This episode dissects the profound valuation gap in Digital Asset Treasury (DAT) stocks, trading far below their crypto holdings, and questions whether this presents a unique buying opportunity or a value trap.
Understanding Digital Asset Treasuries (DATs) and MNAV
- Digital Asset Treasuries (DATs) emerged as companies explicitly adopting Michael Saylor's MicroStrategy playbook: accumulating significant Bitcoin, Ether, and other long-tail crypto assets on their balance sheets. This strategy aimed to create a self-perpetuating "flywheel" of value for shareholders.
- Initially, many DATs traded at substantial premiums, with their Multiple Net Asset Value (MNAV) exceeding one.
- MNAV (Multiple Net Asset Value) quantifies how investors value a company relative to its underlying crypto holdings. An MNAV of 1 means the company's market capitalization equals its crypto assets; above 1 indicates a premium, below 1 a discount.
- Recent market downturns, including Bitcoin's drop from $126,000 to $80,000, reversed this trend. DATs, acting as high-beta plays, now trade almost universally below an MNAV of one.
- This shift prompts critical questions: What is the natural MNAV equilibrium for these companies, and do current deep discounts signal a value play for long-term crypto bulls?
- Steve Erlick states, "investors now are valuing these companies less than even the value of their crypto holdings."
The Deep Discounts: A Current Snapshot
- Current market data reveals significant MNAV discounts across various DATs, with some trading at half their crypto holdings. These figures highlight a stark market dislocation.
- 21 Capital, Kindly MD (NAKA), and ETHZilla trade with MNAVs around 0.5 to 0.56, indicating their market cap is roughly half their net crypto assets.
- Semler Scientific (SMLR), an early DAT to drop below an MNAV of one, currently sits at 0.57.
- Pro Cap Financial, Anthony Pompliano's group, trades at an MNAV of 0.7.
- Ether Machine, an Ethereum-focused DAT, shows an MNAV of 0.13, though this figure is misleading due to pending business agreements and anticipated share dilution.
- Steve Erlick notes, "Ether Machine...that number as I point out in the story is actually a little misleading because that particular company is still finalizing its business agreement and there's a massive dilution in shares that's going to be created."
Equilibrium Valuation and Asset Productivity
- Experts suggest the natural equilibrium for DAT MNAVs should hover around one, with slight deviations. This target reflects the underlying asset value, accounting for management fees and operational costs.
- Closed-end funds, a traditional finance parallel, often trade slightly below an MNAV of one due to management fees and the absence of direct arbitrage mechanisms found in ETFs.
- Ether-holding DATs might command a slight premium over time. Ether is a "productive asset" allowing for staking and restaking to generate passive yield (e.g., 2.7-3%), enhancing potential returns.
- Bitcoin-holding DATs face a tougher path to premium. Bitcoin is not a productive asset; miners require ASICs (Application-Specific Integrated Circuits) and power, not staking, to generate new Bitcoin. While Bitcoin can be deployed in lending or DeFi, its yield generation differs from Ether.
- Steve Erlick asserts, "The [MNAVs] for these companies should be somewhere around one."
GBTC vs. DATs: A Flawed Analogy
- Comparing current DAT discounts to the Grayscale Bitcoin Trust (GBTC) discount experience is misleading. GBTC's path to closing its discount involved unique market and regulatory catalysts absent for most DATs.
- GBTC, launched in 2013, offered accredited investors regulated Bitcoin exposure. Its premium flipped to a discount in February 2021, deepening to 50% during the 2022 bear market.
- GBTC's discount narrowed significantly only after Grayscale won a lawsuit against the SEC in August 2023, paving the way for its conversion to an ETF. ETFs feature authorized participants who arbitrage away premiums or discounts, forcing the MNAV to one.
- Current DATs lack this clear arbitrage mechanism. Share buybacks, while attempted, are insufficient to counter the massive dilution from initial capital raises.
- The broader crypto market bottom remains uncertain, unlike GBTC's recovery which coincided with renewed market momentum and clear ETF conversion timelines.
- Steve Erlick cautions, "any analogy or similarity between GBTC and these companies, I think is unfounded."
Ineffective Strategies to Close the Gap
- DATs are attempting various strategies to close their MNAV discounts, but these efforts largely prove insufficient against the scale of existing dilution and market sentiment.
- Share buybacks are the primary tool, but their impact is limited. The volume of shares bought back often pales in comparison to the massive supply inflation created during initial funding rounds.
- Companies like Sharpling Gaming and ETHZilla announced large buyback programs ($1.5 billion and $250 million, respectively) but have executed only a fraction of these, indicating flexibility rather than immediate, full deployment.
- Psychologically, initiating buybacks can signal a shift away from the "flywheel" growth model, making future creative capital raises more challenging as investors recall past FOMO-driven valuations.
- No "magic bullet" exists to instantly reverse these discounts. Long-term MNAV convergence to one requires patience and a strategic, high-conviction bet on the underlying crypto market's recovery.
- Steve Erlick explains, "these share buybacks, they're really not large enough to put a meaningful dent in just the massive supply inflation that was created and how these deals were structured."
Navigating Company-Specific Risks
- Investors considering DATs must conduct thorough due diligence, as each company presents unique risks and deal mechanics that influence its path to MNAV convergence.
- Kindly MD (NAKA) faces a NASDAQ delisting risk due to its stock trading below $1 for 30 consecutive days, though a reverse stock split could mitigate this.
- Ether Machine still awaits the closing of its business agreement. This will trigger a "massive sell wall" from PIPE (Private Investment in Public Equity) shares becoming liquid, potentially causing significant price drops, a pattern seen in other DATs post-deal closure.
- M&A activity offers a potential path to premium. Strive Asset Management, associated with Vivek Ramaswamy, is attempting to acquire Semler Scientific at a significant premium to its current share price, though market conditions could jeopardize the deal.
- Steve Erlick advises, "If they're going to try to if they want to try to buy one of these companies, really understand the mechanics of the deal."
Investor & Researcher Alpha
- Capital Allocation Shift: Investors should prioritize direct spot crypto exposure over DATs for immediate market upside. The "discount" in DATs is not easily arbitraged and carries company-specific risks that dilute pure crypto beta.
- Due Diligence Imperative: Researchers must analyze individual DAT deal structures, share dilution schedules (especially PIPE shares), and operational strategies (e.g., staking yield generation) rather than relying on broad market comparisons.
- M&A as a Catalyst: Monitor M&A activity in the DAT space. Acquisitions at premiums could be a rare, company-specific catalyst for value realization, but these are not systemic solutions to the broader discount problem.
Strategic Conclusion
Digital Asset Treasury stocks present a complex valuation challenge, trading at deep discounts to their crypto holdings without clear arbitrage paths. The industry must move beyond the "flywheel" hype, focusing on fundamental value creation and transparent deal mechanics to restore investor confidence and drive MNAVs towards equilibrium.
