Strategy The End of the Betting Game: DAT Premium Bubble Burst and Regulatory Liquidation Countdown

Author: Joseph Ayoub, former Head of Encryption Research at Citigroup

Compilation: Deep Tide TechFlow

Original Title: Warning of the Cryptographic Treasury Company Bubble: From "Financial Alchemy" to the Countdown for Liquidation

Introduction The last time cryptocurrency experienced a "traditional" bubble was in the fourth quarter of 2017, when the market exhibited astonishing double-digit and even triple-digit percentage daily increases. Exchanges were overwhelmed by surging demand, new participants flocked in, speculative ICOs (Initial Coin Offerings) were emerging one after another, trading volumes hit historic highs, and the market welcomed a new paradigm, new heights, and even a first-class luxury experience. This was the last mainstream, traditional retail bubble in the cryptocurrency space, nine years after the birth of the first "trustless" peer-to-peer currency.

Fast forward four years, cryptocurrency has experienced its second major bubble, which is larger in scale, more complex in structure, and incorporates a new paradigm of algorithmic stablecoins (such as Luna and Terra), along with some "rehypothecation" crimes (such as FTX and Alameda). This so-called "innovation" is so complex that few truly understand how the largest Ponzi scheme among them operates. However, like every new paradigm, participants firmly believe this is a new form of financial engineering, a new model of innovation, and if you don't understand it, no one has the time to explain it to you.

The largest scale retail Ponzi scheme collapses

The Era of DAT Arrival (2020-2025)

At that time, we did not realize that Michael Saylor's MicroStrategy, founded in 2020, would become the seed driving institutional funds to reposition Bitcoin, which all started with the dramatic crash of Bitcoin in 2022, [1]. By 2025, Saylor's "financial alchemy" had become the core driving force behind the demand from today's cryptocurrency marginal buyers. Similar to 2021, very few truly understand this new paradigm of financial engineering mechanisms. Nevertheless, those who have experienced the past "dangerous atmospheres" are gradually becoming more alert; however, the occurrence of this phenomenon and its secondary effects are precisely the key to distinguishing between "knowing there might be a problem" and "profiting from it."

A new paradigm of financial wisdom..?

What is the basic definition of DAT?

Digital Asset Treasuries (DATs) are a relatively simple tool. They are traditional equity companies whose sole purpose is to purchase digital assets. New DATs typically operate by raising funds from investors, selling company shares, and using the proceeds to buy digital assets. In some cases, they continue to sell equity, diluting the interests of existing shareholders, to continue raising funds to purchase digital assets.

The calculation method for the net asset value (NAV) of DAT is very simple: assets minus liabilities, divided by the number of shares. However, what is traded in the market is not the NAV, but the mNAV, which is the market's valuation of these shares relative to their underlying assets. If investors pay $2 for every $1 of Bitcoin exposure, that is a 100% premium. This is known as "alchemy": in the case of a premium, the company can issue shares and purchase BTC at an appreciated value; while in the case of a discount, the logic reverses—share buybacks or pressure from aggressive investors dominates.

The core of this "alchemy" lies in the fact that these are new products with the following characteristics:

A) Exciting (SBET surged 2,000% within the trading day)

B) High volatility

C) Seen as a new paradigm of financial engineering

Self-reinforcing flywheel mechanism

Therefore, with this "alchemy", Saylor's MicroStrategy has been trading at a premium above its net asset value for the past two years, allowing Saylor to issue shares and buy more Bitcoin without significantly diluting shareholder equity or affecting the stock price premium. In this case, this mechanism is also highly reflexive:

MicroStrategy's acquisition activities can be more aggressive during periods of premium. During periods of discount, debt and convertible bonds become the main driving forces.

mNAV premium allows Saylor —> issue stocks —> purchase BTC —> BTC price rises → increases its NAV and stock price —> attracts more investment at a stable premium ——> further financing and more purchases. [2]

However, a phenomenon has emerged for the first time: the strong correlation between the discount and the Bitcoin price seems to have diverged; this may be the result of other DATs being launched in the market. However, this could mark a crucial turning point, as MicroStrategy's ability to maintain this flywheel mechanism through financing has weakened, and its premium has also significantly decreased. This trend is worth closely monitoring; in my opinion, this premium is unlikely to return significantly again.

MSTR Premium/Discount Compared to Bitcoin Price

There is no doubt that as the net asset value of DAT has grown from 10 billion dollars in 2020 to over 100 billion dollars today, this tool provides significant liquidity to the market, equivalent to the total of all Bitcoin ETFs at 150 billion dollars. Under positive risk conditions, including Bitcoin, all risky assets benefit from this mechanism, which also injects a highly reflective pricing mechanism into the underlying assets [3].

