Another company adds bitcoin as treasury asset a la Strategy. What are the risks?

Silo Pharma, a small company with a market capitalization of about $4 million, plans to buy $1 million worth of bitcoin. The startup thus hopes to diversify its assets and hedge against inflation, as reported by Investing.com. Video game retailer GameStop and several dozen other companies have previously made similar moves. Meanwhile, analysts warn this strategy could lead to bankruptcy if bitcoin tanks.

Silo Pharma's board has approved the purchase of up to $1 million worth of bitcoin as a treasury reserve asset. The market capitalization of the company, which is focused on merging traditional therapeutics with psychedelic research, jumped above $5 million after the decision was announced, with shares rising more than 26% to $0.72 apiece during trading yesterday.

The company expects the move to help increase long-term value for shareholders. CEO Eric Weisblum said it was driven by the need for a digital store of value with significant upside and as a safeguard against inflation, as reported by Investing.com.

More and more companies are investing in crypto in an effort to diversify their asset structure and reduce their dependence on traditional financial instruments. Although investors are still wary of bitcoin due to its volatility and regulatory uncertainty around the crypto market, the market reaction to Silo Pharma's announcement shows the "growing acceptance of bitcoin as a legitimate asset among institutional investors," Investing.com argues.

Dozens of publicly traded companies, including Trump Media and meme stock GameStop, are already copying the strategy that Strategy founder Michael Saylor used to turn his business intelligence software company into the largest holder of bitcoin. Saylor's plan involves using a combination of debt and equity financing to make large-scale purchases of bitcoin for the company's balance sheet, writes Yahoo Finance. Since 2020, Strategy has spent $40.7 billion to acquire more than 580,000 bitcoins. In that time frame, the company's stock has rocketed more than 2,900%, while the S&P 500 index is up 76%.

“It's not complicated, it's not even risky, in my opinion, it's just novel. If you want to 10x your money, you buy bitcoin. If you want 100x your money, you buy bitcoin with someone else's money. If you want to 1000x your money, you buy bitcoin with someone else's money, and then you leverage the bitcoin," Saylor said last month at a conference.

Since 2023, public companies have increased their exposure to bitcoin by 160% and now hold roughly 3.4% of all bitcoins in circulation, according to Bernstein analyst Gautam Chhugani. In total, on the estimates of Bernstein and Coinkite, 80 companies have adopted the so-called “bitcoin standard” by holding bitcoin as part of their treasury reserves. Many are funding these investments by issuing equity or debt, or combining the two.

"Strategy's bitcoin acquisition playbook demonstrates how small-low growth companies can optimize capital allocation from a low growth business to a high yielding BTC treasury," Chhugani wrote in a May report. "Since there is no visible road ahead for value creation [at those firms], [and] the success of the MSTR model offers them a rare value creation path, these companies are uniquely positioned to adopt Strategy’s bitcoin playbook."

In the last 12 months, the price of bitcoin has risen about 57%. In January, it rose above $109,000 before plunging to below $80,000 in April amid the escalating trade tensions.

"The main risk in running a leveraged 'bitcoin treasury' strategy is that a rapid drop in the price of bitcoin would lead to a possibility of bankruptcy," NYU Stern School of Business David Yermack told Yahoo Finance.

Another problem is the scale of Strategy. "Not every bitcoin treasury will be successful simply replicating MSTR’s playbook, in our view," Chhugani noted.

"Frankly, it's almost like the meme stock phenomenon where we know people are piling in just because it has worked for MicroStrategy," Omid Malekan, a professor at Columbia Business School, told Yahoo Finance. "Whatever benefit there is to be had in a number-go-up market could become problematic in a number-go-down market."