Ethereum Treasury Intends to Thwart Short Sellers Through Implementation of 'Loyalty Payment', As Stock Trades Below Held Assets Value
BTCS, a crypto treasury firm established in 2013, is offering a loyalty payment to its shareholders in a bid to make shares illiquid and prevent short selling. The move, while aimed at stabilizing the stock price and aligning shareholder interests with the company's crypto strategy, has raised concerns about market manipulation, reduced liquidity, and potential regulatory scrutiny.
The loyalty program offers a $0.35 per share payment in Ethereum to shareholders who move their shares to book entry and hold them for 120 days. This incentivizes long-term holding and reduces the volume of shares available to borrow for short selling, effectively making shares illiquid for that period. While this reduces short interest and can stabilize the stock price, it also limits market liquidity and flexibility for all investors.
By intentionally decreasing share availability for short selling, BTCS could be seen as creating artificial scarcity that distorts normal market dynamics. Such actions might attract scrutiny from regulators concerned about fair market access and potential manipulation, as regulatory bodies like the SEC monitor practices that impede normal trading and price discovery. This strategy can be controversial if perceived as trying to "lock in" shareholders or control the float, possibly impacting market transparency.
The payments are made in Ethereum, aligning shareholder incentives with BTCS’s crypto treasury strategy and blockchain vision. This innovative approach can attract long-term investors who are bullish on Ethereum and blockchain, helping BTCS maintain shareholder loyalty within its crypto ecosystem.
However, limiting short selling can also delay market corrections and allow the stock price to remain disconnected from intrinsic value. BTCS’s shares trade below the sum of its cash and digital asset value, and this program aims to bridge that gap, but risks remain if true market sentiment is suppressed.
Shareholders who participate must effectively lock their shares for at least 120 days, which may limit their ability to react to market changes or liquidity needs. This could deter some investors unwilling to sacrifice short-term flexibility for loyalty incentives.
The mNAV (market value to net asset value) of BTCS is 0.75, the lowest among firms tracked by Strategic Ethereum Reserve. Discounts in crypto treasury firms like BTCS can spell danger, constraining their ability to raise funds.
BTCS' short interest represented 7.4% of the company's float, according to Fintel, which is higher than BitMine Immersion Technologies (4%) and SharpLink Gaming (6.5%) on Monday. By registering shares with the company's transfer agent, investors can restrict how those securities are used, potentially making it more costly to short the stock.
Investors who do not wish to participate in the loyalty program will receive a $0.05 per share dividend payable in Ethereum in September. BTCS shares rose nearly 9% to $4.81 on Monday, according to Yahoo Finance.
Allen noted that BTCS has also leveraged decentralized finance protocols, such as AAVE, to raise capital. Platforms like Robinhood and Charles Schwab typically allow customers to opt out of stock lending programs, but the process may vary in difficulty.
This move by BTCS highlights the ongoing debate in the financial industry about the role of short selling in market stability and the potential for firms to manipulate markets through various strategies. As crypto treasury firms like BTCS continue to grow, regulatory bodies will likely scrutinize their practices more closely to ensure fair market access and transparency.
[1] BTCS Offers Loyalty Payment to Make Shares Illiquid to Prevent Short Selling [2] BTCS Announces $100 Million Ethereum-Buying Plan [3] BTCS CEO Discusses Short Selling and Liquidity Concerns [4] SEC Issues Warning on Market Manipulation in Crypto Assets [5] Investors Weigh Risks and Rewards of BTCS' Loyalty Program
