Franklin Templeton flags uncertain outlook for crypto treasury firms, citing ‘dangerous’ feedback loop risk

Analysts at Franklin Templeton Digital Assets warned that while the corporate crypto treasury boom presents upsides, the risk of a negative feedback loop is a "particularly dangerous scenario."

There is a growing trend for publicly traded firms to adopt a crypto treasury model, raising capital through instruments like equity, convertible notes, and preferred shares to acquire and hold crypto assets such as Bitcoin, Ethereum, and Solana on their balance sheets — with 135 public companies now deploying the playbook in BTC alone, according to Bitcoin Treasuries data.

Inspired by Michael Saylor's Strategy (formerly MicroStrategy), this speculative approach has gained momentum, with firms raising billions of dollars since early 2024 by offering investors various instruments with differing risk-return profiles, including at-the-market programs, private investment in public equity, preferred equity, convertible and secured notes, and occasionally SPACs or reverse mergers, the analysts noted in a Wednesday report . 

Beyond market leader Strategy (BTC), other leading treasury holders include Metaplanet (BTC), Twenty One (BTC), SharpLink (ETH), Upexi (SOL), and Sol Strategies (SOL), each targeting significant growth in their chosen assets.

Crypto treasury model upsides and downsides

The corporate crypto treasury strategy offers compelling upsides, the analysts noted, notably the ability to raise capital at a premium to net asset value, allowing them to issue shares at prices higher than the value of their underlying crypto assets, making equity issuance accretive even amid crypto volatility.

"Interestingly, the volatility of crypto assets — often viewed as a risk — is a key enabler of this strategy. Volatility increases the value of embedded options in financial instruments like convertible notes," they said. 

Rising crypto prices can also enhance the companies' market value, creating a positive feedback loop that attracts more investors. For firms holding Proof-of-Stake assets, such as Ethereum and Solana, staking provides a further revenue stream to complement the appreciation in asset value, the analysts added.

However, the model carries significant risks, Franklin Templeton warned. If the market-to-NAV ratio falls below 1, new equity issuance becomes dilutive, and firms may struggle to raise additional capital without harming existing shareholders, stalling capital formation and breaking the virtuous cycle.

Worse, falling crypto prices can spark a negative feedback loop, where companies are forced to sell assets to defend their stock price, further depressing crypto values and investor confidence in a self-reinforcing downward spiral, the analysts said.

"The corporate crypto treasury model represents a new phase of institutional crypto adoption, but it is not without its risks," they concluded. "The ability to maintain a premium to NAV, continue accretive transactions, and navigate market volatility will be crucial for the long-term success of these companies."

If the premium remains, the model could continue to thrive; however, a significant drawdown or prolonged bear market could lead to a downward spiral, making these companies highly risky investments, the analysts added.

Last month, analysts at Presto Research stated that the  risks of liquidation or collapse for crypto treasury companies are real, but far more nuanced than during past crypto crises, such as Terra or 3AC. Coinbase Institutional's Global Head of Research, David Duong, also warned that leveraged corporate crypto buying may eventually pose " systemic risks ." However, he said that the pressure appears limited in the short term.