Making the Case for Investing in Digital Asset Treasury Companies

The emergence of digital asset treasury companies has been a notable trend in recent times, with many of these companies not only holding cryptocurrencies as part of their treasury assets but also raising capital to expand their holdings. Unlike in the past, these companies are no longer limited to investing in bitcoin and are now exploring other alternatives, which has led to a shift down the risk curve. The easing of regulatory concerns, combined with the success stories of companies like MicroStrategy, has contributed to the acceleration of this movement. Despite the misconceptions surrounding digital asset treasury companies, it is our assertion that those with a robust strategy and a strong underlying asset can create substantial value for their shareholders and may provide the most suitable means for many investors to participate in the digital asset market. The digital asset treasury model is particularly effective due to its ability to offer multiple channels for value creation. For instance, companies that focus on pre-mined assets can acquire tokens at a discounted price, which is in line with a long-term holding strategy and can result in built-in gains for shareholders as the discount narrows over time. Additionally, companies that focus on proof-of-stake assets can stake their treasury holdings, thereby converting them from inactive to productive assets. Moreover, digital asset treasury companies can utilize strategic capital issuance to the benefit of their shareholders, as exemplified by MicroStrategy's ability to increase its bitcoin holdings per share by 74% and generate a $13 billion gain for its shareholders in a single year. The capital markets component of this model has the potential to create a self-reinforcing cycle that can be extremely powerful once activated. This cycle begins with the market valuing the company at a multiple of its digital asset holdings, which can occur for several reasons, including the company's ability to issue capital intelligently. Digital asset treasury companies can capitalize on this premium by issuing equity above its book value, which is inherently accretive. For example, issuing equity at twice its book value is equivalent to selling $1 for $2, essentially buying the digital asset at half price. Companies may also issue convertible debt, which provides bond market investors with access to digital asset-like returns and gives convertible bond arbitrage traders the opportunity to capitalize on a highly volatile underlying asset. This, in turn, allows the company to access low-cost or 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 an increase in digital assets per share, which, all else being equal, should lead to an increase in the stock price, enabling the company to maintain its premium to net asset value and perpetuate the virtuous cycle. Furthermore, this construct enables the digital asset company to benefit from a triple-action price performance when the underlying cryptocurrency appreciates: the stock price should rise in tandem with the digital asset, the market multiple may expand, and the company can engage in more frequent and accretive issuances for the benefit of its shareholders. While investing in digital asset treasury companies is not without risks - the company must be backed by the right asset, operate with risk awareness, and maintain low leverage - investing in digital assets through a well-managed digital asset treasury company can offer numerous benefits to investors, including multiple compounding value creation mechanisms, a virtuous capital markets cycle, and triple-action price performance, making it an attractive means of accessing digital assets for many investors.