"‘Hodling’ model on the verge of collapse? ‘Digital coin treasury companies’ rush to buy back, trying to boost prices"
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The digital currency treasury industry is rapidly shifting from early hype to a tough reality. Many companies whose main business is holding digital assets have started to buy back shares to boost their falling stock prices. This business model is facing significant challenges.
After some digital currency treasury companies experienced a stock price crash, at least seven crypto treasury companies have announced share buybacks in recent weeks, with five of them now having a market value below the value of their held crypto assets. Some companies are even borrowing money to buy back shares, which runs contrary to their original philosophy of investing funds into cryptocurrencies.
The Coinbase research team stated in their latest report that the business model of digital asset treasury companies faces major challenges, and the scarcity premium once enjoyed by early adopters has now disappeared.
Multiple Companies Buy Back Shares in Attempts to Boost Stock Prices
Digital currency treasury companies typically issue stocks or take on debt to purchase cryptocurrencies such as Bitcoin and Ethereum, hoping that their market value will grow faster than the value of their held crypto assets. However, this model is collapsing, and many companies have had to buy back their own shares to support stock prices.
Last month, biotechnology company 180 Life Sciences changed its name to ETHZilla and began buying up large amounts of Ethereum. Even though it holds about $460 million worth of Ethereum, its stock price has fallen 76% from its peak in August and its market capitalization is only $416 million. Last week, ETHZilla used its held Ethereum as collateral to raise $80 million from Cumberland DRW toward its $250 million buyback plan.
Texas electric vehicle maker Volcon changed its name to Empery Digital this July and switched to buying Bitcoin, with its stock price once soaring 380%. However, the company’s stock has since lost all its gains. Last Friday, it increased its debt financing from $25 million to $35 million and raised an additional $50 million to fund share buybacks. Although Empery holds $476 million worth of Bitcoin, its market capitalization is only about $378 million.
Many analysts hold a pessimistic outlook for the prospects of digital currency treasuries. Elliot Chun, a partner at crypto consulting firm Architect Partners, said that only a very small number of these companies can succeed. Adam Morgan McCarthy, senior research analyst at crypto analytics firm Kaiko, believes these buybacks are “a sign of an oversaturated market.” He said:
“These companies are just trying to buy time, maintain the status quo, until they can take advantage of the next surge in crypto prices. Many of these companies are like houses of cards and will collapse quickly.”
Despite the challenges faced by digital assets, some companies are still insisting on buying cryptocurrencies. Alex Spiro, lawyer for Tesla CEO Elon Musk, serves as chairman of a Dogecoin treasury company, which increased its Dogecoin holdings from 500 million to 600 million last week.
The Coinbase research team expects the crypto market to maintain a constructive outlook in the fourth quarter. Strong liquidity, a supportive macroeconomic environment, and favorable regulatory developments will continue to provide support. They anticipate that if the Fed starts cutting interest rates, it could provide liquidity support for risk assets.
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