Crypto Treasury Companies Risk Ignoring Lessons from History, Warns Galaxy

The rapidly-expanding crop of public companies using their stock to accumulate digital asset treasuries ought to trigger lessons from history about the way compounded risks can spread through the financial system and then dramatically unravel, warns a report on the trend by Galaxy Digital.

The growth model of Digital Asset Treasury Companies (DATCOs), which now account for over $100 billion in digital assets, critically depends on a persistent equity premium to net asset value (NAV), driven by the up-only trajectory of cryptocurrencies like Bitcoin BTC$87,469.11 and Ethereum tokens ETH$2,956.98. If the premium collapses, or worse, flips to a discount, the model begins to break.

Fear of missing out on the Bitcoin treasury play presents an interesting parallel with the rush into investment trusts of the 1920s, a reflexive loop and mass speculative pathology, which saw new trusts launched at a rate of one per day, and Goldman Sachs Trading Corporation becoming the MicroStrategy of its day.

Explicitly pursuing a business model of accumulating digital assets (usually bitcoin) is a blueprint established by Michael Saylor’s Strategy (MSTR), which began BTC accumulation in 2020; other large entrants to the DATCO space are Metaplanet (3350.T) and SharpLink Gaming (SBET).

If one or two companies pursue this route in isolation, it may not matter much to the broader ecosystem, Galaxy said in its report, but ten or so firms a week are now crowding into this trade. These DATCOs are largely correlated, both to each other and to the underlying cryptoasset markets upon which they are built. If redemptions or buybacks become widespread among firms, that could be the beginning of a larger-scale unwind, Galaxy said.

“By now, the playbook is clear and capital is pouring in. But this is part of the risk. When hundreds of firms adopt the same one-directional trade (raise equity, buy crypto, repeat), it can become structurally fragile. A downturn in any of these three variables (investor sentiment, crypto prices, and capital markets liquidity) can start to unravel the rest,” said the report.

An unwind in the DATCO trade could exert significant downward pressure on digital asset prices themselves. In the same way that inflows from treasury companies have served as a “persistent bid” for bitcoin, outflows driven by redemptions would likely have the opposite effect. At the very least, there could be a halt in net accumulation, Galaxy said.

The DATCO trend may still be some way off reaching crescendo, yet several firms’ stocks are already beginning to flirt with discounts to NAV. In such cases, these companies may start buying back stock to arbitrage the discount, using their digital asset reserves or operational cash. (Already, Bitmine has secured board approval to repurchase up to $1 billion worth of its shares whenever management sees fit to do so.)

One possible result of an unwind is sector consolidation, Galaxy predicts. Larger, better-capitalized players like Strategy (MSTR), still trading at a premium, may begin acquiring smaller DATCOs at NAV discounts. These transactions would effectively allow buyers to acquire BTC at a discount using their own equity. However, this only works as long as the acquirer retains a premium.

“As these firms continue to scale, their influence over digital asset markets grows accordingly. An unwind would weaken the strongest tailwind crypto has had this cycle: the normalization of digital assets on corporate balance sheets,” Galaxy said.

“An unwinding of the DATCO trade could conceivably dull the public equity markets’ appetite for digital asset exposure of any kind, slowing inflows into crypto ETFs, which, all else equal, would weigh on the underlying cryptocurrencies’ prices.”