Encryption Treasury Company Bubble Warning: From "Financial Alchemy" to Liquidation Countdown

Written by: Joseph Ayoub, former Head of Encryption Research at Citigroup

Compiled by: Shenchao TechFlow

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 gains. Exchanges were overwhelmed by a surge in demand, new participants flocked in, speculative ICOs (initial coin offerings) emerged one after another, trading volume hit historical highs, and the market welcomed a new paradigm, new heights, and even the luxurious experience of first-class. 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.

Four years later, cryptocurrency experienced its second major bubble, larger in scale and more complex in structure, incorporating a new paradigm of algorithmic stablecoins (such as Luna and Terra), along with some "rehypothecation" crimes (like FTX and Alameda). This so-called "innovation" is so complex that few truly understand how the largest Ponzi schemes among them operate. 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 scale retail Ponzi scheme collapses

The Arrival of the DAT Era (2020-2025)

At that time, we did not realize that Michael Saylor's MicroStrategy, founded in 2020, would become the seed for reshaping institutional-level funds into Bitcoin, all of which began with the sharp crash of Bitcoin in 2022, [1]. By 2025, Saylor's "financial alchemy" has become the core driving force behind today's demand from marginal buyers in cryptocurrency. Similar to 2021, very few truly understand this new paradigm of financial engineering mechanisms. Nevertheless, the crowds that have experienced those past "dangerous vibes" are gradually becoming more alert; however, the occurrence of this phenomenon and its secondary effects are precisely what distinguish 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 fairly 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 shares of the company, and using the proceeds to purchase 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 of 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 what is known as "alchemy": in the case of a premium, the company can issue shares and buy BTC at an appreciated value; while in the case of a discount, the logic reverses—repurchases or the 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% during the trading day)

B) High volatility

C) Viewed as a new paradigm of financial engineering

Reflexive 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 purchase more Bitcoin without significantly diluting shareholder equity or affecting the stock price premium. In this case, this mechanism is also very reflexive:

MicroStrategy's acquisition behavior can be more aggressive during the premium period. During the discount period, debt and convertible bonds become the main drivers.

mNAV premium allows Saylor —> issue stock —> buy BTC —> BTC price rises → increases its NAV and stock price —> attract more investment with 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 price of Bitcoin seems to have diverged; this may be the result of other DAT being launched in the market. However, this could mark a critical turning point, as MicroStrategy's ability to sustain this flywheel mechanism through financing has weakened, and its premium has also significantly decreased. This trend is worth close attention; in my opinion, this premium is unlikely to return significantly again.

MSTR Premium / Discount Compared to Bitcoin Price

Undoubtedly, as the net asset value of DAT has grown from 10 billion dollars in 2020 to over 100 billion dollars today, this tool has provided significant liquidity to the market, comparable to the total of all Bitcoin ETFs at 150 billion dollars. Under positive risk conditions, including Bitcoin and all risk assets, this mechanism has also injected a highly reflective pricing mechanism into the underlying assets [3].

The total net asset value of the cryptocurrency treasury company

Why did it crash?

I think 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 continuously operating, and the insatiable demand driving cryptocurrency prices further up. This is a new paradigm driven by financial alchemy.

DAT started trading at a discount, leading to a gradual market recovery, until forced liquidation and bankruptcy protection occurred (Deep Tide note: a chapter of U.S. bankruptcy law that provides a form of bankruptcy protection), ultimately resulting in a complete collapse.

DAT started trading at a discount, being forced to sell the underlying assets to repurchase shares, pay off debts, and cover operating costs. This unwinding process became recursive until these DATs reduced in scale, ultimately becoming "shell companies."

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 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 discount trading 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 be trading at a deep discount well below NAV.

The underlying reason 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, and so on. However, DAT lacks such capabilities; their only ability is to issue stocks, issue debt, or engage in some small financial operations like pledging, but these have virtually no significant impact. So, what value is there in holding these companies' stocks? Theoretically, the value of these DAT 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 solely depends on the price the market is willing to pay for them.

Ultimately, the value of equity now depends on:

The possibility for future buyers to create a premium (based on DAT's ability to continuously raise funds at a premium).

The price of the underlying asset and the liquidity of the market absorption and sales.

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 lack any mechanism to distribute the value of these assets to investors. For those with good memories, this clearly reminds me of GBTC and ETHE, which also experienced similar situations during the significant unwinding process in 2022, when the premium of Closed-End Funds quickly turned into a discount [4].

This type of unwinding is essentially priced based on the implied probabilities of liquidity and future conversion possibilities. Given that GBTC and DAT cannot achieve redemption, the market will price at a premium when liquidity is ample and demand is strong. However, when the price of the underlying asset falls and begins to contract, this discount becomes very apparent, with the trust's discount even reaching 50% of NAV. Ultimately, this "discount" to NAV reflects the price investors are willing to pay for an asset that cannot logically or foreseeably allocate NAV value to trust holders; therefore, the 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 Grayscale Bitcoin Trust is gradually collapsing.

