In theory, this trade doesn’t make a lot of sense. Sure, the value of a company’s assets help inform its share price but any change in the price of those assets should correlate directly.
For some reason, crypto is different. Firms that have piled crypto on to their balance sheets have seen a jump in their share price far out of proportion to the value of the crypto they added.
Little wonder that more CEOs are glomming on to the same tactic. After all, if you can achieve a huge spike in your firm’s share price simply by swapping one currency on your balance sheet for another, why not? To get a sense of how popular the tactic has become, here is a screenshot from Bitcoin Treasuries’ list of publicly-traded firms with the most Bitcoins (one Bitcoin is currently worth around $118,000):
While some of these firms were set up solely to invest in Bitcoin, many of them are operating firms whose core business involves something else. Mitchell Petersen, a finance professor at Northwestern University, likens the phenomenon to the internet stock bubble of the year 2000 when firms discovered they could boost their share price simply by adding “dotcom” to their name.
Petersen added that reporting rules do not require firms to disclose the specifics of the “cash equivalents” in their financial statements, but that these almost always consist of safe, liquid assets. The only exception he can recall is mining firms that have occasionally used their cash to put gold on their balance sheet, and justified the move by claiming a special expertise in the direction of gold prices.
This same reasoning can be found in some of the firms above. Specifically, the firms that are engaged in Bitcoin mining and that are well-versed in the cyclical patterns of the crypto industry. Some investors may view it as worth it to pay a premium for their share price.
In the case of other publicly traded firms, though, it is hard to see a compelling reason to believe their Bitcoin purchases are based on any particular expertise. At the same time, the volatile nature of crypto markets means many of these firms could find themselves in a tough spot during an inevitable downturn.
This raises the question of whether the current trend of public firms buying crypto is sustainable. According to another expert on corporate finance, the answer is simple: It’s not sustainable.
“It’s a meme effect that has nothing to do with investment prowess or good corporate strategy,” says Darrell Duffie, a finance professor at Stanford University.
Duffie holds the view that firms should use their capital to invest in their core competencies rather than try to compete with hedge funds on speculative plays. He acknowledges that, in the case of Michael Saylor’s Strategy, the share price of the firm has performed extremely well—but says that, as more and more firms try a copycat approach, the market will eventually come to its senses.
“It’s a fad and it will go away and one day some other fad will take its place,” said Duffie.
