TREASURY OR TRASH
“HEARD YOU LIKE CRYPTO, SO we PUT IT IN A COMPANY”
Foreword
Digital Asset Treasury (DATs) companies are all the rage, but they are sowing the seeds of the next crypto winter by launching leveraged vehicles into public markets with highly volatile underlying token prices as the only thing standing between them and bankruptcy.
“To the moon or death!” might as well be the rallying cry, and bad news, it’s mostly going to be death.
David: Publicly-listed Crypto Treasury firms are, as a class, the ticking FTX or Luna of this crypto cycle - guaranteed, on the whole, to incinerate capital, if not melt down catastrophically. But that doesn’t necessarily apply to the category leader these new entrants are mimicking.
WHO, DAT, WHERE?
DATs are multiplying rapidly. They are already well into the double digits in terms of public listings, and talking with friends, I have seen a small army of these being marketed currently. They come in many forms: the familiar SPAC of Chamath infamy, the conversion of existing companies into DATs, the fake conversion of existing companies through pledges to become a DAT without actually doing anything (like when the local sandwich chain would add internet to its name in the 2000s), or repurposing shell companies to hold these assets with large capital injections.
Regardless of how it is done, most DATs look like boxes that hold assets, and… not much more than that? There are, of course, some novel components to them. Multi-asset DATs that approximate some kind of index, and some that even have plans to have operating components or business inside of them that can generate something most businesses have as part of their core offering: cash flow.
Either way, they are proliferating in public markets, they are trading at prices that are far higher than the crypto they have on their balance sheet (even when not having any other assets!), and this week we ask, what the hell is going on here?
Imagine throwing money into a large bucket, and then much later the person you intend to receive the money comes to the bucket and takes out a few dollars at a time over weeks. If this sounds like some form of dead drop in the traditional physical world, that's because it kind of is.
DAVID’S TAKE
Austin having made the fatal mistake of letting me bat leadoff this week, I’m going to open with a question:
Why are you not in an ETF, YOU DAMN DIRTY APE?!?!?
It’s what I want to scream whenever someone talks to me about “DATs,” a term in the grand crypto tradition of three-letter neoacronyms, which I learned just last month now means “Digital Asset Treasuries.” We used to just call them “treasury companies,” or more often “Bitcoin Treasury Companies.” Or more precisely “company,” since for a long time there was just one.
The most important thing to know about DATs is that they’re irrationally overvalued, in the objective sense that there isn’t even potential upside to fill the gap. The second most important thing to know is that the market is going crazy anyway - on the thesis that, in essence, capital markets and the dollar itself are dying.
But before we get ahead of ourselves, let’s acknowledge: holding your own crypto is scary. In fact, it’s more scary the more informed and savvy you are. It’s not hard to get hacked, and it’s also pretty easy to lose a private key, and there’s essentially nothing anyone can do to help if the worst happens. Centralized exchanges are easier in some ways, but still more intimidating to normies than some of us might grasp. Personally, even after a decade in the field, I have less than four figures on-chain (Disclosure: This is largely so I can get long $HYPE.)
So what kind of premium would you be willing to pay to not have to deal with the anxiety and hassle of managing private keys? 5%? 10%? What would that number go up to if you were self-awarely not good with tech? 15%? 20%?
How much would you have to distrust both yourself and the technology you’re investing in to pay an intermediary or custodian to manage an asset whose value substantially derives from its non-custodial and disintermediating features?
How about a 32% premium on every single Satoshi (or every ETH, or every SOL) you buy?
That’s a lot! But it’s what market participants are paying right now for Bitcoin wrapped up in Strategy (MSTR, formerly Microstrategy), a software firm that plowed its first $250 million in cash into BTC in 2020, becoming the original Bitcoin Treasury play. 32% is almost certainly an understatement of that premium on the stock, given the cascading stack of secured notes, senior secured notes, and other elements that will take equity holders out to the woodshed if anything goes really wrong.
Skeptics think things could definitely go wrong, if the price of Bitcoin doesn’t fulfill Strategy CEO Michael Saylor’s prophetic visions. Greyscale Bitcoin Trust kind of wrong. Maybe even Enron/FTX/Luna-unwind kind of wrong. Bitcoin has no cash flow, after all, so this is a price bet (there is the slight exception of Lightning Network yield, but that’s an edge case for now). And somewhere in there, it’s a leveraged price bet - which is why Jim Chanos has announced a short on MSTR hedged against a Bitcoin long.
