1/ I see a lot of bad analysis of DATs, or digital asset treasury companies. Specifically, I see a lot of bad takes on whether they should trade at, above, or below the value of the assets they hold (their so-called “mNAV”).
Here's how I approach it.
Here's how I approach it.
2/ The first thing to do when evaluating a DAT is ask yourself: If this company had a fixed lifespan, what would it be worth?
3/ The value of this approach is obvious if you think in very short time frames. For instance: Imagine you had a bitcoin DAT that announced it was shutting down this afternoon and distributing its bitcoin to investors. It would trade at exactly at the value of its bitcoin (an mNAV of 1.0).
4/ Now extend your time frame. What if it announced it was shutting down in a year? Now you have to think about all the reasons our DAT should trade above or below the value of its bitcoin. Let’s review them.
5/ There are three big reasons a DAT should trade at a discount: Illiquidity, expenses, and risk.
6/ Illiquidity: You wouldn't pay full price today for bitcoin you'd receive in a year. But you would pay some price. Would you ask for 5% discount? A 10% discount? I’d definitely do it for 10%. This would reduce the value of our DAT.
7/ Expenses: Every dollar spent on operating expenses or executive compensation comes out of your pocket. Imagine our 12-month DAT held $100 of bitcoin per share, but paid executives the equivalent of $10 per share per year. You would insist on a 10% discount to NAV.
8/ Risk: There is always a risk that a company will slip up in some way. You need to bake this into the price too.
9/ Now let's look at why DATs might trade to a premium. Here in the US, there's only one: If it is increasing its crypto-per-share.
There are four primary ways I've seen DATs try to do this.
There are four primary ways I've seen DATs try to do this.
10/ Issuing Debt: If you issue debt in USD and buy crypto, and crypto goes up relative to USD, you can pay off the debt and increase your crypto-per-share. This is generally how Strategy has increased its BTC-per-share. (If bitcoin's price goes down, the reverse can happen.)
11/ Lending Crypto: If you lend your crypto and receive interest payments, you can increase your crypto-per-share.
12/ Using Derivatives: If you hold crypto and do something like writing calls against it, you can generate income and acquire more of the asset. Of course, you risk forfeiting upside.
13/ Acquiring Crypto at a Discount: There are various ways a DAT might acquire crypto at a discount. It might:
* Buy locked assets from a Foundation looking to sell a given asset without roiling the market;
* Acquire another DAT trading at a discount;
* Buy back its own shares if it they are trading at a discount;
* Acquire a cash-flow generating business and use that cash flow to buy crypto.
* Buy locked assets from a Foundation looking to sell a given asset without roiling the market;
* Acquire another DAT trading at a discount;
* Buy back its own shares if it they are trading at a discount;
* Acquire a cash-flow generating business and use that cash flow to buy crypto.
14/ One challenge for DATs is that most of the reasons they should trade at a discount are certain and most of the reasons they might trade at a premium are uncertain.
15/ For this reason, DATs will have a high hurdle: Most will trade at a discount, and only a few exceptional firms will trade at a premium.
16/ To return to our example: If you have a bitcoin DAT that is liquidating in 12 months, you can: 1) Calculate its expenses; 2) Add a risk discount; and, 3) Offset those discounts with your expectation of its ability to increase bitcoin-per-share. That is your fair value!
18/ You might be thinking: OK Matt, but DATs don’t have a finite lifespan. They extend forever!
19/ This makes it more complex, to be sure. But really, what it means is everything is amplified. Expenses and risk compound over time, so watch those closely. Similarly, DATs that can steadily increase their crypto-per-share can be quite valuable.
20/ As I look through the ways DATs can increase their crypto-for-share, what strikes me is that every one benefits from size.
21/ Larger DATs will have an easier time issuing debt than smaller DATs; they will have more crypto to loan; they will be access a more liquid options market; they will have better access to M&A and other discount deals.
22/ For the past six months, DATs have risen and fallen together. Going forward, I think there will be more differentiation. A few will execute well and trade at a premium, and many will execute poorly and trade at a discount. This model is one way to think about which is which.
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