After an unprecedented surge in funding, the landscape of the cryptocurrency sector is evolving rapidly, as a multitude of newly established firms seek to validate their high valuations and demonstrate that their treasury strategies extend beyond mere hype. Recently, a notable trend has emerged in which companies are emulating the successful model initiated by Michael Saylor’s bitcoin-centric corporation, Strategy.
This approach is characterized by a simple yet effective playbook: create or rebrand a publicly traded company, raise capital via debt and equity, and utilize the funds to acquire cryptocurrencies. While bitcoin remains the primary focus, other coins like ether, Solana, and Avalanche are gaining traction. This strategy is marketed as a safer and often leveraged means for investors to gain exposure to cryptocurrencies without the need to directly hold the tokens.
The model has gained significant traction amidst rising crypto prices and a more favorable regulatory environment for digital assets. Since Strategy made its first bitcoin purchase in August 2020, its stock has skyrocketed by over 2,200%. Japan’s Metaplanet, which adopted a similar “digital asset treasury” (DAT) strategy in April 2024, has seen astonishing returns, up 3,830% since starting its crypto acquisitions.
The popularity of this approach has spurred the formation of an entire industry. According to Elliot Chun from Architect Partners, a financial advisory firm based in Palo Alto, 228 publicly traded companies have launched DAT strategies in a remarkably short timeframe, with a total of $148 billion invested in cryptocurrencies. This influx stems from the belief that holding digital tokens will significantly enhance their stock values.
A new metric dubbed market-to-net asset value (mNAV) has also emerged, measuring a company’s market capitalization against the value of the cryptocurrencies it holds. In the current climate, most DAT firms are trading at or above a 1.0 mNAV, indicating that their stock prices equal or exceed their underlying crypto values. However, approximately 15% of DAT companies are trading at discounts, suggesting their market valuations fall below their asset values. For instance, 26 out of 168 public companies that hold bitcoin are currently valued at a discount, with similar trends observed among Solana-focused treasuries.
Research analyst Kevin Li from ParaFi Capital views mNAV as analogous to the price-to-earnings ratio for these crypto-focused companies, where growth is derived from increasing digital assets per share. Companies that hold proof-of-stake tokens, such as ether or Solana, may benefit from “organic” asset growth through staking, which helps secure blockchain networks in exchange for yield, thus potentially yielding higher mNAVs compared to those limited to bitcoin.
Though current mNAV compression signals a saturation of crypto equity, industry experts maintain optimism. Matt Hougan, Chief Investment Officer of Bitwise, notes that trading below NAV is nothing new, as Strategy itself has often been found below its NAV during more volatile periods. This scenario does not preclude potential capital growth through mechanisms like staking or lending.
The ongoing discount in valuations poses challenges for these companies in securing fresh capital to bolster their crypto holdings. Nonetheless, for value investors seeking lucrative opportunities, these discounted stocks may present enticing prospects.
Communication and transparency are also crucial in this relatively nascent industry. Frank Chaparro, head of content and special projects at market maker GSR, emphasizes the importance of effective engagement from management to bolster investor trust, particularly as many DATs lack analyst coverage.
Chun adds that while not all DATs have established sound strategies, those led by competent management are likely to outperform and maintain premium positions. Pantera Capital’s Cosmo Jiang advocates for focusing on trading volumes as a key metric, arguing that the excitement surrounding a token and its ability to attract new investors are critical to a company’s prospects.
With skepticism surrounding the sustainability of many DATs, industry experts assert that it’s essential to recognize that a significant percentage of these companies may not survive in the long term due to poor management or inability to execute their strategies. However, among the fray, a select group is expected to thrive and become major players in the market within the next decade.
