Original article by Jeff Dorman, CFA

Original translation: TechFlow

Crypto Vault Companies: Facts and Myths

After six weeks of gains, the Bloomberg Galaxy Crypto Index (BGCI) finally pulled back last week, even as stocks and U.S. Treasuries rallied. Despite all the talk of a “malfunctioning” U.S. Treasury market, it’s worth noting that the 10-year Treasury yield has actually been trading in a 100 basis point range over the past two years, another classic example of narrative dominating facts.

Speaking of narratives, the growing number of US public companies buying Bitcoin and other digital assets is undoubtedly a hot topic in the market. But as usual, this trend is also accompanied by many misconceptions. Therefore, we will do our best to sort out the facts and myths behind these new digital asset buyers.

Some people call these companies "Bitcoin Treasury Companies" while others call them DATs (Digital Asset Treasury Companies). Regardless of the name, these companies are essentially just new shell companies used to hold digital assets. This is different from the original Bitcoin Treasury Companies. For more than five years, we have been discussing the phenomenon of some publicly traded companies adding Bitcoin to their balance sheets for various reasons.

These companies can be divided into several categories:

• Some are regular companies that have tentatively held Bitcoin, such as Tesla and Block (formerly Square);

• Some are crypto-native companies, like Coinbase and Galaxy, which naturally hold these assets through their main businesses;

• Others are Bitcoin mining companies whose core business is to hold Bitcoin.

The growth of Bitcoin on these companies’ balance sheets is easy to track and sometimes even drives stock prices higher. But in most cases, Bitcoin holdings do not mask their core businesses. Furthermore, until recently, the Financial Accounting Standards Board (FASB)’s accounting standards for Bitcoin holdings posed significantly more downside risk to earnings per share (EPS) than upside benefit.

Instead, these companies’ impact on bitcoin prices is often limited because they tend not to buy large amounts of bitcoin on the open market. Most companies simply accumulate bitcoin through their daily operations, and for those that do buy bitcoin, the amounts are relatively small.

Source: BitcoinTreasuries.net

Meanwhile, MicroStrategy (ticker: MSTR) is on its way to becoming the first true “Bitcoin company,” a public company whose sole purpose is to buy Bitcoin. We first covered MSTR five years ago when it announced its first Bitcoin purchases, which instantly sent its stock up 20% and sparked widespread market attention. As we wrote in August 2020:

“MSTR’s share price is up 20% following last week’s announcement, which is likely to have resulted in a busy weekend for junior staff in corporate finance departments around the world, who are frantically researching Bitcoin. Remember 2017, when companies couldn’t stop mentioning ‘blockchain’ on earnings calls, even though they had no idea or plan for how to actually use it, just because the market would reward companies that appeared to be ahead of the technology curve? Now, prepare for a repeat of Bitcoin.”

MSTR’s initial Bitcoin purchases were done with cash on its balance sheet, but the real “brilliance” over the past five years has been how easily and frequently it has tapped the capital markets. While MSTR also has a core business that generates $50 million to $150 million in annual EBITDA (earnings before interest, taxes, depreciation and amortization) through business intelligence and enterprise software analytics services, that business was quickly overshadowed by the Bitcoin purchases.

Unlike other public companies trying to emulate it, MSTR has existing cash flow from its ancillary (once core) business lines that can be used to pay corporate expenses and interest on its debt. This makes it significantly different from other public companies.

Source: ChatGPT and Microstrategy financial reports

By leveraging debt, convertible notes, preferred stock and equity markets for a new round of financing to purchase Bitcoin, MSTR opens the door for an entirely new group of investors to gain exposure to previously unavailable crypto asset investment opportunities.

While I’m too lazy to delve into the specific details of each financing round (these details are not important to my argument, after all, this is content generated through ChatGPT), MSTR’s “magic” in the capital markets is indeed amazing: over the past five years, it has demonstrated the pure sophistication of how capital markets work.

Source: ChatGPT

Each new round of funding and Bitcoin purchases further drives up the price of Bitcoin (BTC) due to the size of the transaction and the signaling effect of future purchases. This also drives up the price of MicroStrategy (MSTR) as the market begins to focus on new metrics such as "Bitcoin per share" and "Bitcoin yield" that did not exist before. Essentially, the only goal of MicroStrategy the "company" has shifted to increasing its Bitcoin reserves, and everyone involved has benefited from this process.