The total net asset value of the cryptocurrency treasury company

Why it will crash

I think the development path of this matter is not complex. For me, there are only three paths and a logical conclusion:

1. DAT continues to trade at a premium above mNAV, the flywheel mechanism keeps operating, and the unmet demand drives cryptocurrency prices further up. This is a new paradigm driven by financial alchemy.
2. DAT began trading at a discount, leading to a gradual unwinding of the market until forced liquidation and bankruptcy protection occurred (Note: a chapter of U.S. bankruptcy law that provides a form of bankruptcy protection), ultimately resulting in a complete collapse.
3. DAT starts trading at a discount, being forced to sell underlying assets to repurchase shares, repay debts, and pay operating costs. This unwinding process becomes recursive until the scale of these DAT diminishes, ultimately turning into a "zombie company."

I believe the likelihood of DAT continuing to trade at a premium is extremely low; in my view, this premium is a result of risk assets benefiting from loose liquidity conditions, which have also allowed Nasdaq index stocks and overall stock prices to perform well. However, when liquidity conditions tightened in 2022/2023, it was clear that MSTR was not trading at a premium, and even experienced a discount in the short term. This is the first area where I believe there is mispricing – DAT companies should not exist at a premium; in fact, these companies should trade at a deep discount well below NAV.

The root cause lies in the fact that the implied equity value of these companies depends on their ability to create value for shareholders; traditional companies achieve this through dividends, stock buybacks, acquisitions, business expansions, and so on. However, DATs lack such capabilities, and their only abilities are to issue stock, issue debt, or perform some minor financial operations, such as pledging, but these have little significant impact. So what value does holding these companies' stocks have? Theoretically, the value of these DATs lies in their ability to return their net asset value to shareholders; otherwise, their equity value has little significance. However, given that these instruments have failed to realize this potential, and some companies even promise never to sell their underlying assets, in this case, the value of these stocks depends solely on the price the market is willing to pay for them.

Ultimately, the value of equity now depends on:

1. The potential for future buyers to create premiums (based on DAT's ability to continuously raise funds at a premium).
2. The price of the underlying asset and the liquidity of market absorption and sales.
3. The implied probability of shares being redeemed at net asset value.

If DAT can return capital to shareholders, it would be similar to an ETF. However, since they cannot achieve this, I think they are closer to a Closed-End Fund. Why? Because they are a tool for holding underlying assets, but there is no mechanism to distribute the value of these assets to investors. For those with a good memory, this clearly reminds me of GBTC and ETHE, which experienced similar situations during the significant unwinding process in 2022, when the premium of closed-end funds quickly turned into a discount [4].

The essence of this unwinding is priced based on the implied probabilities of liquidity and future conversion possibilities. Given that both GBTC and DAT cannot achieve redemption, the market will price at a premium when liquidity is abundant and demand is strong. However, when the underlying asset price falls and begins to contract, this discount becomes very pronounced, with the trust's discount even reaching 50% of NAV. Ultimately, this "discount" to NAV reflects the price that investors are willing to pay for an asset that cannot logically or foreseeably distribute NAV value to trust holders; therefore, pricing is based on its potential to achieve this goal in the future and the demand for liquidity.

Market confidence and liquidity are tightening, and the premium of the Grayscale Bitcoin Trust is gradually collapsing.

Debt and Subordinate Risk

Similarly, besides capital return, there are only two ways DAT can create value for shareholders: through financial management (such as staking) or through borrowing. If we see DAT start to borrow on a large scale, it will be a signal indicating that a large-scale unwinding may be imminent, although I think the likelihood of borrowing is low. In either case, these two methods of creating value are far from comparable to the equity value of the assets held by the company, which inevitably brings to mind GBTC. If this analysis holds, investors will sooner or later realize this, the confidence bubble will eventually be burst, leading to a shift from premium to discount, and possibly triggering the sale of the underlying assets.

Currently, I believe the likelihood of forced liquidation or bankruptcy protection due to leverage or debt liquidation is also very low. This is because the current debt levels are not problematic for MicroStrategy or other DATs, considering that these trusts tend to finance through equity issuance. Taking MicroStrategy as an example, its debt is 8.2 billion, holding 630,000 bitcoins, and the price of bitcoin would need to fall below $13,000 for debt to exceed assets, which I believe is extremely unlikely to happen [5]. BMNR and other Ethereum-related DATs have little to no leverage, so forced liquidation is also unlikely to become a major risk. In contrast, other DATs, besides MSTR, are more likely to gradually liquidate through aggressive acquisitions or shareholder votes and return capital to shareholders. All the acquired bitcoins and ethereums may directly return to the market and circulate again.

Saylor's Choice

Although Saylor holds only about 20% of MicroStrategy's equity, he possesses over 50% of the voting rights. Therefore, it is nearly impossible for activist funds or investor coalitions to force a sale of shares. The potential consequence of this situation is that if MSTR starts trading at a significant discount, and investors are unable to force a buyback of the stock, there may be investor lawsuits or regulatory scrutiny, which could further negatively impact the stock price.

Debt is still far below net asset value, and mNAV remains at a premium.

Overall, my concern is that the market may reach a saturation point, at which additional DAT will no longer have an impact on prices, thereby enhancing the reflexivity of these mechanisms. Once the market supply is sufficient to absorb both artificially created and immature DAT demand, the process of unbinding will begin. In my view, such a future may not be far off. It seems to be just around the corner.

