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

BlockBeats News, July 3rd, according to The Block, an analyst from Franklin Templeton's digital asset department warned that although the corporate crypto treasury trend has brought some upward potential, the "risk of a negative feedback loop" poses a "particularly dangerous situation." More and more 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 adding them to their balance sheets. Several companies have raised billions of dollars through various financing means, each with different risk-return characteristics.

The analyst added that the rising cryptocurrency prices may also increase the company's market value, creating a positive feedback loop that attracts more investors. However, Franklin Templeton warned that this model also comes with 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 difficult for the company to raise capital without harming existing shareholders' interests, hindering capital formation, and breaking the original virtuous cycle.

Even worse, a decline in cryptocurrency prices could trigger a negative feedback loop. Companies may be forced to sell assets to support 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 stage 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 key to these companies' long-term success.