The once-profitable strategy of corporate Bitcoin holdings, often referred to as the "infinite money glitch," has hit a snag. Previously, companies holding Bitcoin enjoyed a significant premium on their stock prices compared to their Net Asset Value (NAV). This allowed these firms to issue overpriced shares to acquire Bitcoin at a lower cost, effectively increasing their Bitcoin reserves per share through financial engineering. The success of this approach hinged on maintaining a consistent equity premium. However, recent Bitcoin price declines have eradicated this premium, according to data from Glassnode. Since mid-November, the price of Bitcoin has fallen below the 0.75 quantile, resulting in over a quarter of its supply sitting at an unrealized loss.
The Bitcoin Digital Asset Treasury (DAT) sector, with a market cap of about $68.3 billion, has decreased by 27% in the past month and about 41% over the last three months, as reported by Artemis data. Meanwhile, Bitcoin's price dropped roughly 13% and 16% in the same periods. The "high beta" nature of these equities has manifested primarily on the downside, breaking the mechanism that once supported aggressive share issuance by companies like MicroStrategy and Metaplanet. As these firms now trade near or below 1.0x "mNAV" (market value adjusted for debt), issuing shares to buy Bitcoin is no longer beneficial. For this sector to transition back to being a premium asset class, significant improvements in price, liquidity, and governance are necessary.
A significant obstacle lies in the high cost basis of late entrants to the market. A simple rebound in Bitcoin's price won't suffice to revive the issuance engines, as companies' average Bitcoin cost bases are significantly high. According to Artemis data, newer treasury companies are finding themselves in a precarious financial position, with average cost bases exceeding $107,000. Current spot prices, lingering in the low $90,000s, are causing substantial mark-to-market losses. This situation shifts the narrative from being regarded as visionaries managing capital to being seen as distressed holding companies. The leverage, identified by Galaxy as price, issuance, and financial leverage, exacerbates these challenges. For instance, Nakamoto has seen its value plummet by over 38% in a month and more than 83% in three months, behaving more like a struggling small-cap rather than a structural proxy. To restore premiums, Bitcoin must not only recover but maintain levels significantly above these high-water marks, enabling balance sheet repairs to convince investors of the value in "Bitcoin-per-share."
Another crucial factor is changing market perceptions of leverage. The collapse in DAT valuations indicates that equity investors are currently wary of "unsecured leverage." Galaxy's analysis portrays the DAT sector as a means for high-beta exposure without engaging in derivatives. However, in the current risk-averse environment, this approach is proving counterproductive. With soft spot ETF flows and low futures open interest, there's limited enthusiasm for additional leverage through equities. CryptoQuant data reveals a drop in average weekly spot and futures volumes, reaching cycle-low liquidity levels. Consequently, market activity has slowed, and investors are taking defensive positions.
In this context, institutional investors may prefer holding spot ETFs like BlackRock's IBIT if a DAT trades at 0.9x NAV, due to the ETF's 1.0x exposure, lower fees, and reduced execution risk. For the DAT premium to return, the market needs to shift to a "risk-on" stance, attracting investors to volatility arbitrage opportunities presented by companies like MicroStrategy. Artemis data highlights the current "levered spot" penalty, with MicroStrategy's shares dropping about 30% over the past month, reflecting the market's skepticism about the model's reliability.
The era of indiscriminate stock issuance to acquire Bitcoin is over. To rebuild investor confidence, corporate boards must prioritize balance sheet defense over aggressive accumulation. Where the market once rewarded unrestrained acquisition, it now values financial resilience. MicroStrategy's recent move to secure approximately $1.44 billion in cash reserves underscores this shift, aimed at covering financial commitments and strengthening its balance sheet against a prolonged bear market.
Finally, the DAT sector must address its concentration risk, with MicroStrategy controlling over 80% of the Bitcoin held by these companies and representing about 72% of the sector's market cap. The sector's fate is closely tied to MicroStrategy's liquidity and its status in market indices. The MSCI's pending decision on whether to exclude "digital asset treasury companies" from major indices is a looming threat. If MicroStrategy remains indexed, passive funds could mechanically boost its premium, lifting the sector. Exclusion, however, could reduce the sector to closed-end funds trading at a discount.