Galaxy Digital, a crypto-centric financial services company founded by Bitcoin Bull Michael Novogratz, notes that the rapid rise of public companies buying Crypto for its balance sheet could make the market “structurally vulnerable.”
In its July 31 research report, the New York-based crypto company said the rise of digital asset financing companies (Datcos) is tied to a single trade. Increase fairness and use your revenue to buy Bitcoin or other cryptocurrency.
“If hundreds of companies adopt the same one-way trade (raising capital, purchasing crypto, repeating it), they can become structurally vulnerable. Recessions in one of these three variables (investment sentiment, crypto prices, capital market liquidity) begin to unravel,” the report warns.
At the time of reporting, Datcos owns over $100 billion in cryptocurrency for each data compiled by Galaxy Digital.
Michael Saylor's strategy leads a group with over 607,700 BTC, worth around $70 billion at current market prices, followed by Metaplanet in Japan and Semler Scientific in the US.
Cryptocurrency Company Stock Insurance Fees
While BTC accounts for the majority of its holdings of around $93 billion, companies add ETH, SOL, BNB and other tokens to their finances. For example, as of August 1, Tom Lee's Bitmine is the largest ETH owner, with over 625,000 ETHs worth around $2.3 billion worth of data on strategic ETH reserves.
Risk of Cascade Disorders
According to Galaxy Digital, today's Datco Boom rivals the mutual fund boom of the 1920s, when premiums on asset values accelerated rapid growth until sentiment changed.
The investment company said it could rewind if it could blunt the public stock market's appetite for all types of digital assets exposure and slow the inflow into crypto ETFs.
“These cascade obstacles were the acceleration of the crash in 1929 and the terrifying prash that followed. Datcos may be more transparent and regulated than trusts in the 1920s, but the Mnav-led capital formation mechanism is eerie,” reads the report.
Galaxy Digital points out that, with the exception of the strategy, Datcos holds only about $32 billion in crypto, so the risk remains “mainly theoretical” for now.
Warning Sign
Galaxy Digital is not the only prominent company that is sounding alarms. Blockchain gaming and investment company Animoca Brands previously highlighted the risks associated with the growing practices of companies unveiling their Altcoin Treasury strategy.
The company warned that such strategies would allow companies to be exposed to volatility, liquidity issues and the possibility of forced asset sales when their debt structure is under stress. It also pointed out the risk that activist investors will pressure management to sell their assets at a disadvantage if the stock falls below the value of its net worth.
Early stage crypto venture capital firm Breed VC has issued a similar warning, claiming that many Bitcoin finance companies that rely heavily on debt “pose a greater systematic threat.”
He said the most at-risk pure play companies are those that rely heavily on premiums known as net asset value or multiples of MNAV. “The existential threat is an expanded bear market that erodes MNAV premiums, just as significant debt maturation is paid,” Breed said.
The report warned of a potential “death spiral” that could drive down BTC prices and rising debt to distressed businesses. In such a scenario, strong players who are likely to have large companies like Strategy win weak rivals in the dollar will survive.
