The Case for Digital Asset Treasury Companies

A plethora of digital asset treasury companies have recently come to market, looking to not only hold crypto as a treasury asset but also raise the capital to do so. Furthermore, such companies are no longer confined to bitcoin, and continue to move down the altcoin risk curve. Given that 40 Act issues are potentially less of a concern with a more open SEC combined with MicroStrategy’s wild success, it’s no wonder this movement is accelerating. Amidst much misunderstanding, we contend that digital asset treasury companies, at least those underpinned by end game-winning assets and the right strategy, create tremendous shareholder value and may be the best way to invest in digital assets for many investors.

A key reason the digital asset treasury model is so powerful is that it offers multiple compounding value accrual mechanisms. For example, digital asset treasury companies focused on premined assets may acquire locked tokens at a discount, which aligns with a HODL strategy and creates built-in gains for shareholders as the discount moves to par over time. In addition, digital asset treasury companies focused on proof-of-stake assets may stake their treasuries, turning them from idle to productive assets. And most importantly, digital asset treasury companies can utilize intelligent capital issuance for the benefit of shareholders — which is exactly how MicroStrategy increased bitcoin per share by 74% and created a $13B bitcoin gain for shareholders last year alone.

The capital markets component may create a virtuous cycle that, when activated, is extremely powerful. It starts with the market valuing the company at a multiple of the digital assets it holds. This comes about for several reasons, including:

• Access to value accrual mechanisms that would otherwise be inaccessible (like buying locked tokens).
• Paying a premium for digital assets in the form of a familiar equity security.
• Investors present-valuing the future spread between the company’s cost of capital and the expected return of the digital asset (which is added to the NAV and is positive when markets expect strong forward digital asset returns).

Intelligent capital issuance

Digital asset treasury companies can monetize this premium to their underlying assets for the benefit of shareholders via intelligent capital issuance. To do so, companies often issue equity above book value, which is by definition accretive. In fact, issuing equity at 2x book value is like selling $1 for $2 — in other words, buying the digital asset for half off. Furthermore, companies may issue convertible debt which gives the bond market access to digital asset-like returns. It also gives convertible bond arbitrage traders access to a highly volatile underlying asset that they can monetize, while giving the company access to low/no-cost funding, delayed dilution and the ability to sell stock at a premium to the current price due to a typically higher conversion price.

These accretive issuances result in rising digital assets per share that, all else being equal, should cause the stock to rise, helping it to maintain its premium to NAV and enabling the virtuous cycle to continue.

The digital asset treasury company capital markets flywheel

What’s more, such a construct can enable the digital asset company to benefit from three things when the underlying cryptocurrency rises, triple action price performance if you will: 1) the stock should rise with the digital asset, 2) the multiple (ie. market cap / value of digital assets held) may expand and 3) the company can engage in more frequent and accretive issuances for the benefit of shareholders.

While certainly not without risk — the digital asset treasury company must be underpinned by the right asset, must operate in a risk-prudent fashion and have low leverage — investing in digital assets through the right digital asset treasury company can offer investors many benefits. Multiple compounding value accrual mechanisms, a virtuous capital markets flywheel and triple action price performance all make the case for making it an opportune way to access digital assets for many investors.