“The current influx of public organizations embracing crypto treasury operations ushers in a new phase of financial engineering. This is akin to the Leveraged Buyouts (LBOs) in the ’80s or Exchange-Traded Funds (ETFs) in the ’90s,” Chung stated in a recent report. He further noted that this trend is primarily misunderstood outside the crypto industry and is often overly simplified as a mere ‘leveraged ETF trade.’

Chung elaborated that these companies are raising funds, or attempting to do so, to buy bitcoins and other cryptocurrencies in order to maximize shareholder value. This model, inspired by Strategy’s playbook, has gained traction, particularly in the U.S., which is favored by its deep capital markets and experienced institutional investors.

The companies typically restructure themselves as former operating firms, SPACs, or shell companies, repurposed to serve as conduits for crypto accumulation. They choose funding methods like private investment in public equity, at-the-market offerings, convertible bonds, or perpetual preferred shares, which are suited to their maturity stage and investor base, with the goal of efficiently leveraging crypto market volatility without pledging assets as collateral.

The quick rise of crypto treasury companies has raised alarms about their leveraged positions possibly causing a new wave of forced liquidations if crypto markets turn bearish. Chung pointed out two main risks: collateral liquidation risk and activist-driven liquidation. However, he argued that these risks are more contained than those that triggered past crypto cycle collapses.

The second concern is that crypto treasury companies trading at a discount to their net asset value could become targets for activist investors aiming to force asset sales. However, Chung explained that in reality, activists usually prefer less aggressive tactics, with liquidation used only as a last resort due to its cost and complexity.

Currently, 228 companies have adopted some form of crypto treasury strategy for bitcoin alone. High-profile names like Twenty One, Nakamoto, Trump Media, and GameStop have recently joined the ranks, following the bitcoin acquisition model pioneered by Strategy and its co-founder, Michael Saylor.

However, managing these strategies is a complex task. Newer, less experienced entrants may stumble in a downturn, especially if they mismanage liquidity or overextend their balance sheets. But this doesn’t necessarily make the crypto market riskier overall, Chung said, as crypto treasury companies reflect the same liquidity challenges faced by large retail holders.

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