Digital Asset Treasuries are crypto’s latest hype — and maybe its next bubble

Economic

Summary:

Digital Asset Treasury companies boomed by holding crypto on balance sheets, but falling prices and shrinking mNAV premiums now threaten their model. Forced token sales, dilution risks, and structural fragility raise fears of a bursting DAT bubble.

The term Digital Asset Treasury companies, known as DATs or DATCOs, has emerged as one of the biggest buzzwords in the digital currency industry this year, providing investors with a novel way to play crypto — but with new risks.

A DAT is effectively a publicly-listed entity that holds cryptocurrencies like bitcoin or ether and provides investors with exposure to the underlying digital currency. DATs aim to outperform the price action of the cryptocurrency that they hold.

But with crypto markets seeing a big plunge in recent weeks, the strategies of DATs has come under scrutiny and raised concerns about whether they could add further pressure to an already weak crypto market.

What is a DAT?

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

The original — and one of the biggest DATs — is Michael Saylor’s Strategy which began buying bitcoin in 2020 and has done so ever since.

But more recently, there has been an explosion of this type of vehicle. In 2021, fewer than 10 companies held bitcoin in their treasuries, according to DLA Piper. That number has since jumped to 190 companies, while another 10 to 20 firms are focused on alternative digital assets as of September, DLA Piper said.

These DATs hold around $100 billion worth of cryptocurrencies combined, according to data from The Block.

Why do DATs exist?

The DAT explosion this year has been driven by buoyant crypto markets and more favorable regulation in the United States toward the industry.

But their growth has also come at a time when it’s easier than ever to buy cryptocurrencies directly or invest in the asset via other regulated entities like exchange-traded funds (ETFs).

DATs are intended to outperform the underlying assets which they hold. They can achieve this through various strategies to maximise returns. In contrast, ETFs effectively hold the cryptocurrency passively and issue shares backed one-to-one with the actual asset.

DATs can also provide regulatory certainty to investors, according to a note from Macquarie published last week. They “package crypto assets within SEC-regulated securities,” the investment bank’s analysts said. “This eliminates regulatory ambiguity and ensures the same public reporting, disclosures, and investor protections as any public equity.”

Carol Alexander, professor of finance at Sussex University, told CNBC that DATs also offer an option to “institutional and professional investors with regulatory, fiduciary or operational constraints that make direct token ownership or crypto ETFs unsuitable.”

DAT strategies

DATs offer unique capabilities that ETFs cannot, employing a range of strategies to enhance investor returns.

To assess the performance of these DATs, a metric known as market net asset value, or mNAV, is closely watched. It compares a company’s enterprise value to the value of its digital asset holdings. It can show how much of a premium investors are assigning to a DAT, with an mNAV over 1 signifying a premium.

DATs can use an at-the-market (ATM) equity program to increase their crypto holdings. When its share price exceeds the net asset value of the crypto holdings, a DAT can issue more shares at a premium and therefore raise cash. That allows the DAT to fund the purchase of more crypto — as has been the case for Strategy.

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

Staking is another strategy that is employed by DATs. It allows a holder of cryptocurrency to earn yield, similar to interest, on their assets. To stake, an investor effectively locks up their crypto on a blockchain to help the network run better. In return, the investor receives a return in the form of more crypto. However, unstaking crypto can take several weeks, which may limit ETFs and similar products from fully embracing staking, given their need for liquidity and stable asset values.

Staking creates free cash flow that “can be redeployed into mergers and acquisitions (M&A), token purchases, on-chain opportunities, or shareholder distributions,” ARK Invest said in a note last month.

As the market advances, there are likely to be new trading strategies employed by DATs.

What happens to DATs when the market plunges?

DATs have come into focus amid recent crypto market turmoil, with bitcoin well off its all-time high.

As crypto prices fall, mNAV may fall under 1, meaning companies are trading at a discount to their crypto holdings. This can create a number of issues.

“When the crypto market pulls back, DATCOs face pressure and they have a limited menu of realistic responses,” Alexander said.

“Some may double‑down and hold, viewing the drop as a buying opportunity for future appreciation. Others may need liquidity, especially those that used financing (e.g. debt, convertible bonds, share issuance) which can force them to sell part of their token holdings.”

And an mNAV premium is key for the DAT market.

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

The investment bank also notes that if a DAT’s stock price falls or near NAV, equity issuance becomes dilutive, meaning “new shares issued no longer increase crypto per share, but rather dilute existing shareholders’ exposure. This can break the self-reinforcing cycle that sustains the premium.”

Meanwhile, the explosion in the number of DATs and growing interest from investors creates its own risks.

“The sector is becoming increasingly crowded, with capital flowing in according to an established playbook. This influx, however, increases structural fragility. Should any of the key variables - investor sentiment, crypto prices, or capital market liquidity - fall, the DATCO model could unravel,” Macquarie said.

Strategy has sought to protect itself against the downturn. On Monday, the company announced a $1.44 billion U.S. dollar reserve that was funded by the sale of more stock. The reserve is designed to support the payment of dividends and service debt, Strategy said.

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

“It is not particularly confidence-inspiring: it highlights both their dependence on, and their expectation of, a recovery in token prices,” Butterfill told CNBC.

“We do expect token prices to rebound, particularly if the Federal Reserve delivers a December rate cut, which should help these companies avoid forced liquidations. Nevertheless, the episode underscores the inherent fragility of the DAT model.”

Will DATs impact crypto prices?

If mNAVs continue to fall and DATs don’t have the means to keep afloat, they may turn to selling digital tokens which could put pressure on crypto markets.

“As token prices drop, even the highest‑profile DATs have begun scaling back. This can amplify volatility in the broader crypto markets, because DATs are large holders: their sales, even if staggered, increase supply into already weakened liquidity conditions,” Alexander said.

For now, DATs’ digital currency holdings account for less than 1% of the total crypto market. But as their influence potentially grows, they may have more of an impact on braoder markets.

“As DATCOs scale, their market influence grows; an unwind could weaken a major tailwind for crypto, namely the normalization of digital assets on corporate balance sheets,” Macquarie said. “This, in turn, could dampen public equity interest in digital asset exposure, slow crypto ETF inflows, and pressure cryptocurrency prices.”

Has the DAT bubble burst?

The DAT space is currently in a bubble, according to Sussex University’s Alexander.

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

CoinShares’ Butterfill said the “bubble has already decisively burst,” with many DATs now trading at mNAVs below 1 and a “clear signal that the market fears” these companies will be forced to sell their digital assets.

However, both experts said DATs may evolve in the future.

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

“Tolerance for shareholder dilution and for extremely high token concentrations without accompanying revenue streams will diminish. The recent frenzy of token accumulation has, in many ways, undermined the original intent of the DAT concept: credible global companies seeking diversification from fiat-currency and depreciation risks.”

Alexander said that these digital asset treasury firms may also begin to diversify their holdings into non-crypto assets too.

“I believe those that pivot toward operations such as yield‑generation through staking, increasing the diversification of their tokens, and mix with token traditional assets like cash or T-bills, may survive as legitimate digital‑asset infrastructure players,” Alexander said.

Source: cnbc

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