Many crypto-treasury companies are trading for less than what their digital assets are worth. Is this a bargain or a big red flag?

KindlyMD, a healthcare company that adopted a bitcoin-treasury strategy in May, saw its shares drop around 96% from their all-time high. - Getty Images

Luke Cannon, a 26-year-old retail investor, held his nose and bought into a recently hot part of the crypto market, even though lately it looked to be springing a leak.

In August, Cannon purchased shares of ALT5 Sigma Corp. ALTS, a company that holds cryptocurrency on its balance sheet. Cannon wasn’t a fan of the company or the token; what caught his eye was the gap between where its shares were trading and the value of the crypto held by the company’s treasury. He decided to bet on that gap closing.

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ATL5 Sigma is one of more than 200 publicly traded companies that adopted a crypto-treasury strategy this year — meaning that their corporate balance-sheet plans would hinge on holding and buying crypto, though many of these companies originally had no ties to digital assets. Before this year, only a limited number of companies had done so, and it had not yet emerged as a widespread trend.

These companies often raise money by selling stock and debt securities, and then use the cash to buy crypto. Investors can buy the stock as an easier way to get crypto exposure, hoping the shares trade above the value of the tokens held.

For the past few weeks, however, shares of several of these companies have fallen closer to, or even below, their net asset value. Traditionally, net asset value reflects a fund’s assets after subtracting its debts. For crypto-treasury companies, investors look at a company’s crypto holdings; about 25% of crypto-treasury companies in the U.S. had market capitalizations lower than their net asset value as of last week, according to analysts at crypto-research firm K33 Research.

The weakness has investors like Cannon hoping some of these stocks are now a bargain. However, they also could be a trap that could leave latecomers holding the bag if prices keep sliding.

The wave of new crypto-treasury companies started with Michael Saylor’s Strategy Inc. MSTR — the software company formerly known as MicroStrategy, which began pouring its corporate cash into bitcoin BTCUSD in 2020 and is now viewed largely as a leveraged bitcoin play.

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The trend heated up this year as some crypto firms merged with existing public companies to put the same strategy in place, or expanding their bets to smaller tokens like ether ETHUSD, solana SOLUSD or dogecoin DOGEUSD. A regulatory environment viewed as more friendly to crypto under the Trump administration has helped.

Furthermore, the coin held by Cannon’s ALT5 Sigma bet was called World Liberty Financial, or WLFI — a crypto linked to President Donald Trump’s family. Yet the company’s discount to net asset value has continued to widened from 25%, where Cannon first bought in, based on his calculations. ALT5’s shares ended trading at $3.10 on Friday, down more than 68% from an intraday high at $9.76 on Aug.11, when the company announced its WLFI treasury strategy.

However, that wasn’t Cannon’s only play in the sector. His loss in ALT5 has been offset, so far, by gains from two other companies that adopted a strategy of buying HYPE, a cryptocurrency tied to the decentralized crypto exchange Hyperliquid. That’s left him with an overall profit on his crypto-treasury company investments, according to account statements viewed by MarketWatch. Both companies, Hyperion DeFi Inc. HYPD and Hyperliquid Strategies Inc. SONN, originally engaged in biotechnology.

Cannon, who trades crypto as his main source of income, said he capped his investments in crypto-treasury companies as a “very small part” of his digital-assets portfolio. “I think there are a lot of risks that you take when you’re investing in these,” he said.

Cannon also warned that crypto companies continue to operate with limited transparency, which, in his view, creates opportunities for investors.

This comes as the U.S. Securities and Exchange Commission and the Financial Industry Regulatory Authority have reportedly begun scrutinizing unusually high trading volumes and sharp stock-price gains in the days before some companies made their announcements to adopt crypto-treasury strategies, according to a report by the Wall Street Journal.

An SEC spokesperson said the agency does not comment on the existence or nonexistence of a possible investigation. Finra declined to comment.

Continued plunge?

Among the crypto-treasury companies now trading at discounts to their net asset value, one notable example is Kindly MD Inc. NAKA, a healthcare company that adopted a bitcoin-treasury strategy in May and is now led by Trump crypto advisor David Bailey. The company saw its shares drop over 96% from their all-time high in May. The ratio of its enterprise value to net asset value fell to around 0.7 last week, from 75 in May, according to K33.In May, Kindly MD said it raised $51.5 million through a private share sale and $200 million through convertible-notes sales to launch a bitcoin treasury. - CryptoQuant

Representatives at ALT5 Sigma and KindlyMD did not respond to requests seeking comment for this article.

Several companies holding smaller crypto, such as ether and solana, saw similar patterns as well. Even Strategy, the first and largest crypto-treasury company, has seen its premium over net asset value narrow to about 1.4 on Friday, from over 8 in 2020, when looking at all diluted shares, according to data from StrategyTracker.

It’s likely that share prices of Strategy and many other crypto-treasury companies will continue to fall close to or even below their net asset values, according to Gus Galá, senior equity research analyst at Monness, Crespi, Hardt & Co.

The narrowing of Strategy’s premium is a result of “dilution fatigue” and its struggles to maintain a consistent funding strategy between debt and equity, Galá noted.

For one, Strategy has repeatedly raised capital by issuing new stock and convertible notes, a type of debt that can be later converted to equities. When new shares are created or convertible notes are converted into equities, the ownership of existing shareholders will shrink and be diluted.

While Strategy once pitched a mix of debt and equity, most of the balance since has tilted toward equity-like products, including common stock and preferred stock, Galá said.

On top of that, the crypto-treasury trade has gotten more crowded. “At a certain point, there are too many strategies pursuing the same promised land and a finite amount of investor demand for similar exposures,” Galá told MarketWatch in a phone interview.

Many smaller crypto-treasury companies follow a similar strategy and thus face a similar problem, according to Galá. “We would further argue this is magnified for smaller issuers given subscale nature — they are likely to struggle more as it relates to raising capital, marketing the name [and] driving premiums to the multiple,” he said.

The bottom line is that some companies’ share prices may remain below their net asset value and never rise to par, said Adrian Fritz, global head of research at crypto-asset manager 21Shares.

That’s because, in addition to the risks of crypto assets, investors in such companies also face business and management risks. For several such companies, the original operations were already failing, Fritz said in an interview.

“If you are buying some of these treasury companies below [net asset value], there’s probably not as much downside anymore, but there also may not be a ton of upside either if you don’t think this treasury company is going to be the winner, or the one or two winners, in that category,” said Cosmo Jiang, general partner at crypto venture firm and asset manager Pantera, who has looked at over 150 such deals and invested in several of them.

Jiang expects to see consolidation among crypto-treasury companies. “We think there will be two or three major leaders across each of the major coins. I would not be surprised if everyone else trades at a discount to their net asset value,” Jiang said in a phone interview.

Liquidation risks

There could be more mergers and acquisitions within the space, where a company trading at a higher multiple may acquire another company at a lower multiple, said Rob Hadick, general partner at crypto venture firm Dragonfly, which invested in a public company that buys and holds ENA, a crypto linked to stablecoin project Ethena.

“I’d be shocked if we didn’t see some M&A over the next 12 to 18 months,” Hadick noted.

Meanwhile, if a company’s share price continues to decline relative to the value of its crypto holdings, it could be tempted to sell the crypto and buy back shares, Hadick added.

The situation could get particularly tricky if crypto prices start to experience a downturn. If some companies eventually are forced out of business and liquidate their crypto holdings, the market could see further downward pressure on crypto prices, creating a “liquidation spiral,” said 21Shares’ Fritz.

It could even be the potential catalyst for the next crypto bear market, Fritz noted.

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