The continuous decline in cryptocurrency prices since last October has shaken companies that heavily bet on Bitcoin, after their stock prices fell in the market, bringing back to the forefront fears of a bubble forming.
Why did companies turn to buying Bitcoin?
Bitcoin saw a rise at the beginning of the year, reaching a record level in early October, surpassing $126,000.
Amid this rise, companies began purchasing amounts of Bitcoin, either to diversify their cash reserves, hedge against inflation, or attract investors looking for quick profits.
Some of these companies were already active in this field, such as trading platforms or ‘mining’ companies that produce Bitcoin as a reward for operating the network. But other companies, with no direct connection to the sector, also entered the buying spree, which helped boost demand and raise the price.
Why is this strategy considered risky?
Some companies bet on Bitcoin’s price continuing to rise, so they resorted to issuing what are known as ‘convertible bonds,’ meaning borrowing at low interest while giving lenders the option to convert the debt into shares.
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But when the stock price falls, for example due to a Bitcoin decline and the loss of appeal of the business model, investors prefer to get their money back in cash instead of shares. In this case, the company’s ability to continue becomes linked to its capacity to secure sufficient liquidity to repay its debts.
What are the repercussions of Bitcoin’s price decline?
Signs of weakness began to appear in the fall, as Bitcoin’s price gradually declined before falling below $90,000 in November, a level lower than at the start of the year, which shook confidence in the model of these companies.
A technology specialist stated, “The question the market quickly asked is: Will these companies face difficulties? Will they go bankrupt?”
An economics professor noted that the bubble associated with this type of company is “bursting slowly.” They added that the lack of regulatory clarity and risks related to cybersecurity or internal fraud increase investor caution.
What happened with the company Strategy?
The software company Strategy, which did not respond to inquiries, is the largest company in terms of Bitcoin holdings, owning more than 671,000 coins, or about 3% of the total future supply.
However, the company’s stock lost more than half its value in six months, while its market value briefly fell below the value of its Bitcoin holdings. This is attributed to its heavy reliance on convertible bonds, exposing it to high debt risks.
To reassure the markets, Strategy raised about $1.44 billion by selling shares. Finding itself in a similar situation, the semiconductor company Sequans sold 970 Bitcoins to secure liquidity allocated to repay part of its debts.
Is there a risk of the crisis spreading?
If struggling companies are forced to sell large amounts of Bitcoin at once, it could lead to further pressure on prices, exacerbating the crisis.
An economics professor believes that “the risk of contagion in cryptocurrency markets would then be significant,” but they rule out it having a “significant impact on traditional markets.”
In contrast, a Bitcoin executive at the Japanese company Metaplanet said, “We consider these fluctuations” as “the price to pay for long-term upside potential.”
The company was specialized in the hotel sector before turning to investing in Bitcoin, the current estimated value of its holdings being about $2.7 billion.
What is the future of this sector?
A technology specialist believes these companies will have to find new ways to benefit from their Bitcoin reserves, such as developing financial products, instead of just betting on price increases. They stated, “Not all of them will survive,” but “this model will continue,” expecting mergers in the sector.
In this context, initiatives continue, as a French entrepreneur launched the company ‘The Bitcoin Society’ in late November, specializing in cryptocurrency asset management.
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