For a considerable period, investors were willing to pay a premium for shares in Digital Asset Treasury (DAT) firms. These companies, which held significant amounts of cryptocurrencies like Bitcoin on their balance sheets, were seen as a practical substitute for direct crypto ownership, especially when regulated access to the underlying assets was limited. This approach proved effective in a market where corporate balance sheets offered the closest approximation to holding Bitcoin itself, bridging a crucial gap for institutions and retail investors alike.
However, this landscape is undergoing a fundamental transformation. According to Matt Hougan, Chief Investment Officer at Bitwise Asset Management, the very conditions that once justified these elevated valuations have changed dramatically. In a comprehensive valuation framework released in November, Hougan outlined how this $130 billion sector now faces a profound structural shift. He posits that while certain factors pushing DATs below their crypto holdings' intrinsic value (such as illiquidity, operating costs, and execution risk) are constant, the elements that might lift valuations above parity are now severely restricted and uncertain. The natural state for a passive treasury, he argues, is a discount.
The Inevitable Shift Towards Discount Valuations
Hougan's analysis directly challenges the long-held assumptions that fueled the growth of companies like Strategy (formerly MicroStrategy) and Metaplanet Inc., both of whom built their investment narratives around accumulating substantial Bitcoin reserves. His model establishes spot-value parity as the starting point, from which three predictable valuation drags inevitably subtract value:
- Illiquidity: When Bitcoin is held within a corporate structure, shareholders cannot redeem it directly. This friction between ownership and access typically translates into a discount. Hougan describes this gap as the price investors are willing to pay for delayed or constrained access to the underlying asset.
- Operating Expense: Publicly traded companies incur a continuous stream of costs. These include employee compensation, audit fees, custody arrangements for their digital assets, and legal services. Such ongoing expenses continuously erode the net asset value, meaning a dollar's worth of Bitcoin held by a corporation is inherently worth less than a dollar held directly by an investor.
- Execution Risk: Investors must always factor in the possibility that management might make poor capital allocation decisions, misinterpret market dynamics, or encounter regulatory hurdles. Because this probability is never zero, markets generally price this risk into the valuation of such firms.
“Most of the reasons they should trade at a discount are certain and most of the reasons they might trade at a premium are uncertain...Expenses and risk compound over time.”
These combined factors establish a baseline markdown that applies to most DAT structures, even before any potential upside drivers are considered.
ETF Competition Reshapes the Investment Landscape
The downward pressure on DAT valuations has intensified dramatically with the widespread availability and success of spot Bitcoin and Ether exchange-traded funds (ETFs). Prior to the approval of these ETFs, corporate treasuries served as the primary, often only, entry point for both institutional and retail investors seeking regulated exposure to cryptocurrencies without the complexities of direct custody. This scarcity allowed some DAT stocks to trade significantly above the value of their underlying holdings.
However, the introduction of spot ETFs effectively removed that structural advantage. Prominent financial powerhouses like BlackRock Inc. and Fidelity Investments, among others, now offer readily accessible, low-fee products that directly track the price of Bitcoin and Ether. These ETFs boast intraday liquidity, daily creations, and redemptions, providing a far more direct and efficient exposure mechanism.
Nate Geraci, President of NovaDius Wealth, famously dubbed spot ETFs as “DAT killers.” He argues that these new products have effectively closed the regulatory arbitrage window that once justified premium pricing for DAT firms. Bloomberg Intelligence ETF analyst Eric Balchunas further elaborated that ETFs perform the same function as DATs, but “with good tracking,” offering cleaner exposure while completely bypassing the overhead and complexities of a corporate structure. While acknowledging that some institutions are restricted to holding only equities or bonds, which offers companies like MicroStrategy a residual appeal, Balchunas noted that this niche group is “not enough for a bunch of them to thrive.”
Moving Towards “Crypto-Per-Share” Expansion
With the premium valuation model eroding, Hougan asserts that a DAT firm's future valuation will increasingly hinge on its ability to increase its crypto holdings per share. He identifies four primary strategies that reliably support this objective:
- Issuing Debt to Acquire More Crypto: Historically, this has been a potent tool, especially during periods of favorable credit markets and strong Bitcoin appreciation. If the asset's performance consistently outpaces the interest burden, shareholders can realize accretive gains. However, this strategy is highly reliant on market timing, the firm's balance sheet strength, and its access to capital markets.
- Lending Assets for Yield: Generating incremental returns through lending digital assets can boost a firm's value, but it introduces counterparty risk.
- Using Options Strategies: Employing various options strategies can also generate additional yield, albeit with inherent strategy risks.
- Acquiring Assets at a Discount: Mergers and acquisitions can increase scale, potentially lowering financing costs and expanding the range of transactions a DAT can pursue. Hougan emphasizes that “scale matters,” as larger firms typically benefit from cheaper capital and better deal flow.
Hunter Horsley, CEO of Bitwise, anticipates that these market pressures will accelerate consolidation within the sector. He believes “we’re in the early innings of what DATs will become,” predicting that surviving firms will evolve into dynamic operating companies that actively acquire private crypto businesses and generate revenue, rather than merely relying on the appreciation of their treasury holdings. Reflecting on this evolution, Hougan concluded:
“Going forward, I think there will be more differentiation. A few will execute well and trade at a premium, and many will execute poorly and trade at a discount. This model is one way to think about which is which.”
Sector Repricing Takes Hold
This push towards more disciplined and realistic valuations coincides with significant losses across many Bitcoin treasury stocks. Research from 10X Research estimates that retail investors have collectively lost approximately $17 billion in recent months as markets adjusted to repriced corporate crypto holdings. The firm attributes these losses to the collapse of what it termed “financial alchemy,” where share issuance initially created the illusion of expanding upside, only for market volatility to eventually erase that perceived benefit.
Data from CryptoRank further illustrates this sector-wide dispersion in performance. Firms with high operating costs, limited scale, or substantial sell-side overhangs have generally underperformed. Conversely, those firms that have strategically focused on actively expanding their crypto-per-share metric have demonstrated greater resilience in the face of these market shifts.
In conclusion, these shifts collectively indicate that Digital Asset Treasury firms must now directly compete with ETFs on crucial fronts: cost, liquidity, and transparency. The era where corporate balance sheets automatically commanded a premium for crypto exposure is no longer supported by the current market structure. For the largest and most ambitious players, the primary challenge now is to prove they operate legitimate businesses that generate value, rather than simply functioning as static balance-sheet vehicles. Firms unable to offset their expense drag or consistently grow their crypto-per-share are likely to trade at structural discounts. Those that adopt more active, value-generating strategies, however, may be able to retain a valuation advantage. As ETFs capture an increasingly larger share of institutional and retail flows, the market is sending a clear signal: merely holding Bitcoin is no longer sufficient. A DAT must demonstrate its ability to create value beyond its treasury, or its equity valuation will simply reflect the underlying arithmetic of its holdings minus its operational realities.
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