Debt and Subordinated Risk

Similarly, apart from capital return, the only two ways DAT can create value for shareholders are 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 believe the likelihood of borrowing is low. Regardless of the situation, these two ways of creating value are far from comparable to the equity value of the company's held assets, which inevitably brings to mind GBTC. If this analysis holds true, investors will eventually realize this, and the confidence bubble will ultimately be burst, leading to a shift from a premium to a discount, and possibly triggering the sale of the underlying assets.

Currently, I believe that 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 insufficient to pose a problem for MicroStrategy or other DATs, considering that these trusts are more inclined to finance through equity issuance. Taking MicroStrategy as an example, its debt is $8.2 billion, holding 630,000 bitcoins, and the bitcoin price 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 little leverage, so forced liquidation is also unlikely to become a major risk. In contrast, other DATs, apart from MSTR, are more likely to gradually liquidate through aggressive acquisitions or shareholder votes and return capital to shareholders. All acquired bitcoins and ethers may directly return to the market and be recirculated.

Saylor's choice

Although Saylor holds only about 20% of MicroStrategy's shares, he has more than 50% of the voting rights. Therefore, it is almost impossible for activist funds or investor coalitions to force a sale of shares. The consequence of this situation might be that if MSTR starts trading at a significant discount and investors cannot force a stock buyback, there could be investor lawsuits or regulatory scrutiny, which could further negatively impact the stock price.

Debt remains well below net asset value, and mNAV is still in a premium state.

Overall, my concern is that the market may reach a saturation point, at which additional DAT will no longer affect the price, thereby enhancing the reflexivity of these mechanisms. The unblocking process will begin when the market supply is sufficient to absorb both artificially created and immature DAT demand. 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 greatly exaggerated. His current holdings are insufficient to pose a significant issue in the short term. In my opinion, his convertible bonds will ultimately have to be redeemed in cash at face value, as his equity may drop significantly if the adjusted net asset value (mNAV) trades at a discount.

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 approach solving the mNAV problem is very low, because once investor confidence is damaged, it is hard to restore. Therefore, continuously issuing debt to compensate for the mNAV problem could be a risky path. Moreover, if the mNAV continues to decline, MSTR's ability to issue more debt to cover its debt will become increasingly difficult, which will further impact its credit rating and the demand for its products from investors. In this case, issuing more debt could trigger a reflexive downward spiral:

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

Saylor is considering a stock buyback through debt issuance - a potentially dangerous road.

Regulation and historical precedents

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

MicroStrategy faces a class action lawsuit from investors demanding the return of shareholder capital to net asset value.

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 ostensibly disguise themselves as operating businesses but actually serve as investment vehicles, regulatory intervention may occur. For example, in the 1940s, Tonopah Mining Company was ruled to be an investment company due to its primary holdings in securities [6]. In 2021, GBTC and ETHE traded at extremely high premiums, but then crashed to a 50% discount. When investors were making profits, regulators chose to turn a blind eye, but when retail investors fell into losses, the narrative changed, ultimately forcing them to convert into ETFs.

MicroStrategy's situation is similar. Although it still calls itself 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, limiting leverage, imposing fiduciary duties, or mandating redemptions. They might even completely shut down the "flywheel" model of equity issuance. Actions once seen as financial alchemy when trading at a premium may be defined as predatory behavior when trading at a discount. This might 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, indicating that the liquidity cycle is about to reach its peak.

Pepe, Bonk, Fartcoin and others

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

The valuation dynamics of DAT will gradually approach that of a closed-end fund.

This trend can be captured through trades of "shorting equity / going long on the underlying asset" to seize mNAV premium.

Such transactions will be accompanied by capital costs and execution risks. Additionally, using OTM (out-of-the-money) options is also a simpler way to express this.

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

Stock issuance has stopped. Without new capital inflow, these companies will become static "zombie companies" on the balance sheet. No growth flywheel → No new buyers → Discount persists.

4. MicroStrategy may face a collective lawsuit from investors or regulatory scrutiny, which could call into question its commitment to "never sell Bitcoin."

This marks the beginning of the end.

5. As the price moves downward, its reflexive impact on the underlying asset will quickly turn positive evaluations of financial engineering and "alchemy" into negative ones.

The views on Saylor, Tom Lee, and others will shift from "genius" to "fraud."

6. 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 relevant trading strategy involves using debt leverage and increasing short premium positions.

7. 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, prompting liquidation and forcing BTC/ETH to be returned to shareholders. This will set a precedent.

8. Regulatory intervention:

The SEC may enforce disclosure rules or investor protection measures. Historically, closed-end funds trading at a persistent discount 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).