Original Title: ETHZilla: Ethereum’s Monster Treasury Company | McAndrew Rudisill & Avichal Garg

Host: Ryan Sean Adams

Guests: Avichal Garg, Founder of Electric Capital; Mac Rudisill, Chairman of ETHZilla

Compiled & Translated by: LenaXin, ChainCatcher

ChainCatcher Editor's Summary

This article is compiled from the fifth episode of the Bankless podcast series "ETH Asset Management Company," featuring Avichal Garg, founder of Electric Capital, and Mac Rudisill, head of ETHZilla. They discuss the reasons behind the surge in the scale of the ETH treasury during this cycle; how credit market tools such as convertible bonds, preferred stocks, and debt accelerate capital accumulation; and how the flywheel effect transforms Ethereum into high-quality collateral from stablecoins to DeFi and then to ETH. They analyze the business logic that makes the ETH treasury more akin to Berkshire-style value investing rather than short-term speculation.

Why have asset management companies been so active recently? Will this wave ignite a second boom in DeFi?

ChainCatcher has compiled and translated the content.

Highlights of Key Points:

• Avichal: ETFs have limitations; if maximizing returns is the goal, Decentralized Asset Trusts (DAT) may be a better choice.
• Avichal: It is essential to strictly control leverage and position concentration, continuously assess market liquidity boundaries, and avoid chain reactions triggered by the risk exposure of a single entity.
• Avichal: The core difference between Ethereum and Bitcoin is that Ethereum can perfectly accommodate compliant assets and debt instruments.
• Avichal: If a robust on-chain financial infrastructure is built, Ethereum will achieve autonomous asset management and credit operations.
• Avichal: The current phase is similar to the consolidation period after the 1999 internet bubble; once infrastructure and user scale mature, the potential of digital finance will be truly unleashed.
• Mac: Despite differences in market resources, Ethereum still shows a prosperous trend.
• Mac: Generate free cash flow through differentiated business and continuously convert it into increased ETH holdings.
• Mac: Currently, no ETH asset company can access such preferred markets or high-yield money markets.
• Mac: Investing in Ethereum treasury companies allows shareholders to gain cash flow returns.
• Mac: The current implied volatility of Ethereum is much higher than that of Bitcoin, actually approaching the levels of Bitcoin five years ago.

(1) How Does the ETH Treasury Catch Up with Tom Lee and Peter Thiel?

Ryan: Tom Lee currently holds 1.5 million ETH (worth about $7 billion). Can you catch up? What plans does ETHZilla have to accumulate a large amount of ETH?

Mac: We continuously purchase ETH from the market, and our spot reserves have reached $1 billion. Our operational model is highly similar to Tom Lee's early immersive trading phase with Bitmine.

Avichal: Tom Lee's target of holding 5% ETH may face diminishing marginal returns. Although the flywheel effect can continue to increase holdings through compounding, excessive positions may negatively impact the ETH ecosystem. If he actively adjusts his strategy, it will provide a value recovery window for major holders like SBET and Joe Lubin, as well as for ETH.

Ryan: How do you attract investors like Peter Thiel?

Mac: Unlike other ETH asset management institutions, our highlight is the collaboration with Electric Capital and Avichal Garg for asset management.

Our returns significantly outperform market peers, which is a core differentiating advantage; the deep integration with the Ethereum ecosystem constitutes another key competitive strength.

We collaborate with many founders of leading DeFi protocols, accessing high-yield protocols while integrating real-world assets through Ethereum. This dual advantage of "ecosystem access + asset standardization" forms the core investment logic of generating free cash flow through differentiated business and continuously converting it into increased ETH holdings.

Ryan: Why does Peter Thiel choose to invest in ETH asset management institutions rather than directly holding ETH or an Ethereum ETF?

Mac: Investing in an Ethereum ETF requires a management fee of 1.5%-2%, while investing in an Ethereum treasury company allows shareholders to gain cash flow returns. Its net asset value (NAV) includes cash and ETH holdings, and when combined with the cash flow multiplier effect, it can generate a premium that ETFs cannot provide.

