Why Digital Asset Treasuries Will Continue To Defy Gravity

Transcript

Let's talk about debts since uh we have I I think I guess maybe our first DAT representative on the on the show. Um I mean Brian Upexi was was very early into the Salana Treasury game. Talk about what the last couple weeks have have been like for you. >> I'd say not much has really changed. So for us, we're really focused on what we can control. For any DAT, that's really two things. One is you want to be as visible as possible. Uh, so you want to maximize people actually knowing about you. And so if they think about, hey, I want to invest in Salana, maybe a data is the best way to do it, they think about UPEX. And so we announced this morning that we're at three different traditional finance conferences later this month. I'll be disappointed if our

pace doesn't pick up over the rest of the year. Uh, and so we're really hyperfocused on increasing our visibility. We have a bunch of other initiatives of foot there. And then the second component is issuing equity which would you issue equity above book it is by definition accreative for shareholders. MSTR selling it two times they've come in a little bit but it's tantamount to selling a dollar for two or buying Bitcoin half off and this is how they created literally 26 billion worth of free Bitcoin for shareholders over the last uh six quarters. So we're very focused on figuring out what we can do there. we have an equity line that we're hopeful uh will go effective very soon and then we're always out in the market and this is not MNPI um this the

business model of ADAT to raise capital in the secretive fashion so we're looking at all options in order to do so >> okay and Chris let's you >> if you step back this is the summer of DATs 2021 was DeFi summer this is where DATs came on the scene and established themselves as a core innovation and a lot of that unlock was frankly regulatory. Sailor proved it and now we've got this regulatory unlock. Now I'll agree with Rahm there's a ton of froth. However, I believe probably like Brian here that DATs are going to emerge as a fundamental part of market structure within crypto ecosystems

public facing and then you've got the foundation labs maybe they consolidate but this has been a major innovation and and the reason why not all of them have been successful is because it's really really hard to pull it off and we've been very very active in the space to make a DAT work you need about five elements market timing has to be right The market has to be ready for you. The market was closed for a long time. Really important. Timing is hugely important. You need good fundamentals on your token. And I think as we depart Bitcoin, we get into yielding assets and and that gets really exciting when you stake and you restake and you can generate fundamental value that way to generate a natural MNAV. Foundation alignment really really helps. You need

to have a really good advisor, bankers who know what they're doing top-notch. You need a strong management team. You need good asset managers who know how to manage those underlying assets and drive those that yield. And then perhaps most of all, you you need a KO. You need someone who can tell the story and who can translate. These DATs are beautiful convergence tech innovations. They bring it all together. I think they're here to stay. Um, yes, there's going to be a shakeout, but the the winners are going to be really, really special thing to watch and we're very excited. And by the way, I don't think we're at the beginning of this. I think we're I don't think we're at the end of this. I think

we're at the very beginning. I think there's some amazing projects uh that are still coming out and um yeah, we remain really excited. Yeah, Brian, one of the interesting trends that came out when DATs first came um really came to prominence, I guess, post Sailor was the fact that the the the first companies to follow were focused on Salana, not not ETH. And it was it was you guys, it was Soul Strategies and it was um DeFi Development Corp. I believe I always get that last name. I always confuse that last name. But now, I mean, ETH recently hit an all-time high. Um, ETH treasury companies are are raising billions and and Salana is is all of a sudden in certain ways maybe the little brother to

Ethereum again. Uh, what is it like for you right right now? Because I'm sure when you're out fundraising, investors are asking about the differences between Salana and Ethereum. They're they both can generate passive yield. What are some of the hard questions that you're getting in some of these meetings and and and what are your responses to them? >> Yeah, that is a great question. Um, I would say that candidly the knowledge and tradi is quite low. So the most common question I get is like what's the difference between Bitcoin and Salana?