Of course, if you’re looking at it from the other direction - as a potential founder of one of these treasury cos, let’s say someone who owns a dead NASDAQ ticker for some failing software operation - the risk is not what you’re looking at. You’re not asking yourself “am I starting an obfuscated ponzi scheme in public markets?”
No. Potential treasury company founders are looking at a 32% equity premium to NAV and going “huh” quietly under their breath. “Tomorrow” is maybe not a word prominent in their collective vocabulary.
And there’s a lot of that going around right now. At least a dozen entities specifically built for treasury strategies are announced or live, without looking very hard. CoinMarketcap lists 155 firms worldwide with some announced Bitcoin treasury strategy.
It’s not all Bitcoin, either. Tom Lee is seizing the moment for an ETH treasury company, BitMine, that actually makes a lot of sense because it’s not Bitcoin. Japan’s Metaplanet is running the MSTR Bitcoin playbook under what analysts say is a tax regime particularly beneficial to the structure. Credible veterans like Adam Back and canny influencers like Anthony Pompliano are leveraging their visibility to get a piece of the BTC-premium action.
But you’ve also got many, many opportunists like Vivek Ramaswamy, who I guarantee thinks “difficulty adjustment” is a thing you do when you can’t beat a video game. Vivek has started a copycat Bitcoin Treasury firm that is in fact wildly more risky and infinitely more stupid than MSTR, for reasons we’ll get into it. There’s also the nominal risk of paper crypto floating around - that is, holding companies that aren’t actually holding.
You’ve even got sort of indirect treasury plays like Bullish, which is far too proud to market itself as a treasury company - We’re an exchange! And god dammit, people use us! - but whose IPO blowout definitely benefitted from the broader narrative and about $2.8B worth of Bitcoin on the balance sheet. [Author’s note: David talks more about this here.]
That leaves the implied valuation of Bullish’ actual business - like Strategy’s vestigial software nub - somewhat less impressive.
AUSTIN’S TAKE
I have the advantage (some would say disadvantage) of being a professor at a business school, so I tend to have the advantage of being able to zoom out on these things and look at them from a long-term perspective. I also have the advantage of a few decades of brain damage running trading desks on the street, so I tend to be better than the average bear at thinking about structures.
So what’s the deal with the DATs?
First of all, I think David leads with the right question: “why not an ETF” should be the first thing you ask. If the concern is not wanting to manage your own private key security, not wanting to be a target for kidnapping or ransom, and not wanting to have to deal with all the, well, crypto-y parts of having to own crypto, you should probably default to an ETF. I do! It’s the main holding vehicle for a supermajority of my crypto holdings now (apologies to all would-be kidnappers).
The reason for this is a simple one: holding your own private keys is prone to all kinds of problems. I know a lot of people who have lost wallets. More than have been hacked, but I also know a lot of people who have been hacked. The loss rate on self-custody is much higher than is typically acknowledged. ETFs (for now) seem not to have that problem.
Great, so we’ve established a use case for a different entity with a custodial arrangement holding crypto. So… why a DAT?
If the answer you get involves that somehow they are going to use financial engineering or leverage to generate gains, I am going to remind you that these are tools that act upon existing structures, not things that create value themselves. They are also the kinds of things that people blow up with constantly when they believe asset prices can only go up (see: 2008), and anyone waving their arms wildly and telling you a story about financial engineering is almost certain to blow up in the long run.
Naturally, when the market gets euphoric, people doing that will be richly rewarded, as they are now, which is why it keeps happening. People always believe that this time is different. This is not, by the way, a denial of the economic value of the underlying asset (I am a long-term BTC owner), but it is a statement that leveraging your way to the future usually doesn’t work out well.
So are there valid reasons to do a DAT?
