By Nancy, PANews
Recent regulatory news has dampened the enthusiasm surrounding cryptocurrency
stocks. The Nasdaq stock exchange recently signaled increased oversight of
publicly traded companies that hold significant cryptocurrency reserves. This
announcement has exerted downward pressure on the prices of “digital asset
treasury” (DAT) companies, causing premiums over their net asset values
(NAVs) to shrink as market sentiment shifts. The once-booming growth of DATs
may be slowing.
Nasdaq’s Potential Actions Weigh on US DAT Stocks and Premiums
According to a September 4 report by The Information, sources familiar with
the matter stated that Nasdaq is intensifying its scrutiny of companies that
primarily raise capital to accumulate cryptocurrencies in order to inflate
their stock prices.
Nasdaq, the primary exchange for many crypto-related stocks, worries that
this behavior could mislead investors. Therefore, they are increasing
regulatory supervision. While specific regulations are still being
formulated, companies are expected to disclose investment sizes,
cryptocurrency strategies, and potential risks. Companies that frequently
trade crypto assets will likely face more rigorous examination. Failure to
meet these requirements could lead to trading suspension or even delisting.
US-based companies currently dominate the DAT market. Data from Architect
Partners suggests that since the beginning of the year, over 150 US-listed
companies have invested in cryptocurrencies. According to Bitcointreasuries,
which tracks public Bitcoin holdings, 61 of these companies are based in the
US, a far larger number compared to Canada, the UK, or Japan. Nasdaq’s
intervention could, therefore, significantly affect the entire DAT market.
Market confidence has waned following the announcement of potential
Nasdaq regulations. US-listed DAT company stocks are generally experiencing
price declines. For example, after the market opened today, MSTR declined by
0.81%, SBET by 8.26%, and BTCS by 2.3%.
Meanwhile, the mNAV (market capitalization to net asset value) ratio has also
generally fallen. Data from Blockworks indicates that, as of September 4th,
MSTR’s mNAV has declined from a high of 3.5x to 1.3x, SBET’s mNAV from
3.72x to 0.82x, and BMNR’s mNAV has dropped from 9.45x to 0.88x.
Significantly, only six DATs currently trade at a premium (mNAV above 1),
while the majority trade at a discount. This suggests that the “reservoir
effect” once associated with rising crypto asset values is diminishing.
Stricter Regulation Could Widen Market Gaps, Pressuring Smaller
Cryptocurrencies
The looming regulatory pressure may trigger significant changes in the DAT
market.
On one hand, increased oversight may lead DATs to adopt more transparent and
conservative strategies regarding cryptocurrency investments, thereby
mitigating risks like market manipulation and insider trading. Fortune
reported that several publicly traded crypto asset management firms have
experienced abnormal stock price fluctuations. For example, SharpLink’s stock
price hovered below $3 in April and early May, then surged to almost $36
following an announcement on May 27 about a $425 million increase in its
Ethereum holdings. The stock price doubled in the three trading days leading
up to the announcement, yet the company did not file any relevant paperwork
with the SEC or issue a press release. Similar instances have been observed
in companies like Mill City Ventures, MEI Pharma, Kindly MD, Empery Digital,
Fundamental Global, and 180 Life Sciences Corp.
On the other hand, the dominance of leading companies in the DAT market may
increase. While a wider array of cryptocurrencies, including Bitcoin,
Ethereum, Solana, Tron, BNB, Chainlink, SUI, and Ethena, are being used in
crypto treasury strategies, Blockworks data as of September 4th shows that
the total value of cryptocurrencies held by DAT companies exceeded $69.5
billion, with Bitcoin and Ethereum accounting for the vast majority at $68.1
billion. Of these assets, only Bitcoin had an mNAV above 1 (1.17),
suggesting a lack of broad investor confidence in other crypto assets.
Furthermore, market share is highly concentrated among the largest players.
Blockworks data as of September 4th indicated that the total market
capitalization of crypto treasury companies exceeded $108.48 billion.
Strategy and BitMine, the leaders in Bitcoin and Ethereum reserves
respectively, control over 91.4% of the market. The advantages of leading
companies and widely-adopted assets are likely to solidify further, while
smaller cryptocurrencies face significant challenges.