Not even like what's the difference between Ethereum and Salana? So >> I thought we were past that. >> Yeah. I mean, there are some folks that have some sort of a background in crypto or digital assets and will start to ask hard questions, but nobody's asking me about like when is Salana going to implement multiple concurrent leaders, like that type of thing. Um, I still think that there are some folks that don't truly buy into the value creation from ADAT. Like for me, it's really about having access to these value acrruel mechanisms that by the way all compound. So the big one is issuing equity above book value which you can do either via like an ATM or an equity line or even if you go to any sort of like convertible note issuance

most like uh options pricing models will have like a really high delta there and we'll suggest like there's a 90% plus of these things to convert into equity because the duration of these notes are so long and the volatility of the underlying is so high. So that is another way for DATs to actually sell equity at an even higher MNAV than where they're currently priced. Uh and so like that to me is the big one. This is where like Micro Strategy has created so much value for shareholders. It's more than tripled the return of Bitcoin and it has barely any leverage. But the second thing is when you get into pre-mine tokens or you get into tokens that are built on a proof-ofstake consensus mechanism, you can do things like staking where like UPEX is staking to earn a 8% plus yield, turning our

treasury into this productive asset and we're also buying lock tokens at this 15% discount. If you put that discount into any sort of yield equivalent, we're roughly doubling the staking yield on anything that we buy in locked form. And we have this buy and huddle strategy. We don't intend to sell any soul. So there's no reason for us not to do that. And so these additional value acroal mechanisms are things you can't get by buying a token natively or in other instruments like an ETF. And so I think a lot of this is investor education and just walking them through how powerful this model can actually be when you're underpinned by the right token. C >> can you elaborate on the statement you had at the outset around banks are debts? Like banks are FDIC insured. They can rehypothecate. They have a lender of

last resort. What were you getting at there? >> Yeah, this is a massive simplification, but banks earn spread income. They raise funds from depositors. They lend to borrowers and they make the difference between the yield on loans and their cost of deposits. And then also a massive simplification, but investors will basically present value all of that future spread income and add it to book value. Banks generally trade above book value. They don't really issue equity because it's hard to come by loan growth. Um, but there are historically some banks like Mnt that had just issued equity again and again because they traded at this premium multiple and they used it for this rollup strategy and they just basically

>> it's more of a BDC I would say. You have it's a BDC like a private credit fund that's publicly traded business company. They make loans they earn spread. They've got some back leverage. They're trying to capture that spread >> and they're we're kind of the same way. So we raise funds from the capital markets. We invest into Salana. We earn the difference between the return on soul and our cost of capital. When the market thinks that the return on soul will outpace our cost of capital, that spread will be positive not just this year but in future years. It will present value that add it to the NAV and that will work and out to be something that's above one that we can then monetize for shareholders.

>> Got it. >> It's hard to underscore the importance of this education. Right now we have these dads running around all the traditional long only investors and explaining you know what Salana means, how it's a yielding asset. Like that education is just so good for the asset class. And I I mean I think that's probably the biggest benefit to the ecosystem um of what we're seeing here. >> Yeah. >> Is it education or marketing promotion? >> It's both. When we first started, there were a lot of questions as to whether this was just a money grab and whether DAPs were this existential threat to the token ecosystems or underpinned by because you could be a force seller at exactly the wrong time. Then I think

folks have seen like Ethereum success and Tom Lee is on CNBC every other day and in my opinion like this is what lifted ETH from 2700 to 4,700 is reason. >> Yeah. Um, so I think like now there's this big focus by a lot of other token ecosystems to really embrace and push DATs forward just as another key visibility mechanism to get them out there, especially to traditional investors. >> There's so many DATs, you know, like I I wonder if you were to pull someone on Twitter and say, can you name eight tickers for DATs? I don't think anyone could. I know Chris could. I know Brian could. It's like I think about the

the dad who has like eight kids. I struggle with three kids. My kids' names I call one by the other name. People know MSTR for sure. It took years to build that brand and aware. It literally comes down to these things like how many elements can the human mind recall and you're competing for those slots in the context of other tickers. It is the attention game. It's not just the product game which is Brian and Chris where you were focused on and the value creation machine and the financing machine and the stake and yield packaging machine etc. It's like there are not there are not enough slots in the human mind for all these players to succeed and thrive.

