Analysis: The Economics of a Digital Asset Treasury
Is there a difference between DATs, ETFs, SPACs, and the underlying assets?
Gm Fintech Architects —
Today we are diving into the following topics:
Summary: In this article, we analyze the mechanics behind Digital Asset Treasuries (DATs), highlighting how they differ from ETFs, SPACs, and direct crypto holdings. DATs are public companies that actively manage treasuries of crypto assets, using strategies such as staking, restaking, leverage, and operating businesses to enhance returns. A modeled DAT shows that with $1B in PIPE financing and monthly capital raises, the treasury grows quickly if ETH appreciates and mNAV multiples expand. Performance hinges on assumptions like leverage, market premiums, and asset appreciation — DATs work best when actively managed and bullish macro conditions support the underlying token and equity structure. Download the financial model below:
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Long Take
Key Differences of DATs
We have been covering the growth of digital asset treasury (DAT) companies in detail over the last few months as these vehicles have come to market. The numbers involved are material, with multiple DATs raising and reaching multi-billion dollar market capitalizations. However, analysts have a range of views on the sector, and today we want to model out the largest levers that differentiate DATs from ETFs or holding the underlying crypto asset directly.
Let’s first make a few qualitative points.
DATs and SPACs have a different structure. SPACs are public capital vehicles that raise some amount of cash and then find a private company target. Private companies are valued on multiples, and one of the main issues during 2021 is that private markets valued Fintech revenues at 100x, while public companies valued them at 10x, leading to a 90% value collapse. DATs hold underlying tokens that already have an established market price. For liquid and large assets like BTC ($2.5T) and ETH ($0.5T), that market price is already “public” and unlikely to see a valuation disconnect.
Second, DATs have been recently compared to investment trusts. Investment trusts are closed-end publicly traded vehicles, which are also valued compared to their underlying assets with an mNAV ratio. However, trusts are often used for long-term investment or development projects, which benefit from permanent capital. Crypto markets, by comparison, are far more liquid. Further, the DATs have an operating component of securing underlying blockchains through staking/validation, like a Bitcoin miner. A Bitcoin miner is not an investment trust and has different characteristics, even when actively managing their balance sheet.
Lastly, a DAT is not an ETF or a direct holding of underlying crypto. It is an actively managed public company with an operating business and a treasury strategy. Whereas it does have operating costs, which drags on the business, a DAT is flexible and can grow — it can (1) use leverage and structured products actively, like Microstrategy, (2) build out adjacent business lines related to its proprietary capital, acting like a token Foundation, and (3) allocate capital based on the macro-economic environment and appetite for risk in the market. A DePIN DAT, for example, may hold some protocol token, but also own a whole bunch of hardware infrastructure that uses that token.
Let’s jump into the model to see how it all connects.
Modeling the Economics
We are going to start with a few assumptions.
The DAT will:
Be focused on Ethereum (e.g., like Bitmine, Sharplink, Ethzilla, or Ether Machine)
Raise $1B in a private investment into public equity (PIPE)
Access an additional $100MM per month at the market (ATM) once the entity is public without moving the share price, which may or may not be the case.
It will also have access to debt instruments at something like a 12% annual rate, and will exercise the leverage 3x per year
Above, we have the initial transaction and the following capital raises. In month 1, the model accounts for the core economics of the trade. PIPE investors put in $1B both in cash and in-kind, and then there are several uses for those proceeds.
$20MM goes to a target acquisition of a public company shell
$25MM, give or take, goes to the placement agent for the PIPE and other sponsor parties
Here, we chose to spend $500MM immediately on crypto, while holding the rest in cash to phase in the rest of the purchases
So far, so good. You can also see in months 2-12 that the company gets additional funding by issuing equity into the public markets and taking on debt, thereby acquiring more crypto assets at a rate of about $230MM every month.
Let’s add a view of the treasury.
We have two components: (1) Cash and (2) Crypto. For each, we model out the starting amount, the various changes, and then the ending amount.
So for example —
We start with $0 in cash in Month 1, then add $1B, use up $545MM, and have $454MM in cash left. There is a $1MM loss in Net Income, which will be explained later.
Under Crypto, we start with $0 in Month 1, then add $500MM from acquisitions, and model in nothing from capital gains, because the starting amount was blank.
