The following is a guest post and opinion of Robert Schmitt, Founder of Cork Protocol.
Many people view crypto treasury strategy companies as a form of leveraged crypto exposure to digital assets. In many ways, this thinking is correct, as these companies seek to deliver amplified returns by strategically accumulating and managing digital assets on their balance sheets. But given the leverage involved, a downturn could severely impact prices and cause significant contagion in broader markets, similar to the blowups experienced last crypto winter.
So, what exactly are these companies? Marvels of financial engineering, or ticking time bombs ready to crash the market?
To understand the risks, we first need to understand what a treasury strategy entails. There is not one singular approach, but a series of financial tools with different trade-offs, each carrying its own risks and considerations.
When the stock is trading above its Net Asset Value (NAV)—which is the per-share market value of the underlying crypto assets—it can issue new shares and sell via At-The-Market (ATM) offerings. This generates proceeds that are used to purchase more crypto. Holding other factors constant, this increases the crypto holdings per share depending on the stock premium to NAV.
Some companies also deploy assets in staking or DeFi strategies to earn additional yield for shareholders. However, the specifics depend on the company; not all actively stake or engage in restaking.
If the stock price falls below NAV, companies may buy back shares to increase crypto holdings per share. This buyback cash can come from balance sheet cash or from selling part of the crypto treasury.
The main risk source in a downturn lies in the use of debt and preferred stock, as both impose future cash liabilities. These non-dilutive capital-raising tools can increase risk depending on their scale relative to the company’s assets.
Crucially, deviations between stock price and NAV are captured by the treasury vehicle through these transactions, directly affecting crypto holdings per share. When the stock trades at a premium, treasury companies effectively generate buying pressure on the underlying crypto asset. Conversely, when trading at a discount, buybacks may create selling pressure as crypto assets are liquidated to fund purchases.
Many treasury company investors view these stocks as a “trade.” In bear markets, significant outflows could force asset sales, increasing downward pressure on crypto prices.
Buying stock in a treasury company provides direct exposure to the specific underlying crypto, so stock prices closely track the asset price and can contribute non-negligible buying or selling pressure on the crypto itself.
As crypto treasury companies grow, their downside risks become more significant, driven mainly by three factors:
First, debt maturities loom large. For instance, Strategy holds about 630,000 BTC and carries roughly $8.2 billion in convertible debt maturing between 2028 and 2032. While this maturity timeline allows flexibility, including refinancing options, a severe Bitcoin price crash could constrain options.
Second, the $3.95 billion in preferred stock issued by Strategy pays an 8–10% dividend, generating nearly $395 million in annual cash outflows. In a bear market where stock prices trade near or below NAV, raising capital through stock issuances becomes difficult, potentially forcing BTC sales or diluting shareholders. Either outcome risks further downward pressure.
Lastly, raising capital through new issuances becomes difficult during a bear market when the stock trades near or below NAV, potentially forcing asset sales or dilution. Persistent trading below NAV during outflows can cause treasury companies to sell crypto assets to fund buybacks, exacerbating price declines and possibly triggering a negative feedback loop.
When markets rise, leverage amplifies volumes and valuations, enabling more leverage. In downturns, leverage is unwound aggressively, shrinking activity.
This dynamic underpins the risk and reward profile of treasury vehicles. While these vehicles are generally accretive to the ecosystem, a large amount of short-term speculative capital chases their stocks, which could lead to abrupt outflows when market sentiment shifts.
The crypto treasury strategy is effective with prudent risk management that avoids blowups.
So far, major market participants have taken a conservative approach. However, as crypto prices climb, leverage becomes more attractive. Aggressive issuance of debt and preferred stock in a race to dominate treasury assets could introduce substantial systemic risk.
Currently, many treasury companies operate with zero or modest leverage, supported by significant balance sheets. If leverage trends higher and becomes unstable, the fallout is sure to be disastrous—but that time has not come… yet.
