This episode critically examines the allure and inherent risks of public crypto treasury strategies, questioning their long-term viability against the backdrop of venture capital investment principles.
The Case Against Public Crypto Treasury Strategies
- Rob initiates the discussion by elaborating on his skepticism towards public crypto treasury strategies, which involve companies holding significant crypto assets. He views them as "point-in-time solutions that have no reason to exist over any reasonably mid to long-term time horizon."
- He acknowledges these vehicles can be profitable in the short term for specific capital pools. Investors might contribute capital, sometimes via in-kind contributions (donating existing crypto assets like ETH or Bitcoin directly instead of cash), for short lock-up periods (e.g., 30-60 days).
- These strategies often trade at a premium to NAV (Net Asset Value) – where NAV is the underlying value of the crypto assets held. Rob notes premiums can range from slightly above 1x to as high as 10x, influenced by capital structure and the reputation of the managing team.
- Rob, whose perspective is grounded in market dynamics, cautions, "over time these are going to trade back down to NAV and in a distressed market they are probably likely to trade below NAV." This can lead to a "death spiral," especially if debt is involved, forcing sales of underlying assets and diluting equity holders.
MicroStrategy: An Outlier or a Precedent?
- Diego challenges Rob's view by citing MicroStrategy, a company that has successfully employed a Bitcoin treasury strategy, defying predictions of a downturn for years.
- Rob concedes MicroStrategy's success but argues it's an exception. He points to a current "mania" with numerous new vehicles emerging with "looser offerings" and terms more punitive to equity holders, increasing the risk of adverse selection (where the riskiest ventures are most likely to seek funding).
- He draws a parallel to the GBTC (Grayscale Bitcoin Trust) trade, where a persistent premium eventually collapsed, significantly impacting firms like Three Arrows Capital. Rob states, "it's the wrong conclusion to look at what Sailor has done... and then say okay well like all these other people can do it on all these other assets in all these other ways and that we won't have adverse selection."
- Strategic Implication for Investors: The proliferation of crypto treasury vehicles demands careful due diligence. Investors should scrutinize the capital structure, lock-up terms, and the potential for NAV discounts in volatile markets, rather than assuming all will replicate MicroStrategy's performance.
Venture Capital Lens: Trades vs. Long-Term Investment
- Diego aligns with Rob's skepticism but frames it through a venture investor's lens. He categorizes these treasury strategies as "trades" rather than long-term investments.
- He emphasizes that venture capital focuses on extended holding periods (e.g., 7-12 years), working closely with teams, even if crypto offers earlier liquidity. Diego, reflecting a traditional VC ethos, says, "as a venture investor, we're not looking for trades... you're taking a long-term position and you're working with these teams."
- He acknowledges that because crypto assets are inherently tradable, "everything becomes a trade." However, he maintains that venture investment vehicles should adhere to long-term holding philosophies, even with liquid tokens.
- Strategic Implication for Researchers & Investors: Differentiate between short-term trading opportunities and long-term value creation. For those focused on foundational crypto AI projects, the underlying principles of venture investing—long-term commitment and support—remain paramount, distinct from capitalizing on transient market structures like treasury premiums.
Conclusion
The discussion underscores that while public crypto treasury strategies offer short-term trading appeal, they carry significant risks of unwinding, contrasting sharply with the long-term, value-oriented approach of venture capital. Crypto AI investors and researchers should critically assess if such vehicles align with sustainable growth or represent transient market phenomena.