In month 2, the starting cash position is $454MM. We raise $100MM from the ATM, spend $230MM on crypto acquisitions (see the Capital Uses part of the spreasheet above) and get some cash from operations. On the crypto side, our $500MM of capital sees $40MM of capital gains, and $230MM of new purchases for a total position of $770MM.
Now, part of the assumption set is price appreciation for the underlying asset. Nothing in life is guaranteed, and we are not trying to indicate a view on ETH price. But someone running this strategy would have to be bullish on the underlying asset, so we baked in the idea that ETH is appreciating from $4,200 to about $10,000 by end of year.
You may think that’s too conservative or too aggressive, so play around with the model!
Let’s take a look at the P&L.
There are a couple of core assumptions:
The model has 2 major operations in play. First, the treasury is deployed to secure the underlying network in order to earn staking rewards, like a miner in the case of Bitcoin. We assume a 3% per year staking reward, and another 3% per year from restaking, DeFi operations, and market making
Second, the business either launches or acquires an adjacent company that takes third-party assets and charges a 1% fee on those assets. This can be a custodian, prime broker, asset manager, or exchange. It can also be something unrelated, like a private equity strategy to roll-up telecoms (e.g., Inversion Capital).
We assume the cost of debt to be 1% per month, and the cost of operations at $12MM per year without scaling. Those assumptions can be challenged, but are simple and directional.
Since the treasury operations yield revenue on crypto assets, we see the returns ramp up from $0 to $20MM per month, for a total of about $100MM per year or $250MM ARR. The operating business is slower to ramp, but we would see meaningful numbers likely around years 2 and 3 that would start to compete with the treasury.
On borrowing costs, you can see that the debt does not overwhelm the revenue in this set-up, eating up a bit less than half of the revenue generation and retaining a 50% budget. Some players may want to get less levered, and others will want to maximize it. There is risk involved, since the revenue is derived as a % share of the value of the tokens on the balance sheet.
The effort needs extremely prudent risk management.
All of this brings us down to share price, and whether investing in a PIPE can be better than investing in the underlying token or at the market.
There are two value calculations for the floor and ceiling of the market capitalization:
Using an mNAV multiple, we multiply the assets the treasury has in place (cash + crypto) by the multiple. Often, there is a trading pop, which here is up to 2x, and then it settles to a longer term number. That can be between 0.7x and 1.3x, depending on market dynamics. We go with the optimistic case.
We can take the ARR of the company and put a multiple on it, which is assumed to be 10x. One can get more or less aggressive with it. Circle trades at 15-30x of net revenue, for example.
As you can see, the enterprise value is expanding because of the continuous ATM issuance and the appreciation in the underlying asset. Without that appreciation, the market value would of course not grow as quickly. Without leverage or an mNAV premium, the exercise is more challenging.
Why not just hold the underlying tokens?
Modeling returns is imprecise, because deal dynamics are usually less simple than what has been shown above.
But if we assume a $10 share price at the PIPE, then the mNAV expansion delivers a 91% return in the first month, compared to the 8% return on the underlying crypto. Over time, this narrows as the mNAV compresses. However, the positive effects of managing the balance sheet and operating business create additional acceleration.
The case we have built out can be summarized in the following chart:
The underlying collateral becomes more valuable over time, but an investment in the DAT has a few levers that allow it to accelerate much faster. The numbers are illustrative, but highlight the effects of active management.
That isn’t always the case. If we crash all of our assumptions, with mNAV at 0.9, crypto returns at 1% per month, and no leverage, then the vehicle underperforms. But in this case, it is failing to work according to its designed function.
And if we get super aggressive, and drive mNAV very high and put on much more leverage, the projections look healthy again.
Debt remains low because the on-balance sheet crypto gets a lift through the mNAV valuation, which outpaces the debt. Such a mechanic has effectively allowed MicroStrategy to get into the $100B valuation stratosphere.
Different people will believe different scenarios, but we hope this model helps you de-mystify what this phenomenon is all about. If you want to get a copy of the model, just download it here:
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Pretty cool idea and visions.
Serious question who is and what is happening with the pound £ stable coins?
How come I haven’t come across one yet ?
Moving forward, you have to imagine even newer and fresher ideas coming down the pipe line.
All the best .