Many companies follow the steps of their strategy (previously micro-strategic strategies) and adopt a proactive strategy to buy Bitcoin. However, Digital Asset Bank Sygnum has raised alarms regarding risks related to these so-called Bitcoin-acquisition vehicles.
Banks warned that while these companies are aiming to capitalize on the rise in Bitcoin’s value, their leveraged approach could destabilize the market and attract regulatory scrutiny.
Corporate Bitcoin Purchases: Trends worth following?
Beincrypto recently reported that at least 61 companies with various core businesses have adopted Bitcoin as a reserve asset. Furthermore, this trend does not appear to have slowed down. In fact, many new companies are founded with business models that focus solely on Bitcoin accumulation.
Unlike traditional companies with diverse businesses, these companies function similarly to investment funds, raising capital, particularly to acquire the largest cryptocurrency. According to a study by Sygnum, this approach has increased the price of Bitcoin by attracting additional investments, particularly from investors seeking indirect exposure to digital assets.
Nevertheless, Sygnum warns that the BTC persear growth model is not indefinitely sustainable. These companies are at significant risk because they rely heavily on leverage, borrowing or issuance to fund the purchase of Bitcoin.
A bearish shift in cryptocurrency markets and the plateau of demand could force these companies to liquidate their holdings of Bitcoin to cover their debt or to meet investor redemptions. An extreme lower Bitcoin price can prevent debt redemption and lead to bankruptcy risk.
Furthermore, liquidation can cause a sudden price drop, destabilizing the broader cryptocurrency market and eroding investor trust.
“The saturation of demand coupled with the crypto-bear market could lead to these vehicles having to sell Bitcoin at the price of Bitcoin that exacerbates the already existing downward trend.
Regulation risks remain a major concern. Sygnum noted that Bitcoin finance companies implement investment strategies but are generally not regulated as financial institutions, which could potentially be exposed to potential regulatory challenges.
“The current political and regulatory environment in the US reduces this risk (or could only bring about very minimal penalties if any), but future elections could change the balance,” the bank added.
The report also highlighted that concentrations pose a risk. Sygnum explained that large-scale Bitcoin holdings by several entities could reduce Bitcoin liquidity and increase volatility. Additionally, it could undermine the appeal as a central bank’s reserve asset.
“Large and concentrated holdings are risk to any asset, and at this point holdings of (micro) strategies is approaching a point of concern, with the company holding nearly 3% of the total Bitcoin issued so far, but with a much higher share of actual liquid supply,” writes Sygnum.
Thus, the rise of Bitcoin acquisition vehicles reflects the growing institutional interest in cryptocurrencies, but also highlights the speculative nature of such strategies. The success of the strategy has affected imitators, but not all have financial resilience to weather market fluctuations.
Furthermore, Beincrypto noted that the spread of these companies indicates a mature market. However, their aggressive tactics can exacerbate volatility in unpredictable asset classes. Sygnum’s warning serves as a reminder that while Bitcoin’s acquisition vehicle may drive short-term profits, its long-term viability remains uncertain.
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