Directly holding ETH makes it difficult to achieve compounding growth under scale effects; investing in a treasury company essentially bets on its ability to continuously generate cash flow and accelerate ETH accumulation through scale expansion.

Avichal: Currently, investing in ETFs cannot be staked, which has limitations, and the returns will inevitably be lower than direct staking. If maximizing returns is the goal, Decentralized Asset Trusts (DAT) may be a better choice. They may achieve excess returns through scale effects and on-chain strategies.

For public market investors, DAT can provide on-chain yield exposure without the need for active management of DeFi; for private market investors, it avoids the technical barriers and compliance complexities of directly operating DeFi. Both types of capital may find more efficient allocation paths from DAT than from ETFs or direct holdings.

(2) Treasury Strategy vs ETF Allocation vs Simply Holding ETH: The Game of Three Investment Paths

Ryan: Can independent asset management companies use 100% of their ETH for staking to gain full yield advantages?

Avichal: Creating or redeeming shares requires settlement, which necessitates asset transfer, buying or selling ETH, so liquidity management is necessary.

If a conservative strategy is adopted, one can refer to the practices of BlackRock or Bitwise, retaining 20% to 25% of ETH on the balance sheet to address potential settlement risks. However, if regulatory changes lead to some ETH being frozen while facing redemption demands, it could trigger serious issues.

Therefore, under current rules, even if ETFs allow staking in the future, their performance is likely to be inferior to direct staking.

Ryan: Is the general rise in government bonds related to institutional investment strategies?

Mac: One reason institutions choose government bonds is that they have high liquidity and mature micro-strategies, with daily trading volumes ranking among the top 50 in U.S. stocks.

Scale effects are another key factor. For example, the cash flow generated from holding $100 billion in government bonds is far greater than that from smaller holdings, and its compounded cash flow is viewed by investors as a high-profit business, with opportunities to gain from the appreciation of underlying assets. Therefore, despite differences in market resources, Ethereum still shows a prosperous trend.

Avichal: Saylor's innovation lies in building a new capital base, namely the credit market. Large institutions can provide funding at about 10% interest, while borrowers can invest it in assets yielding 30%-40% annually, creating an arbitrage space.

The core lies in financing high-yield assets at low costs, repaying debt with the appreciation of assets, and continuously scaling up.

In the capital market, sovereign wealth funds and other institutions indirectly gain leveraged Bitcoin exposure by holding related instruments, often outperforming direct Bitcoin holdings. This is driven by the pursuit of profit and financial instrument innovation.

Mac: Each share of Bitcoin appreciates by 16 cents daily; when compared to the Anit Zilla strategy, our percentage return rate is higher.

Similar situations exist in other Ethereum treasury companies. Currently, the implied volatility of Ethereum is much higher than that of Bitcoin, actually approaching the levels of Bitcoin five years ago.

The collaboration mechanism between debt capital market investors and Ethereum treasury companies allows us to issue convertible bonds at low interest rates. Investors are both seeking volatility exposure and optimistic about Ethereum's appreciation potential, and the combination can attract significant capital.

Ryan: Has Saylor fully leveraged the potential of financing tools like convertible bonds? Has he completely absorbed the demand for convertible bonds in the cryptocurrency market?

Mac: Yes.

Ryan: Does this mean that the financing space for convertible bonds has been exhausted? Do other Ethereum asset management companies still have similar opportunities?

Mac: He recently issued preferred shares fully collateralized by Bitcoin, structured similarly to Morgan Stanley's money market products. Investors can earn a 9% yield without sacrificing the appreciation potential of Bitcoin.

He pays about 4%-10% interest using the cash he holds as collateral and uses the $500 million raised to directly purchase Bitcoin to pay the yield. This innovative tool achieved de-convertibility within two weeks.

