Written by: Joseph Ayoub, former Head of Crypto Research at Citigroup
Translated by: Deep Tide TechFlow
Introduction
The last time cryptocurrency experienced a 'traditional' bubble was in the fourth quarter of 2017, when the market saw astonishing double-digit and even triple-digit percentage daily increases, exchanges were overwhelmed by surging demand, new participants flooded in, and speculative ICOs (initial coin offerings) emerged in abundance, setting new records for trading volume, ushering in a new paradigm and new heights, even luxurious first-class experiences. 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, the cryptocurrency market has entered a second major bubble, larger in scale and more complex in structure, incorporating new paradigms of algorithmic stablecoins (such as Luna and Terra), along with some 'rehypothecation' crimes (like FTX and Alameda). This so-called 'innovation' is complex enough that very few truly understand how the largest Ponzi schemes operate within it. However, as with 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 retail Ponzi scheme collapses
The Era of DAT (2020-2025)
At that time, we did not realize that Michael Saylor's MicroStrategy, born in 2020, would become the seed that drove institutional-level funds to reposition Bitcoin, and it all began with Bitcoin's severe crash in 2022 [1]. By 2025, Saylor's 'financial alchemy' had become the core driver of today's marginal buyer demand in cryptocurrency. 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 vigilant; however, the occurrence of this phenomenon and its secondary effects is precisely what distinguishes 'knowing there may be a problem' from '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 purchase digital assets. In some cases, they continue to sell equity, diluting existing shareholders' rights in order to continue raising funds to purchase digital assets.
The net asset value (NAV) of DATs is calculated simply: assets minus liabilities, divided by the number of shares. However, the market trades not on NAV but on 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 the so-called 'alchemy': in a premium situation, companies can issue shares and purchase BTC at a premium; whereas in a discount scenario, the logic reverses—the pressure from buybacks or aggressive investors prevails.
The core of this 'alchemy' lies in: as these are new products, they have the following characteristics:
A) Exciting (SBET surged 2,000% during trading days)
B) High volatility
C) Viewed as a new paradigm of financial engineering
Reflexive flywheel mechanism
Thus, 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 purchase more Bitcoin without significantly diluting shareholder rights or affecting stock price premium. In this situation, this mechanism is also very reflexive:
MicroStrategy's acquisition activities can be more aggressive during premium periods. Conversely, during discount periods, debt and convertibles become the main drivers.
mNAV premium allows Saylor → issue shares → 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: the strong correlation between discount and Bitcoin price seems to have diverged; this may be a result of other DATs launching in the market. However, this could mark a critical turning point, as MicroStrategy's ability to maintain this flywheel mechanism through financing has weakened, and its premium has significantly decreased. This trend needs close monitoring; in my view, this premium is unlikely to return significantly.
MSTR Premium/Discount compared to Bitcoin price
Undoubtedly, as the net asset value of DATs grows from $10 billion in 2020 to over $100 billion today, this tool provides significant liquidity to the market, comparable to the total of all Bitcoin ETFs at $150 billion. Under favorable risk conditions, including Bitcoin and all risk assets, this mechanism also injects a highly reflexive price mechanism into the underlying assets [3].
The total net asset value of cryptocurrency treasury companies
Why it will collapse
I believe the development path of this matter is not complicated; for me, there are only three paths and one logical conclusion:
DAT continues to trade at a premium above mNAV, with the flywheel mechanism continuing to operate, and unmet demand driving cryptocurrency prices even higher. This is a new paradigm driven by financial alchemy.
DAT begins to trade at a discount, leading to a gradual unwinding of the market until forced liquidation and bankruptcy protection occur (note: a chapter of U.S. bankruptcy law that provides a mechanism for bankruptcy protection), ultimately leading to a complete collapse.
DAT begins to trade at a discount, being forced to sell underlying assets to buy back shares, pay off debts, and cover operating costs. This unwinding process becomes recursive, until these DATs shrink in scale and ultimately become 'zombie companies'.
