“This will end badly, it will end in a bubble,” says Estes. 

“Just as fast as they went up, they can go down too.”