Crypto’s virtuous cycle is more of a spiral

Bitcoin is trading like it's 2021. The cryptocurrency has hovered near all-time highs despite massive ruptures in the market, including fraud charges and high-profile bankruptcies. Exchange-traded funds have lent some validation, and a slew of restructurings serve to purge the system of bad behavior. But a deeper look at companies’ interests in the digital currency suggest another bubble is afoot, and more than just bitcoin purchasers are at risk.

The latest upswing has thrown up a mixed bag of winners. Index fund giant BlackRock BLK has managed to attract over $16 billion in its spot bitcoin exchange-traded fund in just four months. The surging price of bitcoin, up more than 3.5 times to over $64,000 since FTX declared bankruptcy in November 2022, has also helped almost all customers of the failed crypto exchange get their money back.

Yet companies have started to get deeper into the currency in ways that are worrisome. Software firm MicroStrategy MSTR, whose core business of selling intelligence software remained stagnant for about a decade, has seen the value of its shares multiply nearly ninefold over the past five years simply by hoarding the cryptocurrency on its balance sheet. Jack Dorsey-led Block SQ will use 10% of its gross profit from bitcoin products to buy the cryptocurrency each month.

None of this furthers the practical use of crypto. It can still take hours for bitcoin transactions to clear on blockchain technology. High fees make smaller payments impractical. Meanwhile, products like ETFs have made it easier than ever to speculate.

Instead, companies are enabling a bubble, putting their own shareholders at risk. Block contends that “less than 3% of company resources are dedicated to bitcoin-related projects.” But its biggest business, accounting for more than 40% of annual revenue in 2023, were the fees it collected through bitcoin purchases on Cash App.

As companies begin to buy up crypto for their balance sheets, a dangerous cycle forms. They have businesses that benefit from people buying and selling crypto, and a new model that is also invested in helping the price systematically go up. Higher bitcoin prices, in turn, beget more purchases of the currency, but still with no fundamental value backing it. The inevitable unwind becomes more painful, then eventually bringing bitcoin holders and shareholders down with it.

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CONTEXT NEWS

Crypto exchange FTX will have between $14.5 billion to $16.3 billion to pay its creditors and customers, according to an amended reorganization plan filed by the company on May 7 in a U.S. bankruptcy court.

"We are pleased to be in a position to propose a chapter 11 plan that contemplates the return of 100% of bankruptcy claim amounts plus interest for non-governmental creditors," CEO John Ray said.

Block CEO Jack Dorsey on May 2 wrote in a shareholder letter that the company will invest 10% of its gross profit from bitcoin products each month into purchasing bitcoin. The company currently dedicates less than 3% of its resources to bitcoin-related projects, he said.

The company posted a 19% jump in total net revenue, to about $6 billion in the three months ended March 31. On an adjusted basis, Block earned 85 cents per share in the reported quarter, beating analysts' expectation of 72 cents per share.

Block now expects full-year annual adjusted core earnings to be at least $2.8 billion, higher than its previous forecast of $2.6 billion.