Bitcoin Treasury Model with a Built-In Value Floor

It is now almost normal to hear a conversation about the Bitcoin Treasury. Bitcoin is hard cash. Fiat debases. Bitcoin is a long-term investment for companies that have it on their balance sheets. It’s all true. The question no longer is whether it is.

It is the structure of the question that interests me. It is not. It is not necessary to be able to understand A company may hold Bitcoins, but What kind of business are you? It is important to understand why the stock should be held, as well as what it means for the business’ performance over an entire market cycle.

Three models There are several. Each one reflects different levels of convictions, capital structures and trade-offs.

• It is a pure-play. One company’s primary objective is to acquire Bitcoins by capital raises and financial engineering. They have no main operating business. Lean structure, singular mission.

• Digital credit issuing companies are the digital credit providers. Pure-play is a sophisticated version of this thesis. They issue Bitcoin-backed instruments such as preferred stocks, convertible notes and other similar products to finance continued accumulation. This creates an accumulation engine at scale that is unmatched by simpler models.
• The company that operates with a Bitcoin bank. Businesses with revenue, clients and operations that are real, but who hold Bitcoins as long-term reserves in a strategic alliance with their business.

The Bitcoin Treasury thesis can be expressed in all three ways. These three options are not designed to meet the same objectives. In fact, the differences between them matter much more than what most people in treasury talk acknowledge.

How pure-play can get it right

Pure-play deserves a genuine response because it is a case with real power.

The pure-plays of financial engineering have a capital-efficient nature in an important and specific sense. Each dollar is used to accumulate Bitcoin, with minimal operational costs. It is a singular mission, and it’s reflected in the organization. Investors benefit from this clarity. Investors can now see exactly what is being underwritten. They know that they have direct Bitcoin exposure on the corporate level.

Digital credit models extend this. Businesses that are able to issue preferred instruments, such as Bitcoin-backed securities and products, have developed accumulation engines on the basis of dollars raised that can be matched by operating businesses. At scale, a complex capital structure has an incredibly powerful compounding impact. It is the ultimate expression of Bitcoin’s Treasury thesis and its destination should be understood by all operators in this area.

In practice, what does it mean to have a prerequisite?

It is rare to see the prerequisites for the digital credit model: scale, credibility of institutions, and market infrastructure, which are things that many companies today who want to build a Bitcoin Treasury do not have. This is not the starting point, but rather the destination.

There’s an intermediary period, where financial engineering structures are more exposed than they usually acknowledge. In that time:

• The operating income is not available to fallback on
• Bitcoin’s market sentiment is closely linked to the ability to raise funds
• When conditions are unfavourable, the options for strategic action become limited
• The cost structure of a company is entirely dependent on the capital markets remaining active

It is not intended to be a critique of the model. This is not a criticism of the model. It’s a description. What structure is best for the company during that journey?

Operating company models: What they actually provide

You can also find out more about the following: operating company with a Bitcoin treasury Bitcoin does not increase faster with a good pure-play. Operational cash flow has no impact at all on the accumulation of Bitcoins. This is a different advantage, which deserves to be stated clearly.

Bitcoin’s trading status is not relevant to the income generated by an operation. This revenue will cover fixed costs and the business is no longer dependent on the capital markets to finance its operations. The company can keep on hiring and serving customers, while accumulating assets at its own pace, without having to make capital decisions based solely on timing.

Compounding works as follows:

• The operating revenue is sufficient to cover costs, and maintain the Bitcoin value throughout the cycle.
• The balance sheet is preserved, which improves future terms for capital raisings. Lower dilution and better facilities access, as well as a stronger position in negotiations with partners.
• Operating credibility broadens capital availability by reaching allocators that cannot currently underwrite Bitcoin exposure.

Bitcoin does not accumulate quicker in good conditions. All of these mechanisms work together to make the firm more resistant in any situation.

A built-in floor valuation

The majority of Bitcoin Treasury Company valuations are determined by one number: the mNAV. This is the premium that the market gives to Bitcoins held in corporate treasuries. When capital flows into this space and sentiments are high, the premium will expand. It shrinks when the story cools. This is because the value of the Bitcoin company moves in accordance with market appetite.

Operating company models introduce a second element that acts differently. Profitable operating businesses have a multiple of earnings that is backed by their revenue, customer relationships and track record. When Bitcoin performs, it does not grow dramatically. It does not shrink when sentiment changes either. This is because it is more stable than mNAV.

The two components, Bitcoin NAV, and a multiple of earnings on operating businesses, don’t move in tandem. The point is that they do not move together. The earnings multiple remains constant when mNAV is compressed. A pure-play structure with an entirely sentiment-dependent valuation does not provide a company with a defensible floor of valuation.

Three specific aspects of this matter in the real world:

• Capital raises. Even when Bitcoin is not popular, a company that has a reasonable valuation floor will be able to raise money on favourable terms. Pure-plays with compressed mNAVs and without earnings components have less flexibility.
• Talent. Equivalent compensation which is tied to two components of valuation makes it easier for potential hires to understand and more reliable than equity that’s tied solely to Bitcoin market sentiment.
• Allocator access. Many institutional allocators are unable to underwrite an entirely mNAV-based valuation within the scope of their current mandates. The earnings component opens the doors to investors who would have otherwise been unable to invest, regardless of their conviction.

It is more than just comfort in difficult times. This is an advantage structural that grows over time.

What to consider when making a decision

The three models have different goals. Answering a few simple questions honestly is the first step to finding a framework that works.

• Existing business – what does it look like? An operating company is a model that can be used by a business with revenue and customers already established. Without it, a company must choose between building the foundation or committing to pure play.
• What realistically is the path to scaling? It takes time for the digital credit model to gain credibility and reach the scale required. Operating company models do not require that they reach this threshold in order to work well.
• How does an investor base look? Allocators seeking direct Bitcoin exposure are most likely to prefer pure-play structure. Operating businesses can access a wider range of capital investors, such as those who require that an operating company participate.
• What type of business do you wish to run across the full cycle? The question that lies at the core of all others. It is the answer that should determine the structure of the document, and not the opposite.

You can also read our conclusion.

It is unlikely that all companies will look alike when it comes to the adoption of Bitcoin by corporates in the coming years. The digital credit issuers are going to be the pioneers of Bitcoin-native financial markets. Pure-plays in financial engineering will work with a focused commitment to reach this destination. Operating companies can build businesses that are based on the mutual support of the core operations and the Treasury.

Each model is an authentic expression of the thesis. This framework aims to help executives choose the right structure for what they’re building.

It was never a question of which model has the highest Bitcoin. The question was never which model best suited your goals.

Disclaimer: The content of this page was created by the author. Bitcoin For Corporations It is intended solely for informational purposes. The author has expressed his own opinion, and it should not be regarded as investment advice. This article does not constitute an invitation or offer to buy, sell or subscribe any financial products or securities.