Ryan: Can Saylor replicate similar financing opportunities? Do other Ethereum asset management companies have the same conditions?

Mac: Currently, no ETH asset company can access such preferred markets or high-yield money markets.

Avichal: This is similar to BlockFi but on a larger scale and aimed at institutions. Saylor borrows against Bitcoin as collateral, pays 9% interest, and then uses dollars to buy more Bitcoin. If the debt term is long enough, this arbitrage strategy is highly valuable.

His core ability is to tap into massive funds in the capital market. By offering a 9% yield (higher than the 4% in the money market), he only needs to attract 1% of that market's funds to double the operable capital.

If interest rates decline, the 9%-10% yield will become even more attractive. It is expected that within 6-12 months, ETH asset companies may also enter similar funding pools.

Ryan: If ETH treasury companies emulate MicroStrategy's entry into the debt capital market, could they face similar risks as BlockFi?

Avichal: Rehypothecation risk is the core issue exposed in cases like BlockFi. When collateralized assets are withdrawn and re-lent, it creates a cycle of leverage, a model that has led to collapses in the DeFi space multiple times.

The real risk lies in maturity mismatch and liquidity pressure. Although the capital market provides a way to repay old debts by issuing new ones, once market confidence wavers, this mechanism may fail. For the ETH ecosystem, if a single entity holds too high a proportion of assets, it poses systemic risks to the underlying protocols. Excessive concentration combined with high leverage is extremely dangerous.

Therefore, it is essential to strictly control leverage and position concentration, continuously assess market liquidity boundaries, and avoid chain reactions triggered by the risk exposure of a single entity.

Ryan: Why are there such leverage opportunities? Who are the buyers of these micro strategies, such as bonds?

Avichal: It is necessary to distinguish between the financing targets of micro strategies and ETH treasury companies; the former has covered multiple channels of capital including convertible bonds, high-yield bonds, preferred stocks, and money markets, while ETH companies currently mainly rely on traditional convertible bond investors.

Currently, ETH convertible bonds are mostly structured as fully cash-collateralized, allowing holders to enjoy conversion rights when the stock price rises in the future, while issuers gain the option to issue cash on their balance sheets, resulting in very low risk for shareholders.

Overall, the financing stage of ETH treasury companies is still in its early days, far from the diversified capital utilization level of MicroStrategy.

Ryan: When the financing capacity improves to cover multiple channels such as convertible bonds, high-yield bonds, preferred stocks, and money markets, who are the actual buyers of these debt instruments?

Mac: The global high-yield market has daily trading volumes reaching tens of trillions of dollars, even hundreds of billions. Buyers are looking for opportunities that offer high-margin recurring cash flows, leveraging their operations. They must redeploy their capital to achieve substantial interest income.

They are still pursuing yield.

Ryan: How high of an excess return can buyers of ETH treasury company debt instruments potentially achieve?

Avichal: Debt repayment capacity depends on the ratio of ETH holdings to debt. For example, when there is $200 million in debt for every $1 billion in ETH, the interest coverage ratio is extremely high, and the risk is manageable.

The core breakthrough is that the credit market now recognizes Bitcoin and ETH as legitimate collateral.

Ryan: Have Bitcoin and Ethereum been officially classified as "high-quality liquid collateral" in the global capital markets? If so, do they hold the same positioning as traditional high-quality collateral? Do other assets possess the same level of collateral attributes?

Mac: Real estate, oil, and most commodities are considered high-quality collateral due to their liquidity, and securities portfolios have long been the preferred targets for bank loans. Now, Bitcoin and Ethereum have been included in this category, becoming recognized collateral assets in the capital markets.

(3) Why Have Asset Management Companies Been So Active Recently?

Ryan: Why did ETH asset management companies suddenly emerge in concentration after May 2024? Is this directly related to regulatory clarity?

Avichal: Regulatory clarity is a core driving force, while the market's long-term value recognition of ETH and the DeFi ecosystem is also key. The legislative process for stablecoins is accelerating, primarily relying on Ethereum, further validating the necessity of ETH as infrastructure.

