Stocks of KindlyMD Plummet After Purchasing $679 Million Worth of Bitcoin

In a bold move, healthcare technology company KindlyMD has closed a $200 million convertible note offering as part of its Bitcoin-buying strategy. This strategic shift, announced in May, saw the company spend $679 million to purchase 5,743.91 Bitcoin, with the transaction made via its wholly-owned subsidiary, Nakamoto Holdings, Inc.

The Bitcoin purchase was made at an average price per Bitcoin of approximately $118,205. At the time of the announcement, Bitcoin was trading for $113,200, marking a 2.4% decrease over a 24-hour period and more than 5% over the past week.

As KindlyMD joins the ranks of 168 public companies with Bitcoin treasuries, holding a combined total of over 983,000 Bitcoin, the strategy presents significant risks. These include high financial volatility, security and operational vulnerabilities, counterparty risks, and creditworthiness concerns.

One of the key risks is volatility risk. Bitcoin is about five times more volatile than the S&P 500 in the short term, which can cause rapid and large valuation swings that destabilize company operations and treasury value.

Security and custodial risks are another concern. Companies depend on third-party custodians and exchanges like Coinbase or Binance, exposing them to cyberattacks, operational failures, regulatory issues, and potentially exchange insolvency.

Concentration and leverage risk also loom large. When Bitcoin constitutes a significant portion of reserves, companies resemble speculative portfolios rather than stable treasuries. Heavy concentration in a few companies increases sector risk, and models that leverage Bitcoin holdings amplify upside but also magnify downside, potentially forcing dilution or asset sales in downturns.

Funding and liquidity risk is another potential pitfall. Declining Bitcoin prices can compress market NAV (mNAV), drying up financing options, increasing interest costs, causing dilution, or forcing sale of BTC holdings at unfavorable prices.

Credit risk and financial stability are further concerns. The strategy can increase the company’s credit risk profile, weaken creditworthiness, and create liquidity crises, even with insurance and security measures in place.

Despite these risks, the Bitcoin treasury strategy offers potential upside in bull markets. However, it exposes companies to material financial instability, operational complexity, and regulatory uncertainty, which can significantly impact survival and shareholder value during market downturns.

David Bailey, the CEO of KindlyMD, has been at the forefront of this strategic shift. Bailey, who advised President Donald Trump on crypto policy while he was campaigning last year, has steered KindlyMD towards a focus on Bitcoin accumulation since 2020.

The strategy involves raising cash to buy Bitcoin, allowing investors to buy shares of a publicly traded company and get regulated exposure to the asset. This approach is exemplified by Twenty One, a company started by a combination of crypto and traditional finance powerhouses, which holds 43,500 BTC-almost $5 billion worth as of this writing-although it has yet to begin trading.

KindlyMD's stock (NAKA) was down by more than 13% to a price of $10.41 following the announcement, reflecting investor concerns about the risks associated with the Bitcoin strategy.

Nakamoto, the holding company co-founded by Bailey, also plays a key role in KindlyMD's Bitcoin strategy. In August, KindlyMD raised an additional $540 million in a private placement in public equity (PIPE) to buy Bitcoin.

As KindlyMD continues to navigate the complex and evolving landscape of Bitcoin, it will be interesting to see how the company manages these risks and capitalizes on the opportunities presented by this digital asset.