Next-big-thing trends and innovations have been a staple on Wall Street for more than 30 years. Beginning with the proliferation of the internet in the mid-1990s, investors have pretty consistently had a game-changing innovation or trend to captivate their attention.
Since the fourth quarter of 2022, there's arguably not been a more prolific innovation than artificial intelligence (AI). Giving software and systems the capacity to reason and instantly act without human intervention is something that can benefit virtually all industries around the globe.
However, AI isn't the only trend that's led to big cash inflows. Over the last year, investors have begun to flock to publicly traded companies that are fully or partially pivoting to Bitcoin(CRYPTO: BTC) treasury strategies.
Image source: Getty Images.
So-called "Bitcoin treasury companies" aim to purchase and hold the world's most-valuable cryptocurrency by market cap with a meaningful portion of their treasury reserves (i.e., cash), with the goal of capitalizing on Bitcoin's outsized long-term returns and its perceived hedge against monetary inflation.
While one company, in particular, has shined a bright light on this seemingly innovative strategy, there's more than enough evidence and historical-based data to suggest that the Bitcoin treasury strategy will be a spectacular failure.
Strategy rebrands as the first Bitcoin treasury company
Though there are dozens of public companies now holding at least 100 Bitcoins on their balance sheet, none has been the face of the Bitcoin treasury strategy quite like Strategy(NASDAQ: MSTR), which until recently was known as "MicroStrategy."
For decades, Strategy's core operations entailed developing enterprise analytics software, which recently incorporated AI solutions. But nearly five years ago, on Aug. 11, 2020, Strategy signaled a decisive game plan shift with the purchase of 21,454 Bitcoin for a cost basis of around $250 million at the time.
No public company had ever acquired $250 million in Bitcoin before -- or any figure near this amount for that matter. Since this initial purchase, Strategy's Bitcoin holdings have grown to 568,840 tokens, and its stock has skyrocketed by more than 2,900%! It's spent roughly $39.4 billion to purchase 2.71% of all Bitcoin that will ever exist, including future crypto mining.
One of the prime reasons Strategy's game plan has worked so perfectly is the perceived scarcity of Bitcoin. Whereas Bitcoin currently has a finite cap of 21 million tokens, the U.S. Treasury's money supply is expanding on an almost constant basis. The devaluation of the U.S. dollar over time, coupled with steady inflation, would appear to make Bitcoin an attractive asset to hold.
Strategy CEO Michael Saylor is also taking full advantage of the recency bias of investors. Over the last 15 years, no stock, commodity, bond, or piece of real estate has come remotely close to matching the returns of Bitcoin.
Lastly, Strategy has leaned into what some investors have referred to as the "infinite money glitch" in online forums. Saylor's company has relied on seemingly endless at-the-market share offerings and the occasional preferred stock offering to raise capital in order to purchase more Bitcoin. If the price of Bitcoin were to continue climbing, it would likely increase Strategy's share price, thereby allowing even more capital to be raised and more Bitcoin to be purchased -- rinse and repeat.
While the Bitcoin treasury company approach has worked wonders for Strategy and led to some eyepopping single-session moves for smaller public companies announcing Bitcoin treasury purchases of their own, there are ample to reasons to believe this short-term success will eventually lead to epic failure.
Image source: Getty Images.
Prediction: Bitcoin treasury hype is a dumpster fire in the making
One of the biggest concerns with the Bitcoin treasury strategy is that it exposes a lack of true innovation and operational success at the corporate level. Companies that choose to invest a significant portion of their cash into Bitcoin are effectively admitting they can't find a way to innovate or improve on their existing operations.
This would be acceptable if we were talking about an industry-leading "Magnificent Seven" stock that can maintain its competitive advantages and is generating more cash from operations than it knows what to do with. But in many instances, the companies adopting Bitcoin treasury strategies aren't profitable and/or aren't growing.
For example, Strategy's software segment has seen its sales slump by more than 12% over the trailing decade (through the end of 2024). Additionally, Strategy's enterprise analytics segment isn't generating positive cash flow. Pivoting to simply purchasing Bitcoin sends the signal that Saylor and his board lack any real innovation and have no tangible plan to improve the company's only source of revenue and operating cash flow.
The second issue I have with the Bitcoin treasury strategy is that it makes the incorrect (but arguable) assumption that Bitcoin's first-mover advantages are sustainable.
I won't argue with the fact that Bitcoin has proved naysayers like me wrong for 15 years. But it also doesn't change the reality that Bitcoin's competitive edges are mostly fairy tales.
For instance, Bitcoin isn't actually scarce. The only thing keeping its token count from climbing is a few lines of code and developer consensus. Whereas it's a mathematical certainty that the amount of gold, oil, silver, etc., on planet Earth right now is finite, there is no certainty that developers won't choose to increase the token count for Bitcoin.
With the exception of having a brand-name within the crypto space, Bitcoin isn't the best at anything. It's not the fastest payment network, nor is it remotely close to being the cheapest. It also failed in its real-world utility test in El Salvador.
Third and finally, the companies adopting the Bitcoin treasury strategy are usually reliant on the price of Bitcoin heading higher. Although Bitcoin has skyrocketed since mid-2010, it's also undergone its fair share of steep bear markets.
Over the trailing-10-year period, Bitcoin lost 74% of its value on a peak to trough basis from mid-2014 to early 2015, plunged by more than 80% from late 2017 into early 2019, and dumped by 76% from late 2021 into 2022. Mind you, this doesn't factor in the more than one dozen pullbacks ranging from roughly 25% to 35% that have occurred over the last decade. Steep bear markets are historically normal and inevitable for Bitcoin, and they could very easily result in Bitcoin treasury companies (including Strategy) being forced to dump their Bitcoin at a loss.
While Bitcoin treasury purchases have helped to artificially inflate the price of Bitcoin in recent months, forced liquidation during a bear market would further drag down an already depressed cryptocurrency.
Public companies putting their excess cash to work in Bitcoin may be the buzzy trend right now, but it's not an innovative or sustainable solution, or one that in any way addresses the growth needs of a business.
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Sean Williams has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bitcoin. The Motley Fool has a disclosure policy.
