Digital Asset Treasury (DAT) companies explained

The DAT explosion this year was driven by booming cryptocurrency markets and more favorable regulation in the US towards the industry.

But its growth has also come at a time when buying cryptocurrencies directly or investing in assets via other regulated entities such as exchange-traded funds (ETFs) is easier than ever before.

DATs aim to outperform the underlying assets you own. They can achieve this through different strategies to maximize returns. In contrast, ETFs passively hold cryptocurrency and issue shares backed by the actual asset.

DATs could also provide regulatory certainty for investors, according to a note from Macquarie published last week. The investment bank’s analysts said they “group crypto assets under securities regulated by the Securities and Exchange Commission.” “This removes regulatory ambiguity and ensures the same public reporting, disclosures and investor protections as any public stock.”

DATs also provide an option for “institutional and professional investors who have regulatory, fiduciary or operational constraints that make direct token ownership or crypto ETFs inappropriate,” Carol Alexander, a professor of finance at the University of Sussex, told CNBC.

DATs provide unique capabilities that ETFs cannot, as they use a range of strategies to enhance investor returns.

To evaluate the performance of these DATs, a metric known as market net asset value, or mNAV, is closely monitored. It compares a company’s enterprise value to the value of its digital asset holdings. It can show how much of a premium investors are allocating to DAT, where mNAV more than 1 indicates a premium.

If mNAVs continue to decline and DATs do not have the means to stay afloat, they may look to sell digital tokens which may put pressure on cryptocurrency markets.

“As token prices fall, even prominent DATs are starting to decline,” Alexander said. “This could exacerbate volatility in broader cryptocurrency markets, because DATs are large holders: their sales, even if staggered, increase supply in already weak liquidity conditions.”

Currently, cryptocurrency holdings of DATs represent less than 1% of the total cryptocurrency market. But as their influence potentially grows, they may have a greater impact on broader markets.

“As DATCO’s scope expands, its market influence grows; a decline could weaken a key tailwind for cryptocurrencies, which is the normalization of digital assets on corporate balance sheets,” Macquarie said. “This, in turn, could dampen public equity interest in exposure to digital assets, slow crypto ETF inflows, and put pressure on cryptocurrency prices.”

The DAT space is currently in a bubble, according to Alexander of the University of Sussex.

“The DATCO model appears to have attracted many entrants driven more by marketing, hype and easy capital than by durable business fundamentals,” she told CNBC.

CoinShares’ Butterfill said that “the bubble has already decisively burst,” with many DATs now trading at mNAVs below 1 and a “clear indication that the market fears” that these companies will be forced to sell their digital assets.

However, both experts said DATs may evolve in the future.

“In the longer term, investors are likely to demand a more measured approach,” Butterville said.

“Tolerance for shareholder dilution and extremely high concentrations of tokens will diminish without accompanying revenue streams. The recent token accumulation craze has, in many ways, undermined the original intent of the DAT concept: credible, global companies seeking to diversify from fiat currencies and the risk of depreciation.”

These digital asset treasury companies may also begin to diversify their holdings into non-crypto assets as well, Alexander said.

“I believe that those who focus on processes such as generating yield through staking, further diversifying their tokens, and mixing with traditional tokenized assets such as cash or treasury bills, may survive as legitimate players in the digital asset infrastructure,” Alexander said.