One would be taxes. If someone can find a more tax-efficient way to hold crypto (very possible in some tax regimes) through a corporate structure vs. personal holdings or an ETF, that’s a totally valid reason to do this. If you want to test for credibility with that, the company doing that should be relentlessly focused on optimization and delivering that value, but if you are in a jurisdiction where this is relevant and a company is telling that story, I think that’s plausible. There are a lot of otherwise silly structures that exist out there simply because taxes are such a driver of long-term returns (almost the entire life insurance industry might be this in the United States).
Two would be that there is an actual operating model in here, especially one that is going to be hard for individuals to replicate. One of the great misses in this regard was the ENA DAT, where they managed to create a DAT that owns the ENA governance token, but didn’t think to put the yielding basis trade token in the DAT. That would be a business model! Actual cash flow! That’s the kind of thing that would matter, and the low-hanging fruit of building a sort of crypto Berkshire Hathaway through this strategy is definitely out there.
However, the DATs that just exist to own tokens and then kind of either sit around or use leverage to own tokens? That’s the thing that isn’t going to work. Just buy an ETF.
STAKES
WHY? And WHY NOW?
DAVID: To understand why MSTR is different than the mini-mes following in its wake, and why this explosion of treasury companies happening now is so deeply unhinged, we have to rewind almost exactly five years, to August 11 of 2020. That’s when Saylor’s Microstrategy first plowed excess cash into Bitcoin - $250 million, at a time when BTC was trading at around $12,000.
Saylor at the time was rather new to Bitcoin, and talked about it with the passion of a convert - specifically, some sort of vengeful Calvinist relishing the thought of his unworthy doubters burning in Hell. He got some technical details wrong in public, and more egregiously, told people to mortgage their homes to buy Bitcoin. The fact that bet would have paid off doesn’t make it any less stupid for any individual, and struck me as a pretty gross attempt to pump Saylor’s own bags.
Saylor’s extremism, and his dogmatic, hammer-and-tongs communication style, were driven by elements of what’s known as Bitcoin Maximalism. Maximalists believe, in many variations, that all government fiat currencies are on the road to Weimer-style hyperinflation, and that Bitcoin’s programmed inflation cap will motivate a mass migration to it as a default settlement network for the planet, following Gresham’s Law of the crowding out of lower-quality money.
Most important, though, is Saylor’s price target for BTC: $13 million per token by 2045. And that’s his bear case.
I personally believe some very moderated version of this, but the culture of Bitcoin Maximalism circa 2021 was so toxic that friend of the newsletter Nic Carter infamously disowned the movement of which he had been a significant figurehead. People don’t really talk about it all that much anymore, especially after infamous grifter Su Zhu rode his own “supercycle thesis” all the way to the total incineration of Three Arrows Capital. In finance, “the asset will go up forever” tends to be pretty dangerous logic.
Saylor doesn’t buy into the entire Maximalist package today - he’s a surprisingly overt advocate of the free issuance of private tokens, or what Maximalists would call “shitcoining.” But obviously he turned out to be incredibly correct on the inflation + Bitcoin price thesis in the medium term, and he became a star during the pandemic.
MSTR stock went parabolic from late 2020 to early 2021, and for actually very good reasons besides Saylor’s good short-term directional bet: it was still very difficult at the time for investors in the tradfi world to get exposure to Bitcoin. You couldn’t buy Bitcoin on the stock market, OTC was and remains fairly exclusive, and even traditional hedge funds often lacked the confidence to, I guess, open up a Coinbase account. MSTR was one of just a handful of methods for accessing BTC for many investors, and its timing was impeccable.
But even as Bitcoin moved from $12k in 2020 towards $60,000 by 2021, Saylor had shockingly few imitators. Elon Musk’s Tesla was really the only one of note, and that was little more than an early example of Elon’s descent into increasingly short-term, hype-chasing stock-pump tactics. Tesla bought $1.5 billion in Bitcoin in February of 2021, saying it would accept BTC as payment … and then sold 75% of it into the tanking post-FTX market, possibly making a small profit but losing out on billions of dollars in pending gains, and providing an early clue that one particular distractable emperor never had any clothes.
Anyway. Fast forward to January 2024, and everything should have changed. That’s when the first Bitcoin ETFs started to reach the market, following Gary Gensler’s grudging compliance with a court order that they be allowed. It was now easy for retail and institutions to get trustworthy, near-frictionless exposure to Bitcoin, at very, very close to its actual open-market price. Tom Lee’s ETH treasury, and maybe even a rumored Solana treasury company, make a certain kind of sense because there are still no SOL or ETH ETFs, so treasury firms can still sensibly and ethically harvest a premium for acting as a proxy.