>> What what do we make though? I mean the attention game I mean Tom Lee and and and Bitmine their their MNAV is I think 1.1 now and and it's been dropping. What do you guys make of that? >> So, I haven't been super close on other ecosystems. Um, but my impression is that Bitcoin has kind of become saturated. Um, I think you're seeing some like Emperi and Sequins that are trading at like 7.8 of NAV. I don't think that Ethereum is saturated, but I think it is a bit of a race. And so I think you're seeing some of the players in there sell equity all the way down to one times. Whereas you had someone like Micro Strategy that when they were the only game in town, they would only

really sell via their ATM when they were at 1.6 1.7 or higher. So I think all that selling out there and I see why they're doing it. They want to be the biggest because whoever's the biggest gets the most trading volumes and then you can issue the most equity uh via the ATM because that's what you're kind of limited by. Um, so I like that in my opinion is what is happening out there in the other token ecosystems. Um, I do think that Salana has the highest staking yield. It you can buy lock tokens at this discount for built-in gains for shareholders. And so I do think like there's some argument for a Salana DAT to trade at this higher MNAV versus some others. And so far that is proving to be true. But again, like I mean it's out there in the public news.

There are other Salana DATs coming. So, we'll we'll see if that does anything to the MNAVs either way. >> Yeah, I think you're at 1.7 right now. I was just checking your website, >> Kristen, your view, what's the better move? Like, is it better to own spot commodity or own the DA? If I look at Ethereum, like Ethereum's got a bit a forced bid from these DATs. So, it's an accumulation bid. And if you're a DAT, you're issuing shares. That's called dilution. That's sell pressure. I isn't the simple idea just buy what people are forced to buy. Keep it simple.

>> Okay, so it's still super early as we get into a lot of the DATs and I'll give you an example. Last week we put together a letter to the SEC and Fazby because LSTs were considered liquid staking tokens are considered intangible assets. And so like we still need to have a lot of things to come together. A lot of these DATs are only getting the machine running right now. I saw that one of our portfolio companies, Ether 5, benefited from, you know, Ezilla put some some ETH to work there. So, it's it's very early, but when you step back, let's let's look at like ETH as a as an example because there's a little more complexity around the ETF. You can invest in the ETF, you can invest in spot. For a lot of investors, they can't touch spot. So, that's off the table.

That brings them to the ETF, but the ETF, they can't generate yield because of the there's a lot of constraints around daily liquidity with ETFs. you know, you have a 13-day unbonding window. You can't just stake. Eventually, they'll figure it out and you'll have a total return product, but it's an inferior product. No offense to the ETF issuers, but it is because you don't get that yield and that's core to the investment if you're if you're a long-term investor. If you're any term investor, right, you want that yield. Okay, so that brings you to the DAT. The DAT has that wrapper like the ETF that you can buy, you know, on on your brokerage account very easily and very accessible. It gives you greater access to the yield of the underlying product.

So, in in a in a sense, it's a better product because you can't you can't touch spot because you're a traditional player. You're not allowed to. It's not part of your investment um authorizations. It's a little bit better than the ETF. So, that brings you to the DAT for here and now. Um, at the same time, maybe someday a total return e pure total return eth product will emerge. And so maybe you have a little bit a little lack of transparency. I think the DATs are trying to say, wait a second, we're going to we're going to differentiate through transparency. This is what we're doing with the assets. And that's the game is to give investors not just access to the asset, but to everything you can do with that asset, leveraging DeFi and everything else.

that that's the investment case in a rapper that they understand and in a rapper that they're allowed to deploy. Oh, by the way, you open up the entirety of US equity capital markets. You can you can eventually that'll be I mean it's no different than any any other equity. You take it to your prime brokerage account. You can get leverage and you can use all the other things that you you use equities for collateral etc going forward. That's the case for these for this instrument. You're right. There's like plenty of froth. I talked about the elements. they all have to come together. It's super hard. It sounds like Brian's got it figured out.

