Risks of a Corporate Crypto Bubble Highlighted by Prestos Insights

The rise of corporate cryptocurrency reserves signals a new era in the financial sector, reminiscent of the introduction of leverage and ETFs, but it also carries inherent risks. This is highlighted in a report by Peter Chang, head of research at Presto.

«While some crypto treasury companies (CTCs) may not achieve significant success, this does not necessarily imply that the market has become riskier. The management of such risks entirely relies on each CTC’s ability to anticipate cash flow requirements and structure their capital to support and grow their crypto assets. The market will reward the successful with higher NAV multiples while penalizing those who do not succeed,» the analyst stated.

The term CTC refers to public organizations prioritizing the accumulation of cryptocurrencies as a key driver of shareholder value, funded through public capital markets. This excludes companies whose primary value comes from standard operations with partial crypto treasury assets, such as Tesla, Coinbase, or miners.

Chang noted that the treasury model, inspired by Strategy, has gained traction, particularly in the U.S., which benefits from deep capital markets and experienced institutional investors. These organizations often evolve from former operational firms, SPACs, or shell companies repurposed to focus on accumulating cryptocurrencies.

The rapid expansion of CTCs has sparked concerns that firms with leveraged positions might trigger a new wave of forced liquidations if the crypto market enters a bearish phase.

Chang identified two primary risks: collateral liquidation and «activist attacks» — hostile takeovers aimed at profiting from NAV deficiencies. However, these concerns are more limited than those that fueled previous cycles, such as the downfall of Terra.

«While an excessive premium may indicate a bubble, the limited historical data on most crypto treasury companies makes it difficult to determine what level of premium qualifies as excessive. The recurring nature of accumulation suggests that some premium is justified. Furthermore, unlike closed-end funds, CTCs can utilize capital markets to enhance their per-share crypto assets through innovative financing,» Chang clarified.

The researcher emphasized that managing cryptocurrency strategies is complex, which means some new and inexperienced participants might face challenges during downturns. Ultimately, the key risk lies not in the market itself, but in how well each player plans for unpredictable funding needs, Chang concluded.

As a reminder, Coinbase has pointed out that the growing popularity of corporate Bitcoin reserves is both a major trend and a potential risk for the crypto market.