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Author:Matt Hougan, Chief Investment Officer of Bitwise; Compiled by: BitChain Vision
I’ve seen a lot of faulty analysis of Digital Asset Treasury, Inc. (DAT).Specifically, I see a lot of misconceptions about whether they should be traded at, above, or below the value of the holding (the so-called “mNAV”).Here’s my take on it.
When evaluating a DAT company, first ask yourself:If this company had a fixed life, what would it be worth?
The value of this approach is clear when considered from a very short time frame.For example: Let’s say you have a Bitcoin DAT that announces it is closing this afternoon and distributes Bitcoins to investors.It will trade at exactly the value of its Bitcoin (mNAV is 1.0).
Now extend the time frame.What if it announced it was closing a year later?Now you have to consider why our DAT trades above or below its Bitcoin value.Let’s review these reasons.
There are three main reasons why DAT trades at a discount: illiquidity, fees, and risk.
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illiquidity: You wouldn’t buy Bitcoin at full price today that you won’t receive until a year from now.But you will definitely pay some money.Would you ask for a 5% discount?10% discount?I would definitely accept the 10% discount.This will reduce the value of our DAT;
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cost: Every dollar spent on operating expenses or executive compensation comes out of your pocket.Assume our 12-month DAT holds $100 in Bitcoin per share, but pays executives the equivalent of $10 per share annually.You will definitely insist on buying at 10% below the net asset value (NAV);
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risk: Any company is at risk of making mistakes.You also need to factor this risk into the stock price.
Now let’s look at why DAT may be trading at a premium.In the United States, there is only one reason:If its number of cryptocurrencies per share is increasing.I’ve observed that DAT achieves this in four main ways.
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issue bonds: If you issue a USD bond and buy cryptocurrency, and the cryptocurrency appreciates relative to the USD, you can pay off the bond and increase the amount of cryptocurrency you hold per share.This is typically how Strategy increases the number of Bitcoins per share.(The opposite is true if the price of Bitcoin falls.)
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Cryptocurrency Lending: If you lend cryptocurrency and earn interest income, you can increase the amount of cryptocurrency per share.
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Use derivatives: If you hold cryptocurrency and do things like sell call options, you can make gains and get more of the asset.Of course, you also run the risk of losing potential upside gains.
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Get cryptocurrencies at discounted prices:DAT There are many ways to acquire cryptocurrency at a discount.For example:
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Buy locked assets from funds that want to sell specific assets but don’t want to disrupt the market;
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Acquire other DATs trading at discounted prices;
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Repurchase if own shares are trading at a discount;
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Acquire a business that generates cash flow and use the cash flow to purchase cryptocurrency.
One challenge facing DAT is,Most of the reasons why they typically trade at a discount are certain, while most of the reasons why they might trade at a premium are uncertain.
Therefore, DAT will face a high threshold:Most DATs will trade at a discount, with only a few outperforming companies trading at a premium.
Back to our example: If you hold Bitcoin DAT that will be liquidated in 12 months, you can:1) Calculate its fee; 2) Add a risk discount; and 3) Offset these discounts with your expected ability to grow in value per Bitcoin per share.This is your fair value!
You might be thinking: Okay, Matt, but DAT doesn’t have a fixed lifespan.They last forever!
This undoubtedly makes the situation more complicated.But in practice, this means that all factors are amplified.Fees and risks can add up over time, so pay close attention to these factors.Likewise, a DAT that steadily increases the number of cryptocurrencies per share could be very valuable.
When I looked at the various ways DAT could increase its cryptocurrency share, I found that each one benefits from economies of scale.
Larger DATs will have an advantage over smaller DATs in issuing bonds; they have more cryptocurrencies available for lending; they have access to more liquid options markets; and they have easier access to M&A and other discounted transactions.
Over the past six months, DAT’s share price has generally followed a consistent trend.Going forward, I think this will change and more differences will emerge.A few companies will do well and their stock prices will be at a premium; while most companies will do poorly and their stock prices will be at a discount..This pattern helps determine which companies fall into the former category and which ones into the latter category.
