The crypto-treasury dream unravels after a 90% stock plunge

The business model of launching a public company to buy crypto is falling apart. As a result, those in the queue to do so through blank-check companies are facing pressure from investors against a market backdrop that is fiercely unfriendly.

Take ReserveOne Inc., a cryptocurrency asset manager that had prominent associates, including private equity magnate and former US Commerce Secretary Wilbur Ross.

ReserveOne had agreed to combine with M3-Brigade Acquisition V Corp., a special-purpose acquisition company, or SPAC, whose sole purpose is to find another entity to buy, taking it public in the process. Ross did not back the deal financially, but after it closed, he was slated to join ReserveOne’s board. Other promoters of the effort are a who’s who of big names in finance and crypto.However, the $1 billion transaction collapsed after at least two large investors in ReserveOne demanded the sale be terminated, according to people familiar with the matter.

Those investors believed ReserveOne’s shares would inevitably trade at a discount to its net asset value if they listed because of how far Bitcoin and other tokens have fallen since the tie-up was announced nearly a year ago, said the people, who were not authorized to discuss details publicly. Combined with fees that would’ve been owed to bankers and sponsors for completing the deal, it simply wasn’t worth it, the people said.

Ultimately the two firms agreed to bid each other farewell, according to a June 12 filing.

A spokesperson for M3 declined to comment. ReserveOne didn’t respond to requests for comment.The scuttled ReserveOne-M3 transaction is emblematic of problems with trying to introduce a digital-asset treasury company, or DAT, through a SPAC these days. Others with similar plans have either failed or flopped, reflecting the market’s deterioration.

For instance, Avalanche Treasury Corp., which combined with a SPAC called Mountain Lake Acquisition Corp. on June 11, has been mercilessly pummeled since its debut.

Avalanche Treasury shares have tumbled almost 90% since shareholders approved the combination, with the price dropping to around 85 cents on Thursday. A spokesperson for Avalanche Treasury directed Bloomberg to a press release about its Nasdaq debut, but declined further comment.

The DAT trade effectively stopped working when it became dilutive for companies to raise money through equity markets to buy crypto, said Jan-Philip Grabs, a partner at the digital-asset advisory firm Areta. DATs have sometimes characterized their long-term plans as being not just crypto accumulators, but companies that facilitate payments or perform other, more important work.

“We expect this bear market to be a decisive filter for the category: some of these companies will use it to build a genuine operating model and make accretive acquisitions, while others will remain capital-markets vehicles with no underlying business and struggle to survive as token prices stay depressed,” he said.

DAT Plunge

Michael Saylor engineered the idea of DATs in 2020, turning his software company MicroStrategy into one focused on buying Bitcoin instead. The market took off: shares of the company, now called Strategy Inc., hit a high above $500 by 2024. A number of companies including Metaplanet, BitMine, Twenty One Capital and SharpLink followed in its footsteps that year or the next.

Strategy’s stock closed at $112.53. Bitcoin itself is down roughly half since hitting a high last October, which has left some firms that sought to replicate Saylor’s idea out of luck.

Those still waiting in the wings include BSTR Holdings Inc., whose initials stand for Bitcoin Standard Treasury Company. A blank-check entity sponsored by an affiliate of Cantor Fitzgerald agreed to combine with BSTR in a deal with as much as $1.5 billion in equity financing last July, but its fate is now in question.

The Cantor-linked SPAC has scheduled a vote on June 26 about whether to proceed with the merger, according to a recent filing. Its board is unanimously in favor of the deal going through and recommends a “yes” vote, but it’s not clear that will happen.

BSTR is led by Adam Back, co-founder and chief executive officer of Bitcoin infrastructure firm Blockstream Corp. The British cryptographer was recently in the news after the New York Times portrayed him as Satoshi Nakamoto, a pseudonym used by the inventor of Bitcoin, a claim he denies.

Investment firm Meteora Capital was involved in both the BSTR and ReserveOne deals through a strategy known as private investment in public equity, or PIPE, according to the people. That means it put up capital to participate after privately negotiating terms with sponsors.

But because PIPE investors have less sway in the outcome than sponsors, who are the key decision makers, Meteora also decided to build up positions in the two related SPACs in the public market, they said. Meteora had been pushing for the deals not to close given the fundamentals, said the people.

Representatives for Meteora and Cantor Fitzgerald declined to comment. BSTR didn’t respond to requests for comment.

Other crypto treasury firms that were pursuing SPAC deals remain in limbo as the financials for doing so have turned upside down. DATs that already trade publicly shed some $62 billion in market value between Bitcoin’s peak in October and early June, Bloomberg previously reported, citing Artemis data.

“Only real operating companies in the digital-asset industry will succeed long-term,” said Alexander Blume, CEO of crypto asset manager Two Prime. “DATs aiming to just follow the Saylor playbook will have a hard time going forward.”

Costly Bet

Up until fairly recently, crypto accumulation seemed like a winning bet.

Public companies that did everything from operate hotels to facilitate sports gambling decided to pursue the DAT idea instead. Others that launched as private crypto buyers agreed to be absorbed by SPACs, ultimately creating hundreds of publicly traded DATs.

The frenzy created lots of wealth for founders, investors and sponsors, sometimes at the expense of retail investors who have cumulatively lost tens of billions of dollars investing in the idea.

Though pursuing a SPAC-quisition has become unpopular, canceling a planned deal can also be costly, as The Ether Machine Inc. and Dynamix Corp. learned.

In April, the two agreed scrap a $1.5 billion pact that would have created an Ether-focused accumulator. That meant Dynamix was entitled to $50 million because of a termination agreement, according to a filing.

“Current market conditions make it impractical to move forward with the transaction,” Andrew Keys, co-founder of The Ether Machine, told investors in an email obtained by Bloomberg.