Is the infinite crypto money problem sustainable?

Crypto companies are fueling growth through the “infinite money problem,” raising capital to buy Bitcoin and increase in value.

Cryptocurrency treasury companies are now numerous. Yet their methods of raising capital could prove problematic if future economic trends suffer a slowdown.

Financial engineering is the field of creating new investment products and solving problems. It has long been a path followed by banks and institutions to make as much money as possible through investments, debt and equity. Yet in 2008 it caused huge problems during a major financial crash. So, is the “Infinite Money Glitch” started by cryptocurrency companies headed for disaster, or is it here to stay?

The concept of the infinite money problem

As of September 25, the Bitcoin price chart shows a slight decline in its price to the $111,655 level. This follows similar trends set on Monday, where the crypto market lost $87.8 billion in the span of a weekend. The previous week, the market saw huge growth, especially in the altcoin sector.

Binance noted that the Fed’s 25 basis point cut pushed the total crypto market cap back to US$4.1 trillion, with BTC surpassing US$117,000 and BNB surpassing US$1,000 for the first time. Altcoins significantly outperformed, signaling renewed risk appetite.

This continued rise in the price of Bitcoin and crypto has contributed to what has been dubbed the “Infinite Money Glitch.” This is when companies sell their stock and use other methods, like convertible notes, to raise capital. This is then used to purchase Bitcoin or other cryptocurrencies. As their price increases, so does the value of the company. They can then use this high stock value to launch other rounds of capital raising, and so on.

The concept was started by Strategy, formerly a software company named Microstrategy. Its architect is Michael Saylor. In August 2020, the company began purchasing Bitcoin as a store of wealth. Since then, they have continued, even using their acquisition as their primary business model rather than software development. As the price of Bitcoin has increased, so has the value of the company. In fact, its value increased by 2,810% in the space of three years. They now hold 2.25% of all Bitcoin in existence.

They’re not the only ones thriving on this idea, either. Metaplanet is a Japanese Bitcoin treasury company, formerly a struggling hotel chain. By tackling Bitcoin, it rode the wave of growth, seeing its stock increase in value. Today, companies as large as Spanish coffee chains and gaming retailers have all jumped on the cryptocurrency cash flow strategy and are embarking on an infinite money problem.

Does it work with altcoins?

As companies consumed the supply, Bitcoin became less prevalent in the markets and its price became more static. Thus, many companies have sought to apply the concept to altcoins with great success. This may be due in part to a general shift toward altcoins in the broader market.

Over the past week, Binance noted that altcoins like BNB have surged over 10%, becoming the second-best performing large cap year-to-date, even surpassing ETH. BNB chain activity growth, token burns, and exchange-driven demand have strengthened its fundamentals, while cash inflows have highlighted growing institutional interest beyond BTC.

Thus, more value can be derived from altcoins in the current climate. Altcoins offer businesses a longer path and possibly more growth opportunities. Many have not undergone as many cycles as Bitcoin and have not been as institutionally accepted. Companies such as Nano Labs, SharpLink Gaming, and Upexi have all benefited from Altcoin treasuries.

Is the infinite money problem sustainable?

The real question is whether this is sustainable. The technique is not new and has been used in the past. While it didn’t contribute to the financial crash of 2008, it certainly didn’t help. What makes things so different, however, is that cryptocurrency, a very different investment tool, wasn’t on the table then.

The main problem is that even though MicroStrategy is making headlines with its stock price, it is carrying debt under the hood. It is out of stock and has doubled its debt to $4.2 billion in less than a year. They are now considering taking on more risk by issuing perpetual preferred shares. These provide a fixed dividend indefinitely with no maturity date.

Selling stocks like this also depletes a company’s net asset value (NAV). It is the difference between a company’s assets and liabilities. It is calculated by deducting liabilities from the market value of one’s shares and then dividing that number by existing shares. By creating more shares, a quarter of companies holding Bitcoin Treasuries are now trading below NAV levels, with the average NAV falling from 3.76 in April to 2.8. Although this is not a major problem, it seriously limits the ability to purchase more capital, thus ending the endless cycle of financial problems.

It will take a huge crash in the crypto market to derail the method right now. Businesses should be careful not to overuse the strategy and deplete its value, and protect themselves against crypto market declines. If they succeed, it looks like the infinite money problem is here to stay.