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The term Digital Asset Treasury companies, known as DATs or DATCOs, has emerged as one of the biggest buzzwords in the digital currency industry this year, providing investors with a novel way to play crypto — but with new risks. A DAT is effectively a publicly-listed entity that holds cryptocurrencies like bitcoin or ether and provides investors with exposure to the underlying digital currency. DATs aim to outperform the price action of the cryptocurrency that they hold. But with crypto markets seeing a big plunge in recent weeks, the strategies of DATs has come under scrutiny and raised concerns about whether they could add further pressure to an already weak crypto market.
What is a DAT?
A Digital Asset Treasury is a type of company that buys and holds cryptocurrencies directly on its balance sheet. Investors can buy shares of that entity to get exposure to the underlying digital asset. The original — and one of the biggest DATs — is Michael Saylor's Strategy which began buying bitcoin in 2020 and has done so ever since. But more recently, there has been an explosion of this type of vehicle. In 2021, fewer than 10 companies held bitcoin in their treasuries, according to DLA Piper. That number has since jumped to 190 companies, while another 10 to 20 firms are focused on alternative digital assets as of September, DLA Piper said. These DATs hold around $100 billion worth of cryptocurrencies combined, according to data from The Block.
Why do DATs exist?
The DAT explosion this year has been driven by buoyant crypto markets and more favorable regulation in the United States toward the industry. But their growth has also come at a time when it's easier than ever to buy cryptocurrencies directly or invest in the asset via other regulated entities like exchange-traded funds (ETFs). DATs are intended to outperform the underlying assets which they hold. They can achieve this through various strategies to maximise returns. In contrast, ETFs effectively hold the cryptocurrency passively and issue shares backed one-to-one with the actual asset.
Should any of the key variables — investor sentiment, crypto prices, or capital market liquidity — fall, the DATCO model could unravel. Macquarie
DATs can also provide regulatory certainty to investors, according to a note from Macquarie published last week. They "package crypto assets within SEC-regulated securities," the investment bank's analysts said. "This eliminates regulatory ambiguity and ensures the same public reporting, disclosures, and investor protections as any public equity." Carol Alexander, professor of finance at Sussex University, told CNBC that DATs also offer an option to "institutional and professional investors with regulatory, fiduciary or operational constraints that make direct token ownership or crypto ETFs unsuitable."
DAT strategies
DATs offer unique capabilities that ETFs cannot, employing a range of strategies to enhance investor returns. To assess the performance of these DATs, a metric known as market net asset value, or mNAV, is closely watched. 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 assigning to a DAT, with an mNAV over 1 signifying a premium.
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