Bitcoin Treasuries have been buying at a record pace following the success of Strategy (MSTR). This intense buying raises questions on how long will these treasuries keep acquiring Bitcoins? Will they buy and sell as per market cycles, or do they have a longer game in mind?
Whatever be the case, Bitcoin Treasuries cannot continue buying if the debt pile goes up beyond a certain limit. At the peak of their debt ceiling, they either have to resort to other funding methods, or sell some assets to repay debt.
In this article, we will center our discussion around the possible future of Bitcoin Treasuries, especially those which have been created on the debt model. The article will not cover government treasuries or those created with surplus cash.
The Debt Model of Bitcoin Treasuries
Although other modes of buying Bitcoins exist, most corporate treasuries go for the debt model because the repayments on debt is far lower than the long-term returns from Bitcoin’s price appreciation.
The model was pioneered and perfected by Michael Saylor between 2020 and 2024, via his treasury “The Strategy”, which has since then emerged as the largest Bitcoin Treasury in the world.
As a result, multiple treasuries have been established on the debt model. Here, the assumption is that Bitcoin’s long-term returns (>5 years) will outpace the cumulative debt liability on the treasury.
Some of the well-known treasuries working on these principles are:
- Strategy (formerly MicroStrategy)
- Metaplanet
- GameStop
- Riot Platforms (formerly Riot Blockchain)
Understanding the Bitcoin Treasury Business Model of Michael Saylor
The Debt Pile Up Scenario for Bitcoin Treasuries
Despite the assumption that Bitcoin’s returns will forever beat the cost of debt, there is a possibility that it might underperform or even deliver negative returns. Servicing debt would be too painful for Bitcoin Treasuries in such situations.
Further, during bear markets, the cost of debt will keep on increasing (compound interest) despite no gains from the Bitcoin reserves of the Treasury. Not all debt instruments would be willing to convert their bonds into shares (as done by Strategy’s lenders).
Even if Bitcoin continues to beat debt markets and inflation year-on-year for the foreseeable future, without repayment, there would be a time when the debt liabilities on Bitcoin Treasuries would be unmanageable. This could lead to situations like forced liquidation by the government or might even trigger a panic sell-off due to FUD.
In all these situations, there is a need to balance the books in a permanent manner, which saves the treasury and also reduces its debt obligations.
How are Different Bitcoin Treasuries Managing Debt?
Here are some real world solutions on how Bitcoin Treasuries do manage their debt in a sustainable way.
Strategy (formerly MicroStrategy)
Strategy has been using debt to finance its Bitcoin acquisition since 2020. However, it has resorted to other financing options such as equity and preferred shares.
Even in the case of debt financing, Strategy usually goes for convertible debt. The benefit of using this instrument is that, in case the company is unable to pay back the debt, the bonds are converted into preferred or ordinary shares.
This conversion prevents the accumulation of too much debt for the company and also assures that in case of missed payments, the bonds will not default. Rather, they will be converted into shares, thereby saving some of the originally invested amount.
GameStop
GameStop took on a debt of $1.5 billion for its first Bitcoin purchase tranche. The debt was easy to secure because there was almost $5 billion of excess cash on the company’s books. At a later phase, GameStop could pay back this debt from its cash reserves if it doesn’t want to sell its Bitcoins.
Metaplanet
Metaplanet benefits from the unique low-interest regime in Japan and issues zero-interest bonds. The repayment is either done by issuing new bonds or by generating extra returns from selling cash-secured options.
Riot Platforms
Riot Platforms uses plain debt to buy Bitcoins aligned with mining. A portion of the mining rewards is sold to fund operations while the other half goes to its reserve. As a result, it has a lot lower debt to asset ratio than its peers.
Few Possible Ways Treasuries Could Continue Buying Bitcoins
The case studies above highlight a few ways to get debt in a sustainable way. While methods like zero coupon bonds might not be feasible everywhere, here are a few methods which can be used by new treasuries to make the debt model more sustainable.
Conversion of Debt into Ordinary Shares
Strategy’s conversion of debt into shares shows a unique way in which the company can keep on getting new debt without worrying about short or medium term repayments.
If the debt gets close to default, the bonds are converted into shares. This way, neither the lender loses their funds, nor does the company come under pressure of repayment.
Partial Asset Sale
Treasuries might consider partial asset sales during market peaks to take profits and repay debts. When the markets get to a bottom, they can repurchase the Bitcoins at a much lower cost.
10 Factors to Consider for a Company Before Building a Bitcoin Treasury
