TRON eyes IPO: Justin Sun bets on crypto treasury strategy

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On the heels of Circle's relatively successful initial public offering (IPO), it didn't take long for another crypto company to step up to the plate and announce its plans to go public on the United States stock market. This time around, Justin Sun, the founder of TRON, announced he would be taking TRON public through a reverse merger with Nasdaq-listed SRM Entertainment ($SRM) (NASDAQ: SRM).
Once the deal is complete, SRM Entertainment will change its name to TRON, and its business model/strategy will switch to the relatively new, increasingly popular business model of owning and operating a crypto treasury. Once finalized, the company will buy and hold the TRON token.
To kickstart the treasury, the newly formed company plans to issue 100,000 shares of its Series B Convertible Preferred Stock, which can be converted into 200 million shares of common stock at 50 cents per share. Additionally, the company will issue 220 million warrants, allowing SRM to acquire up to 220 million shares of common stock at an exercise price of 50 cents per share. If fully exercised, the company will take in $210 million which they will then use to buy TRON and begin building their treasury.
Why public companies are racing to build crypto treasuries
Recently, it has become increasingly popular for publicly traded companies to build crypto treasuries. Trump Media & Technology Group (NASDAQ: DJT), GameStop (NASDAQ: GME), and, of course, MicroStrategy (NASDAQ: MSTR) have all either announced that they are beginning to build or continuing to top up their Bitcoin treasuries.
There are various reasons a company might want to build a crypto treasury. Some argue it's a hedge against inflation. Others say it aligns with their company's values of being tech-forward and innovative. But regardless of what the companies are telling the public, no company would be doing this if it didn't believe it would be good for its bottom line.
The obvious economic benefit of a crypto treasury is that the price of the cryptocurrency it holds could appreciate, increasing its overall value and making the company richer.
But so far, there has been a secondary effect that has been even more beneficial than crypto-price appreciation. When companies announce they're building or topping up crypto treasuries, they start getting media attention. Once the headlines roll in, the company's stock price usually climbs.
Most of the time, the price of the crypto asset they're buying increases too. Although both the stock and the crypto asset rise, historically this strategy, and the media attention that comes with it, has been more beneficial for the company's stock price than it has for the underlying digital asset itself.
TRON, which hasn't completed its merger with SRM yet, is a perfect example. When the company announced its plans to merge and build a TRON treasury, the price of $SRM increased by over 500%, while the price of the TRON token increased by just 3.4%.
Why crypto treasuries are a double-edged sword
Admittedly, these crypto treasuries are a unique feat of financial engineering. The companies that own and operate them have found a way to pump their bags, and essentially double-dip on revenue generation since their stock price and crypto treasury rise when they announce that they're adding to their treasury.
But we haven't really seen this play out in the long term; just like there are supporters of the crypto treasury model, there are critics who have been scrutinizing the strategy since August 2020, when MicroStrategy became the first publicly traded company to add cryptocurrency to its corporate treasury.
Cryptocurrencies are notorious for their volatility. When a publicly traded company builds a crypto treasury on top of its other business activities (if it even has other business activities), shareholders are suddenly exposed to cryptocurrency price swings. Depending on the size of the crypto treasury, this can put companies at significant risk. When times are good, they'll thrive. But when the market takes a downturn, it's possible for these companies to incur substantial losses that harm the financial health of the business, all thanks to their crypto treasury.
For instance, earlier this year, MicroStrategy reported an unrealized loss of $5.91 billion due to a drop in BTC's price. If a smaller company follows this strategy and gets caught on the wrong side of a price swing, it could result in them having to close shop.
All of this raises the question: Are crypto treasuries sustainable on a long enough time horizon? The answer is, we don't know yet.
The oldest crypto treasury from a publicly traded company, MicroStrategy, is approaching five years old. Although it's previously reported unrealized losses, the treasury still exists, it's still being topped up, and MicroStrategy is still afloat.
At the same time, the economics of a company whose sole 'product' is a crypto treasury don't look great. When a company isn't creating anything of value, anything that solves a real problem in the world, and therefore isn't generating customer demand or building a reliable customer base, the entire business model becomes shaky. The 'value' of the company is reduced to one speculative idea: that it'll be worth more tomorrow because the crypto they're holding is expected to go up.
These flawed economics put companies with crypto treasuries—especially those whose only product is the treasury itself—at extreme risk. They are essentially living and dying by the price of the crypto they're accumulating.
Tesla sold its BTC; what happens when others do?
One thing we've seen very little of is companies expressing their exit strategy. Every company undoubtedly views its crypto treasury strategy as profitable—but unless they one day exit the position, that profit will never be realized.
Only one publicly traded company has explicitly accumulated Bitcoin for their crypto treasury and then subsequently sold it for a realized revenue. On March 31, 2021, Tesla (NASDAQ: TSLA) sold ~4,320 BTC, representing roughly 10% of its holdings, generating about $272 million, and then, a little more than one year later, in July of 2022, Tesla sold approximately 75% of its remaining BTC and argued that they did this to prove the liquidity of BTC as an alternative to holding cash, essentially testing that BTC was a fully functional treasury asset.
Whatever the reason may be, you'd imagine that companies are stockpiling crypto to one day sell it, which in and of itself could unwind the entire financial engineering play. If a company sells a large chunk of its treasury, that could cause the price of the crypto asset to fall, which then reduces the overall value of the remaining treasury. That decline could impact the company's perceived value and hurt the stock price, triggering a negative spiral that reverses all the gains that made the strategy so attractive in the first place.
There still isn't enough data to know how this plays out. Only a handful of companies have tried the publicly traded crypto treasury model, and even fewer have liquidated their positions, which makes it hard, and arguably too early, to call the crypto treasury a winning strategy. As more time passes and the price of BTC continues to move, we'll find out whether this strategy truly is a feat of financial engineering or if it's just another buzzword financial gimmick.
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