So why are people still buying MSTR at a massive premium to its Bitcoin NAV? And why in the name of all that is holy are people starting new Bitcoin treasury companies?
There’s no reason for them to exist with ETFs on the market - right?
Austin: As a starting point, I like to call the Bitcoin Maximalist crowd Satoshi’s Witnesses because it properly captures the religious nature of their belief system. In this vein, I don’t view Saylor telling people to mortgage their house to buy bitcoin as misaligned with the belief you would expect from someone who had a religious system built around Bitcoin prices and the status as the holiest form of money. It’s some sort of complex prosperity cult plus economic conspiracy theories plus mangled understanding of technology balled together into a giant orange wad of random stuff that spews out low-quality aphorisms.
To that end, of course he would believe mortgaging your house to buy bitcoin was a good idea. Religious fanatics believe all kinds of insane things based on high tenuous textual readings of things they don’t understand (like the bitcoin whitepaper). Need I remind everyone of the great disappointment of the Millerites on October 22, 1844 when Jesus did not, in fact, return as advertised (or if he did, he sure kept it on the DL and didn’t let them in on it)? The Seventh Day Adventists are still busy pushing versions of this idea, as such things never seem to quite die, like some deeply profound virus of the mind.
Now, combine that religious belief with a tradeable product, and you really have a fertile ground for some very silly things to happen. Obviously some of the beliefs around bitcoin are well-founded, some are contested but plausible, and some are… well, they are either insane or actually, when one looks under the hood, predictions of doom for the global economy (like the $13M per bitcoin prediction, which really is a prediction of hyperinflation in dollars).
Are these the people buying DATs? I’m sure some of them are. Especially the bitcoin ones. There are other important groups though, like nihilistic gamblers and trend followers. More on that later.
DIVING IN: DECONSTRUCTION
David: Let’s be blunt: Saylor et. al. aren’t exactly getting hounded right now to justify their premium to NAV. Most players in the market have the herd instincts of sheep, and there are too few responsible shepherds. Retail investors are low-information and getting lower. Institutions are happy to ride directional plays whether they understand them or not. And as a once and future member of the financial press, asking hard questions is not exactly the flywheel driving CNBC’s business model.
But beyond the front page, people are asking those questions, and there are basically two answers being offered. First, that Treasury companies should be measured on a new metric called “Bitcoin [or whatever] per share”; and second, that the broader overvaluation of the stock market means the Strategy play is less unhinged than it seems.
The first point doesn’t really make any sense without the second, and the sum of the parts is that defenders see these firms, like Bitcoin itself, as a bet against the continuing vitality, or even stability, of the American economy and financial system. Saylor in his early years described the dollar as “a melting ice cube,” and fears of Wiemar-style hyperinflation are core to the Bitcoin Maximalist ethos.
This, the Strategy defenders argue, is reflected in stock market valuations broadly - and that’s anything but crazy. Excess money pumps financial assets, which is what partly drove the pandemic bubble in both crypto and certain tech plays (Peloton, for those who’ve lost track, no longer has a market cap of $50 billion.)
The best example is actually another company with at least some Bitcoin still in its treasury - Tesla. But Tesla’s persistent huge P/E premium isn’t thanks to Elon’s paper hands. In fact, according to Preston Pysh of Swan, Tesla’s vertiginous multiple is just one particularly extreme example of a common trait across the market - and that this is actually what makes Strategy’s own multiple make sense. The Maximalist-inflected argument is broadly that, at some point, the rest of the stock market is going to collapse, but Strategy’s bitcoin holdings will keep it strong, even if it’s currently overvalued. A more cautious analysis might note that available historical evidence shows Bitcoin tends to boom and crash in step with equity markets, and especially with high-P/E Cathey Wood stocks.
