Episode 12: Treasury Companies: Risks You Need to Understand

Navigating the Risks of Investing in Treasury Companies

Welcome back to “Old Men New Money.” I’m Douglas Borthwick, and today we conclude our module on corporate treasury strategies with an essential episode focusing on risks. While we have explored various models and strategies, from Bitcoin accumulation to infrastructure plays, it’s equally vital to understand what could potentially go wrong. Investing in treasury companies involves considerable risk and volatility, and a failure to understand these risks can lead to significant financial loss.

Understanding the Risks

Treasury companies face seven major categories of risk:

1. Asset Price Risk: These companies make leveraged bets on crypto assets. A 1% move in Bitcoin could result in a much larger impact on treasury company stocks due to leverage.

2. NAV Premium Compression: As market sentiment fluctuates, the premiums that these companies trade at can evaporate, leading to losses even when crypto prices stay stable.

3. Dilution Risk: Treasury companies often raise capital by issuing new shares. Poor timing on these raises can be detrimental to existing shareholders.

4. Debt and Leverage Risk: During bear markets, the financial engineering that worked in bull markets can rebound as debt covenants tighten.

5. Regulatory and Legal Risks: The unpredictable nature of crypto regulations poses a significant threat to treasury companies’ business models.

6. Key Person Risk: The success of these companies often hinges on a few key individuals. Any disruption in their leadership could impact the strategic direction.

7. Execution Risk: Each company must execute its strategic plans effectively to maintain investor confidence and meet ambitious growth targets.

Position Sizing and Active Management

To manage these risks, position sizing becomes critical. Treasury companies should form a small part of your portfolio, serving as a speculative investment, not a core holding. It’s vital to monitor key metrics such as NAV premium, debt ratio, and share count growth closely. Moreover, clear exit rules based on these metrics should be established to prevent emotional decision-making in volatile markets.

A Cautionary Note to Investors

This episode serves as a cautionary note to those considering investments in treasury companies. They are high-risk, high-reward ventures and not suited for conservative investors or those who are unable to actively manage their portfolios. The ability to withstand significant drawdowns, understand crypto fundamentals, and manage positions actively is a prerequisite for potential investors.

Conclusion

As we wrap up our exploration of corporate treasury strategies, we’ve dissected the models, opportunities, and, importantly, the risks. The upcoming module will take us into the realm of real-world asset tokenization. We’ll explore how to tokenize real estate, commodities, bonds, and more, bridging digital securities with the real economy. I’m Douglas Borthwick, and this is “Old Men New Money.” If these episodes have helped deepen your understanding of treasury companies, share them with someone else trying to learn about this dynamic and evolving investment landscape.