Ryan: What else is related to this?

Avichal: Application demand drives ETH purchasing behavior, thereby increasing ETH prices and forming a positive cycle. The market's understanding of Ethereum's essence deepens, and the attributes of ETH as an asset are widely recognized, this shift is similar to the cognitive evolution process of Bitcoin in 2019.

Ryan: Is ETH replicating Bitcoin's institutional path (2019-2024) and becoming "the next Bitcoin"? Can the market accommodate multiple mainstream crypto assets simultaneously?

Avichal: History often resembles rather than simply repeats. In the next three to five years, the market will gradually realize that ETH possesses characteristics such as 100% digitalization, inherent nature, ultra-low inflation, a stablecoin foundation, and an efficient DeFi ecosystem, and is tacitly approved by the U.S. government. From a purely capital perspective, ETH and Bitcoin meet similar value conditions, but current capital still prefers Bitcoin.

Why has the market not fully recognized ETH's compliance and technical economic advantages? In fact, ETH reached a market capitalization of $350 billion at its 10th anniversary. The capital market will eventually awaken; ETH meets all rational investment conditions, so why not include it in allocations?

Ryan: Does the core logic of ETH asset management companies rely on the long-term rise of ETH prices? How can the correlation between stablecoin growth and ETH value enhancement be demonstrated?

Avichal: Many countries globally face significant inflationary pressures, with about 20%-25% of the population experiencing a base inflation rate of 6%-8%. Against this backdrop, the market urgently needs a financial system that is dollar-denominated, globally applicable, institutionally secure, and can avoid unilateral intervention from local or U.S. governments. The Ethereum DeFi ecosystem is spontaneously building such a system through stablecoins and supporting mechanisms.

The use of stablecoins has spurred DeFi demand, and as ETH serves as a mainstream collateral and reserve asset, its demand has consequently increased. Users can borrow by collateralizing ETH without third-party custody, further driving up ETH demand and price, attracting institutional participation.

Institutional behavior, in turn, feeds back into the scale of stablecoins and the liquidity of on-chain assets, forming a closed-loop flywheel. This model relies on Ethereum's smart contracts and collateral mechanisms to achieve system self-enhancement, fundamentally differing from Bitcoin, which lacks a stablecoin ecosystem's closed loop.

Ryan: What does the future of stablecoins depend on?

Avichal: The future of stablecoins depends on specific use cases and the needs of market participants. For example, in the case of Tron or other fast Layer 1 chains, stablecoins will indeed exist on these chains and serve specific scenarios.

However, institutional users place greater emphasis on censorship resistance and trusted neutrality. If users are entirely under U.S. jurisdiction, they may choose Layer 1 solutions launched by companies like Circle or Stripe, which are similar to the past Silvergate SEND network, providing efficient infrastructure for regulated entities.

But many countries are unwilling to be entirely subject to U.S. jurisdiction. For instance, in the logic of the European dollar system, when both parties in a transaction are unwilling to use their local currency, they will choose to settle in dollars. At this point, decentralization, high stability, and continuous operational capability become key advantages.

(4) Ethereum vs Bitcoin: The Battle for Value Storage and Differences in Institutional Paths

Ryan: How can the market be convinced that ETH is not only a value storage asset but that its attributes are superior to or distinct from Bitcoin and other traditional value assets?

Avichal: The concept of value storage makes sense both economically and logically, with core characteristics including portability, divisibility, durability, and verifiable scarcity. Both Bitcoin and Ethereum meet these criteria and outperform gold on multiple dimensions.

As for whether one would prefer to own art, farmland, platinum, or ETH, many may reinterpret the rationale for ETH within this framework. Gold or art does not have absolute intrinsic value; its uniqueness stems from human consensus and cultural preference, which aligns perfectly with the logic used to defend Bitcoin a decade ago.

Value storage assets are not the only option.

