Is the DAT model a bridge connecting TradFi, or is it the "death spiral" of the crypto market?

Author: Matt Hougan

Translation: Deep Tide TechFlow

I see many flawed analyses regarding DAT (Digital Asset Treasury). In particular, I have seen many misconceptions about whether their trading prices should equal, exceed, or fall below the value of their held assets (the so-called "mNAV").

Here are my thoughts on this issue.

When evaluating a DAT, the first question to ask yourself is: If this company had a fixed lifecycle, what would its value be?

The value of this approach is particularly evident in a short-term framework. For example: Suppose you have a Bitcoin DAT that announces it will close this afternoon and distribute its held Bitcoin to investors. Its trading price would exactly equal the value of the Bitcoin it holds (i.e., mNAV of 1.0).

Now extend the time frame. What if it announces it will close in a year? At this point, you need to consider all the possible reasons that could cause this DAT's trading price to be above or below its Bitcoin value. Let's analyze them one by one.

There are three main reasons that can lead to a discount in a DAT's trading price: lack of liquidity, expense outlays, and risk.

Lack of liquidity: You wouldn't want to pay full price today for Bitcoin that you won't receive until a year later. But you would be willing to pay a certain price. So, would you ask for a 5% discount? Or a 10% discount? If it's 10%, I would definitely accept that. This liquidity discount reduces the value of the DAT.

Expense outlays: Every dollar of operating expenses or executive compensation ultimately comes out of your pocket. Suppose our 12-month DAT holds Bitcoin worth $100 per share but pays executive compensation equivalent to $10 per share annually. You would certainly demand at least a 10% discount relative to NAV (Net Asset Value).

Risk: There is always the possibility that the company could have a misstep in some way, which is a risk that cannot be ignored. You also need to factor this risk into the price.

Now let's look at why a DAT might trade at a premium. In the U.S., there is only one reason: if it can increase the amount of cryptocurrency held per share.

Here are four main ways I have seen DATs attempt to achieve this goal.

Issuing debt: If you issue debt in dollars and purchase cryptocurrency, and the cryptocurrency appreciates relative to the dollar, you can repay the debt and increase the amount of cryptocurrency held per share. This is often how some strategies increase their Bitcoin holdings per share. (Of course, if the price of Bitcoin falls, the opposite could happen.)

Cryptocurrency lending: If you lend out cryptocurrency and earn interest income, you can increase the amount of cryptocurrency held per share.

Using derivatives: If you hold cryptocurrency and operate by writing call options, you can generate income and acquire more assets. Of course, this also means you might forfeit potential gains from price increases.

Acquiring cryptocurrency at a discount: DATs can acquire cryptocurrency at a discount in various ways, such as:

• Purchasing locked assets from foundations that wish to sell certain assets but do not want to disrupt the market;

• Acquiring other DATs that are trading at a discount;

• Repurchasing their own shares (if their shares are trading at a discount);

• Acquiring cash-generating businesses and using that cash flow to purchase cryptocurrency.

For DATs, one challenge is that most reasons leading to their trading at a discount are certain, while most reasons that could lead to their trading at a premium are uncertain.

Thus, DATs face a higher threshold: most DATs will trade at a discount, and only a few outstanding companies will trade at a premium.

Returning to our example: If you have a Bitcoin DAT that will liquidate in 12 months, you can: 1) calculate its expenses; 2) add a risk discount; 3) offset these discounts with your expectations of its ability to increase the amount of Bitcoin held per share. That is its fair value!

You might think: Well, Matt, but DATs do not have a fixed lifecycle. They exist indefinitely!

This indeed complicates the issue. But in reality, this means everything will be magnified. Expenses and risks will compound over time, so it is essential to keep a close eye on these factors. Similarly, those DATs that can steadily increase the amount of cryptocurrency held per share may become very valuable.

When I closely examined how DATs increase the amount of cryptocurrency held per share, I noticed a significant feature: each method benefits from economies of scale.

Larger DATs find it easier to issue debt compared to smaller DATs; they have more cryptocurrency available for lending; they can access more liquid options markets; they also have better opportunities in mergers and acquisitions (M&A) and other discount trades.

Over the past six months, the performance of DATs has fluctuated in sync. But looking ahead, I believe there will be more differentiation. Some DATs will perform well and trade at a premium, while more DATs will perform poorly and trade at a discount. This model can help us think about which DATs belong to the former and which belong to the latter.

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