Should You Invest in a Bitcoin Treasury Company? The Motley Fool's Recent Research Uncovers the Largest Public Companies Holding Bitcoin.

Key Points

• Strategy, formerly known as MicroStrategy, sparked the trend of Bitcoin treasury companies that raise capital to buy the top digital asset.

• Only investors who have a deep understanding of both Bitcoin and security analysis should participate.

• The best solution is usually to focus on simplicity, which means gaining exposure to Bitcoin directly.

• 10 stocks we like better than Bitcoin ›

Bitcoin (CRYPTO: BTC) has been a fantastic investment, climbing 991% in the past five years (as of Sept. 11). This kind of performance has led to many different parties getting involved.

The Motley Fool published research recently that revealed the largest Bitcoin holders. For those who closely follow this space, it's not a surprise that so-called Bitcoin treasury companies, whose core purpose is to buy and hold Bitcoin on their own balance sheets, are some of the most important players when it comes to owning Bitcoin.

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Strategy, formerly known as MicroStrategy, is the biggest corporate holder with 638,460 Bitcoin units on its book right now. Its shares have skyrocketed 2,220% during the last five years. In search of higher returns, investors might be interested in buying a Bitcoin treasury company.

Is this a smart move? Or should you just stick to Bitcoin?

Image source: Getty Images.

The pros and cons of Bitcoin treasury companies

Besides Strategy, there are other sizable treasury companies, like Twenty One Capital. It can get extremely complex when trying to figure out how these businesses operate. At a high level, it comes down to raising capital in the debt and equity markets, like with convertible bonds, preferred stock, or common stock, hopefully on favorable terms. The proceeds are then invested into Bitcoin. The goal is typically to increase the amount of Bitcoin on the balance sheet relative to the number of diluted outstanding shares. It's a form of financial engineering.

The most obvious reason to buy these kinds of business is the upside. When Bitcoin's price goes up by 20%, for example, a treasury company's stock price might rise by 40%. Market confidence could rise, leading to a sizable premium to the net asset value of Bitcoin.

Buying shares in a Bitcoin treasury company might also be the only way that certain investors can gain exposure to the top digital asset. There might be strict rules around owning Bitcoin, so allocating capital to an investment vehicle that has unique exposure might be the only way to get involved.

On the other hand, the most obvious risk is that things can go in the opposite direction. If Bitcoin's price declines significantly, and doesn't recover for a long time, share prices of treasury companies can suffer. That's because there is lots of leverage involved, and the market might get worried that it'll be difficult to service debt obligations. There are extreme levels of volatility to deal with.

Other things to consider are spot Bitcoin ETFs, which are drawing in huge flows of capital, making them a potential competitor. Moreover, investors are betting on the financial prowess of these management teams, hoping they can successfully execute in a variety of market conditions.

Keep it simple

The only investors who are in a position to test the waters with Bitcoin treasury companies are those with deep knowledge of not only Bitcoin, but of security analysis and how the fixed-income market functions. Realistically, there probably aren't many people out there who understand these different topics enough to invest their hard-earned savings.

It can be very easy to fall into the trap of getting greedy and chasing huge gains. If things work out as planned, then Strategy's stock price could reach astronomical levels in the future. However, investors shouldn't overlook the inherent risk.

In my view, the best course of action is to always keep things simple. And this means focusing on the underlying asset. It's about deciding to own Bitcoin directly and using self-custody, or buying one of the many spot ETFs that track its price. Even though Bitcoin itself has soared historically, there is still substantial upside for investors who have a long time horizon.

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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.