Ryan: Since ETH outperforms or at least matches Bitcoin in functionality and value storage attributes, why has its price performance lagged behind Bitcoin in this cycle?

Avichal: The development of the next round of token issuance takes time; the retail market is already of considerable scale but still requires a new round of capital injection. The Bitcoin community has excelled in this regard, particularly in attracting institutional participation, which has been significantly aided by DAT.

Mac: Due to compliance restrictions, investors previously had to sign a lot of documents to purchase Bitcoin through banks, while Ethereum ETFs were even directly prohibited by compliance departments. Thus, IBIT became the first approved Bitcoin ETF security, with many large bank clients allocating Bitcoin through MicroStrategy's brokerage accounts.

In contrast, Ethereum ETFs only began trading at some large banks in recent months. Although Ethereum's actual application development is progressing faster, its institutional adoption is just beginning. This reality indicates that Ethereum's compliance entry and capital inflow are still in the early stages.

Ryan: What are the differences between ETH treasury and Bitcoin treasury?

Avichal: Ethereum's network architecture creates rich on-chain yield opportunities. Bitcoin is viewed as digital gold, with investment logic based on faith and price growth expectations; whereas Ethereum requires betting on network expansion, including underlying protocols, multi-layer scaling, and ecosystem development.

The most critical difference is that Ethereum can perfectly accommodate compliant assets and debt instruments. When Wall Street institutions begin to utilize its mechanisms, the scale of assets touched will far exceed that of Bitcoin, which is the core advantage of Ethereum's financial model.

(5) ETH Investment Strategy: What is the Key to Project Success?

Ryan: What kind of yield are you focusing on? What is your expected yield?

Avichal: The core issue is how much risk one is willing to take. We have established a comprehensive risk framework, considering options slightly above the base staking LRT plan. There are interesting opportunities in the RWA space, with an attractive risk-return ratio.

For the ETH ecosystem, only a few million dollars are needed to guide new protocols, promoting ecosystem development through around 15% token incentives. As investors, active participation is more valuable than passive holding.

Mac: The core value of current market education lies in the fact that most institutions still lack the motivation for in-depth understanding, but they will eventually awaken over time.

Ryan: Does the purchasing strategy for ETH involve price trigger mechanisms and scale limits? Will excess liquidity be used for allocation?

Mac: We adopt a regular fixed-amount strategy to continuously build positions in ETH, based on medium to long-term bullish expectations, without pursuing short-term timing.

Ryan: How do you define a reasonable range for total market capitalization premiums in a stable state?

Mac: The stock price of financial companies is linked to Nasdaq liquidity, and recently has shown volatility due to AI market trends. The reasonable valuation range for MNAV is 1.7-2 times, with bull markets potentially breaking 3 times, while bear markets or current valuation compression may present repurchase opportunities.

Ryan: How do you assess the risks posed by investment tools like BitMex due to insufficient liquidity and high fees?

Mac: The initial fundraising cost for this business is high, but once scaled, the operating costs are extremely low, allowing for the management of large-scale assets with minimal manpower, achieving high net profit margins and significant operational leverage.

Ryan: Can a similar cash flow generation model to Berkshire be achieved through holding ETH treasury bonds?

Mac: This is my reason for betting on buying these stocks. Due to the free cash flow returns, the actual business operation of this company is very good.

Avichal: The Ethereum ecosystem has now accumulated about $60 billion in TVL, with many core developers deeply involved in technological evolution. The current strategic focus is on re-integrating ETH assets into the on-chain system, reducing reliance on the traditional Wall Street financial system through tokenization and the construction of on-chain credit markets.

If a robust on-chain financial infrastructure is successfully built, Ethereum will achieve autonomous asset management and credit operations. The value of this long-term ecological construction lies not in short-term market cycles but in over a decade of continuous technological accumulation and community consensus. When the public chooses on-chain financial products, they are more likely to lean towards those that genuinely practice on-chain principles.

Ryan: Does the community multiplier effect constitute a key condition for project success?

