Bitcoin treasuries play havoc with merger maths
Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Eagle-eyed investors love an arbitrage opportunity: spotting and profiting from inefficiencies in how assets are priced. Bitcoin treasuries, this year’s hottest and strangest Wall Street fad, are giving them new opportunities to test their skills.
Inspired by MicroStrategy, now known simply as Strategy, bitcoin treasuries are corporate shells created simply to buy and hold the digital token, a widely available asset anyone can freely purchase. Strategy, and some others, trade at a premium to their bitcoin holdings. But many trade at a discount, in seeming contradiction of the efficient markets theory. In any event, the trend has entered a new phase: consolidation.
On Monday, Strive, the listed bitcoin vehicle backed by right-wing entrepreneur Vivek Ramaswamy, announced an all-stock deal to acquire Semler Scientific, a medical device company turned cryptocurrency pot. Strive, with a market capitalisation of around $2.2bn, trades at more than three times the value of its bitcoin holdings; Semler trades at a modest discount. Ramaswamy is using an overvalued currency to buy an undervalued asset. It all sounds relatively straightforward.
The market, though, has responded in an odd fashion. Strive shares fell after the merger was announced, and Semler’s rose, but not as much as might have been expected. By Tuesday, one Semler share was worth a little over $34, or around 10 times the price of a Strive share. Yet under the terms of the deal, each Semler share gets swapped for 21 Strive shares, theoretically equivalent to $73.
Bitcoin treasuries had already presented investors with a market mystery — why companies would trade at valuations detached from the bitcoin they hold, for reasons that aren’t exactly clear. The Strive deal drives home another discrepancy: that different bitcoin hoards can trade at different prices depending on who is holding them.
It remains to be seen whether these companies’ shares will move into line with the exchange ratio Strive has offered. Nor is it clear why they haven’t. The obvious trade right now is to buy Semler shares, cheap to the implied share swap value, and separately short the Strive stock.
It may be that the deal has simply forced the respective shareholders to confront the irrationality of an underlying asset bifurcating sharply from the value of a traded security linked to it.
From Ramaswamy’s perspective, it is to be hoped that the market adjusts to his point of view rather than Semler’s. If the target’s current price were a fair indication of where the stocks will settle, Strive’s shares could have much further to fall. An attempt to exploit an inefficiency in market pricing might have accidentally prompted its unwinding.