Franklin Templeton: Uncertainty Looms Over Crypto Treasury Companies, With Risk of a 'Dangerous' Negative Feedback Loop

BlockBeats News, July 3rd, according to The Block, an analyst from Franklin Templeton's digital asset department warned that despite the corporate cryptocurrency treasury trend bringing some upward momentum, the "risk of a negative feedback loop" poses a "particularly dangerous situation." More and more public companies are adopting the cryptocurrency treasury model: raising funds through stocks, convertible notes, preferred shares, and other financing instruments to purchase and hold Bitcoin, Ethereum, Solana, and other crypto assets, incorporating them into their balance sheets. Several companies have raised billions of dollars through various financing means, each with different risk-return profiles.

The analyst added that the rise in cryptocurrency prices could also increase a company's market value, forming a positive feedback loop to attract more investors. However, Franklin Templeton cautioned that this model also comes with significant risks. If the market value-to-net asset value (NAV) ratio falls below 1, newly issued shares will be dilutive, and the company may struggle to raise capital further without diluting existing shareholder interests, hindering capital formation, breaking the original virtuous cycle.

Worse still, a cryptocurrency price drop could trigger a negative feedback loop. Companies may be forced to sell assets to support the stock price, further suppressing cryptocurrency prices and investor confidence, ultimately forming a self-reinforcing downward spiral. The corporate cryptocurrency treasury model represents a new stage of institutional cryptocurrency adoption, but it is not without risks. Maintaining a market value above net assets, engaging in value-accretive transactions continuously, and effectively managing market fluctuations will be key for these companies to achieve long-term success.