In today’s “Crypto for Advisors” newsletter, Aaron Brogan of Brogan Law breaks down the history and business model of digital assets.
Then, in “Ask an Expert,” DJ Windle of Windle Wealth answers questions advisors need to know about crypto-finance companies.
–Sarah Morton
Digital Asset Treasuries: Separating Hype from Value for Advisors
Digital Asset Treasury (DAT) companies offer public crypto exposure, but how much hype are you buying?
The Digital Asset Treasury (DAT) company is a recent invention with a long history. They are public companies that pursue an explicit priority of buying digital assets. Back in 1989, Michael Saylor founded MicroStrategy (now Strategy) as a software company. It achieved some success and went public in 1998, only to implode spectacularly in 2000, losing more than 99% of its market value and catching an SEC investigation.
It’s unlikely, however, that Strategy didn’t go bankrupt in 2000 and continues to offer obscure software and services today. However, the magic happened elsewhere. In 2020, the company started buying bitcoin and it hasn’t stopped.
At first it appeared to be rabid evangelism. Saylor would buy bitcoin, go on TV and convince others to buy bitcoin, and that would drive up the company’s investment. But over time, another phenomenon appeared. As Strategy bought more and more bitcoin and the price of bitcoin rose ever higher, Strategy increasingly became a box of bitcoins with a rudimentary software company attached to it. At this point, its stock price and market capitalization should have converged to the price of bitcoin, but it didn’t. It traded at a premium. When this happened, promoters moved from their caches like Smaug and DAT was born.
This multiple of a DAT’s net asset value (NAV) and its market value, known as its multiple of NAV (mNAV), creates a special kind of power. If you can buy an asset for $1 and increase your market value by $2, then you don’t need to do anything else. You can sell equity and actually raise debt and put it to immediate direct productive use, providing shareholder value. As long as this relationship holds, it is essentially a money printer.
And as Strategy ran this playbook over time, others noticed. They started to get the idea that maybe the could follow it and make their own DAT. Some used BTC, like Mara Holdings, Inc., but over time others tried it with other assets like Ether owned by Bitmine Immersion Technologies, Inc., and Solana which is also owned by Forward Industries, Inc..
Source: Galaxy Research
For the initiators of these projects, the value is clear. Asymmetric increases in equity value, combined with public trading, lead to rapid profits. BTC has always been very liquid, but for virtually every other digital asset, the creation of a public sink to buy tokens offers the dazzling potential to increase asset values and provide exit liquidity in one fell swoop. This is a major reason why the meta has gained so much traction recently. It is good for bag holders.
But what about buyers? Well, to access a DAT share before its mNAV growth is good, as the company implements its strategy and hopefully gains value, stockholders can see gains. But for an ordinary buyer in public markets, after a positive mNAV is established, the value proposition is speculative. You buy a premium on the underlying asset, and that premium can easily fade.
Historically, access to strategy was valuable to institutional advisors who were hesitant or legally unable to purchase bitcoin directly for their clients. They could hold Strategy instead. But as old taboos fade, and regulatory disapproval with it, this proposal may lose luster. At the same time, exchange-traded products (ETPs), which skip the step of wrapping a treasury into an operating company, have recently been approved, further diluting DAT’s advantage.
There is also the issue of regulation. Strategy is not a ’40 Act Fund because BTC is not a security, but it is not obvious that the same rationale would apply to DATs holding other assets. A future administration unfriendly to the industry could test the operating company exemption on which they depend. To the extent DATs use leverage to acquire assets, future market volatility may lead to liquidations, increasing risk. The premiums can also collapse even now.
Chart: Strategy Performance vs. bitcoin (Source: strategtracker.com)
For advisors, understanding these different risk vectors is critical to advising clients on a DAT buying strategy. Regulatory risk is unlikely to be significant in the current environment, but premium collapse could be, so understanding a DAT’s mNAV at purchase is critical to evaluating its risk profile. Leverage can also increase the risk profile. Finally, DATs can change strategy more easily than a comparable ETP, so monitoring the evolution of management is another important factor to consider.
– Aaron Brogan, Founder and Managing Attorney, Brogan Law
Ask an expert
Question: What do advisors need to understand before clients start asking about digital asset finance companies?
ONE: Advisors don’t need to master all the nuances of on-chain finance, but they do need to understand what makes a digital asset treasury (DAT) company behave differently than a traditional stock. These companies have large amounts of crypto on their balance sheets, and their stock prices often move with these assets rather than their business fundamentals.
When clients bring them up, they really ask, “Is this a safe way to own crypto in my brokerage account?” The best preparation is to understand that DATs act as leveraged proxies for digital assets. They can trade well above (or below) the value of their holdings depending on market sentiment, leverage and liquidity. Being able to explain that dynamic clearly separates education from hype.
Q: How can advisors assess whether a DAT makes sense for a portfolio?
ONE: Start with what drives the stock. A DAT’s share price reflects not only the value of its crypto-treasury, but also investor sentiment, leverage and liquidity. Advisors should review three things:
- Treasury Mix: What assets are held and how transparent are they?
- Leverage: Did the company borrow to buy more crypto? If so, volatility is magnified.
- Premium/Discount: Compare the company’s market value to its actual asset value. This gap is where most investors misjudge risk.
Advisors can then reframe the client’s enthusiasm around fundamentals. Is the objective diversified exposure or speculation on a premium? This distinction determines whether a DAT belongs anywhere near a client’s portfolio.
Q: What should advisors be ready to explain when clients compare DATs to spot ETFs?
ONE: This will be the most common question. The answer is that spot ETFs hold the digital asset directly, trade close to net asset value and operate under clear regulation. DATs, on the other hand, are companies that use corporate balance sheets to hold the same assets and sometimes use debt to do so.
This means that the potential upside may look exciting, but the risk profile is closer to a leveraged stock than an ETF. Advisors should prepare to discuss taxation, concentration risk and how DATs may react differently than the underlying crypto. Helping clients see that difference turns a speculative headline into a teachable moment about structure, liquidity and risk tolerance.
– DJ Windle, Founder and Portfolio Manager, Windle Wealth
Continue reading
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