Holders of convertible bonds and preferred shares are effectively playing the “cheap volatility” game, taking advantage of volatility in both MSTR stock and Bitcoin prices. Straight debt holders are only interested in fixed income returns, which are easily supported by the EBITDA that MSTR can still generate through its old core business. Meanwhile, equity investors are profiting from a premium on MSTR stock that is far higher than the net asset value (NAV) of Bitcoin on its balance sheet.

Everybody wins! Of course, when everybody wins, two things usually happen:

• The voices of doubters are getting louder

Critics began posting angry messages online, trying to find ways to question the viability of this strategy. We began responding to these ridiculous accusations as early as 2021. At the time, many market participants were convinced that MSTR would be forced to sell Bitcoin, completely misunderstanding how debt covenants worked, not to mention confusing them between holding Bitcoin directly and holding a leveraged futures position with a liquidation price.

To this day, we still frequently have to contend with claims that MSTR poses a systemic risk to Bitcoin, even though we have largely given up on fighting this never-ending debate. We wish Jim Chanos the best of luck on his latest “long Bitcoin, short MSTR” trade (although it probably won’t work either, for the reasons we outline here). “Shorting MSTR” has become the new “shorting Tether,” a highly coveted trade because it appears to offer low risk and high reward, but the probability of success is low.

• Imitators emerge

Welcome to a new era of crypto madness. Let’s explore this phenomenon a little further.

Source: Bloomberg and Arca internal calculations

If 2024 is the year of the “crypto ETF,” 2025 will be the year of the “SPAC and reverse merger.” We once described crypto ETFs as “two steps forward, one step back”:

“Many people think that ETFs are a victory for real-time settlement assets, but the opposite is true. Bitcoin ETFs are actually cramming a real-time settlement system (blockchain) into an outdated T+1 settlement product (ETF). Isn’t this a step backwards? As an industry, we should be working to bring global assets to the blockchain, not forcing on-chain assets into Wall Street’s legacy system.”

While we acknowledge that this is necessary to drive adoption and interest, this point still holds true. There is a big difference between "blockchain technology" and "crypto assets." We are more concerned with bringing the world's most popular assets (such as stocks, bonds, real estate) to the blockchain than shoehorning questionable crypto assets into outdated systems. However, the trend of shoehorning crypto assets into stock shells will not stop. Let's take a look at what is currently happening.

SPACs (special purpose acquisition companies) and reverse mergers have been around for a long time, but have rarely been adopted across the board for a single purpose. However, this is exactly what is happening now. If you have a listed stock shell, it can be used to acquire crypto assets and hope to trade at a significant premium to net asset value (NAV). These new structures are often slightly different from MicroStrategy. Some companies only hold Bitcoin, trying to copy MSTR's model exactly (although with far less brand awareness and capital markets expertise); while others have purchased new assets - some hold Ethereum (ETH), some hold Solana (SOL), and some hold TAO, and more new assets are emerging. Arca currently receives 3 to 5 new idea proposals from investment banks every week.

Here is a (probably not exhaustive) sample of some of the deals that have been recently announced and are currently funding:

• SharpLink Gaming (SBET)

• Upcoming Events: May 2025

• Financing method: $425 million in private equity investment (PIPE)

• Acquiring Crypto Assets: Ethereum (ETH)

• Trump Media & Technology Group (DJT)

• Upcoming Events: May 2025

• Funding: $2.3 billion raised through stock and convertible bond sales

• Acquiring Crypto Assets: Bitcoin (BTC)

• GameStop Corp. (GME)

• Upcoming Events: May 2025

• Financing method: $1.5 billion in convertible bonds

• Crypto assets acquired: 4,710 Bitcoins (BTC)

• Jetking Infotrain (India)

• Upcoming Events: May 2025

• Financing method: Rs 6.1 crore raised through equity sale

• Acquiring Crypto Assets: Bitcoin (BTC)

• Meliuz (CASH 3.SA - Brazil)

• Upcoming Events: May 2025

• Financing method: 150 million reais raised through share issuance

• Acquiring Crypto Assets: Bitcoin (BTC)

• Details: Brazilian fintech company Meliuz announced an initial stock offering, planning to raise 150 million reais (about $26.45 million) to acquire Bitcoin. The company plans to distribute 17, 006, 803 common shares as an initial tranche.

