This year's most popular cryptocurrency trade has abruptly cooled off. Some investors admit they "saw it coming," while others are doubling down on their bets.

For most of the year, the "go-to trade" involved selling stocks or borrowing funds to pour into Bitcoin, Ethereum, and other cryptocurrencies. Investors drove up shares of these "crypto treasury companies," viewing them as tools to amplify returns in the volatile crypto market.

Michael Saylor pioneered this model in 2020 by transforming a small software firm, MicroStrategy, into what is now known as Strategy—a Bitcoin behemoth. However, as Bitcoin and Ethereum prices plummeted, Strategy and its imitators saw their stock prices nosedive in tandem. The company's market capitalization, which peaked at around $128 billion in July, has now shrunk to approximately $70 billion.

The sell-off has impacted high-profile investors like venture capitalist Peter Thiel—who backed several crypto treasury firms—as well as retail investors who followed "evangelists" into these stocks. Saylor remains bullish as ever, declaring on social media that Bitcoin is now on "discount sale." Skeptics anticipated this pullback, noting that crypto treasury stocks typically trade at a premium to the intrinsic value of their token holdings.

"The whole concept makes no sense to me—it's like paying $2 for a $1 bill," said Brent Donnelly, president of Spectra Markets. "These premiums will eventually compress."

Initially, crypto treasury companies provided institutional investors with access to cryptocurrencies that were previously hard to obtain. However, cryptocurrency exchange-traded funds (ETFs) launched over the past two years now offer the same exposure.

BitMine Immersion Technologies, a major Ethereum treasury firm backed by Thiel and run by Wall Street veteran Tom Lee, has seen its shares drop over 30% in the past month. ETHZilla, a biotech-turned-Ethereum treasury company also backed by Thiel, fell 23% during the same period.

For much of this year, crypto prices rallied amid a pro-crypto Trump administration push. The frenzy around crypto treasury firms further fueled token prices. But the rally ended abruptly on October 10 as U.S.-China trade uncertainties triggered a market sell-off. Record-long government shutdown risks and Federal Reserve policy uncertainty added downward pressure.

Bitcoin has dropped 15% over the past month. During the same period, Strategy shares fell 26%, while Tuttle Capital Management's MSTU ETF—designed to deliver twice Strategy's returns—plunged 50%.

"Digital asset treasuries are essentially leveraged crypto plays, so they fall harder when crypto drops," said Matthew Tuttle, CIO of Tuttle Capital. "Bitcoin has proven it’s here to stay, and buying the dip pays off."

Where do crypto treasury stocks go from here? At least one prominent investor has adjusted his portfolio after the crash. Jim Chanos, the famed short-seller who closed his hedge fund in 2023 but still trades and advises clients, had been shorting Strategy while buying Bitcoin, arguing there was no reason to pay a premium for Saylor’s company when investors could buy Bitcoin directly. Last Friday, he told clients it was time to unwind this trade.

In a Sunday interview, Chanos said crypto treasury stocks remain overvalued—though no longer egregiously so—as their prices still exceed the value of their crypto holdings. "This thesis has largely played out," he wrote to clients.

As long as crypto holdings retain value, most firms that raised funds to buy digital assets are unlikely to face immediate trouble. Some companies raised substantial cash reserves, allowing them to buy more crypto at lower prices or even acquire competitors.

But analysts warn that firms facing losses may struggle to issue new shares for further crypto purchases, potentially pressuring token prices and raising doubts about their business models.

"Many companies are in a tough spot," said Matt Cole, CEO of Bitcoin treasury firm Strive, which raised funds earlier this year to buy Bitcoin at an average price over 10% above current levels. Strive’s shares have fallen 28% in the past month, though Cole claims the firm is well-positioned to "weather volatility" after raising capital via preferred shares instead of debt.

Cole Grinde, a 29-year-old Seattle investor and beverage salesperson, bought $100,000 worth of BitMine stock at around $45 per share earlier this year when the firm began hoarding Ethereum. The investment is now down roughly $10,000. Still, Grinde is adding to his position, using options to offset some losses. His confidence stems from Ethereum blockchain adoption and Tom Lee’s influence.

"Since he took over, his connections and charisma have helped the stock soar," Grinde said of Lee, a 15-year JPMorgan veteran and Fundstrat Global Advisors managing partner who frequently appears on business TV.