Digital asset treasuries: financial alchemy meets bitcoin
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Illustration: Aïda Amer/Axios
A number of public companies have recently made moves into acquiring bitcoin, and it's easy to see why — the market's been handsomely rewarding businesses that buy up digital assets.
Why it matters: Digital asset treasury companies (DATs) are on the rise, giving investors an easy way to take leveraged bets on an inflection point for cryptocurrencies. The giant risk they pack just may be hard to see now when times are good.
How it works: The core idea driving DAT investment philosophy is to trade an inflationary asset (dollars) for a scarce asset (cryptocurrency), particularly one believed to be catching on.
- The pitch to investors is that DATs are a better buy than a crypto-based exchange-traded fund because they'll grow holdings per share. ETFs, by contrast, simply buy and sell bitcoin (or other assets) as investors buy and sell the ETF.
- In short: If a DAT company's share represented, say, 1 bitcoin at purchase, it might be worth 1.5 in a couple years. Or that's the theory.
Investors have been buying in
Strategy (aka MicroStrategy, trading under MSTR), the leader in the DAT movement, has been trading at twice the value of its bitcoin holdings and its underlying business, according to analysis by VanEck.
- The company pioneered the notion of BTC yield — the rate at which BTC per share grows — and is targeting a rate of 4 to 8%.
- "Purchases into these vehicles effectively lock supply away, with a low likelihood of being sold because these are effectively one-way closed-end funds," Cosmo Jiang, of Pantera Capital, wrote in a letter disclosing investments the firm had made that reflect its conviction in this approach.
The big picture: Investment strategies based on leverage — using borrowed capital to boost returns — always look great when prices are rising.
- Bitcoin, the biggest of all cryptocurrencies, just set a new all-time high, driven by massive institutional accumulation of the original virtual asset, both in the form of new crypto ETFs and in public companies with DATs.
- Strategy itself holds 580,250 bitcoin, 2.8% of all the maximum supply, a chunk currently worth about $60 billion.
Risks hiding in plain sight
But leveraged bets also carry risks, going up faster in good times, but dropping faster when things fall.
- And as we know, crypto does have a tendency to take a sharp turn for the worse from time to time, especially when buyers get swept up in hype around a trade that seems too good to be true.
What they're saying: "Your fundamental premise here is 'sometimes people will buy $1 for $1.5 for no apparent reason [and] we think this can last forever,'" Nic Carter, partner at Castle Island Ventures, said of the DAT trend on social media.
- Carter compared it to another investment from the days before crypto ETFs, when the former premium on Grayscale's bitcoin trust — which traded for a long time above its notional value — eventually fell to a discount.
Threat level: A big enough downturn in crypto prices, and a resulting drop in a DAT company's shares, could start a vicious cycle.
- For example, take Strategy. It's been financing its bitcoin purchases with zero-coupon convertible notes. Investors have essentially been lending it free money based on the expectation that they'll make out handsomely by converting the notes into sky-high Strategy shares down the road, and make money on the stock's short-term fluctuations along the way.
- But if bitcoin prices fall, and a DAT's stock doesn't perform, bond investors could instead demand their money back — in dollars — at the end of the term.
Zoom in: This could present a problem. For many DAT companies, cash flow is scarce, and their crypto holdings are their most valuable assets.
- A prolonged downturn could force them to sell some of their crypto to repay their borrowings, which would accelerate a drop in crypto prices — perhaps enough to put the whole crypto market into bear mode again.
State of play: Equity buyers should beware of the fact that most of the DAT firms have been engaging in flavors of financial alchemy.
- In Asia, a former hotel company reported a 225% yield on its bitcoin treasury holdings, which now total 8,888. MARA, the Bitcoin miner, has moved in as well.
- Cantor Fitzgerald, SoftBank and the stablecoin giant Tether backed a firm called Twenty One with 42,000 BTC (valued at $3.6 billion), and it aims to do the same.
Other cryptocurrencies are getting brought in on the act, too. A few companies have announced the same strategy for solana, including Upexi, SOL Strategies and DeFi Development Corp. Just Monday, an ed tech company announced plans to raise $500 million with convertibles to build a solana treasury.
- Others are getting into XRP.
- Blockchain-focused investors turned SharpLink Gaming, a company that provides marketing to sports gamblers, into a bet on the second-largest digital asset, Ethereum's ether, with a $425 million private placement.
What we're watching: The best positioned firms will be the ones that accumulated in the bad times.
- Strategy's massive bitcoin war chest has been purchased at an average price of $68,459 (as of April 27), a 30% discount on current prices. So it has headroom.
- But even at 0% interest rates, debt has to be paid back eventually, one way or another. Investors should ask themselves where the money to do that is going to come from.
