Pantera: Why we are optimistic about digital asset vault companies

Author: Cosmo Jiang, Partner at Pantera Capital; Translator: AIMan@黄金财经

A new area of ​​public market cryptocurrency investment is emerging - Digital Asset Treasury companies (DATs). These companies follow the strategy of MSTR (Strategy, formerly MicroStrategy) and provide digital asset investments through permanent capital vehicles listed on public stock exchanges. After carefully studying the subtleties of the strategy, we are convinced of this investment concept and tend to invest in it in a concentrated manner.

As investors, we seek to constantly test our prior biases. Given the persistence of the MSTR premium and the buying of fundamentals-oriented funds including Capital Group and Norges, we look for asymmetric opportunities to take advantage of the DAT trend. While the premium may not last forever, there are fundamental reasons to invest in digital asset treasury companies and explain why they may trade at a premium to their underlying net asset value (NAV).

The most basic bullish argument is that through MSTR, it is possible to own more BTC-per-share ("BPS") over time than if you bought BTC directly. Let's do some simple math:

If you buy MSTR at twice the NAV, you are buying 0.5 BTC instead of 1.0 BTC through spot. However, if MSTR can raise funds and BPS grows 50% per year (it grew 74% last year), then by the end of the second year you will have 1.1 BTC - more than you would have if you bought spot directly

To believe that MSTR can continue to grow BPS, you have to believe three things:

1. Stocks sometimes do not trade at fair value, and markets can become irrational, resulting in valuations that are too high relative to NAV. Any investor who has been in the market long enough knows that markets are not always rational.

2. The volatility of MSTR stock is high, which creates conditions for MSTR to sell convertible bonds, or to capture volatility by selling call options on itself, thereby obtaining a high premium.

3. Management has enough financial savvy to take advantage of these conditions.

Looking further ahead, An underestimated factor driving the success of DATs is how they connect traditional investor behavior to digital asset investment - essentially by converting cryptocurrencies into stocks. The strong demand for products such as MSTR, ETFs, and the new wave of DATs shows that a lot of money was previously marginalized by the complexity of getting started with crypto-native products (such as setting up a wallet or a crypto exchange account). It is encouraging that more capital is now entering the field, even if it is through "old" systems.

DATs also present an interesting contrast to ETFs from a structural supply perspective: buying DATs effectively locks supply, and since DATs are effectively one-way closed-end funds, they are less likely to be sold. In contrast, tokens held by ETFs can be dissipated as easily as they are accumulated. This phenomenon may have a better impact on the price of the underlying asset, because DATs can both buy more tokens as their reserves and not encourage selling.

Pantera has invested in several DAT companies.

BTC DAT Companies: 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 big enough to leverage all capital markets tools, while also having a smaller market cap, so it has the flexibility to grow BPS at a faster pace than MSTR and trade at a higher premium. As a company, Pantera is the largest investor in Twenty One’s post-IPO Private Investment in Public Equity (PIPE).

SOL DAT Companies:Pantera led the investment in DeFi Development Corp (NASDAQ: DFDV, formerly Janover), which is kicking off the DAT trend in the U.S. DFDV, led by CEO Joseph Onorati and CIO Parker White, is taking a page from MSTR’s playbook but applying it to Solana. Solana is an interesting alternative to BTC for several reasons: (a) it has potentially greater upside than BTC due to a shorter maturity period; (b) it has higher volatility than BTC, meaning that higher yields can be achieved by leveraging that volatility; (c) its staking yield component can drive growth in SOL per share; and (d) it has more untapped demand since there are fewer alternatives currently available (e.g., no publicly traded miners and no spot ETFs).

ETH DAT Companies:Our latest investment in the space is Sharplink Gaming (SBET), the first US-based Ethereum digital asset vault company. SBET is backed by Consensys, a leading Ethereum software company, and Pantera has been working with its team for over a decade.

Pantera’s support of companies like DFDV, CEP, SBET, and their successful response in the market has helped spur a host of subsequent projects, many of which we continue to actively evaluate.