'The MSTR Model Is Dead': Relief Rally in Crypto-treasury Stocks as U.S. Shutdown Ends

TradingKey - Since October, Bitcoin’s price has steadily breached the psychological thresholds of $120,000, $110,000, and $100,000, with the broader crypto bull market consistently lacking upward momentum. Consequently, crypto treasury companies, many of which emulate the "Strategy model," are facing significant challenges. However, with the end of the US government shutdown now in sight, crypto investors are shifting their focus to improved liquidity as a potential catalyst for a reversal of fortunes.

Just one year ago, the prospect of "Trump returning to the White House" ignited enthusiasm for cryptocurrency investments. The former crypto skeptic had entirely shifted his stance on the nascent industry ahead of the 2024 US election, vowing to transform the United States into the "world's crypto capital."

Inspired by Strategy's successful transformation from a software firm into a crypto company deeply tied to Bitcoin, and bolstered by the tailwind of crypto-friendly government policies, Digital Asset Treasury (DAT) companies emerged as a significant wave in capital markets.

A report released by CoinGecko earlier this month indicated that since Strategy became the first pure DAT company in August 2020, the number of crypto treasury companies has surged from 4 to 142, with 76 of these established this year alone.

Unfortunately, few survivors remain under the "crypto treasury model." This straightforward "HODLing" strategy faces challenges such as excessive reliance on cryptocurrency price performance, intense competition, and a lack of differentiation. The stock prices of most DAT companies experienced dramatic volatility before launch but subsequently plummeted.

Built on Bitcoin, Broken by Bitcoin

Despite what some perceive as a crypto bull market, Bitcoin’s price has only risen 13% year-to-date, underperforming popular assets like the S&P 500 Index (+14.40%) and gold (+56.86%).

As of November 10, Bitcoin's price had declined 12% over the past month. In turn, Bitcoin-linked stock MicroStrategy fell 23%, Ethereum-linked stock BitMine dropped 30%, and Solana-linked stock Upexi saw a 49% decline.

When the prices of the cryptocurrencies they rely on fail to rise, crypto treasury companies have resorted to tactics such as "selling shares to buy crypto" and "borrowing to acquire cryptocurrencies" in an attempt to boost their stock prices.

However, during periods of macroeconomic risk impacting capital markets, highly volatile cryptocurrencies consistently prove more vulnerable than assets like US equities. Furthermore, leveraged crypto asset firms, such as digital currency treasury companies, experience even steeper declines.

While crypto treasury companies offer investors who are reluctant to directly invest in crypto assets or related ETFs an equity-based exposure to this emerging sector, a significant risk arises when the value of a crypto treasury company merely mirrors the price of its underlying crypto assets.

Industry insiders note that this investment thesis has been fully priced in. Excluding funds raised through additional financing, these crypto treasury companies will likely face significantly increased difficulty in obtaining further capital by issuing more shares. The real-world test for the "Strategy model" is proving more brutal than anticipated.

Matt Cole, CEO of Bitcoin treasury company Strive, stated that many of them are stuck. Even BitMine, the largest Ethereum-holding company, suggested that the "bubble" in crypto treasury companies might have already burst.

Of particular concern is that crypto treasury companies' "downward diversification strategy" into less established assets is exacerbating the "DAT bubble." In recent weeks, publicly listed companies such as Greenlane, OceanPal, and Tharimmune have announced purchases of smaller cryptocurrencies like BERA, NEAR, and Canton Coin.

Moody's remarked that DATs are expanding into more esoteric, less liquid cryptocurrencies, which is precisely where the risks are likely higher. When the market declines, the stocks of these companies will face greater pressure.

Pantera Capital warned that using core company assets for buybacks is only suitable for highly liquid tokens like Bitcoin, Ethereum, and Solana. Applying this strategy to small-cap tokens could trigger a "death spiral."

US Government Shutdown Ends — A Lifeline for DATs?

The temporary funding bill passed by the US Senate on November 9 paves the way to end what has been a record-setting 40-day US government shutdown. Some agencies anticipate a resumption of government funding as early as this week.

TradingKey noted that for investors, the conclusion of the federal government shutdown could alleviate the current liquidity crunch in the US market. This is because the US government is expected to release funds from its swollen trillion-dollar Treasury General Account (TGA) back into the economy and markets.

Presto Research believes that this political breakthrough will help alleviate recent market pressures. The extended shutdown had drained liquidity from overnight funding markets, leading to significant market tightness over the past few weeks. The elimination of this uncertainty clears the path for risk assets to be priced in a favorable macroeconomic environment—characterized by looser monetary policy, the resolution of trade disputes, and fiscal stimulus anticipated ahead of next year's midterm elections.

As of writing, Bitcoin's price has rebounded 4% in the last 24 hours, Ethereum's price has bounced 5%, and Ripple has climbed over 11%. During Monday's pre-market trading, MicroStrategy's stock surged over 2%, BitMine gained 6%, and Upexi rose approximately 10%.

LVRG Research highlighted that improved liquidity conditions are the primary catalyst, which historically tends to benefit risk assets like cryptocurrencies. Furthermore, the firm emphasized that the government shutdown agreement might only be a secondary factor, given the sustained institutional capital inflows.

Theoretically, a rebound in crypto asset prices would drive a turnaround for these crypto treasury companies. However, industry insiders are also considering how these companies can achieve more sustainable growth, such as by imbuing their underlying tokens with "utility."

SUI Group, which recently launched its own stablecoin, stated that DAT companies that merely buy tokens will ultimately face a complete collapse.

Digital Asset Capital Management, which anticipates DAT companies becoming more active, cited a prime example: Near-related DAT companies raising capital to bolster the development of the NEAR ecosystem network, thereby allowing the DAT valuation model to transcend a traditional passive perspective.