Is the "Crypto Treasury" Strategy a Risky Choice for Investors?

Recent trends in the cryptocurrency market have prompted companies to promote "crypto-treasury" stocks as a simple investment avenue. These companies buy shares to gain exposure to Bitcoin or other digital assets while enjoying the benefits of liquidity and regulatory oversight associated with public markets. While these stocks can outperform their underlying cryptocurrencies during bullish market conditions, they tend to decline more sharply in bearish phases. Understanding the risks associated with investing in these equities is crucial for potential investors.

Key Takeaways

Crypto-treasury stocks can outperform Bitcoin in rising markets, but they often underperform during downturns.
Investors are not purchasing Bitcoin directly; they are buying equity in companies that possess crypto assets, which adds layers of complexity and risk.
The net asset value (NAV) concept plays a significant role in the pricing of these stocks, often leading to significant premiums or discounts based on investor sentiment.
Market mechanisms and corporate governance issues can impact stock performance, especially in volatile markets.
Spot ETFs are changing the dynamics of how institutional investors approach cryptocurrency investments, affecting the appeal of crypto-treasury stocks.

Understanding Crypto-Treasury Stocks

Recently, companies that engage in crypto-treasury strategies have positioned their stocks as a straightforward investment option. By securing shares, these companies aim to gain exposure to Bitcoin and other digital assets while leveraging the liquidity and regulatory advantages characteristic of public markets. This approach proved beneficial during periods of rising market prices.

The Risks During Market Declines

However, when the market declines, the situation changes significantly. Crypto-treasury stocks often experience sharper downturns compared to the cryptocurrencies they hold. For instance, since October 2025, Bitcoin saw a decrease of about 30%, while shares of Strategy dropped around 57% during the same timeframe.

This phenomenon isn't coincidental; it arises from the interplay between equity markets, company balance sheets, and investor behavior. A company's value should ideally align with the price of its crypto assets. In reality, history shows otherwise. During market sell-offs, these equities frequently fall short of the performance of the assets they are meant to represent.

It's crucial to recognize that investing in these stocks does not equate to purchasing Bitcoin directly. Investors buy shares in companies that are heavily influenced by market sentiment and leverage, making this distinction particularly important when investor risk appetite diminishes.

Did you know? In bullish markets, crypto-treasury stocks tend to trade at a premium to their crypto holdings, as investors are willing to pay extra for the potential of future accumulation or financial innovations.

What Do Investors Gain When Investing in Crypto?

Companies engaged in crypto-treasury strategies operate as businesses, not as exchange-traded funds (ETFs) or trusts. Even if their principal activity consists of holding cryptocurrencies, owning their shares embodies part ownership in a corporation. This ownership comes with multiple considerations, such as:

A capital structure that includes equity, debt, and convertible securities.
Management's decisions.
Financial obligations and requirements.
Risks associated with share dilution.
Regulatory and governance challenges.

In contrast, holding crypto directly, either through buying it outright or via a spot ETF, offers exposure only to the price of Bitcoin.

These distinctions explain the marked performance differences seen during tumultuous market periods.

Did you know? When market sentiment changes, the premium associated with crypto holdings can disappear suddenly. Share prices can decline not only due to falling crypto values but also because investors retract their willingness to pay extra for the strategy itself.

Understanding Premiums, Discounts, and NAV

The concept of net asset value (NAV) is fundamental to these market movements. NAV calculates the market value of a company's crypto assets minus liabilities and divides this by the number of outstanding shares. Ideally, shares should trade close to NAV, but that seldom happens.

In bullish trends, crypto stocks often command a premium over NAV, as investors expect the company to:

Efficiently acquire more crypto.
Implement strategies that enhance crypto value per share.
Profit from rising equity valuations alongside crypto prices.

