Bitwise CIO: Here's my take on the current state of DAT company
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Bitwise CIO: Here's my take on the current state of DAT company
Is the DAT model a bridge connecting TradFi, or a "death spiral" for the crypto market?
Navigating Web3 tides with focused insightsAuthor: Matt Hougan
Translation: TechFlow
I see many flawed analyses around DATs (Digital Asset Treasuries). In particular, there's widespread misunderstanding about whether their trading prices should equal, exceed, or fall below the value of their holdings—what’s known as "mNAV."
Here's how I think about it.
When evaluating a DAT, first ask yourself: what would its value be if the company had a fixed lifespan?
The value of this approach is clearest in a short-term framework. For example: suppose you own a Bitcoin DAT that announces it will shut down today and distribute its Bitcoin holdings to investors. Its trading price would exactly equal the value of its Bitcoin holdings (i.e., an mNAV of 1.0).
Now extend the time horizon. What if it announced it would close one year from now? Then you’d need to consider all the reasons why the DAT might trade above or below the value of its Bitcoin. Let’s walk through them.
Three main factors can cause a DAT to trade at a discount: illiquidity, expenses, and risk.
Illiquidity: You wouldn't pay full current price for Bitcoin you won’t receive until a year later. But you'd pay something. Would you demand a 5% discount? 10%? If it were 10%, I’d certainly accept. This liquidity discount reduces the DAT’s value.
Expenses: Every dollar spent on operating costs or executive compensation ultimately comes out of your pocket. Suppose our 12-month DAT holds $100 worth of Bitcoin per share but pays executives $10 per share annually. You’d definitely demand at least a 10% discount to NAV.
Risk: Companies can always make mistakes or face operational failures—a real and non-trivial risk. You must factor this into the price as well.
Now let’s examine why a DAT might trade at a premium. In the U.S., there's only one reason: if it can increase its per-share crypto holdings.
Here are the four main ways I’ve seen DATs attempt this.
Issuing debt: If you issue debt in USD and buy crypto, and crypto appreciates versus USD, you can repay the debt and end up with more crypto per share. This is often how certain strategies grow their per-share Bitcoin holdings. (Of course, the opposite could happen if Bitcoin falls.)
Crypto lending: If you lend out crypto and earn interest income, you can increase your per-share crypto holdings.
Using derivatives: If you hold crypto and generate yield by writing calls or similar strategies, you can capture returns and acquire more assets. Of course, this may mean giving up upside if prices rise sharply.
Acquiring crypto at a discount: A DAT can obtain crypto at a discount in several ways, such as:
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Purchasing locked assets from foundations looking to sell without disrupting the market;
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Acquiring other DATs trading at a discount;
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Repurchasing its own shares (if they trade at a discount);
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Buying cash-flow-generating businesses and using those cash flows to purchase crypto.
A challenge for DATs is that most factors leading to discounts are certain, while most factors that could lead to premiums are uncertain.
As a result, DATs face a high bar: most will trade at a discount, and only a few exceptional ones will trade at a premium.
Back to our example: if you have a Bitcoin DAT set to liquidate in 12 months, you can: 1) calculate its expenses; 2) apply a risk discount; 3) offset those with your expectations of its ability to grow per-share Bitcoin holdings. That’s its fair value!
You might say: Okay, Matt, but DATs don’t have fixed lifespans. They’re perpetual!
This does complicate things. But in reality, it means everything gets amplified. Expenses and risks compound over time, so watch them closely. Likewise, DATs that can consistently grow per-share crypto holdings could become extremely valuable.
When I look closely at how DATs grow per-share crypto holdings, one feature stands out: each method benefits from economies of scale.
Larger DATs find it easier to issue debt than smaller ones; they have more crypto to lend; they gain access to more liquid options markets; and they get better opportunities in M&A and other discounted deals.
Over the past six months, DAT performance has largely moved in sync. But going forward, I expect greater divergence. Some DATs will execute well and trade at a premium, while most will underperform and trade at a discount. This framework helps us identify which are which.
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