Franklin Templeton: The Future of Crypto Custody Companies Is Uncertain, With a 'Dangerous' Feedback Loop Risk

On July 3rd, as per The Block, an analyst from Franklin Templeton's digital asset department cautioned that although the corporate crypto treasury trend has presented some upward potential, the "risk of a negative feedback loop" poses a "particularly perilous situation." An increasing number of public companies are adopting the crypto treasury model: raising funds through stocks, convertible notes, preferred stock, and other financing instruments to purchase and hold cryptocurrencies such as Bitcoin, Ethereum, Solana, etc., and including them in their balance sheets. Several companies have raised billions of dollars through various financing means, each with distinct risk-return characteristics. The analyst further stated that the rising cryptocurrency prices might also enhance the company's market value, creating a positive feedback loop that attracts more investors. However, Franklin Templeton warned that this model is accompanied by significant risks. If the market value-to-net asset value (NAV) ratio is below 1, newly issued shares will have a dilutive effect, making it challenging for the company to raise capital without harming the interests of existing shareholders, impeding capital formation, and breaking the original virtuous cycle. Worse still, a decline in cryptocurrency prices could trigger a negative feedback loop. Companies may be compelled to sell assets to prop up the stock price, further suppressing cryptocurrency prices and investor confidence, ultimately forming a self-reinforcing downward spiral. The corporate crypto treasury model represents a new phase of institutional adoption of cryptocurrency, but it is not without risks. Maintaining a market value above net assets, engaging in value-added transactions, and effectively managing market volatility will be crucial for the long-term success of these companies.