Diluted Value: How Bitcoin Treasury Companies Affect Shareholder Wealth

Buying shares in a Bitcoin treasury company can give investors ownership of a business that holds Bitcoin. However, the value of their shares may not increase as expected if the company decides to buy more coins using borrowed money or by issuing new shares.

A case study is provided by France's Capital B, which has seen its Bitcoin holdings rise by 12% between August 17 and September 7. During this period, the number of shares increased by around 16%, but the price per share barely moved. This is because the company used borrowed money to buy more coins, preserving existing shareholders' percentage ownership for the time being.

The way a company pays for its Bitcoin holdings can have a significant impact on shareholder value. If it issues new shares or borrows money to buy more coins, existing shareholders may see their stake in the company diluted. However, if investors pay a premium for new shares, management may be able to repeat profitable financings and maintain the value of each share.

Capital B has used various funding arrangements to finance its Bitcoin purchases, including issuing ordinary shares and warrants that give holders the right to buy future shares at specified exercise prices. The company also has convertible debt obligations with lenders who receive repayment claims with a contractual path into shares. This type of financing can be more complex than traditional fixed-euro debt.