Companies’ Bitcoin Investments Face Major Risks as Prices Plummet

The recent decline in cryptocurrency values has raised significant concerns for companies heavily invested in bitcoin. Following a dramatic surge that saw bitcoin surpass $126,000 in October 2023, prices have since dropped below $90,000 by November. This downturn has resulted in falling share prices and heightened fears about the sustainability of firms that have embraced bitcoin as part of their financial strategy.

Why Companies Are Investing in Bitcoin

Many businesses began accumulating bitcoin to diversify their cash reserves, protect against inflation, and attract investors seeking high returns. Some of these companies were already involved in the cryptocurrency sector, such as exchanges and “mining” firms that generate bitcoins as rewards. Others, including firms unrelated to crypto, joined the trend, which further boosted demand and drove prices upward.

Despite the initial optimism, investing heavily in bitcoin carries substantial risks. Numerous companies borrowed funds to purchase bitcoin, banking on continual price increases. Some opted for convertible bonds, which offer lower interest rates but allow lenders to be repaid in shares rather than cash. This model can create severe liquidity issues if the company’s share price declines, as a drop in bitcoin’s value could make their business less attractive to investors.

The Impact of Bitcoin’s Decline

The troubles for companies began to surface after bitcoin’s price started to decline in the summer of 2023. With the cryptocurrency losing value, investor confidence waned, leading to questions about the stability of companies heavily exposed to bitcoin. Eric Benoist, a tech and data expert at Natixis Bank, highlighted the growing anxiety in the market, stating, “The market quickly started to ask: ‘Are these companies going to run into trouble? Could they go bankrupt?’”

Carol Alexander, a finance professor at the University of Sussex, pointed out that regulatory uncertainty, risks of cyberattacks, and potential fraud are contributing to growing investor mistrust in the sector.

One notable example is the software company Strategy, which holds over 671,000 bitcoins, accounting for approximately three percent of all bitcoins in existence. Over a mere six months, however, Strategy’s share price plummeted by more than half, with its market value at times dropping below the total worth of its bitcoin holdings. The company relied heavily on convertible bonds, exposing it to the risk of significant cash repayments. In response, Strategy issued new shares to create a reserve of $1.44 billion to meet dividend and interest obligations. In contrast, semiconductor firm Sequans opted to sell 970 bitcoins to reduce its convertible debt.

Future Outlook and Potential Risks

The potential for widespread issues looms if companies begin selling off large amounts of bitcoin to stabilize their finances, which could lead to further drops in price and exacerbate losses across the sector. Alexander noted, “The contagion risk in crypto markets is pretty considerable,” though she added that the impact would likely remain confined to the crypto sector, without posing a major threat to traditional markets.

Dylan LeClair, head of bitcoin strategy at Japan’s Metaplanet, emphasized the inherent volatility of bitcoin, stating, “Bitcoin is inherently volatile in both directions, and we view that volatility as the cost of long-term upside.” Metaplanet, which originally began as a hotel company, now holds approximately $2.7 billion in bitcoin.

As the market settles into a new reality, companies need to find ways to generate income from their bitcoin holdings, possibly through financial products, rather than relying solely on increasing prices. Benoist remarked, “Not all of them will survive,” but he believes the model will continue to exist. Innovations are emerging, such as Eric Larcheveque’s crypto treasury firm, The Bitcoin Society. Larcheveque mentioned that falling prices present “a good opportunity because it allows you to buy more bitcoin cheaply,” suggesting that while the current landscape is challenging, it may also lead to new opportunities for growth.

With the cryptocurrency market facing uncertainty, the future remains unpredictable. Investors will be watching closely to see how companies navigate these turbulent waters and adapt their strategies in an evolving financial environment.