Um but but that's the case. >> The one thing that I would just plus one on is I really do think that people haven't fully internalized just how powerful this accretion is and like compounding NAV over time. And so here is the math and this is what helped me and these multiples have come down but this is the numbers that are fresh in my head. So say I want to start a dad to buy Salana and let's say all the comps are trading at five times. So I raise $100 from Steve. I give Steve 100 shares. He now owns a hundred shares worth a dollar each that my dad is holding $100. I now remix that USD into Salana. And because now I hold $100

worth of soul, I achieved this peer-like multiple. And now it is a 500 and peers are all trading at a five times MNAV. Now, my company has a $500 market cap, and Steve owns 100% 100 shares worth $5 each. Here's where the agreion comes in. I now want to go raise another $100, but because I'm trading at $5 a share, I actually only need to issue 20 shares. So, I go out to the market. I sell 20 shares at five bucks each, I get another hundred US dollars. I remix that into Salana. It takes on another $500 market cap, and now it's a $1,000 company.

Steve has actually been diluted. So he owns a 100 out of 120 shares or roughly 85% but now he owns 85% of a$1,000 company and he just saw his investment move from $500 to $850 via one accretive issuance. So my one point is just this accretion math is so powerful and you can trade at this premium that you could just use it to continually compound NAV and as long as your multiple holds your share price should move up commensurately. The second thing is is I personally feel once we get past this wave of supply that MSTR should be the floor in terms of MNAV. They're trading at like 1.6 right now. I say that because there

should be some sort of embedded growth premium for a smaller company. Like if we issue a hundred million dollars of equity at two times, it's going to be very nicely accredive for us. Whereas if MSTR issues 100 million of equity at any multiple, it's not going to move the needle because they're so big. So there should be this embedded growth premium for us. Similarly, when you are underpinned by a much smaller token, all else equal, there's more potential upside. So soul is literally 4% the market cap of Bitcoin. Bitcoin is unlikely to 5x from here, you know, over any reasonable time period. It's the fifth largest asset in the world, whereas Salana has a lot more potential upside all else equal. So, there should be more embedded growth premium there and then access to these additional

value acroal mechanisms that you don't get with MSTR via things like staking uh and buying lock tokens at a discount. So for all those reasons, I kind of think when things shake out, uh, at least I'm very hopeful that other DATs will end up trading at a premium to wherever Micro Strategy is based on market conditions. But that's at least how I think about multiples. >> If you're able to take on memelike properties in the process of driving these fundamentals, even bigger things could happen. >> Oh yes. >> And like, let's be honest, this is a phenomena we witnessed in crypto. We witnessed in equities as well. And that's the other thing to be mindful of.

Well, the whole goal is for these things to become a meme. Not all of them can. This is like a Highlander game. There can only be one. That's the nature of memes. You've got Palunteer. You know, Tesla was a meme, but you can't have them all meme. That's my view. That's my Now, here's a here's I'll ask a question for you. I I think I have an answer as well, but I want to get your perspective. So, as an investor, would you prefer a high market cap to NAV or a low? Now, I think you're going to say, Brian, I want a high MCAP to NAV because I can go accumulate the underlying spot.

That's number one. Now, the irony of obviously is that you get more value with a lower MCAP to NAV. So, there is this reflexive property at work. And I think the game only works so long as the DAT has momentum. And when momentum breaks, you better get out of the way. And the funny thing is if you trade below MCAP NAV below one, you're an acquisition target. If your MCAP to NAV is very high and you do an acquisition, I believe that that asset price would drop. So I think this is more complicated.

Uh there is a very complicated kind of game theory that that plays out. >> I have so many thoughts. So high verse low MNAV, it all depends on where I think my MNAV is going in the future. If there's one DAT that trades at two times, one that trades at five times, if I think there's going to be convergence, I'd rather buy the cheaper one. If I think they'll stay where they are, I'd rather have the one trading at five times because their issuance is going to be more accreative. Um, and then for me, it kind of all boils down to riskreward. Like if we trade at 167, I look at like one times as the floor and then you're like this. I don't want to say levered because it's not really leveraged where all this comes from, but we're going to

trade with some sort of beta to Salana. And so, you know, the the riskreward is that Salana moves up very considerably. Uh, in times like that, our MNAV will likely move up as well. So, Soul Strategies was trading at 15 times MNAV back in December. It was a different market. There were many fewer options, but that can show you like where these MNAVS can go to. And then when you do trade at these higher