Pantera: Why are you bullish on digital asset vault companies?
Author: Cosmo Jiang, Partner, Pantera Capital
Compiler: AIMan@ Golden Finance
A new frontier of crypto investment in the public market is emerging – Digital Asset Treasury companies (DATs). These companies follow the strategy of MSTR (Strategy, formerly MicroStrategy) and provide investments in digital assets through perpetual capital instruments listed on public stock exchanges. After carefully examining the subtleties of the strategy, we are convinced of this investment philosophy and tend to focus on investing.
As investors, we seek to constantly test our prior biases. Given the persistence of MSTR premiums and the buying of fundamental-oriented funds including Capital Group and Norges, we look for asymmetric opportunities to capitalise on DAT trends. While the premium may not last forever, there is a rationale for investing in a digital asset vault company and explaining why it may trade at a higher price than its underlying net asset value (NAV).
The basic bullish rationale is that through MSTR, it is possible to hold more BTC-per-share ("BPS") over time than if you were to buy BTC outright. Let's do a simple math:
If you buy MSTR for twice your net worth, you're buying 0.5 BTC instead of 1.0 BTC through spot. However, if MSTR is able to raise funds, and BPS grows by 50% per year (it grew by 74% last year), then by the end of the second year, you will have 1.1 BTC – more than you could have bought spot outright.
To believe that MSTR can continue to grow BPS, you must believe in three things:
1. Stocks sometimes do not trade at fair value, and the market can become irrational, resulting in overvaluation relative to net asset value. Any investor who has been in the market long enough knows that the market is not always rational.
2. MSTR stocks are highly volatile, which creates conditions for MSTR to sell convertible bonds or gain volatility by selling its own call options, thereby obtaining a high premium.
3. Management is financially savvy enough to take advantage of these conditions.
Looking at it, an underrated factor driving DATs' success is how they link traditional investor behavior to investing in digital assets – essentially by converting cryptocurrencies into stocks. Strong demand for products such as MSTRs, ETFs, and the new wave of DATs suggests that large amounts of money have previously been marginalized by the intricacies of crypto-native products, such as setting up a wallet or crypto exchange account. It is encouraging that there is now more capital coming into the field, even through the "old" system.
From a structural supply perspective, DATs also present an interesting contrast to ETFs: buying DAT effectively locks in supply, and since DATs are actually one-way closed-end funds, they are less likely to be sold. In contrast, the tokens held by ETFs can be dissipated as easily as accumulation. This phenomenon may have a better impact on the price of the underlying asset, as the DAT can both buy more tokens as its reserves without contributing to the sell-off.
Pantera has invested in a number of DAT companies.
BTC DAT Inc.: The most famous of these is Twenty One Capital (NASDAQ:CEP), led by long-time Bitcoin evangelist Jack Mallers. The company is trying to emulate MSTR's strategy and is backed by three industry giants: Tether, SoftBank, and Cantor Fitzgerald. Twenty One is just large enough to take advantage of all capital market instruments, while also having a small market capitalization, so it has the flexibility to grow BPS at a faster rate than MSTR and trade at a higher premium. As a company, Pantera is the largest investor in Twenty One's Private Investment in Public Equity (PIPE).
SOL DAT: Pantera led its investment in DeFi Development Corp (NASDAQ: DFDV, formerly Janover), which took the DAT wave in the United States. Led by CEO Joseph Onorati and CIO Parker White, DFDV is taking MSTR's strategy but applying it to Solana. Solana is an interesting alternative to BTC for the following reasons: (a) due to its shorter maturity period, it may have more upside than BTC; (b) volatility is higher than BTC, which means that higher yields can be achieved by exploiting this volatility; (c) the portion of its pledged earnings can contribute to the growth of SOL per share; (d) With fewer alternatives currently available (e.g., no publicly traded miners, and no spot ETFs), Solana has more untapped demand.
ETH DAT Inc.: Our latest investment in this space is Sharplink Gaming (SBET), the first Ethereum digital asset vault company in the United States. SBET is powered by Consensys, a leading Ethereum software company, and Pantera has been working with its team for over a decade.
Pantera's support for companies such as DFDV, CEP, SBET, and their successful response in the market helped drive a series of subsequent projects, many of which we continue to actively evaluate.