Bitcoin First Long Positions Strategy: The Secret to Successful Arbitrage Model

In the past 5 years, a certain company invested 40.8 billion USD, equivalent to Iceland's GDP, purchasing over 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, while Bitcoin's increase during the same period was only about 420%. This significant growth has led to the company's valuation exceeding $100 billion and its inclusion in the Nasdaq 100 index.

The huge growth has also sparked controversy. Some predict that the company will become a trillion-dollar enterprise, while others are skeptical, fearing that the company may be forced to sell its Bitcoin, potentially triggering panic that could depress Bitcoin prices for years.

Although these concerns are not without reason, most people lack a basic understanding of how the company operates. This article will delve into how the company functions and whether it is a significant risk for Bitcoin acquisition or a revolutionary model.

How does the company purchase so much Bitcoin?

The company mainly acquires funds to purchase Bitcoin through three methods: operating business income, selling stocks/equity, and debt. Among these, debt is the most concerning. However, in reality, the majority of the funds used by the company to purchase Bitcoin come from issuance, that is, selling stocks to the public and using the proceeds to buy Bitcoin.

This may seem a bit counterintuitive; why would people buy company stocks instead of directly purchasing Bitcoin? The reason is quite simple, it involves the most favored type of business in the cryptocurrency field: Arbitrage.

Why Choose to Buy Company Stocks Instead of Directly Buying Bitcoin

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

These authorizations allow investors to be assured that, for example, a fund that invests only in stocks will not purchase sovereign debt, and vice versa. 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 being able to take on any type of risk at will.

Due to the highly conservative nature of these authorizations, a considerable amount of capital held in funds and entities is "locked" and unable to enter emerging industries or opportunity sectors, including cryptocurrencies, especially unable to directly access Bitcoin, even if the managers of these funds and related personnel wish to engage with Bitcoin in some way.

The founder of the company saw the difference between these entities hoping to gain asset exposure and the actual risks they could bear, and took advantage of this. Before the Bitcoin ETF emerged, the company's stock was one of the few reliable ways for these entities, which could only buy stocks, to gain exposure to Bitcoin. This meant that the company's stock often traded at a premium because the demand for its stock exceeded the supply. The company continuously took advantage of this premium, which is the difference between the stock's value and the value of the Bitcoin contained in each share, to purchase more Bitcoin, thereby increasing the amount of Bitcoin contained in each share.

In the past two years, if you held shares of the company, your "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 though the Bitcoin ETF has recently been launched, because many funds are still prohibited from investing in ETFs, including most mutual funds that manage $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 debts it undertakes. 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 only needs to be repaid at the end of that term. Although loan terms can vary greatly, typically as long as interest payments are made on time, creditors do not have the right to sell the company’s assets.

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

Conclusion

The company is not engaged in leveraged business, but in arbitrage business.

Despite currently holding a certain amount of debt, the price of Bitcoin would need to fall to around $15,000 per coin within five years for it to pose a serious risk to the company. With the expansion of "treasury companies" (referring to companies replicating this company's Bitcoin accumulation strategy), including several companies like MetaPlanet and Nakamoto, this will become a key focus of another topic.

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