Is the crypto infinite money glitch sustainable?

Crypto firms fuel growth through the ‘infinite money glitch,’ raising capital to buy Bitcoin and boost value.

Cryptocurrency treasury companies are now plentiful. Yet their methods of raising capital could prove problematic if upcoming economic trends suffer a downturn.

Financial engineering is the field of creating new investment products and solving problems. It has long been a path followed by banks and institutions to make as much money from investments, debts, and equity as possible. Yet in 2008, it caused huge problems during a major financial crash. So is the ‘Infinite Money Glitch’ spearheaded by cryptocurrency companies headed for disaster, or is it here to stay?

The concept of the infinite money glitch

As of September 25th, the Bitcoin price chart shows a slight drop in its price to the $111,655 level. This follows similar trends set on Monday, where the crypto market lost $87.8 billion over the space of a weekend. The preceding week, the market had seen huge growth, particularly in the altcoin sector. 

Binance noted that the Fed’s 25bps cut pushed the total crypto market cap back to US$4.1 trillion, with BTC surpassing US$117,000 and BNB breaking above US$1,000 for the first time. Altcoins broadly outperformed, signalling renewed risk appetite.

This continued soaring price of Bitcoin and crypto has contributed to what has been dubbed the ‘Infinite Money Glitch’. It is when companies sell off shares and use other methods, like convertible notes, to raise capital. This is then used to buy Bitcoin or other cryptocurrencies. As the price of them goes up, so does the company’s value. They can then use this elevated share value to instigate more rounds of capital raising, and so on.

The concept was pioneered by Strategy, formerly a software company named Microstrategy. Its architect is Michael Saylor. In August 2020, the company began to buy Bitcoin as a store of wealth. Since then, they have continued, even using their acquisition as a primary business model over software development. As the price of Bitcoin has risen, so has the value of the company. In fact, its value is up 2,810% over the space of three years. They now hold 2.25 percent of all Bitcoin in existence.

They are not the only ones to thrive on this idea, either. Metaplanet is a Japanese Bitcoin treasury company, formerly a struggling hotel chain. By taking on Bitcoin, it has ridden the wave of growth, seeing its stock rise in value. Now, companies as far and wide as Spanish coffee chains to gaming retailers have all jumped on the cryptocurrency treasury strategy and are cycling the infinite money glitch.

Does it work with altcoins?

As companies have eaten up the supply, Bitcoin has been less prevalent on markets, and its price has become more static. Thus, many companies have looked to apply the concept to altcoins with great success. Part of this may be due to a general switch to altcoins in the broader market. 

In the last week, Binance has noted that altcoins like BNB have surged over 10%, becoming the second-best performing large-cap YTD, overtaking even ETH. Growth in BNB Chain activity, token burns, and exchange-driven demand have strengthened its fundamentals, while treasury inflows have highlighted growing institutional interest beyond BTC.

Thus, more value can be gained from altcoins in the current climate. Altcoins offer companies a longer path and possibly more opportunities for growth. Many have not undergone as many cycles as Bitcoin and have not been as institutionally accepted. Companies such as Nano Labs, SharpLink Gaming, and Upexi have all benefited from Altcoin treasuries.

Is the infinite money glitch sustainable?

The real question is whether this is sustainable. The technique is nothing new, and it has been used in the past. While it did not contribute to the 2008 financial crash, it certainly did not help. What makes this so different, though, is that cryptocurrency, a very different investment tool, was not on the table then.

The main issue is that while MicroStrategy is grabbing headlines with its stock prices, under the hood, it is taking on huge amounts of debt. It is running out of stock and has doubled its debt to $4.2 billion in under a year. They’re now planning to take on more risk by issuing perpetual preferred shares. These provide a fixed dividend indefinitely with no maturity date.

Selling stock like this also depletes a company’s Net Value Asset (NAV). This is the difference between a company’s assets and its liabilities. It is calculated by deducting liabilities from the market value of its shares, then dividing the number by the shares in existence. By making more shares, a quarter of companies that have Bitcoin treasuries are now trading below NAV levels, with the average NAV declining from 3.76 in April to 2.8. While this isn’t a major problem, it does seriously limit the potential to buy more capital, halting the infinite money glitch cycle.

It will take a huge crash in the crypto market to derail the method at the moment. Companies must be careful not to overuse the strategy and deplete their value, and hedge against drops in the crypto market. If they can do this, it seems the infinite money glitch is here to stay.