Having explored Bitcoin Treasury Companies, their mNAV premiums, and the positive and negative flywheel dynamics, we now examine the specific risks that can slow the growth flywheel or trigger the decline cycle. Many of the key risks exlored here directly or indirectly lead to the compression of the mNAV, that is at the center of the Bitcoin treasury strategy. Thus, understanding these risks matters because the same factors that amplify returns during favorable conditions can amplify losses during unfavorable ones.
What Are the Key Risks?
Every flywheel has failure points. For Bitcoin treasury companies, risks mainly fall into five categories:
- Market Risk: Bitcoin price stagnation or decline
- Financial Risk: Leverage timing and debt maturity challenges
- Competitive Risk: Market saturation and strategy commoditization
- Regulatory Risk: Tax treatment changes and operational restrictions
- Execution Risk: Poor management and capital allocation
Companies that recognize these risks and prepare for them will be the ones that survive long-term.
Market Risk: Bitcoin Price Weakness
The biggest threat is sustained Bitcoin price weakness. Since the flywheel relies on Bitcoin appreciation to amplify returns and support high valuations, extended price stagnation or decline endangers the model’s core.
How Price Declines Break the Model
When Bitcoin price turns negative, USD returns decrease. A 20% Bitcoin yield combined with a 30% price decline results in more Bitcoin per share than holding directly, but it leads to a -16% total USD return. For long-term believers, this can still be beneficial. However, market psychology doesn’t always think long-term.
Recall the formula:
Total USD Return = BTC Yield × (1 + BTC Price Appreciation)
The issue: On the upside, Bitcoin price appreciation amplifies returns and thus mNAV premiums, reflecting growing investor enthusiasm and confidence. However, when that price appreciation fades, premiums can compress rapidly as expectations adjust downward.
Financial Risk: The Leverage Trap
Many Bitcoin treasury companies use convertible debt, viewing it as efficient financing that converts to equity if Bitcoin rises. But this creates timing risks during bear markets.
How Forced Redemptions Can Destroy Value
Companies that issued significant debt near market peaks face difficult decisions when their bonds mature during downturns. This risk is best understood through a concrete example.
Example walkthrough: 20% convertibles with a 40% Bitcoin decline
Starting position:
- Company has 100 shares trading at $10/share ($1,000 market cap)
- Owns 5 BTC at $100/BTC ($500 in Bitcoin holdings)
- BTC per share: 0.05
- mNAV: 2x (trading at $10 vs $5 NAV per share)
The company issues $200 in convertible notes (20% of market cap) with conversion price at $13/share (30% premium). It uses the $200 to buy 2 more BTC, bringing total holdings to 7 BTC. If the notes convert, the company would have 115 shares and 0.061 BTC per share—a 21% increase.
Then Bitcoin drops 40% to $60 per BTC. The convertibles don’t convert, assuming the share price has also fallen. The company must repay $200 in cash. To raise this cash, it needs to sell 3.33 BTC at the reduced $60 price.
Final position:
- 100 shares
- 3.67 BTC remaining (7 – 3.33 sold)
- BTC per share: 0.037
- Result: 40% below the post-raise fully diluted position of 0.061 BTC per share
- Result: 26% below the starting 0.05 BTC per share
For investors evaluating the company after the convertible issuance, they see 0.061 BTC per share on a fully diluted basis. If the convertibles don’t convert and must be redeemed, they end up with 0.037 BTC per share—a 40% decrease from what they initially expected to buy.
Scenarios Across Different Leverage Levels
For illustration, here is the same scenario across different leverage levels and Bitcoin price scenarios:
| Bitcoin Drawdown | 20% Convertibles Outstanding | 30% Convertibles Outstanding |
| 20% decline | -26% BTC per share | -35% BTC per share |
| 30% decline | -32% BTC per share | -43% BTC per share |
| 40% decline | -40% BTC per share | -54% BTC per share |
All scenarios assume a starting premium of 2x mNAV and convertible notes priced at a 30% premium to the current share price. The percentages show how far BTC per share falls compared to where the company started—but investors buying after the convertible issuance face even larger percentage drops from the fully diluted BTC per share they see at the time of purchase.
