The Evolving Landscape of Digital Asset Treasury Firms
Investors have long viewed Digital Asset Treasury (DAT) firms as practical substitutes for holding Bitcoin, especially in an environment where direct access was limited. When regulated channels were scarce, and corporate balance sheets served as the closest approximation to holding the asset itself, this approach was advantageous. However, according to Matt Hougan, chief investment officer at Bitwise Asset Management, the dynamics that once defined these valuations have fundamentally shifted.
The Shift in Valuation Framework
In a recent valuation framework released on November 23, Hougan highlighted major structural changes facing the $130 billion sector. He notes that while certain negative factors—such as illiquidity, operating costs, and execution risks—are consistent across the model, the variables that could elevate valuations above their asset holdings are limited and uncertain. Consequently, a passive treasury’s natural state is now one of discount.
Understanding the Shift Toward Discount Valuations
Hougan’s analysis challenges the assumptions that once underpinned the value of firms like MicroStrategy and Metaplanet Inc., which based their strategies on holding significant quantities of Bitcoin. His model starts with the principle that spot-value parity is the baseline, then subtracts three defined valuation drags:
-
Illiquidity: Bitcoin held within corporate structures is not readily accessible to shareholders, creating a friction between ownership and actual access. This gap translates into a discount as investors factor in the delay associated with accessing the underlying asset.
-
Operating Expenses: Companies incur a range of costs, from compensation to audits and legal services. Such recurring expenses diminish net asset value continuously, meaning a corporate-held dollar of Bitcoin is worth less than one held directly.
- Execution Risk: There’s always a chance that management could make poor capital allocation decisions or face regulatory setbacks. This risk is factored into market pricing, creating another layer of discount.
Hougan encapsulated this sentiment succinctly: “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… Expenses and risk compound over time.”
ETF Competition Resets the Landscape
The valuation pressure on DATs has intensified with the introduction of spot Bitcoin and Ether exchange-traded funds (ETFs). Prior to ETF approvals, corporate treasuries were a primary entry point for institutions and retail investors looking for regulated exposure without the complexities of custody. The limited options allowed some DAT stocks to trade above their underlying crypto holdings.
With the launch of spot ETFs from major players like BlackRock Inc. and Fidelity Investments, that structural advantage has dissipated. These products offer low fees, intraday liquidity, and daily creation-redemption capabilities, making them increasingly attractive.
Nate Geraci, president of NovaDius Wealth, labeled spot ETFs as “DAT killers,” emphasizing their role in eliminating the regulatory arbitrage that previously supported premium pricing. Eric Balchunas, an ETF analyst at Bloomberg Intelligence, noted that ETFs provide cleaner exposure and better tracking, effectively performing the same role as DATs without the associated corporate overhead. He did acknowledge that some institutional investors are constrained to holding only equities or bonds, granting residual appeal to firms like MicroStrategy. However, this segment alone isn’t sufficient to support multiple firms in the sector.
Strategies for Surviving in a Discounted Environment
With the premium model losing its foundation, Hougan argues that a DAT’s valuation now hinges on its capacity to increase crypto-per-share. This growth can only be supported through four reliable strategies:
-
Issuing Debt: This tool can be highly effective, particularly in a favorable credit environment where Bitcoin is appreciating. If the asset’s returns outstrip the interest obligations, shareholders can benefit.
-
Lending Assets: By lending out crypto for yield, firms can generate incremental returns; however, this strategy introduces counterparty and operational risks.
-
Options Strategies: Engaging in options trading can also generate additional returns, but comes with its own set of complexities.
- Mergers and Acquisitions: Acquiring undervalued crypto-related assets can increase scale, lower financing costs, and allow for broader transaction opportunities.
Hougan points out that “scale matters,” as larger firms are positioned to access cheaper capital. Hunter Horsley, CEO of Bitwise, foresees intensified consolidation within the sector. He suggests we’re only at the beginning of understanding what DATs could evolve into, predicting that successful firms will pivot to become operating companies that buy private crypto businesses and develop revenue streams beyond just treasury appreciation.
The Repricing of the Sector
As the shift towards a more disciplined valuation approach unfolds, many Bitcoin treasury stocks have experienced losses. Research from 10X Research indicates that retail investors lost approximately $17 billion recently due to market corrections on corporate holdings.
The research attributes these losses to the collapse of what it terms “financial alchemy,” where inflated share values gave off the illusion of expanding upside until market volatility led to substantial declines. Current market data reveals wide discrepancies among DATs: those with high operating costs or limited scale have underperformed, while firms focused on increasing their crypto-per-share metrics have shown resilience.
These alterations accentuate that DATs must now compete directly with ETFs on various fronts like cost, liquidity, and transparency. The automatic premiums once associated with corporate balance sheets are no longer warranted in the current market landscape.
For the larger players, the challenge now lies in demonstrating that they are operational entities and not merely passive treasury holders. Companies failing to counteract expense burdens or grow crypto-per-share will likely find themselves trading at structural discounts. In contrast, those employing proactive strategies may still maintain a valuation edge, signaling that merely holding Bitcoin is insufficient in this evolving sector.