Mac: I believe that being in the top three of ETH asset management rankings is one thing, but the key that truly sets us apart is the ability to create returns and the way we operate our business. Because I think once the market sees this in a few months or a few quarters, we will be distinctly different from other asset management companies.

(6) The Wave of Mergers and Acquisitions in the Crypto Market and Cycle Evolution: From Bear Market Arbitrage to Long-Term Value Reconstruction

Ryan: Do you think there will be some mergers and consolidations in the market in the coming months or years? When do you think these activities will rebound?

Avichal: There may be mergers and consolidations in the future market, especially in the next bear market cycle. Companies with a market capitalization of less than $1 billion are likely to attract aggressive investors. When stock prices fall below net assets, it may trigger arbitrage. Investors can acquire shares at a discount and then force liquidation to profit from the price difference.

In similar cases, Michael Saylor might acquire an ETH treasury company, sell its ETH, and increase his Bitcoin holdings, thereby eliminating competitive assets and achieving capital transfer.

Ryan: What stage is the current cryptocurrency cycle in? Does it still follow historical bull market patterns? How much upward space is left in this cycle?

Avichal: The cycle trend is mainly related to capital flows brought about by interest rate cuts.

Ryan: Is the cryptocurrency cycle primarily driven by liquidity?

Avichal: Historically, these assets have low liquidity, and the four-year cycle mechanism does exist, but the actual operation is quite challenging. As venture capitalists, we focus more on long-term trends over a ten-year span rather than short-term trading. The current cycle may extend to about 4.5 years due to external events.

The maturity of the Wall Street capital market may change traditional cycle patterns, but the history of gold ETFs indicates that the sustainability of capital inflows may far exceed expectations.

Ryan: What are your views on ETH's price trend by the end of this year or in the next 18 months to three years?

Avichal: Short-term price predictions are extremely difficult to achieve. Our core strategy is that when asset values are very low, if their potential value can exceed ten times the current level, even with time uncertainty, as long as the core logic holds, there is room for long-term tolerance. The key is to judge that "if the underlying logic holds, the value will eventually far exceed the current state," rather than chasing short-term fluctuations.

Ryan: Do you expect asset growth multiples of 10x, 25x, or 100x? Do you agree with Tom Lee's view of a hundredfold increase?

Avichal: If Bitcoin is benchmarked against the $20 trillion gold market as digital gold, its price could reach a million dollars. Ethereum, with a current market cap of $400 billion, has the potential for a 50x growth if it achieves a similar benchmark. History has shown that technological innovation expands the total market capacity, so the actual potential may far exceed static calculations.

Failed cases often underestimate market capacity, while successful cases frequently surpass initial expectations. If Ethereum truly realizes its function as a global digital value storage, its potential may exceed traditional measures. The accessibility of the internet will create an unprecedented market scale. When everyone can easily hold digital assets, the existing valuation framework will become completely invalid.

Ryan: Why choose to benchmark physical gold as a reference for value storage? Should the potential user base for digital assets far exceed the number of gold holders?

Avichal: Take stablecoins as an example; when users discover that assets can generate returns, even if they only allocate a portion of their positions, it may rapidly push the scale beyond the traditional banking system.

The current stage is similar to the consolidation period after the 1999 internet bubble; once the infrastructure and user scale mature, the potential of digital finance will truly be unleashed.

The industry may be entering a maturity window similar to the internet from 2005 to 2008. With infrastructure and cognitive readiness in place, long-term visions may be realized during this phase.

Disclaimer

The content of this article does not represent the views of ChainCatcher. The opinions, data, and conclusions in the text represent the personal stance of the original author or interviewee, and the compiler maintains a neutral position and does not endorse their accuracy. It does not constitute any professional advice or guidance, and readers should exercise caution based on independent judgment. This translation is for knowledge-sharing purposes only; readers should strictly comply with the laws and regulations of their respective regions and refrain from engaging in any illegal financial activities.

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