Short positions, illustrated by the iconic film “The Big Short,” have historically brought extensive losses to those who underestimated their potential. While the bold tactic outlined the tumultuous 2007-2010 financial crisis, cryptocurrencies have generally been dismissed as mere bubbles despite their disruptive innovations. However, Kerrisdale Capital is centering its efforts not on cryptocurrencies directly, but rather on a different narrative: the speculative crypto reserve companies.
What Is Kerrisdale’s Latest Strategy?
Renowned for its adeptness in short-selling, Kerrisdale Capital has recently taken a short position in Bitmine (BMNR) shares. This decision represents an initial step towards predicting the eventual decline of crypto reserve entities. Major global exchanges, including those in the U.S., Japan, and Germany, have yet to witness a fully fleshed-out crypto reserve enterprise. Some companies, meanwhile, are deploying cryptocurrencies as reserves to artificially inflate their stock valuations.
A Turkish company, Martı, has notably followed this strategy on the U.S. stock exchange, raising concerns about companies forming a possible bubble by building crypto reserves. Such companies, fueled by cash flow narratives and the assumption of perpetual crypto growth, mimic the approach taken by Microstrategy. Despite short-selling attempts, Michael Saylor’s early involvement and prudent cost management kept MSTR shares buoyant as they surged past their two-decade-old peak.
Why Might Failures Occur in Crypto Reserve Models?
Kerrisdale Capital scrutinizes the crypto reserve tactic, arguing that increased competition is eroding the advantages quickly. Their critique of BMNR’s approach highlights an unsustainable model that fails due to lack of uniqueness and outdated premium trading logic.
Bitcoin thrived under the same model, and Ethereum alongside Solana experienced moderate success. Binance Coin saw a boost at its all-time high. However, Kerrisdale suggests that firms rushing to build reserves are forfeiting the benefits of being early adopters. As more businesses replicate these strategies, the scarcity that once maintained premium valuations rapidly declines.
Even Microstrategy, an early pioneer, experienced a decline in its market premium ratio from 2-2.5x to about 1.4x NAV. Kerrisdale cautions that as the market evolves and businesses’ models fail, many will be valued at, or even below, their intrinsic worth.
August marked a turning point when Bitmine ceased to disclose vital investor metrics, such as NAV and per-share figures, indicating a negative trend and dampening chances for growth.
- BMNR’s selective reporting after August suggests potential accounting issues.
- Firms overly reliant on inflated narratives may face dire valuation corrections.
- Higher competition and reduced novelty challenge the sustainability of premium prices.
A recent announcement concerning BMNR’s $365 million theoretically “profitable” offering revealed hidden losses when assessed with attached warrants. Kerrisdale’s analysis is blunt: without valid strategies to support premiums, BMNR’s foremost objective appears to be capitalizing on investors by imitating failing models.
