The Secret to Success for the Largest Bitcoin Long Positions: Arbitrage

Over the past 5 years, a certain company has spent $40.8 billion, equivalent to Iceland's gross domestic product, to purchase more than 580,000 Bitcoins. This accounts for 2.9% of the Bitcoin supply or nearly 10% of active Bitcoins.

The company's stock has increased by 1600% over the past three years, far exceeding Bitcoin's approximate 420% increase during the same period. This significant growth has pushed the company's valuation above 100 billion dollars and has led to its inclusion in the Nasdaq 100 index.

Such huge growth has also raised questions. Some predict that the company will become a trillion-dollar enterprise, while others are more cautious, questioning whether the company will be forced to sell its Bitcoin, potentially triggering years of market panic that could depress Bitcoin prices.

Although these concerns are not entirely unfounded, most people lack a basic understanding of how the company operates. This article will explore in detail the company's operating model and whether it truly poses a significant risk to the Bitcoin market or represents a revolutionary business model.

How does the company buy so much Bitcoin?

The company primarily obtains funds to purchase Bitcoin through three methods: revenue from its operational business, selling stocks/equity, and debt financing. Among these three methods, debt financing is undoubtedly the most concerning. However, in fact, the vast majority of the funds the company uses to purchase Bitcoin comes from stock issuance, that is, selling stocks to the public and using the proceeds to buy Bitcoin.

This may seem somewhat counterintuitive; why would people buy the company's stock instead of directly purchasing Bitcoin? The answer is actually quite simple, it involves the most common business model in the cryptocurrency space: Arbitrage.

Why do investors choose to buy the company's stocks instead of directly purchasing Bitcoin?

Many institutions, funds, and regulated entities are subject to restrictions on "investment authorization." These authorizations specify the types of assets that companies can and cannot purchase. For example, credit funds can only buy credit instruments, equity funds can only buy stocks, and funds that are only long positions can never short, and so on.

These authorizations allow investors to be confident that a specific type of fund will not deviate from its established investment strategy. It forces fund managers and regulated entities, such as banks and insurance companies, to be more responsible, taking on only specific types of risks rather than arbitrarily assuming any type of risk.

Due to the highly conservative nature of these authorizations, a lot of funds are "locked" and cannot enter emerging industries or opportunity areas, including cryptocurrency, especially unable to directly access Bitcoin, even though the managers and related personnel of these funds wish to participate in Bitcoin investment in some way.

The founder of the company saw the difference between these entities' desire for asset exposure and the actual risk they could bear, and capitalized on it. Before the Bitcoin ETF emerged, the company's stock was one of the few reliable ways for these entities, which could only purchase stocks, to gain exposure to Bitcoin. This meant that the company’s stock often traded at a premium, as the demand for its shares exceeded the supply. The company continuously leveraged this premium, which is the difference between the value of the stock and the value of the Bitcoin contained in each share, to purchase more Bitcoin while increasing the amount of Bitcoin contained in each share.

In the past two years, if investors held the company's stock, their "return" in Bitcoin terms reached 134%, the highest among large-scale Bitcoin investment returns in the market. The company's products directly meet the needs of entities that typically cannot access Bitcoin.

This is a typical case of "authorized arbitrage". It is completely wrong to think that this strategy is no longer effective even after the launch of Bitcoin ETFs, as many funds are still prohibited from investing in ETFs, including most mutual funds managing $25 trillion in assets.

Debt Terms: Binding for Other Companies, but Supportive for This Company

In addition to a positive supply situation, the company also has certain advantages regarding the debt it has taken on. Not all debts are the same. Credit card debt, mortgages, margin loans, these are all distinctly different types of debt.

Corporate loans can sometimes operate similarly to mortgages, where interest is paid over a specified period and the principal is only repaid at the end of that term. Generally, as long as interest payments are made on time, the debt holder has no right to sell the company's assets.

This flexibility allows the company to respond more easily to market fluctuations, making the company's stock a way to "trap" the volatility of the crypto market. However, this does not mean that the risks are completely eliminated.

Conclusion

The company is not in leveraged trading, but in arbitrage.

Although the company does have some debt at present, the price of Bitcoin would need to drop to around $15,000 per coin within five years to pose a serious risk to the company. As more companies adopt similar Bitcoin accumulation strategies, this will become another topic worth paying attention to.

However, if these companies stop charging premiums to compete with each other and start taking on excessive debt, the entire situation will change and could lead to serious consequences.