BMNR's money game

Author: Theclues Source: X, @follow_clues

The core mechanism of equity dilution: issuing new shares changes the distribution of equity per share, leading to a transfer of value from existing shareholders to new shareholders, unless certain ideal conditions (such as the market fully accepting the issuance and not adjusting the valuation) continue to hold. Below, I will use mathematical calculations to illustrate why this effect cannot be avoided in reality and will ultimately undermine the logic of the "eternal cycle."

1. Example Hypothesis

• Initial State: Company assets: $10 billion ETH (net assets = $10 billion, assuming no liabilities). Market capitalization: $11 billion (implying a 10% premium from the market, possibly based on growth expectations or speculation). Assuming the total share capital is S shares, then: Net Asset Value (NAV) per share = 100/S million USD. Share price = 110/S billion USD (premium = 10% ).
• Action: Raise $5 billion (issue new shares), fully purchase $5 billion worth of ETH.
• In order to keep the stock price unchanged, the new issuance must be priced at the current stock price of 100/S. This is a "market price issuance."

2. Calculate the situation after the increase (assuming the increase is at market price, with no change in stock price)

• Additional shares issued: Raising $5 billion requires new shares N=0.4545S.
• New total share capital: 1.4545S.
• New total assets: 100 + 50 = 150 billion USD ETH.
• New net asset value per share: 150/1.4545S million USD (an increase of about 3.13% compared to the initial 100/S).
• New market value (assuming the market accepts the stock price unchanged): $16 billion.
• New premium: 10/150=6.67% (decreased from 10% to 6.67%).

On the surface, the stock price remains unchanged at 110/S, and the net asset per share has even slightly increased.

But there is a hidden dilution effect here:

• Value Transfer Occurs: An additional $5 billion in assets is shared among all shareholders (old + new). The stake of existing shareholders decreases from 100% to 68.75%. They originally held the entirety of $10 billion in assets, but now own 68.75% of $15 billion (≈$10.313 billion), resulting in a net increase of $313 million. However, without the issuance of new shares, they could have owned $11 billion; here, new shareholders have shared part of the appreciation at a "discount" (due to premium compression).
• Not Real Value Addition: The additional $5 billion is external capital injection, not value created internally by the company. Its "value addition" is merely an accounting illusion—similar to depositing someone else's money into your own bank and then claiming that your family's wealth has increased.
• Premium compression is a warning: An initial 10% premium reflects the market's optimism about "growth potential" (such as expecting more issuance cycles). However, each issuance dilutes this potential, leading to a gradual decrease in the premium (from 10% to 6.67%, and even lower next time).
• Why? Because the company is essentially an "ETH holding shell" with no unique business, the market will gradually see it as an ETH ETF (market value ≈ net assets, premium → 0). Once the premium is 0, further issuance cannot be done at a price higher than the net assets, otherwise no one will buy it.

3. If the cycle continues, the effect will amplify and destroy the model

Assuming the example is repeated several times (each financing is equivalent to 50% of the current assets, issued at the current stock price, assuming the stock price remains unchanged):

• After Round 1: Assets 15 billion, Market Value 16 billion, Premium 6.67%.
• Round 2: Financing 7.5 billion (50% of 150), new shares ≈0.46875S' (S' is the current equity), new assets 22.5 billion, new market value 23.5 billion, premium ≈4.44%, net asset per share increases but premium continues to decline.
• Round 3: Similar, the premium decreased to approximately 3%.

After several rounds, the premium approaches 0. At this point:

• The issuance price is forced to equal the net asset per share (with no premium space).
• Net asset per share no longer increases: For example, Asset A, Capital T, issuance of 0.5A (priced at A/T), new shares = 0.5T, new assets 1.5A, new per share = 1.5A / 1.5T = A/T (unchanged).
• Cycle failure: Without the "stock price increase" driving the next issuance, the model shifts from "appreciation" to "zero-sum" - new funds merely dilute old shares, resulting in no net gain.

This is exactly the manifestation of the dilution effect: initially covered by premiums, later exposed, leading to value transfer (new shareholders entering at low cost, existing shareholders' equity diluted).

4. If it is not a market price issuance, dilution is more pronounced (closer to the "par value issuance" scenario)

5. Why this effect cannot be avoided in practice

• The market is not infinitely rational or optimistic: Your assumption relies on the market always accepting "stock prices remain unchanged," but investors will calculate dilution (using the EV/EBITDA or NAV discount model). Once they realize the model has no intrinsic cash flow (no dividends, relying solely on holding ETH), FOMO turns into panic, and stock prices collapse in advance.
• Nature of Mathematics: Dilution is an arithmetic necessity. Unless the growth rate brought by issuance > dilution rate (Gordon model: value = \frac{D}{r - g}, where g is growth, but g depends on external ETH rise, not perpetual), otherwise value does not increase.

In conclusion, the new shareholders of BMNR continuously erode the rights of old shareholders through additional issuance, merely masked by the rise of ETH. Other coin stocks are similar; the larger the ratio of additional issuance to current market value, the faster the dilution effect!