• Sol Strategies Inc. (CSE: HODL, OTCQX: CYFRF)

• a C$25 million unsecured revolving credit facility provided by Chairman Antanas Guoga;

• $27.5 million CAD (about $20 million USD) in convertible notes from ParaFi Capital;

• Up to $500 million of convertible debt facilities from ATW Partners, with the first $20 million completed in May 2025.

• Initial investment: January 2025

• Financing methods:

• Acquiring Crypto Assets: Solana (SOL)

• Cantor Equity Partners / Twenty One Capital (CEP)

• Upcoming Events: May 2025

• Funding method: It added $100 million in funding to its crypto business Twenty One Capital, bringing the total funding to $685 million. At the same time, existing shareholders (including Tether, Bitfinex and SoftBank) pledged Bitcoin in kind through the existing equity structure.

• Acquiring Crypto Assets: Bitcoin (BTC)

• Upexi Inc.

• Upcoming Events: April 2025

• Funding method: Raising $100 million to build the Solana Reserve

• Acquiring Crypto Assets: Solana (SOL)

• Details: Purchase of SOL via $100 million PIPE (private equity investment), with plans to further increase Sol-per-share through equity and debt issuance.

• DeFi Development Corp (formerly Janover)

• Upcoming Events: April 2025

• Funding method: Raised $42 million to build the Solana Reserve, and plans to raise a further $1 billion

• Acquiring Crypto Assets: Solana (SOL)

These cases show that a growing number of public companies are incorporating crypto assets into their financial strategies, often funding these acquisitions through proceeds from debt or equity offerings.

But who makes money from these transactions?

• Investment Banking

Investment banks earn fees by underwriting PIPEs or executing reverse mergers, a strategy that carries little risk and profits whether the deal succeeds or fails. As a result, they won’t stop facilitating such deals.

• Shell Company Owners/Management

Assume that $100 million is raised through a new PIPE offering, $85 million of which is used to purchase crypto assets, and the remaining $15 million is used for “operating expenses.” These “operating expenses” include higher salaries—a lucrative income for the management team.

• Stockholders prior to the reverse merger or SPAC announcement

Most of these shell companies usually have a stock market value of less than $20 million before they are transformed into crypto stock shells. Some of the investors who hold these stocks may know in advance that the stocks will be transformed into crypto companies through insider information, while others are just lucky. But there is no doubt that the real profits come from these stocks skyrocketing 500%-1000% or more after the announcement.

Who didn’t make money? — New investors.

Unlike MicroStrategy, where we have 5 years of historical data showing that debt, convertibles, preferreds, and equity holders have made money, there is no evidence yet that the new investors in these new types of deals (those who provide funding for PIPEs or SPACs) will make money. These deals are relatively new, and most private investors have not yet converted their private shares to public shares (which usually takes at least 90 days). Therefore, these deals are still going on, and investors are still buying.

If these stocks continue to trade at a significant premium to net asset value (NAV) after the new investors unlock, then we will see more similar deals pop up. But if these stocks start to fall sharply, even below NAV, then it will be game over.

It may be several months before we know how the market reacts when these shares unlock.

However, a misunderstanding has been spread in the market: these unlocks pose a risk to the shell company's equity investors, not to the underlying crypto assets they hold. Unless they are financed through debt and cannot pay interest (i.e. default), there is almost no mechanism to force the sale of the underlying crypto assets. Moreover, these new shell companies are currently small and cannot access the debt market. This operation is currently limited to MicroStrategy (MSTR) and a few other large players.

For equity and preferred stock holders, they have no right to demand the sale of the underlying assets unless the stock price is so far below the net asset value (NAV) that an activist investor starts buying up shares and attempts to take over the board with the goal of selling the underlying crypto assets to buy back shares. This situation may happen in the future, but it is not a significant risk today. Once such an event occurs for the first time, most stocks will quickly close the gap with NAV as the market realizes that this operating model can be exploited over and over again.

