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More and more companies, many of them penny stocks looking for ways to increase their profits, are launching every day. But as bitcoin sags, they are turning to esoteric and more volatile tokens in a bid to amplify returns, according to a Reuters analysis of more than three dozen company announcements.
FUTURE RISKS FOR INVESTORS?
This trend illustrates how the often volatile and speculative world of cryptocurrencies is increasingly intertwined with traditional markets, creating potential dangers for investors.
“DATs are expanding into more exotic and less liquid cryptocurrencies, and that’s exactly where the risk could be much higher,” said Cristiano Ventricelli, vice president and senior digital assets analyst at Moody’s Ratings.
“When markets fall, pressure increases on the equity of these companies,” Ventricelli added.
A VOLATILITY PIPELINE
Since April, many DATs have funded token purchases through private placements or PIPEs – selling shares directly to private investors – usually at a discount.
At least 40 DATs raised more than $15 billion in total through PIPEs between April and November, only five of which were focused on bitcoin, according to Reuters analysis. Bitcoin posted a monthly loss in October for the first time since 2018.
Leading crypto investors in these deals include Winklevoss Capital, Galaxy Digital, Jump Crypto, Pantera Capital, Kraken and DWF Labs, according to public data.
While some institutional investors can purchase tokens directly, DATs provide the opportunity to leverage returns and allow more conservative investors to gain exposure to crypto through regulated public companies.
PIPEs allow companies to quickly access liquidity, but shareholder dilution and potential resale of shares at the end of lock-up periods often fuel stock price volatility. And because many DAT companies rely heavily on PIPEs, they are particularly vulnerable when markets fall, analysts say.
“The hype has died down since DATs hit the market. But I think it could come back,” said Peter Chung, head of research at crypto-focused Presto Research.
An OceanPal spokesperson said its NEAR purchases provide shareholders with a way to benefit from the token’s built-in AI capabilities. Greenlane declined to comment.
Strategy, BitMine, Tharimmune, Winklevoss Capital, Galaxy Digital, Jump Crypto, Pantera Capital, Kraken and DWF Labs did not immediately respond to requests for comment.
TRADING BELOW NET ASSET VALUE
Earlier this year, many DAT companies were trading at a premium to their crypto holdings as investors believed they could use their access to credit to purchase more tokens.
But as bitcoin has faltered and strategy copycats have flooded the market, some are faltering. As of Friday, at least 15 Bitcoin cash companies were trading below the net asset value of their tokens, according to data from crypto publication The Block.
Retail investors, who are big buyers of Strategy and other high-profile Bitcoin DATs, lost about $17 billion on these trades, Singapore firm 10x Research estimated last month, Bloomberg reported.
Some DATs focused on other major coins are also under pressure. ETHZilla and Forward Industries recently approved share buybacks, a move generally aimed at supporting stock prices.
“I think most of these digital asset treasury companies will end up trading at a discount to digital assets,” said Michael O’Rourke, chief market strategist at JonesTrading.
“ABSOLUTELY DECIMATED”
DAT companies hold 4% of all bitcoin, 3.1% of all ether and 0.8% of all solana, meaning their fortunes could have major implications for coin prices, Standard Chartered analysts wrote in a September note, adding that they expected consolidation in the space.
Kyle Samani, president of Forward Industries, said in a statement that buying the company provides “the flexibility to return capital to shareholders when we believe our shares are trading below their intrinsic value.”
He and other DAT executives say their success will depend on their ability to make sound investment decisions.
“You bet on the management team to do interesting things, and that’s what we’re trying to do,” Samani, who is also co-founder of Multicoin Capital, which invested in Forward Industries’ PIPE in September, said in an interview.
An ETHZilla spokesperson said the company was opportunistically buying back shares while its shares were trading below net asset value, and that while it held a lot of ether, it was primarily focused on putting traditional assets on the blockchain.
If a DAT just buys tokens, “in the long run, you’re going to be completely decimated,” he added.
Reporting by Hannah Lang; edited by Michelle Price and Rod Nickel
Our Standards: The Thomson Reuters Trust Principles.