So the goal of these firms is pretty explicitly to turn dollars into Bitcoin, in the anticipation that the dollar is eroding. Forex has always been some part of corporate treasury management, so on some level there’s nothing too fundamentally bizarre here. Where I get sketched out is when boosters say Strategy and others are able to grow their “Bitcoin per share.” There’s some wisp of revenue from core business in a company like Strategy that could explain that growth, but it more likely implies financial engineering involving debt and leverage.
Yeah, financial engineering. That thing that always goes well.
“How does a Bitcoin strategy company create income, not capital gains?” asked veteran analyst Andy Constan on a stellar episode of What Bitcoin Did. “They are marketing [gains] to investors as recurring earnings that deserve a multiple. That is fraudulent. There is no hope of paying the preferred dividends without new proceeds from issuance.
“And that’s a Ponzi scheme.”
DIVING DEEPER: DEMOLITION
Austin: I started my career on wall street as an intern during the business school days on JPM’s distressed debt desk. Watching people dissect the carcasses of dead banks, blown up ABS and securitizations, and having to help dispose of a giant pile of cat bonds that had collateral that had, to be polite, performed less well than expected was how I cut my teeth. Without expressing any ego in this, I was known on the desk as someone who could spot structural problems, had a good eye for deconstructing the mechanics inside things that had been built, and who knew where to pick out relative value.
So turning that onto DATs, let’s start by thinking about these from a first principles basis.
A traditional DAT is one that does the following: hires a management team and board, sets up some kind of corporate structure (or acquires one), has ongoing reporting and compliance requirements as a public company, and holds tokens.
That’s it! That’s the core of what these are doing. People can put window dressing on it however they want, but unless they introduce other elements to the business, that is your stick model of a DAT. It can be simplified even more to just expenses + token.
So what should be the value of that kind of thing? Given that ETFs have structurally lower expenses than most of the DATs, unless there is a tax advantage, this sort of ETF should strictly trade at a discount to the tokens per share of the vehicle. Thus, trading at a premium has always struck me as somewhat bonkers, given that your terminal value is less than the tokens (unless expenses are zero).
This, if you want to understand the Chanos short, is at the heart of that thinking. He is guaranteed to be right if he has enough fortitude to simply hold it long enough. The problem is “long enough” might be decades in some cases. But the price will eventually converge. The market can stay retarded longer than you can stay solvent, but it also can’t stay retarded forever. To paraphrase Warren Buffett, in the short term the market is a voting machine, but in the long term it is a weighing machine.
The other thing this should reveal to readers of this newsletter is that the fate of DATs of this form is going to be one of two things. One will be the exact melting ice cube that Saylor derided above, which is the case of those that build toxic corporate governance structures that can’t be easily taken over, leading to endless shareholder lawsuits and expenses that melt the ice cube into bankruptcy. Two will be that they begin trading at a discount, and eventually the discount is enough that an activist will unwind the vehicle. That trade is simple: buy the DAT shares, short the token in futures markets, and take over the DAT and vote to distribute the tokens or sell them and return the cash. There you go! Profit. Just, you know, not for the original investors.
These problems get worse if you add leverage. At that point, in addition to activist investors in the equity part of your capital structure, you now have debt issuers who are watching you. Debt comes with covenants, and debt also comes with, you know, that pesky requirement to pay interest and repay. A debt default due to a price swoon followed by NAV premium collapse is a very likely path to bankruptcy or restructuring for all of the DATs that have taken on DATs, because even if you are a long-term crypto optimist like myself, you’d have to be hilariously, delusionally optimistic to say that long-term crypto prices will be higher with no downside volatility.
Historically crypto has had a ton of downside volatility. A very, very large amount of it. I will remind everyone a 20% selloff in housing prices produced a financial crisis. Crypto doesn’t have that large of a footprint, but using leverage on highly volatile assets usually ends badly if you are trying to buy and hold. A good way to end up with zero tokens per share is to get blown out by margin calls, after all.
So I remain skeptical that most DATs will survive, other than the ones in the tax advantage or developing an actual business model category. There will be some that survive in parasitic fashion, with no obvious way to unwind them, but vehicles like that are a pathway to the inevitable destruction of equity value and, ultimately, deliver value for lawyers, not investors. Avoid those like the plague.
CONCLUSION
Here is some boring advice almost nobody will take: just buy an ETF (unless you have tax concerns, but if you do, you know who you are and don’t need that advice).
