Strategy’s rising holdings risk making bitcoin ‘inappropriate’ for central bank reserves, Sygnum warns

Bitcoin acquisition vehicles like Strategy (formerly MicroStrategy) have significantly amplified institutional demand for bitcoin, but their increasingly aggressive and leveraged approach to accumulating BTC risks undermining the asset's credibility as a central bank reserve, according to a report from regulated digital asset bank Sygnum.On Monday, Strategy announced it had purchased another 1,045 BTC for approximately $110.2 million at an average price of $105,426 per bitcoin — taking its total holdings to 582,000 BTC, worth more than $63 billion. That's the equivalent of around 2.8% of bitcoin's total 21 million supply and implies around $22 billion of paper gains.There are now 144 companies that have adopted some form of bitcoin treasury, 114 of which are publicly traded, with Tether-backed Twenty One, Nakamoto, Trump Media, GameStop, and K33, recently joining the likes of Metaplanet, Semler Scientific, and KULR in adopting the model pioneered by Strategy co-founder Michael Saylor. Analysts at Bernstein predict Strategy and its corporate copycats could add $330 billion to their bitcoin treasuries over the next five years, driven by the more pro-crypto Trump administration in the U.S.With Strategy's plans to expand those holdings further over time through various multi-billion dollar financial programs, Sygnum warned that such concentration introduces systemic fragility, potentially deterring central banks from adopting bitcoin due to concerns over liquidity, volatility, and centralized influence."Large concentrated holdings are a risk for any asset and at this point Strategy's holdings are approaching a point where they become problematic, with the company holding close to 3% of the total bitcoin ever issued, but a much higher share of the actual liquid supply," the Sygnum analysts said. "Their goal of acquiring 5% of the total issued bitcoin raises concerns, not least because these vehicles amassing too much of the supply undermines bitcoin's safe haven properties. A private corporation controlling a large portion of the existing supply would make bitcoin inappropriate for central banks to hold as a reserve asset."A transforming corporate bitcoin acquisition modelWhat began in 2020 as a corporate treasury strategy to hedge inflation has transformed into a speculative investment vehicle model, Sygnum continued, with companies like Strategy and newcomers such as Twenty One Capital or Nakamoto Holdings now using debt — convertible bonds, preferreds, and even perpetual instruments — to leverage bitcoin purchases beyond the scale of their underlying business operations. These firms now function more like closed-end funds than corporations, raising doubts about the appropriateness of framing such activity as treasury management, the digital asset bank said.Sygnum added that "the steep drop in the liquid supply can also reverse the structural trends of declining bitcoin volatility and rising liquidity" — both of which have been cited by institutions and central banks as key preconditions for adopting bitcoin as a reserve asset. These effects, the analysts argue, are now being distorted by leveraged acquisition vehicles crowding out organic demand.Beyond niche cases like El Salvador, few central banks are currently considering adding bitcoin to their reserves, and even fewer are enacting such plans. However, in March, President Trump signed an executive order to establish a U.S. Strategic Bitcoin Reserve, created from approximately 200,000 BTC ($22 billion) already owned by the federal government that was forfeited as part of criminal or civil proceedings, and directed Treasury Secretary Scott Bessent and Commerce Secretary Howard Lutnick to develop budget-neutral strategies for acquiring additional bitcoin. Authorities in the Czech Republic, Bhutan, and Pakistan also appear keen.Crowding out more measured corporate bitcoin allocators and amplifying downturnsSygnum argues that these leveraged bitcoin strategies, while initially benefiting from strong bullish sentiment and helping reduce liquid supply, are unsustainable in the long term. Share price premiums over BTC holdings are already at risk of eroding or flipping into discounts, especially as more such vehicles launch and investor demand plateaus, the analysts said. Bear markets or fundraising difficulties could force these companies to sell bitcoin, amplifying price downturns and further damaging sentiment, they added.The trend also may crowd out more measured corporate bitcoin allocations, in Sygnum's view. Unlike speculative accumulation plays, small bitcoin positions can serve as prudent hedges in a volatile global financial system. However, these vehicles risk giving the impression that bitcoin is inherently tied to leveraged speculation, potentially undermining thoughtful adoption by institutions, they added."These vehicles have catalyzed demand for bitcoin that cannot, or cannot yet, access the crypto market. In this regard, they have made a contribution similar to the impact of the Bitcoin ETFs. They have also tremendously benefited shareholders of these companies by investing funds into a safe haven asset instead of into a flagging business," the analysts concluded. "However, as demand levels off and is saturated by increased supply, the valuation of these shares relative to their bitcoin holdings is at risk. Additionally, these strategies also create certain risks for the crypto market as a whole."Strategy's capital structure is designed to withstand a 90% bitcoin dropMichael Saylor, on the other hand, remains confident in Strategy's resilience. In a recent interview with the Financial Times, Saylor said Strategy’s capital structure is designed to withstand a 90% drop in bitcoin that persists for four to five years, thanks to its mix of equity, convertible debt, and preferred instruments — though he acknowledged that shareholders would still "suffer" in such a scenario. Analysts at Bernstein also argue that with Strategy's relatively low debt levels and no payments due until 2028, the firm's leverage remains manageable.However, that confidence may not extend to the broader field of corporate bitcoin accumulators now copying Strategy's model — especially those with weaker balance sheets, less investor loyalty, and limited operating income to cushion any potential market shocks. With more companies seemingly entering the space by the week, the risk to bitcoin's price stability and the durability of this model could grow in the event of a sharp downturn.Disclaimer: This article was produced with the assistance of OpenAI’s ChatGPT 3.5/4 and reviewed and edited by our editorial team.Disclaimer: The Block is an independent media outlet that delivers news, research, and data. As of November 2023, Foresight Ventures is a majority investor of The Block. Foresight Ventures invests in other companies in the crypto space. 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