Pantera: Why is there optimism for digital asset custody companies?

Question

Author: Cosmo Jiang, Partner at Pantera Capital

Compiled by: AIMan@Golden Finance

A new area of cryptocurrency investment in the public market 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 examining the nuances of this strategy, we are fully convinced of this investment concept and tend to concentrate our investments.

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

The most basic bullish reason is that, through MSTR, over time, it is possible to hold more BTC-per-share ("BPS") compared to directly buying 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 spot. However, if MSTR can raise funds and BPS grows by 50% each year (it grew by 74% last year), then by the end of the second year, you will own 1.1 BTC — more than if you had purchased spot directly.

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

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.
The volatility of MSTR stock is very high, which creates conditions for MSTR to sell convertible bonds or to acquire volatility by selling its own call options, thus obtaining a high premium.
The management has sufficient financial acumen to leverage these conditions.

Looking around, one underestimated factor driving the success of DAT is how they connect traditional investor behavior with digital asset investment—essentially by transforming cryptocurrencies 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 cryptocurrency products (such as setting up wallets or cryptocurrency exchange accounts). Encouragingly, more capital is now flowing into the space, even through "old" systems.

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

Pantera has invested in multiple DAT companies.

BTC DAT Company: The most notable among them is Twenty One Capital (NASDAQ: CEP), led by long-time Bitcoin evangelist Jack Mallers. The company is attempting to emulate MSTR's strategy and has the support of three major industry giants: Tether, SoftBank, and Cantor Fitzgerald. Twenty One is just the right size to leverage all capital market tools, while also having a smaller market capitalization, allowing it to achieve BPS growth faster 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 Company: Pantera has led the investment in DeFi Development Corp (Nasdaq: DFDV, formerly Janover), which has sparked the DAT trend in the United States. DFDV is led by CEO Joseph Onorati and CIO Parker White, and is borrowing strategies from MSTR, but applying them to Solana. Solana is an interesting alternative to BTC for the following reasons: (a) Its shorter maturation period may offer greater upside potential than BTC; (b) Its volatility is higher than BTC, which means this volatility can be leveraged for higher returns; (c) Its staking yield can contribute to the growth of each SOL share; (d) Due to the current lack of alternatives (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 the first Ethereum digital asset vault company in the United States, Sharplink Gaming (SBET). SBET is powered by the leading Ethereum software company Consensys, and Pantera has been collaborating with its team for over a decade.

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