Nevertheless, Saylor's "debt" theory has been grossly exaggerated. His current holdings are not substantial enough to pose a significant problem in the short term. In my view, his convertible bonds will ultimately have to be redeemed at par in cash, as his equity could drop significantly if the adjusted net asset value (mNAV) trades at a discount.

One point that needs to be emphasized is whether Saylor will buy back shares by issuing more debt when the adjusted net asset value falls below 1. I believe the likelihood of this approach solving the mNAV problem is very low, as once investor confidence is damaged, it is difficult to restore. Therefore, continuously issuing debt to make up for the mNAV problem could be a risky path. Additionally, if the mNAV continues to decline, MSTR's ability to cover its debt by issuing more debt will become increasingly difficult, which will further affect its credit rating and investor demand for its products. In this scenario, issuing more debt could trigger a reflexive downward spiral:

mNAV declines → Investor confidence declines → Saylor issues debt to repurchase shares → Investor confidence remains low → mNAV continues to decline → Pressure increases → More debt issuance (debt needs to reach significant leverage levels in the short term to pose a danger).

Saylor considers share buybacks through debt issuance—a potentially dangerous path.

Regulation and Historical Precedents

In the current situation, there are two scenarios that are more likely to occur:

1. MicroStrategy faces a class action lawsuit from investors seeking to return shareholder capital to net asset value;
2. Regulatory Review. The first of these two scenarios is relatively straightforward and may occur at a significant discount (below 0.7 times mNAV). The second scenario is more complex and has historical precedents.

History shows that when companies outwardly disguise themselves as operating businesses but actually serve as investment vehicles, regulation may intervene. For example, in the 1940s, Tonopah Mining Company was ruled to be an investment company due to its primary holding of securities [6]. In 2021, GBTC and ETHE traded at extremely high premiums, but then crashed to a 50% discount. When investors profit, regulators choose to look the other way, but when retail investors suffer losses, the narrative shifts, ultimately forcing its conversion to an ETF.

MicroStrategy's situation is similar. Although it still refers to itself as a software company, 99% of its value comes from Bitcoin. In fact, its equity acts like an unregistered closed-end fund, with no redemption mechanism. This distinction can only be maintained when the market is strong.

If DAT continues to trade at a discount, regulators may reclassify it as an investment company, restricting leverage, imposing fiduciary duties, or enforcing redemption. They may even completely shut down the "flywheel" model of equity issuance. What was once considered financial alchemy when trading at a premium may be defined as predatory behavior when trading at a discount. This may be Saylor's true vulnerability.

What is the headline news?

I have hinted at the possible scenarios that may occur, and now I will make some direct predictions:

1. More DAT will continue to be launched for higher-risk and more speculative assets, signaling that the liquidity cycle is about to peak.

• Pepe, Bonk, Fartcoin and others

• The competition between DAT will dilute and saturate the market, leading to a significant decrease in mNAV premium.

• Such transactions will involve capital costs and execution risks. Additionally, using OTM (out-of-the-money) options is also a simpler way to express this.
• The valuation dynamics of DAT will gradually approach that of closed-end funds.
• This trend can be captured through trading "shorting equity/going long on the underlying asset" to seize mNAV premium.

• Over the next 12 months, most DAT will trade at a discount below mNAV, which will become a key point for the cryptocurrency market's price turning towards a bear market.

• Stock issuance stops. Without new capital inflow, these companies will become static "zombie enterprises" on the balance sheet. No growth flywheel → No new buyers → Discount continues.

• MicroStrategy may face a class action lawsuit from investors or regulatory scrutiny, which could call into question its commitment to "never selling Bitcoin."

• This marks the beginning of the end.

• As the price has a reflexive impact on the underlying asset during the downward process, the positive evaluation of financial engineering and "alchemy" will quickly turn negative.

• The perception of people like Saylor and Tom Lee will shift from "genius" to "fraud."

• Some DAT may use debt instruments during the market unblocking process, or be used for share buybacks, or for purchasing more assets → This is a signal of an impending collapse.

• The related trading strategy utilizes debt leverage and increases short premium positions.

• A hedge fund may acquire shares of a certain DAT at a discount and pressure or force its liquidation and distribution of assets.

• At least one activist fund (such as Elliott and Fir Tree) will buy DAT positions at a significant discount, inciting liquidation and forcing the return of BTC/ETH to shareholders. This will set a precedent.

• Regulatory intervention:

• The SEC may enforce disclosure rules or investor protection measures. Historically, persistently discounted closed-end funds have spurred regulatory reform.

Sources

[1] MicroStrategy Press Release

[2] MicroStrategy SEC 10-K (2023)

[3] Bloomberg – “Crypto Treasury Companies Now Control $100bn in Digital Assets”

[4] Financial Times – “Grayscale Bitcoin Trust Slides to 50% Discount” (Dec 2022).

[5] MicroStrategy Q2 2025 10-Q filing.

[6] SEC v. Tonopah Mining Co. (1940s ruling on investment company status).