Digital Asset Treasury (DAT) Company Description

The term digital asset treasury company, known as DAT or DATCO, has emerged as one of the biggest buzzwords in the digital currency industry this year, offering investors a new way to play with cryptocurrencies, but it also comes with new risks.

DAT is effectively a publicly traded company that holds cryptocurrencies such as: Bitcoin or ether and provides investors with exposure to the underlying digital currency. DAT aims to outperform the price fluctuations of the cryptocurrencies it holds.

However, DAT’s strategy has come under scrutiny after the cryptocurrency market has fallen sharply in recent weeks, raising concerns that it could put further pressure on an already depressed cryptocurrency market.

Digital Asset Treasury is a type of company that buys cryptocurrencies and holds them directly on its balance sheet. Investors can buy shares in that entity and gain exposure to the underlying digital assets.

One of the original and greatest DATs is Michael Saylor’s DAT. strategy The company started purchasing Bitcoin in 2020 and has continued to do so ever since.

However, recently there has been an explosion in the number of vehicles of this type. According to DLA Piper, fewer than 10 companies held their own Bitcoin in 2021. That number has since jumped to 190 companies, with 10 to 20 more focusing on alternative digital assets as of September, DLA Piper said.

In total, these DATs hold about $100 billion worth of cryptocurrencies, according to data from The Block.

The explosion in DATs this year was driven by a booming cryptocurrency market and more favorable regulations for the industry in the United States.

But that growth also comes at a time when it’s easier than ever to buy cryptocurrencies directly or invest in assets through other regulated institutions such as exchange-traded funds (ETFs).

DATs aim to outperform the underlying assets they hold. You can achieve this through various strategies to maximize your profits. In contrast, ETFs effectively passively hold cryptocurrencies and issue shares that are backed 1:1 by real assets.

A Macquarie memo released last week said DAT could also provide regulatory certainty to investors. Analysts at the investment bank said they are “packaging crypto assets within SEC-regulated securities.” “This removes regulatory ambiguity and ensures the same public reporting, disclosure and investor protections as other publicly traded stocks.”

Carol Alexander, a finance professor at the University of Sussex, told CNBC that DAT also provides an option for “institutional and professional investors who have regulatory, fiduciary, and operational constraints that make direct token ownership and crypto ETFs inappropriate.”

DATs employ a variety of strategies to enhance investor returns and offer unique features that ETFs cannot.

To evaluate the performance of these DATs, a metric known as market net asset value (mNAV) is closely monitored. Compare a company’s enterprise value with the value of its digital asset holdings. This can indicate how much premium investors are assigning to DAT, with mNAV greater than 1 implying a premium.

DAT can increase its holdings of crypto assets through the At the Market (ATM) stock program. If the stock price exceeds the net asset value of the cryptocurrency it owns, DAT can issue more shares at a premium to raise cash. This will allow DAT to fund the purchase of more cryptocurrencies, as is the case with Strategy.

“This creates a crypto-per-share incremental feedback loop where the issuer raises equity, accumulates tokens, and sees the NAV per share increase further increasing the premium, representing incremental dilution,” McCauley explained.

Staking is another strategy employed by DAT. This allows cryptocurrency holders to earn interest-like yields on their assets. To stake, investors effectively lock up their cryptocurrencies onto the blockchain, increasing the network’s performance. In return, investors receive returns in the form of more cryptocurrencies. However, unstaking cryptocurrencies can take several weeks, and the need for liquidity and stable asset values ​​may limit ETFs and similar products from fully adopting staking.

Staking generates free cash flow that “can be reallocated to mergers and acquisitions (M&A), token purchases, on-chain opportunities, shareholder distributions, etc.,” ARK Investments said in a note last month.

As the market progresses, new trading strategies may emerge employed by DAT.

DAT has been in the spotlight amid the recent turmoil in the cryptocurrency market, where Bitcoin has surged above all-time highs.

If the price of a virtual currency falls, mNAV may fall below 1. This means that companies are trading at a discount to their crypto holdings. This can cause various problems.

“DATCO will face pressure if the cryptocurrency market recedes, and there are only a limited number of realistic responses,” Alexander said.

“Some may double down and hold, viewing a decline as an opportunity to buy for future value appreciation. Others may need liquidity. In particular, those who have used financing (debt, convertible notes, equity issues, etc.) may be forced to sell some of their token holdings.”

And mNAV premium is key to the DAT market.

Macquarie analysts said: “DATCO’s viability is closely tied to the persistence of the equity premium to NAV. If this premium erodes or reverses to a discount, the model faces significant challenges.”

The investment bank also points out that as DAT’s share price falls or approaches NAV, the issuance of shares becomes dilutive, meaning that “the issuance of new shares no longer increases the value of crypto per share, but rather dilutes the exposure of existing shareholders. This could break the self-reinforcing cycle that maintains the premium.”

On the other hand, the explosive growth in the number of DATs and increased interest from investors poses its own risks.

“The sector is becoming increasingly crowded and capital is flowing in following established strategies. However, this inflow is increasing structural vulnerabilities. If any of the key variables such as investor sentiment, crypto prices or capital market liquidity decline, the DATCO model could collapse,” McCauley said.

The strategy sought to protect against recession. On Monday, the company announced a US$1.44 billion reserve fund raised through the sale of additional shares. The reserve is designed to support the payment of dividends and service obligations, Strategy said.

James Butterfill, head of research at CoinShares, said other DATs could follow Strategy’s decision to dilute shareholders.

“This doesn’t particularly inspire confidence. It highlights both their dependence on and expectations for a recovery in token prices,” Butterfill told CNBC.

“We expect token prices to rebound, especially if the Federal Reserve implements a December interest rate cut, which should help these companies avoid forced liquidation.Nonetheless, this episode highlights the weaknesses inherent in the DAT model.”

If mNAV continues to fall and DAT does not have the means to survive, DAT could turn to selling digital tokens which could put pressure on the cryptocurrency market.

“As token prices fall, even the most well-known DAT is starting to scale back. As DAT is a large holder, this could amplify volatility in the broader crypto market. Even a staggered sale would increase supply to an already weakened liquidity situation,” Alexander said.

Currently, DAT’s digital currency holdings represent less than 1% of the total cryptocurrency market. But as its influence potentially grows, it could have an even bigger impact on tougher markets.

“As DATCO grows in size, its market influence will increase. An unwinding could dampen a major tailwind for cryptocurrencies: the normalization of digital assets on corporate balance sheets,” McCauley said. “This could reduce public equity interest in exposure to digital assets, slowing crypto ETF inflows and increasing crypto prices.”

According to Alexander from the University of Sussex, the DAT field is currently in a bubble.

“The DATCO model appears to have attracted many entrants driven by marketing, hype and easy capital rather than durable business fundamentals,” she told CNBC.

CoinShares’ Butterfill said that with many DATs now trading below 1mNAV, “a clear signal that the market is concerned” that these companies will be forced to sell their digital assets, “the bubble has already definitively burst.”

However, both experts said DAT could evolve in the future.

“Over the long term, investors are likely to demand a more cautious approach,” Butterfill said.

“Tolerance for shareholder dilution and extremely high token concentrations with no revenue stream will decline.The recent token accumulation frenzy has in many ways undermined the original purpose of the DAT concept: trusted global companies seeking diversification from fiat currency and depreciation risk.”

Alexander said these digital asset treasury companies may start diversifying their holdings into non-crypto assets as well.

“I believe that companies that focus on businesses such as yield generation through staking, increase token diversification, and mix tokens with traditional assets such as cash and Treasury bills have the potential to survive as legitimate digital asset infrastructure players,” Alexander said.