BREAKINGVIEWS-SoftBank grasps the riskiest end of crypto mania

By Pranav Kiran

TORONTO, April 24 (Reuters Breakingviews) - The investment giant behind WeWork isn’t afraid to make big, questionable-seeming bets. At the very least, though, SoftBank boss Masayoshi Son can say that he just misread the potential of the failed landlord’s business model. Explaining away his decision to take a minority stake in a bitcoin-buying vehicle aping cryptocurrency juggernaut Strategy is harder, given equity investors are grist for a volatility-harvesting trade.

On Wednesday, a line-up of crypto luminaries unveiled Twenty One Capital. It will go public by merging with special-purpose acquisition company Cantor Equity Partners CEP.O, run by Brandon Lutnick, son of President Donald Trump’s Commerce Secretary Howard Lutnick. To boot, stablecoin issuer Tether and crypto exchange Bitfinex will contribute a pot of bitcoins, partly funded with cash from Japanese conglomerate SoftBank.

All told, Twenty One will hold over 42,000 bitcoins, worth some $4 billion today. Like Michael Saylor-run Strategy MSTR.O, formerly known as MicroStrategy, it will seek to acquire more using crafty financial engineering. This works for two reasons. First, Strategy’s $93 billion market capitalization is worth twice its coin hoard, giving it rich equity currency to fund purchases. Second, bitcoin's volatility translates through to the stock, attracting hedge funds that can make money from its swings by buying debt convertible into shares while simultaneously selling the shares short.

But such volatility vehicles keep this trade affordable by diluting shareholders to juice liquidity. The sop to regular shareholders is that the amount of bitcoin held relative to stock issued keeps going up. Strategy reports ad hoc gauges – BTC Yield and BTC Gain, representing the shift in this ratio – to imply that each stockholder has an increasingly valuable claim on its currency hoard.

Earnings per share is a more meaningful metric because it represents cash available to shareholders after stripping out payments to, say, creditors, who have a superseding claim on that lucre. Bitcoin has no cashflows, however. SoftBank’s equity, and its claim on Twenty One’s currency, may be junior to creditors in the event of bankruptcy.

Granted, there’s short-term appeal. According to a company presentation, SoftBank is buying Twenty One shares from Tether equal to the value of 10,500 bitcoin, or about $891 million at a 10-day average price of $84,864. If Twenty One trades at a similarly baffling premium as Strategy, the equity it receives in return would be worth perhaps $1.7 billion. Indeed, Cantor Equity Partners' shares have already nearly tripled since the deal's announcement.

There’s little safety net if the trade breaks down. That this deal involves a SPAC adds to the oddity; most blank-check firms are trading below their debut price. An index compiled by Pitchbook tracking those that have completed a merger is down 80% over the last three years. SoftBank’s optimism rarely falters, but the real world often does.

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CONTEXT NEWS

A consortium including SoftBank on April 23 joined hands with a blank-check firm backed by boutique bank Cantor Fitzgerald to launch a bitcoin investment vehicle, Twenty One Capital.

Twenty One will receive bitcoin contributed by stablecoin giant Tether and cryptocurrency exchange Bitfinex. It expects to launch with more than 42,000 bitcoins in a deal valuing the crypto venture at $3.6 billion based on the digital currency’s recent average trading price.

The companies will raise $585 million in additional capital from investors through a combination of convertible bonds and equity financing. The proceeds will be used to purchase bitcoin and for other purposes.