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Don't get me wrong, I'm not against any digital asset treasuries (DATs), it just amazed me that this is a thing in stock market and it's legal. (Disclosure: I even have some position in some DATs)
The first time I heard about MSTR was a few years ago, I looked into the NAV and find it puzzling why are people paying 2\~3 times the value of the underlying asset to buy the stock, and I dismissed it as one of the "stupid things in crypto".
But two weeks ago, I saw a post on seekingalpha saying BMNR is trading at a 20% discount on NAV, that piqued my interest, because any discount sounds like an opportunity to me, so I needed to figure it out what the hell are these DATs, and if the opportunity is real or a trap.
After some studying, and cut through all the bullshit terminology, I finally able to see it clearly what it actually is.
# What The Hell is DATs Stock
If I have to describe it in one single phrase, it'll probably be "market irrationality harvester", "idiot harvesting machine" or "wealth transfer machine" (transfer from idiot ofc).
These DATs are basically public traded companies that are asset heavy, looks like a fund, but does not follow funds regulation or structure, a fund that has less transparency requirement, less protection for their shareholders (that's the point, it has to harvest the idiots).
What the entire management do is very simple, they need to hype the price of their stock beyond the NAV through various marketing mean, ultimately attract people to pay double or triple of the NAV to buy the stock.
The majority of the people who buy the stock has 2 type:
* People who buy when the stock is below NAV (not necessarily mean they'll profit, more on this later.)
* People who buy the stock when the stock is above NAV (not necessarily mean they will lose money too! but **majority of them DO lose money**, they are the target to be harvested, or to be transfer wealth from.)
Let's start with the simple one, why people who buy above the NAV will not necessarily lose money? Here's the ponzi part kicks in, because they sell it for the next idiot that are willing to pay even higher on NAV.
To be fair though, many who bought above NAV knew this, just like in Ponzi, many know what they are getting into, but they just think they'll not be the last one holding the bag. (aka "there'll be a greater fool")
Then there's people who buy the stock below NAV, these are usually people that'll less likely to lose money or with calculated risk or reward, usually they can make money when the stock price reverse back to the NAV, but they can also lose money if the NAV catches up to the discount with dilutive ATM sales, more on it next.
# Accretive & Dilutive of DATs.
Let me use a simple example, there's a stock with 1 million outstanding share, the entire value of the company is $1mil, so the NAV is exactly $1. In this example we'll assume the underlying asset value has no change and stay constant.
Next, the management hyped up the stock with some bullshit marketing, the stock price is now trading at $2 but the NAV stay unchanged, so the company issued 1 million new shares selling at the market price of $2, raised $2mil and bought $2mil of underlying asset.
Now there's 2 million outstanding shares, with $3mil underlying asset, the NAV of each share now becomes $1.5, this is **accretive**.
Then some bad news happen, the stock price crashing from $2 to $1.5, then someone bought at $1.5, then it continue to crash to $1.
At this point, the NAV is still $1.5, but the price of the stock is $1. For buyer at 3 difference price point
* People who bought early at $1, there's no nominal lost for them yet, their stock NAV is $1.5 so they are fine for now.
* People who bought at $1.5, there's a nominal lost of $0.5 for them, but they also know the NAV of the stock is $1.5 so they think they'll be fine.
* People who bought at $2, they lost $1 or half of their investment, they figured out the NAV is $1.5 still below their entry price, they need more bullshit from the management to hype the stock, to the same premium level for them to get out.
Now for some reason, the management of the company decided to issue another 1mil share even when the stock is below NAV, so new 1mil share issued and sell at the market of $1 price, raised another $1mil and bought the asset.
Now there's 3 million outstanding share with $4mil underlying asset, the NAV becomes $1.33, falls from the previous $1.5 and this is **dilutive**. When this happen, all existing shareholders are equally harmed:
* People who bought early at $1, there's no nominal lost for them yet, their stock NAV is $1.33, falling from previous $1.5 if the stock continue to be dilutive, the NAV can continue to fall below their entry price.
* People who bought at $1.5, there's a nominal lost of $0.5 for them, now even if the stock price is back to the NAV of $1.33 they are still in lost, they now needed the marketing to hype the stock to premium NAV to breakeven.
* People who bought at $2, they lost $1 or half of their investment, the chance of them breakeven further decreases, as they require and even higher premium, and it becomes more difficult because the people who bought at $1.5 would probably sell when the premium reach their breakeven point.
So in conclusion, when a DATs only do share issuance when the stock is above NAV, people who bought above the NAV price are the one likely going to lose money and to be harvested.
When a DATs do share issuance when the stock is below NAV, which happened before, and will likely happen again, all shareholders lose value in their share, the damage depends on what discount/premium level they got it.
# Interest of the management is not aligned with shareholders
This is the scariest part, unlike most of the Asset-based ETFs, there's a clear creation and redemption mechanism that let APs arbitrage on the premium/discount to keep the price close to the NAV, there's none for such DATs, and they are even worse than close end funds, because they can issue massive amount of shares at the market.
The best part is, the management of these DATs doesn't necessarily care about the NAV per share, in fact some of their compensation packages are based on growing the total size of the asset for the company, regardless of how many new shares are issued and how many shareholders value has been diluted.
# So is there opportunity?
Personally I think it's fine to make some risk calculated bet, especially when there's a deep discount on NAV, but I think the bet size has to be controlled and cautiously tiny, with clear exit condition such as the company start issue shares when it's dilutive.
Overall I just find this kind of stuff amaze me, it amaze me because I never thought the market would allow such obvious ponzi like stock that does not create any production value at all, and the only mechanism is to trick people to pay high price over NAV, and siphon away their money to benefit some other shareholders, or the management itself.
I think if the point of SEC is to protect the market participants, the point of stock market is to help business raise funds to create more production value, then stock like this should be banned, fined, or force to follow strict fund regulations.
But anyway, I am not writing this because I care, I just want to share how I find it amazing with the hypocrisy of the "highly regulated" stock market.