3 Reasons Cardano's New Bitcoin Treasury Plan May Backfire

Cardano (CRYPTO: ADA) founder Charles Hoskinson wants to convert roughly $100 million of the cryptocurrency, or about 5% to 10% of the chain's treasury of 1.7 billion tokens, into Bitcoin (CRYPTO: BTC), plus a basket of Cardano-native stablecoins. The objective would be to shore up the chain's liquidity for its decentralized finance (DeFi) applications, and prove that Cardano can compete with its faster-growing rivals.

The proposal sounds bold, but so far investors seem to be judging the move as bearish; the coin slid 6% on the news, capping off its fall of 35% this year so far. Here's why the market's skepticism is warranted, and why the plan could end up hurting the chain rather than helping it.

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1. A big swap telegraphs self-doubt

Crypto treasuries exist to fund future development and buffer shocks. It's normal for chains to retain some coins that are issued by their competitors, and it's also normal for chains to retain some Bitcoin. In fact, it's necessary for DeFi projects to be able to access on-chain liquidity denominated in external tokens.

The issue is that this late in the game, swapping a large cache of native tokens for an external asset is a message about management's confidence, or the lack of it, in Cardano's long-run value. Liquidity wasn't a major constraint for DeFi on the chain leading up to this discussion. So there's an implication by management that the chain's total value might actually grow faster if it holds less of its native token.

Image source: Getty Images.

Hoskinson argues the trade would be gradual and conducted over the counter to avoid slamming the price of Cardano. But the idea of diversifying suggests leadership fears continued dilution or sluggish demand for its own coin.

That signal already rattled holders. If management won't keep its war chest in Cardano, why should outside investors keep it in their portfolios?

2. The math barely moves the needle here

Cardano's DeFi footprint is relatively small today.

Its total value locked (TVL) was about $260 million as of June 17, with only $31 million of on-chain stablecoins. With the swap, Hoskinson hopes to lift the stablecoin-to-TVL ratio from roughly 10% to between 33% and 40%.

That calculation doesn't really amount to much, though.

Even if every dollar of the $100 million allocation landed inside Cardano applications, the chain's TVL would climb to about $260 million. That's still less than 1.5% of its nemesis Solana, which hosts $8.3 billion in TVL and $10.8 billion in stablecoins.

The size of the gap would hardly budge, yet a large volume of Cardano would need to be sold to fund the experiment. And that sale pressure could easily eclipse the incremental liquidity benefit.

3. The real bottlenecks are users, yield, and mindshare

The point of deeper liquidity is to attract borrowers, investors, and developers to the chain.

Cardano's main obstacle is that few of those players are waiting on the sidelines right now. Its flagship decentralized exchange (DEX), Minswap, handles about $2.4 million in daily volume. The chain's biggest dollar-backed stablecoin has volume of a mere $50,000 a day.

Without a reason for users to stick around, or compelling yields to offer to those who park their capital on the chain, new Bitcoin collateral risks becoming even more idle capital. And that would make the swap have a poor return for the chain, to say the least.

Meanwhile, competitors keep raising the bar. Solana's DeFi user base is expanding, and Ethereum keeps slashing its gas (user) fees. Investors weighing where to deploy fresh capital will compare those ecosystems to Cardano's, and the comparison is not a favorable one for Cardano's holders.

Cardano's community prides itself on deliberate engineering, but capital markets reward traction more than talk. A treasury diversification that scratches the surface of liquidity while advertising doubt about the coin's upside could end up a self-inflicted wound. Investors should monitor the situation, and perhaps consider selling the asset before it loses more value.

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Alex Carchidi has positions in Bitcoin, Ethereum, and Solana. The Motley Fool has positions in and recommends Bitcoin, Ethereum, and Solana. The Motley Fool has a disclosure policy.