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Bitcoin, Crypto Plunge Accelerates as Leveraged Players (“Treasuries”) Like Strategy Dump Holdings

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Warren Buffett famously said, “Only when the tide goes out do you discover who’s been swimming naked.” Buffett did not add that unlike nature-induced exposure events, market losses will feed on themselves when there is meaningful leverage involved. We are getting a sense now of how significant borrowed money was in stoking the crypto boom as experts warn that the downdraft could go from bad to bloody. Due to the lack of regulation and centralized reporting, along with the very large number of coins implicated. it’s not possible to know how much debt was behind the crypto boom. But the persistent fall of the once pride of the pack, Bitcoin, suggests quite a lot.

We’ll soon discuss crypto “treasuries,” a cleverly misleading branding of entities that bought cypto and borrowed against it and then sold interests to investors as ETFs, giving them an all-too-easy way to turbo charge their crypto exposure. But let’s first look at the level of carnage.

From CoinDesk:

“Since October 2024” ought not sound that bad….unless you were among the punters who added to Bitcoin or crypto positions since then.

But all eyes are on the crypto treasury Stragegy. The lead story in Bloomberg Asia now:

From the text:

  • Retail investors who invested in Michael Saylor’s Bitcoin experiment are paying a heavy price as Strategy Inc.’s shares plunged more than 60% from recent highs.
  • The most popular exchange-traded funds tracking Strategy’s stock have dropped more than 80% this year, with the trio of MSTX, MSTU, and MSTP losing about $1.5 billion in assets since early October.
  • Strategy Inc. has created a $1.4 billion reserve to fund dividend and interest payments, hoping to calm fears that it may be forced to sell Bitcoin if prices fall further.

Strategy Inc. — the company once hailed for wrapping crypto exposure into a public stock — is scrambling to calm markets after its shares plunged more than 60% from recent highs, amid a sweeping digital-currency rout. On Monday, Strategy said it had created a $1.4 billion reserve to fund dividend and interest payments, hoping to calm fears that it may be forced to sell Bitcoin if prices fall further.

But for many investors, the damage is already done. The most popular exchange-traded funds tracking Strategy’s volatile stock — MSTX and MSTU, which offer double the daily return — have both dropped more than 80% this year. That puts them among the 10 worst-performing funds in the entire US ETF market, out of more than 4,700 products currently trading — just behind obscure short bets against gold miners and semiconductor stocks. A third fund, known as MSTP, launched during the crypto mania in June, is down a similar amount since its debut. Together, the trio has lost about $1.5 billion in assets since early October…

At the center of concern is a valuation metric known as mNAV — or market net asset value — which compares Strategy’s enterprise value to its Bitcoin holdings. That premium has largely vanished, bringing the ratio to around 1.15 — a level executives have flagged as a warning zone. CEO Phong Le said on a podcast that slipping below 1.0 could force the company to sell Bitcoin to meet payout obligations, albeit only as a last resort.

Yahoo elaborated:

For half a decade, Strategy (NASDAQ:MSTR) — still “MicroStrategy” in every trader’s muscle memory — has lived by a simple, almost religious rule: buy Bitcoin (CRYPTO:BTC), never sell. Executive chairman Michael Saylor turned that hard-and-fast rule into a brand — a battle cry, even — and the company’s stock went up faster than the asset it was hoarding.

SStrategy’s orange dots — the little markers Saylor posts on X every time he adds more Bitcoin to the pile — became a kind of crypto liturgy. There have never been any red dots. Ever. Whenever the crypto’s high priest was asked by someone about what would happen during a steep collapse in price, he declared he would simply buy more Bitcoin.

And from the Wall Street Journal in The Year’s Hottest Crypto Trade Is Crumbling:

Michael Saylor pioneered the move in 2020 when he transformed a tiny software company, then called MicroStrategy into a bitcoin whale now known as Strategy. But with bitcoin and ether prices now tumbling, so are shares in Strategy and its copycats. Strategy was worth around $128 billion at its peak in July; it is now worth about $70 billion.

The selloff is hitting big-name investors including Peter Thiel, the famed venture capitalist who has backed multiple crypto-treasury companies, as well as individuals who followed evangelists into these stocks..