I believe the likelihood of DATs 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 also allowed Nasdaq 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 discount trading in the short term. This is the first area where I believe mispricing exists—DAT companies should not exist at a premium; in fact, these companies should be trading at a deep discount far below NAV.
The root cause is 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 expansion, etc. DATs lack such capabilities; their only ability is to issue stock, issue debt, or perform some minor financial operations, such as pledging, which have little significant impact. So what is the value of holding stock in these companies? Theoretically, the value of these DATs lies in their ability to return their net asset value to shareholders; otherwise, their equity value is not very meaningful. However, given that these instruments have failed to realize this possibility, and some companies have even promised never to sell their underlying assets, in this case, the value of these stocks merely depends on the price the market is willing to pay for them.
Ultimately, equity value now depends on:
The potential for future buyers to create a premium (based on DAT's ability to continue raising funds at a premium).
The price of the underlying assets and the liquidity absorbed by the market for sales.
The implied probability that shares can be redeemed at net asset value.
If DATs can return capital to shareholders, it would be similar to ETFs. However, given they cannot achieve this, I believe they are closer to closed-end funds. Why? Because they are a tool for holding underlying assets, but with 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 also experienced a similar situation during the significant unwinding process in 2022, when the premiums of closed-end funds rapidly turned into discounts [4].
This unwinding is essentially priced based on the implied probabilities of liquidity and future conversion potential. Given that GBTC and DATs cannot achieve redemption, the market will price at a premium when liquidity is abundant and demand is high, but when the underlying asset prices fall and begin to shrink, this discount becomes very apparent, with the trust's discount even reaching 50% of NAV. Ultimately, this 'discount' in NAV reflects the price investors are willing to pay for an asset that cannot logically or foreseeably distribute NAV value to trust holders; thus, pricing is based on its future potential to achieve this goal and the demand for liquidity.
Market confidence and liquidity tightening, the Grayscale Bitcoin Trust's market premium gradually collapses
Debt and Secondary Risks
Similarly, apart from capital returns, the only two ways DATs can create value for shareholders are through financial management (such as pledging) or through leveraging debt. If we see DATs start to accumulate debt on a large scale, this will be a signal that a major unwinding may be imminent, although I believe the likelihood of leveraging debt is low. In either case, these two methods of creating value pale in comparison to the equity value of the company holding the assets, thus reminding one of GBTC. If this analysis holds, investors will sooner or later realize this, and the confidence bubble will eventually burst, leading to a transition from premium to discount, potentially triggering the sale of underlying assets.
Now, I believe the likelihood of forced liquidation or bankruptcy protection from leverage or debt liquidation is also very low. This is because the current debt levels are insufficient to pose a problem for MicroStrategy or other DATs, considering these trusts prefer financing through equity issuance. For example, MicroStrategy's debt is $8.2 billion, holding 630,000 Bitcoins, and Bitcoin prices would need to fall below $13,000 for debt to exceed assets, which I believe is highly unlikely to happen [5]. BMNR and other Ethereum-related DATs have almost no leverage, so forced liquidation is also unlikely to be a major risk. In contrast, other DATs, apart from MSTR, are more likely to gradually liquidate through aggressive buyouts or shareholder votes, returning capital to shareholders. All acquired Bitcoins and Ethereum may directly return to the market, circulating again.
Saylor's Choice
Although Saylor holds only about 20% of MicroStrategy's equity, he has over 50% of the voting rights. Therefore, it is nearly impossible for an activist fund or coalition of investors to force a share sale. The consequence of this situation is that if MSTR begins trading at a significant discount, and investors cannot force a buyback of shares, there may be investor lawsuits or regulatory scrutiny, which could further negatively impact the stock price.
Debt remains far below asset net value, and mNAV remains at a premium.
Overall, I am concerned that the market may reach a saturation point, at which additional DATs will no longer affect prices, thereby enhancing the reflexivity of these mechanisms. When the market supply is sufficient to absorb the artificially created and immature DAT demand, the unwinding process will begin. In my view, such a future may not be far off. It seems just around the corner.
