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The concept of Digital Asset Treasury (DAT) has gained momentum, particularly after the emergence of Ethereum 
$3,149 reserve companies in June. Even if it does not directly signify cryptocurrency, in traditional markets, “Digital Asset” corresponds to crypto. What are these DAT companies, what strategies do they employ, and what are their risks?
Understanding DAT
DAT companies became notable as their influence expanded with the declining trend of cryptocurrencies, earning them the moniker “ticking time bombs”. These companies hold cryptocurrency on their balance sheets, and their shares transform into a proxy ETF of the concerning crypto asset. Investors, hence, engage with DATs to gain exposure to cryptocurrency ownership indirectly through stock purchases.
For instance, individuals purchase MSTR stocks because they believe in a rise in BTC. In recent times, MSTR has been heavily traded due to significant crypto downturns. MSTR operates with leverages, experiencing greater-scale movements, regardless of the directional move of BTC – upswings or downswings, carrying immense potential.
Strategies and Growth of DATs
Starting in 2020, MicroStrategy initiated BTC accumulation in absence of BTC spot or futures ETF. Others followed this model, establishing new DATs, as individuals resorted to purchasing MSTR stocks because exchange purchases of BTC were unavailable. The number of companies holding BTC grew from under ten in 2021 to over 190 today.
The motivation is clear: acquire cryptocurrencies, boost share demand, issue more debt, and expand reserves, much like MSTR’s aspiration to reach colossal sizes worth billions. According to The Block, all DATs collectively manage crypto reserves exceeding $100 billion, with MSTR alone holding 650,000 BTC, equating to $65 billion. BitMine also stands out, holding over $10 billion in ETH.
Why DATs Are Attractive
DATs provide benefits by generating crypto reserves, enhancing shareholder value, and issuing debt. But why do investors opt for MSTR over direct BTC or BitMine stock over on-chain ETH? As per a Macquarie report, investors are lured by regulatory certainty. The tokens get wrapped in SEC-regulated securities, removing regulatory uncertainty, and ensuring the same public reporting, disclosures, and investor protections as with other securities.
The lack of a 1:1 ratio also results in heightened earnings especially during bullish periods, exemplified by MSTR reaching new ATH levels, outperforming even its dot-com bubble peak, demonstrating unparalleled demand spikes in its 20-year history.
mNAV and DAT Observations
DATs strive to augment investor returns through various strategies, observing mNAV, indicative of a company’s corporate value against its crypto assets. A ratio exceeding 1 implies premium trading, suggesting better performance to investors. The leverage analogy implies issuing more shares when a stock’s price surpasses its net asset value, enlarging reserves. With funding, they acquire additional tokens, witnessing a growth in net asset value per share, amid a reinforcing premium-feedback loop.
DAT Challenges during Crypto Downturns
What happens to DATs during crypto collapses witnessed in the last two months? The mNAV may fall below one, implying discounts relative to their crypto assets. Yet, holding cash reserves allows stronger acquisitions during declines, enabling patience for better returns.
Non-cash holders facing debt, convertible bonds, or stock issue difficulties must meet liquidity demands (like dividends), forcing sales of securities or cryptocurrency holdings. ETHZilla had to sell ETH, whereas Strategy sold shares to assure mid-term dividend payments through cash reserves.
James Butterfill from CoinShares commented on Strategy’s cash moves, expressing concerns about dependency on token price recovery for other DATs. Potential rate cuts by the Federal Reserve might stimulate token value recovery, averting forced liquidations, but these events underscore the intrinsic vulnerability within the DAT model.
