The sharp fall in cryptocurrency prices at the end of the year has shaken the companies that had bet big on Bitcoin. Due to this, shares of many companies have fallen drastically and the fear of bursting of crypto bubble has increased again. Below AFP explains what happens to companies that buy Bitcoin when the price falls.
Why do companies hoard Bitcoin?
This year there was a tremendous rise in Bitcoin and in October its price reached a record level of $ 1.26 lakh. Many companies started buying Bitcoin to divert their cash reserves, protect against inflation or attract investors looking for higher profits. Some companies were already involved in crypto, such as exchanges or mining companies, which earn bitcoins from powerful computers. At the same time, companies from other industries also jumped into it, due to which demand increased and prices went up further.
Why is it risky to buy Bitcoin?
Many companies took loans and bought Bitcoin, thinking that its price would continue to rise. Some have resorted to convertible bonds, which have lower interest rates but give lenders the option to buy shares instead of cash later. Trouble comes when the company’s shares start falling, like when the price of Bitcoin starts falling, the company’s model starts looking less attractive. In such a situation, investors may demand money back in cash and the company finds it difficult to raise funds.
What happens if Bitcoin falls?
When Bitcoin began to fall after the summer and dropped below $90,000 in November, confidence in companies that were heavily dependent on Bitcoin began to waver. Eric Benoist, tech and data expert at Natixis Bank, says the market immediately started asking questions. Will these companies be in trouble? Can they go bankrupt? According to Carol Alexander, finance professor at the University of Sussex, uncertainty regarding regulations, cyber attacks and the threat of fraud are also reducing investor confidence.
What happened with the strategy?
Software company Strategy is the largest corporate company holding Bitcoin. It has more than 6.71 lakh bitcoins, that is, about 3 percent of the total bitcoins ever created in the world. But in six months its share price fell by more than half and for some time its market value went below the total value of the bitcoins it held. The main reason for this was the excessive dependence on convertible bonds, which increased the risk of repaying huge loans in cash. To reassure investors, Strategy created a reserve of $1.44 billion by issuing new shares so that dividends and interest could be paid. Semiconductor company Sequans took a different path and sold 970 bitcoins to repay some of its convertible debt. Both companies did not respond to AFP’s request for comment.
Could the problem spread further?
If stressed companies sell large amounts of Bitcoin, prices could fall further and losses could increase. Alexander says, the risk of infection in the crypto market is very high. However, he believes that its impact will mostly be limited to the crypto sector and will not pose a major threat to traditional markets. Dylan LeClair, head of Bitcoin strategy at Japan’s Metaplanet company, says, Bitcoin has huge fluctuations both up and down, and we consider this fluctuation to be the price of long-term profit. Metaplanet, which was earlier a hotel company, now has Bitcoin worth about $2.7 billion.
What is the future of this sector?
According to Benoist, companies should not just rely on price increases, but will have to find ways to earn from their bitcoins. Like through financial products. He says, not all companies will survive, but this model will remain. New initiatives are also emerging, such as The Bitcoin Society, a crypto treasury company from French entrepreneur Eric Larachevec. Larshevec says that the fall in prices is a good opportunity, because more bitcoins can be bought cheaply.