This situation is very similar to the situation with the Grayscale Trust before the launch of the ETF. At that time, there was no risk that Grayscale would be forced to sell its underlying crypto assets... The real risk was that the Trust (shares) would trade at a discount to its net asset value (NAV). Ultimately, this did happen, causing damage to equity investors, but no impact to crypto asset holders.

Today, every crypto VC holding a ton of high-inflation, low-demand junk tokens is talking about stuffing those tokens into an equity shell company. But that doesn’t automatically create demand, just like most newly launched ETFs have failed to attract investors. Creating an investment vehicle and creating demand are two different things. While these investment vehicles will continue to be created, it’s still unclear whether these shares will actually attract market demand.

Is it possible that these shell companies can maintain a premium above NAV for a long time? The answer is yes, but the conditions are harsh.

Maybe one day, MicroStrategy (MSTR) will become the Berkshire Hathaway of crypto. By then, Bitcoin may become an extremely scarce and highly sought-after asset, and the company may even be willing to accept a lower acquisition offer from Michael Saylor just because he can pay with precious Bitcoin.

Another way that the shell company premium could persist is if these companies become more creative in choosing underlying assets. For example, they could hold high-quality tokens like HYPE that are not currently listed on any centralized exchange, thereby providing new investor groups with exposure to HYPE. This scarcity and uniqueness may attract investors willing to pay a premium. However, these scenarios are only long-term possibilities.

Regardless, just like ETFs, some shell companies will succeed and some won’t. But if bankers want to keep the “profit train” moving, they’ll have to start getting more creative. If crypto assets are simply stuffed into an equity shell company, then there’s a need to keep innovating what’s inside the shell company — making it valuable and difficult to access by other means.

However, I don’t think these equity shells will have a negative impact on crypto assets themselves, at least not in the short term. Without debt in the capital structure, there is no forced sale mechanism. And I think we may also be trying to dispel misconceptions about these shells for a long time, just as we do on many crypto topics.

Tokens can still be used as a tool for capital formation

The recent trend away from token financing and toward shell company equity financing can be seen as “two steps forward, one step backward.” This doesn’t mean token sales have stopped, just that there is less discussion about them.

We often say: "Tokens are the greatest capital formation and user onboarding mechanism ever created, unifying all stakeholders and creating lifelong brand advocates and core users." The idea is simple: instead of issuing equity or debt, where investors cannot become users of the product and customers cannot benefit from the company's growth, why not issue tokens directly to customers, unifying all stakeholders at once? This is exactly what ICOs (initial coin offerings) attempted in 2017, until US regulators shut them down.

The good news is that regulatory pressure is easing, allowing some token financing to return. The bad news is that most token financing is still limited to the “pure crypto” sector — crypto and blockchain-native companies that couldn’t exist without blockchain technology. The missing piece is a world where non-crypto-native companies (like regular gyms, restaurants, and small businesses) can also start issuing tokens to finance their operations and unify stakeholders.

“Internet capital markets” is a term used to describe this emerging theme. The idea is not new (in fact, we’ve been writing about it for seven years — I first blogged about crypto before Arca even had a website). But now, the idea is finally gaining some traction.

Launchcoin is one of the key platforms driving the next generation of token issuance. Launchcoin (which also has its own token) supports Believe, a token issuance platform that is leading the emerging narrative of "Internet Capital Markets". On the Believe platform, tokens debuted through bonding curves and then entered the Meteora platform to enhance liquidity. This platform is very attractive because many credible Web2 companies have already tokenized (created tokens) through Believe. Although direct token value accumulation has not yet been achieved, its potential is huge, making Launchcoin a pioneering force in this narrative.

In other words, Launchcoin and Believe are working toward a vision where every municipality, university, small business owner, sports team, and celebrity can issue their own token.

We have seen many examples where tokens can be used to fill gaps in a company’s balance sheet or for restructuring. For example, Bitfinex has successfully raised capital through its LEO tokens and Thorchain has raised capital through its debt tokens. This type of token financing model is what makes the crypto industry exciting, rather than simply an equity shell company.

But currently both models coexist, and it is crucial to understand the difference.