Nevertheless, Saylor's 'debt' theory has been greatly exaggerated. His current holdings are not large enough to pose a significant problem in the short term. In my view, his convertible bonds will ultimately have to be redeemed for cash at face value, because if the adjusted net asset value (mNAV) trades at a discount, his equity could drop significantly.
One key point to focus on 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 method addressing the mNAV issue is very low, as it becomes challenging to restore confidence once investors' trust is damaged. Therefore, continuously issuing debt to fill the mNAV gap could be a risky path. Additionally, if mNAV continues to decline, MSTR's ability to issue more debt to cover its existing debt will become increasingly difficult, further impacting its credit rating and investor demand for its products. In this case, issuing more debt may trigger a self-reinforcing downward spiral:
mNAV declines → investor confidence declines → Saylor issues debt to buy back 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 danger).
Saylor considers share buybacks through debt issuance—a potentially dangerous route
Regulation and historical precedents
In the current situation, there are two more likely scenarios:
MicroStrategy faces a class action lawsuit from investors seeking to return shareholder capital to net asset value;
Regulatory scrutiny. The first of these two situations is relatively straightforward and may occur at a significant discount (below 0.7 times mNAV). The second situation is more complex and has historical precedents.
History shows that when companies superficially disguise themselves as operating enterprises but actually serve as investment tools, regulation may intervene. For instance, in the 1940s, Tonopah Mining Company was ruled as an investment company due to its primary holding of securities [6]. In 2021, GBTC and ETHE traded at extremely high premiums but subsequently collapsed to a 50% discount. When investors are profiting, regulators choose to look the other way, but when retail investors are losing, the narrative shifts, ultimately forcing conversion to ETFs.
MicroStrategy's situation is similar. Although it still calls itself a software company, 99% of its value comes from Bitcoin. In reality, its equity acts as an unregistered closed-end fund, with no redemption mechanism. This distinction can only be maintained when the market is strong.
If DATs continue to trade at a discount, regulators may reclassify them as investment companies, restricting leverage, imposing fiduciary duties, or forcing redemptions. They may even completely shut down the equity issuance 'flywheel' model. What was once seen as financial alchemy during premium periods may be defined as predatory behavior during discount periods. This may be Saylor's true vulnerability.
What is the headline news?
I have hinted at what may happen; now I will make some direct predictions:
1. More DATs will continue to launch targeting higher-risk, more speculative assets, signaling that the liquidity cycle is about to peak.
Pepe, Bonk, Fartcoin, and others
2. Competition between DATs will dilute and saturate the market, leading to a significant decline in mNAV premium.
The valuation dynamics of DATs will gradually converge to that of closed-end funds
This trend can be captured through trading 'short equity / long underlying assets' to capture mNAV premium
Such trading will come with funding costs and execution risks. Additionally, using OTM (out-of-the-money) options is a simpler way to express this.
3. Within the next 12 months, most DATs will trade at a discount below mNAV, marking a key point of price shift toward a bear market in the crypto market.
Stock issuance halts. Without new capital inflows, these companies will turn into static 'zombie companies' on the balance sheet. No growth flywheel → no new buyers → discounts persist.
4. MicroStrategy may face a class action lawsuit from investors or regulatory scrutiny, potentially questioning its commitment to 'never sell Bitcoin'.
This marks the beginning of the end
5. As prices exert reflexive effects on underlying assets in the downward process, positive evaluations of financial engineering and 'alchemy' will rapidly turn negative.
Views of Saylor, Tom Lee, etc., will shift from 'genius' to 'fraud'
6. Some DATs may use debt instruments during the market unwinding process, either for share buybacks or for purchasing more assets → this signals impending collapse.
The relevant trading strategy is to leverage debt and increase short premium positions
7. An aggressive fund may acquire shares of a DAT at a discount and pressure or force its liquidation and asset distribution.
At least one activist fund (such as Elliott and Fir Tree) will buy into DAT positions at a significant discount, agitating for liquidation, and force BTC/ETH to be returned to shareholders. This would set a precedent.
8. Regulatory intervention:
The SEC may enforce disclosure rules or investor protection measures. Historically, consistently discounted closed-end funds have prompted 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).