A Recent Example
In October/November 2025, Sequans Communications voluntarily sold 970 BTC to redeem half of its convertible debt, reducing BTC per share by 21%. The company had been trading below 1x mNAV since August. While management called this a choice to gain flexibility, it shows how premium compression can push companies to deleverage even when their long-term Bitcoin thesis remains intact.
Figure 1: Sequans, mNAV and BTC per Share (fully diluted) (06.10.25-05.11.25)
The Timing Paradox
During bull markets, companies can raise capital more easily at higher premiums, but Bitcoin prices are elevated. During bear markets, Bitcoin is cheaper to accumulate, but premiums compress and capital raising becomes difficult or impossible.
Competitive Risk: Market Saturation
As Bitcoin treasury strategies become mainstream, competition intensifies. Early pioneers operated with virtually no competition. Now more and more companies compete for the same pool of capital, driving up costs and compressing premiums across the sector. Late adopters face additional challenges: higher Bitcoin acquisition prices and expectations for immediate results comparable to established players.
Regulatory Risk
Bitcoin treasury companies face regulatory risks.
Tax treatment changes: Some strategies depend on favorable tax treatment in specific jurisdictions. The regulatory arbitrage discussed earlier—such as Japan’s 55% Bitcoin tax versus 20% equity tax—creates advantages. Changes in tax treatment could eliminate these advantages.
Restrictions from regulator: Regulators may impose limits on convertible debt structures, stricter disclosure requirements, or restrictions on Bitcoin-backed products. As the largest companies grow, concentration concerns could trigger position limits or operational restrictions.
Historical precedent: Governments have restricted asset ownership during crises—Executive Order 6102 forced gold surrender in 1933. While unlikely today, Bitcoin treasury companies present concentrated, publicly reported holdings that could theoretically face scrutiny during extreme stress.
Execution or Operational Risks
Beyond external factors, companies face internal execution risks that can destroy value regardless of market conditions.
Capital allocation failures: Poor timing on debt issuance or over-leveraging during peaks can leave companies trapped when markets turn. This may lead to the scenario mentioned above of a company being forced to sell some of their Bitcoin holdings to cover their debt.
Custody and operational risks: Bitcoin’s irreversibility means custody mistakes are permanent. Lost private keys, hacking incidents, or custodial failures result in total loss of holdings.
Communication failures: Loss of investor confidence through poor communication, missed guidance, or lack of transparency can compress premiums faster than market conditions alone. Once trust is lost, rebuilding it becomes nearly impossible.
What Determines Survival
Not all companies are equally vulnerable. Several factors matter:
Conservative financial management: Companies maintaining debt-to-equity ratios below 20-30% can better avoid forced Bitcoin sales during downturns. Spreading debt maturities across multiple years reduces refinancing risk.
Multiple funding sources: Access to diverse capital sources—equity, debt, preferred shares, operating cash flows—gives companies more options during stress. Teams with experience managing through Bitcoin cycles understand timing challenges and have established investor relationships.
Differentiation: Committed investors who understand the long-term strategy reduce capital flight risk. Companies with profitable underlying businesses can cover expenses without relying entirely on capital markets.
At Melanion Digital, we are adressing some of these risks through a hybrid approach that complements Bitcoin accumulation with active treasury management. Since 2021, we’ve generated yield through market-neutral and other active strategies strategies, reducing dependence on continuous capital raising and market conditions.
Conclusion
The risks facing Bitcoin treasury companies are real: price weakness, leverage timing, competitive pressures, regulatory changes, and execution failures can all challenge even well-managed strategies.
However, understanding these risks helps with preparation. Companies that maintain conservative financial management, access to multiple funding sources, and clear differentiation have better chances of surviving stress and emerging stronger.
For investors, recognizing these risk factors matters for company selection and position sizing. Bitcoin treasury companies can offer opportunities for amplified exposure, but require careful analysis of risk management and competitive positioning.
Management quality is the key factor. Companies led by teams that understand both how the flywheel accelerates growth and how to navigate challenges when conditions change are far more likely to succeed long-term. As an investor, evaluating whether management has this dual competence—growth execution and risk management—should be central to your analysis.
Next in this series: ‘Evaluating Bitcoin Treasury Companies: Key Metrics That Matter’ – examining the specific metrics for identifying strong execution, spotting warning signs, and comparing companies effectively.