The Risks of Bitcoin Acquisition Vehicles

Many companies are adopting aggressive strategies to buy Bitcoin, following in the steps of Strategy (formerly MicroStrategy). However, digital asset bank Sygnum has raised alarms about the risks associated with these so-called Bitcoin acquisition vehicles.

Many companies are adopting aggressive strategies to buy Bitcoin, following in the steps of Strategy (formerly MicroStrategy). However, digital asset bank Sygnum has raised alarms about the risks associated with these so-called Bitcoin acquisition vehicles.

These companies are aiming to capitalize on Bitcoin’s rising value. However, Sygnum warns that their leveraged approaches could destabilize markets and attract regulatory scrutiny.

At least 61 firms with different core businesses have adopted Bitcoin as a reserve asset, and this trend doesn’t seem to slow down. In fact, many new firms have been established with business models centered exclusively on accumulating the largest cryptocurrency.

Unlike traditional firms with diversified operations, these companies function similarly to investment funds, raising capital specifically to acquire Bitcoin. This approach has helped to drive up Bitcoin’s price by attracting additional investment, particularly from investors seeking indirect exposure to digital assets.

However, Sygnum cautions that the BTC-per-share growth model is not sustainable indefinitely. The heavy reliance on leverage, borrowing, or issuing equity to fund Bitcoin purchases exposes these firms to significant risks.

A bearish turn in the cryptocurrency market or a plateau in demand could force these companies to liquidate their Bitcoin holdings to cover debts or meet investor redemptions. Extreme Bitcoin price drops may prevent debt redemption, leading to insolvency risks.

Moreover, liquidations could trigger sharp price declines, potentially destabilizing the broader cryptocurrency market and eroding investor confidence.

“A saturation of demand coupled with a crypto bear market can lead to these vehicles having to sell Bitcoin which would exacerbate an already existing downtrend in the Bitcoin price – both as a result of the selling pressure and as a result of the impact this would have on sentiment. “Michael Saylor selling Bitcoin” would be a difficult headline for the crypto market to face,” Sygnum noted in its latest report.

Regulatory risks also remain a significant concern. Sygnum pointed out that Bitcoin treasury firms are implementing an investment strategy but are generally not regulated as financial institutions, which could expose them to potential regulatory challenges.

“Although the current political and regulatory climate in the US lowers this risk (or could result in only very minimal penalties if any), future elections may shift the balance and/or new legislation may be passed which could increase the heat on these firms and their actions may come under the microscope,” the bank added.

The report also highlighted that concentration poses risks. Sygnum explained that large Bitcoin holdings by a few entities could reduce Bitcoin’s liquidity and increase volatility. Moreover, it could undermine its appeal as a reserve asset for central banks.

“Large, concentrated holdings are a risk for any asset and at this point (Micro)Strategy’s holdings are approaching a point where they become problematic, with the company holding close to 3 percent of the total Bitcoin ever issued but a much higher share of the actual liquid supply.”

Therefore, the rise of Bitcoin acquisition vehicles showcases the burgeoning institutional interest in cryptocurrencies but also underscores the speculative nature of such strategies. Strategy’s success has inspired imitators, but not all may have the financial resilience to weather market fluctuations.

In addition, the proliferation of these firms signals a maturing market. Yet, their aggressive tactics could exacerbate volatility in an unpredictable asset class. Sygnum’s warning serves as a reminder that while Bitcoin acquisition vehicles may drive short-term gains, their long-term viability remains uncertain.