Questions Linger over Health of Digital Asset Treasury Models

The Japanese investment group paid an average of $116,724 per coin last week, against a prevailing market price of around $112,400. This week, it paid an average of $118,328 against a market price of around $113,000. 

Its overall average purchase price now stands at $107,911, raising the prospect of investor unease should the market slip below the threshold to a lower value than the average paid by Metaplanet during various buying sprees. 

Last week, Metaplanet’s shares peaked briefly, at ¥648, on the news of its BTC purchase, before dropping back to ¥533. It followed the same pattern this week, though with lower numbers: the peak was ¥575, dropping to ¥516. 

When combined with Bitcoin’s price volatility, this raises the question of how well the Digital Asset Treasury (DAT) model can stand-up to cryptocurrencies’ inherent volatility, and what will happen in a bear market. 

Different models 

The standard crypto model, following the approach pioneered by Michael Saylor’s Strategy, focuses on using coin price increases to generate value for shareholders, simply by using excess cash and fundraising to acquire more BTC indefinitely.  

This provides a way for investors to buy exposure to cryptocurrencies without actually buying the coins themselves. This matters when compliance barriers prevent investment in crypto, for example. 

David Bailey’s Nakamoto, using its parent name Kindly, has a different approach, which is based on the long-term integration of crypto into the traditional finance model by using investing in Bitcoin-focused companies. However, investors have not welcomed this approach.  

Nakatomo’s price dropped 55% when Bailey told shareholders to sell-up if they didn’t share the long-term vision, and it has continued to sink. It hit a low of $1.07 last week, following a high of over $25 in May, and is currently around the $1.15 mark. 

Volatility concerns 

The DAT model rests on a simple thesis: that the token’s value will rise and serve as a secure long-term store of wealth. But Strategy’s recent share performance highlights the risks.  

Shares in the US software group, which has the biggest BTC treasury by a long way, have dropped from a July peak of $457.22 to $341.81 on Wednesday, reflecting investor concerns over the company’s debt-fuelled buying spree.  

The volatility of BTC’s price adds to the concerns. And this is despite Strategy’s average purchase price of $73,983. 

A key DAT requirement is that the company’s market capitalization needs to remain higher than the value of its crypto holding so it can continue to buy crypto. 

Nakamoto’s market capitalization of $455mn on Wednesday, however, is significantly lower than the value of its BTC holding, which is worth around $663mn. Given its different approach, does that matter? Does it signal real danger for the company? And, importantly, what could happen if other companies, using the constant acquisition approach, find themselves in the same position? 

Reducing volatility? 

Michael Saylor, Strategy’s co-founder, sought to reassure investors in an interview with Bitcoin podcaster Natalie Brunell last the weekend, describing volatility as a short-term phenomenon linked to long-term holders liquidating to fiat.  

“The volatility is coming out of the asset and that’s a really good thing,” he said, arguing that reduced price swings will attract institutional capital.   

He also sought to prepare the ground for further price drops: “The conundrum is that if the mega-institutions enter, the volatility decreases and it’s going to be boring for a while and people’s adrenaline will drop off and they’re a little bit bearish. But this is just the growing stage.” 

Strategy made its own BTC purchase on 22 Sept, buying 850 coins at an average price of $117,344. It followed up a week later buying 196 BTC at $113,048.  

Growth in crypto treasuries 

In recent months, the number of crypto treasuries companies has grown hugely. CoinMarketCap now lists 157 public companies with BTC on their balance sheets, with 47 holding more than 1,000 coins, though just 12 have invested more than $1bn. There were 38 DAT companies at the beginning of the year. Over the same period, the total Bitcoin they held jumped from 28,500 to 157,000 coins, a more than five-fold increase.  

The latest entrant is OranjeBTC, a Brazilan BTC DAT company, which announced on Wednesday that it has acquired 3,650 BTC and plans to go public via a reverse IPO in October.  

It isn’t just BTC. According to Strategy SOL Reserve,  Solana treasury holdings have now exceeded a total value of $4bn, accounting for 3% of the total 600 million tokens in circulation. Forward Industries is the largest holder, having last week acquired 6.8 mn tokens, currently valued at around $1.6 billion. 

And Coingecko lists 12 DATs with Ether holdings. BitMine is the biggest, with nearly $10bn invested.  

Its Chief Investment Officer, and renown market commentator Tom Lee, was asked by an audience member at TOKEN2049 on Wednesday: “How does a treasury company survive a bear market?”  

Lee answered with typical poise and conviction that, “First, It needs to keep a clean balance sheet. Bitmine has no debt, it has been carrying around $500m of cash every week. Second, the company needs to keep on adding Ethereum per share.” 

Great history; potentially uncertain future 

Despite Lee’s buoyancy for the token Bitmine is backing, the resilience of the DAT model remains untested.  

Bitcoin traded at $60,837 on 01 October 2024, according to CoinMarketCap, and despite significant gains since late 2022, the sector has not faced a sustained bear market, aside from a drop earlier this year that was the result of uncertainty and disquiet around the US tariff policy. Other coins have followed similar trajectories. 

DAT companies continue to expand in size and number, but what happens if prices drop for a prolonged time remains an open question. Will investors tolerate negative equity positions indefinitely, particularly when coupled with leverage?