Pantera: Why We Are Bullish on Digital Asset Custody Companies

A new area of public market Crypto Assets investment is emerging - digital asset vault companies.

Written by: Cosmo Jiang, Partner at Pantera Capital

Compiled by: AIMan@Golden Finance

A new area of public market Crypto Assets investment is emerging - Digital Asset Treasury companies (DATs). These companies emulate the strategy of MSTR (formerly MicroStrategy) by offering digital asset investments through permanent capital instruments listed on public stock exchanges. After closely studying the nuances of this strategy, we are firmly convinced of this investment concept and tend to focus our investments.

As investors, we strive to continuously test our previous biases. Given the persistent existence of the MSTR premium, as well as the purchases by fundamental-oriented funds including Capital Group and Norges, we look for asymmetric opportunities to capitalize on the DAT trend. While the magnitude of the premium may not last forever, there are fundamental reasons to invest in digital asset treasury companies and explain why their trading prices may be higher than their underlying net asset value (NAV).

The most basic bullish argument is that through MSTR, over time, it is possible to hold more BTC per share (BTC-per-share, "BPS") compared to directly purchasing BTC. Let's do a simple math calculation:

If you buy MSTR at twice the net asset value, you are purchasing 0.5 BTC, rather than buying 1.0 BTC directly in the spot market. However, if MSTR can raise funds and BPS grows by 50% each year (it grew by 74% last year), by the end of the second year, you will have 1.1 BTC - which is more than if you had bought the spot directly.

To believe that MSTR can continue to develop BPS, you must believe three things:

1. Stocks are sometimes not traded at fair value, and the market can become irrational, leading to valuations that are too high relative to net asset value. Any investor who has been in the market long enough knows that the market is not always rational.

2. The volatility of MSTR stocks is very high, which creates conditions for MSTR to sell convertible bonds or to obtain volatility by selling its own call options, thus achieving a high premium.

3. The management has sufficient financial acumen to take advantage of these conditions.

Looking ahead, one underestimated factor driving the success of DAT is how they connect traditional investor behavior with digital asset investment—essentially by converting Crypto Assets into stocks. The strong demand for products like MSTR, ETFs, and the new wave of DAT indicates that a significant amount of capital was previously marginalized due to the entry complexity of native Crypto Assets products (such as setting up a wallet or a Crypto Assets exchange account). Encouragingly, more capital is now entering the space, even through the "old" systems.

From a structural supply perspective, DAT presents an interesting contrast to ETFs: purchasing DAT can effectively lock in supply, as DAT is essentially a one-way closed-end fund, thus the likelihood of selling is lower. In contrast, the tokens held by ETFs can dissipate as easily as they accumulate. This phenomenon may have a better impact on the price of the underlying assets, as DAT can both purchase more tokens as its reserves and does not encourage sell-offs.

Pantera has invested in multiple 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 Inc.: Pantera led its investment in DeFi Development Corp (NASDAQ:DFDV, formerly Janover), which took the DAT bandwagon 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) may have more upside than BTC due to its shorter maturity period; (b) volatility is higher than BTC, which means that higher yields can be achieved by exploiting this volatility; (c) its pledged earnings portion 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 Company: Our latest investment in this field is Sharplink Gaming, the first Ethereum digital asset treasury company in the United States (SBET). SBET is supported by the leading Ethereum software company Consensys, and Pantera has collaborated with its team for over ten years.

Pantera's support for companies like DFDV, CEP, SBET, and their successful responses in the market have helped drive a subsequent series of projects, many of which we are still actively evaluating.