“The whole concept makes no sense to me. You are just paying $2 for a one-dollar bill,” said Brent Donnelly, president of Spectra Markets. “Eventually those premiums will compress.”

When they first appeared, crypto-treasury companies also gave institutional investors who previously couldn’t easily access crypto a way to invest. Crypto exchange-traded funds that became available over the past two years now offer the same solution.

And per the accelerating rout, it’s not as if this fall took place in isolation. From the Economist two weeks ago in Crypto got everything it wanted. Now it’s sinking:

In recent years the crypto industry has gone from an object of mockery in mainstream finance and the target of outright hostility from regulators to being broadly accepted, even encouraged. Banks and asset managers are launching products and the latest cast of American regulators are crypto enthusiasts. In October bitcoin’s market value peaked at $2.5trn.

Odd as it might seem, these victories now pose a problem for crypto. Prices have tumbled: bitcoin has dropped from an all-time high of around $126,000 in early October to just above $92,000. For a speculative asset—one which produces no income and relies solely on hopes for future capital gains—the absence of a fresh bullish narrative to justify further price rises is a challenge. And because wider acceptance has deepened crypto’s links with other markets, the ripple effects from the dip will be felt far beyond the industry….

In 2020 and 2021 lockdowns and fiscal largesse were paired with the increasing provision of crypto trading by mainstream brokers…

Today investors have no trouble getting their hands on bitcoin. Brokers offer access to a range of crypto assets to anyone with a phone. Some big investors have stayed away. This month crypto enthusiasts cheered the news that the Czech central bank had purchased $1m in bitcoin and other cryptocurrencies. But that was a drop in the ocean relative to the bank’s $171bn in reserves. And most central banks still rule out including digital assets in their defensive hoards. The scope for higher trading volumes, then, seems limited.

The other price of victory is that the pain from a crypto crash will be felt more widely than in the past. The investors most exposed to the recent slump are those who behaved as if the boom would never end…On October 10th some $19bn in leveraged crypto positions were wiped out after Mr Trump announced fresh 100% tariffs on China (the levies were walked back a few days later). No one knows how much leverage remains, but the further prices fall, the greater the risk of serial blow-ups.

To add to the China part of the equation, its government just announced it was tightening its crackdown on crypto. From Coinspeaker on November 29:

China is taking new steps to strengthen its crackdown on crypto payments as regulators warn that digital assets are once again creating risks in the country’s financial system. Officials say trading activity has resurfaced despite earlier restrictions, and they are now preparing stronger enforcement to curb the use of crypto and stablecoins in payments and transfers….

They [China’s central bank and other regulators] agreed that although the 2021 ban pushed crypto trading underground, the market has been active again. Now, the market has more scams, illegal fundraising schemes, and unregulated cross-border transactions.

Officials repeated that digital assets are not legal tenders and cannot circulate as currency inside the country. They warned that using them for payments or investments constitutes an illegal financial act.

For context, some stablecoins were a major concern because their anonymous nature makes it harder to identify users and trace funds.

China has indeed been intensifying its crackdown on scams, to the degree that it has increased its harassment of Thailand, admittedly with justification. But the “scams” campaign is likely even more about stopping capital flight, tax evasion, and money laundering..

Back to the idea that Strategy won’t liquidate Bitcoin is whistling past the grave. As Michael Shedlock explained:

Technical Failure

Bitcoin took a big dive from over $126,000 to $80,000.

Bitcoin then bounced to about $93,000 where it has since died.

If Bitcoin fails at this level, there is support at $75,000 then 55,000 then 49,000. If that fails then it’s 40,000 and 25,000.

Others are more pointed:

Twitter has some tweets crying about victimization:

Along with IMHO “the lady doth protest too much” level cheerleading about inevitable success:

Contra Shedlock, some believe there is a floor for Bitcoin:

There is also much excitement on Twitter to try to counter the downer Bitcoin charts that Vanguard is just now allowing the purchase of Bitcoin ETFs. One has to think that most who hearted coin would have already done so outside Vanguard.

But there are other interpretations:

Needless to say, this episode is still in play. Stay tuned.

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