These premiums stem from investors' expectations rather than actual asset value. However, when market sentiment shifts, these expectations can vanish quickly. Investors then focus more on downside protection and balance sheet strength, resulting in rapid contractions of premiums, often transforming them into discounts. Consequently, share prices drop not only with diminishing crypto values but also due to reduced valuation multiples.

This combination largely accounts for why these stocks decline more sharply than the cryptocurrencies they are linked to.

The Impact of Leverage Within Equity

Many crypto-treasury firms fund their crypto acquisitions through issuing equity, convertible bonds, or debt rather than using surplus cash. This financing structure inherently introduces leverage into the equity, with equity ranking below debt in terms of capital structure. If asset values fall, equity holders bear the brunt of the losses. For example, a 20% drop in Bitcoin does not affect debt obligations, resulting in a larger percentage loss for shareholders.

Convertible securities add another degree of complexity, as their value reacts to both stock price and market volatility, which may exacerbate downward pressures.

Features that boost gains during bull markets often hinder performance during bear phases.

Crypto Illustration

The Changing Market Dynamics: From Fuel to Friction

While crypto-treasury stocks can showcase a positive feedback loop during bullish phases, these stocks frequently encounter challenges when market sentiment deteriorates. In rising markets, the cycle typically operates as follows:

Stocks trade at a premium to NAV.
The company issues new shares.
Proceeds are used to purchase additional crypto.
The value of crypto per share increases.
The stock's premium seems justified.

This cycle reverses when the market declines. As premiums evaporate, any new share issuance becomes dilutive, diminishing the value per share rather than enhancing it. Investors begin to sell in anticipation, which can accelerate the stock's decline. In extreme cases, liquidity concerns may surface even when significant crypto assets remain intact.

Equity-Market Dynamics Exacerbate Declines

Although underlying digital assets benefit from round-the-clock liquidity, equities carry structural limitations and behavioral dynamics associated with traditional stock markets. Factors influencing these trends include:

Lower liquidity, where large orders can cause exaggerated price fluctuations.
Rapid sell-offs by equity investors.
Options-related hedging amplifying volatility.
Quick unwinds when positions become overcrowded.

These dynamics reflect short-term market mechanics rather than the long-term value of the cryptocurrencies held.

Did you know? Many crypto-treasury companies leveraged debt or convertible bonds to buy cryptocurrencies. When prices decline, equity typically absorbs the losses first, resulting in a more significant drop in stock prices compared to the underlying assets.

Corporate and Governance Risks Emerge

Traditional corporate risks often fade into the background during bullish phases but become apparent during downturns. Investors begin questioning:

Management's commitment to acquiring more crypto.
Potential pauses to conserve cash.
The likelihood of further share issuance.
The transparency of treasury policies.

Increased uncertainty concerning these aspects elevates the risk premium required by investors, further applying pressure on share prices.

The Influence of Spot ETFs on Proxy Trades

Before the introduction of spot crypto ETFs, crypto-treasury stocks offered a convenient alternative for institutional investors unable to hold cryptocurrencies directly. However, this role has diminished as investors can now easily access cryptocurrencies like Bitcoin and Ether through regulated ETFs that:

Closely track spot prices.
Avoid dilutive equity issuance.
Eliminate risks associated with corporate execution.

During risk-off periods, capital can swiftly shift from proxy stocks to ETFs or exit crypto altogether, further accelerating premium compression, making it a more rapid and severe occurrence compared to previous market cycles.

A Case Study: Strategy's Performance During Market Declines

The performance of Strategy effectively illustrates the dynamics of crypto-treasury stocks. During market downturns since 2025, Bitcoin's price decreased significantly, while Strategy's stock fell much more sharply. The contributing factors included:

Bitcoin's price decline resulting in reduced NAV.
Compression of the stock's premium.
Ongoing share issuance raised concerns over dilution.
Increased risk aversion in the equity market.

None of this suggests a failure of Bitcoin as an asset; rather, a shift in sentiment and financing conditions proved sufficient to impact performance.