Tighter regulations could also slow down the DAT market’s expansion. Higher
financing costs and greater difficulties for DAT listed companies will
directly impact their investment pace, specifically the scale and speed of
crypto accumulation. Reduced arbitrage opportunities and diminishing market
attractiveness will make the DAT model less appealing, particularly for
companies with limited capital or those focused on niche cryptocurrencies.
“DAT companies planning a shift to a DAT microstrategy need complete
acquisition (100%) of their US shell companies or else they must hold a
shareholder meeting for a vote prior to announcing the transition. This
effectively raises operating costs and extends the timeline for new DAT
treasury companies. Existing DAT treasury model companies must also hold a
shareholder vote before issuing new shares. Issuing bonds or convertible
bonds is not considered issuing new shares and isn’t covered.” Crypto
influencer
@qinbafrank
analyzed that Nasdaq’s move aims to temper the DAT model, increasing
difficulties for shell company transitions and making share issuance more
complex. This should have a cooling impact in the short term, and numerous
smaller cryptocurrency DAT treasury companies could face increasing
difficulties. Additionally, existing DAT treasury models must avoid capital
manipulation tactics (like exchanging tokens for shares or purchasing tokens
at a discount) to secure a majority vote in shareholder meetings.
Liquidity Innovation or Financial Bubble? The Sustainability of DATs is
Debated
The market reaction to the rapid growth of DATs has been divided.
Supporters view DATs as a valuable bridge for transferring crypto assets
between on-chain and off-chain environments, potentially revolutionizing
liquidity in the crypto financial market. Xiao Feng, Chairman and CEO of
HashKey Group, believes that DATs are the optimal method for moving crypto
assets off-chain, citing four key advantages over ETFs: Improved liquidity
due to faster asset transfers. Greater price elasticity due to significant
market volatility and risk isolation, allowing for more sophisticated
arbitrage tools. Enhanced leverage through leveraged financing structures,
potentially generating higher premiums for investors compared to crypto price
growth alone. Built-in downside protection via buying opportunities on
Bitcoin or ETFs at a discount if the stock price falls below net asset
value. These discounts are quickly corrected by the market.
Moreover, several crypto VCs have increased DAT investments. Pantera Capital
revealed its investment of over US$300 million in DAT companies. Andrei
Grachev, executive partner of DWF Labs, also recently stated willingness to
finance 10% to 20% of the funding for projects that promote token
treasuries for US-listed companies.
However, many question the long-term viability of DATs. Ledn co-founder and
CEO Adam Reeds believes cryptocurrency-hoarding digital asset treasury
companies are facing a critical juncture. Bitcoin treasury companies were
once revolutionary, but replicating those initial outsized returns is now
difficult. What’s lacking is a unique value proposition. Most DAT CEOs
claim increasing per-share cryptocurrency holdings is their only goal, but
the presence of exceptional management teams or superior capital management
skills is questionable.
Similarly, Glassnode’s chief analyst, James Check, believes the Bitcoin
treasury strategy’s lifespan is shorter than anticipated and may already be
over for new entrants. He argues that focusing on long-term product and
strategy sustainability is key. Newly established Bitcoin treasury companies
face an uphill battle, as investors prioritize early adopters.
Further skepticism arises from the inherent financial structure of DATs. The
ETF Store’s president, Nate Geraci, argues that those who genuinely believe
in Bitcoin and Ethereum should invest directly in spot markets or ETFs
rather than relying on DATs. He emphasizes that the prosperity of these
companies depends on regulatory arbitrage, which will decline as regulatory
barriers are lowered. Analysts at Franklin Templeton warn that if DAT
market capitalization falls below net asset value, new share issuance can
dilute value and hinder capital formation. Combined with falling crypto
prices, companies could be forced to sell assets to support stock prices,
further depressing the market and investor confidence, creating a
self-reinforcing negative cycle. Former Goldman Sachs analyst Josip Rupena
compared DATs to CDOs (collateralized debt obligations) from the 2007-2008
financial crisis, suggesting that while crypto treasury companies ostensibly
hold bearer assets without counterparty risk, they actually introduce risks
such as management inadequacies, cybersecurity breaches, and liquidity
issues. These compounding effects could amplify systemic risks.
In summary, the future success of DATs depends on moving beyond regulatory
arbitrage and leveraging, and achieving long-term sustainability through
maintaining a market value exceeding net assets, creating consistent
value-added transactions, and implementing effective risk management
strategies.