Money Stuff: Cracking Open the DATs

For a while, you could sell $1 of Bitcoin for $2 on the stock exchange. If you had a pot of $100 million of Bitcoin, you could pop that into a public company, and the company’s shares would be worth $200 million. This was a hugely popular trade — the “digital asset treasury company” trade, or DAT — and lots of people with stashes of crypto did it. Good trade.

But then it collapsed. Now you can’t sell $1 of Bitcoin for $2 on the stock exchange anymore. Strategy Inc., which pioneered the DAT strategy, is trading at about a 9% premium to net asset value, down from more than 100% at the peak, but many of the copycats are trading at significant discounts to NAV. These days, $1 of crypto might trade at 80 cents on the stock exchange. 

That is a sad conclusion to the story, if you are a promoter or early shareholder of a DAT. But if you don’t know or care about the back story — if you come to this situation with fresh eyes — then “$1 of crypto trades at 80 cents on the stock exchange” is great! That’s a great trade too! You just have to buy. Selling $1 of Bitcoin for $2 was a good trade while it lasted, but it ended; buying $1 of Bitcoin for 80 cents is the good trade now. Not investing advice!

Well, the trade isn’t as simple as that. (Neither was the original DAT trade. [1] ) If there’s a $100 million pot of crypto trading at a $80 million valuation, and you buy some stock, you don’t actually get any of the underlying crypto. You get the stock. Of course, if you bought all of the stock for $80 million, you would be the sole owner of the pot. You could crack it open, take out the crypto, and sell it on the open market for $100 million. Good trade. But if you buy a little bit of stock, there’s no guarantee that the price will converge to the net asset value. Maybe it will go down some more. [2]

Of course, there are plenty of companies whose stocks arguably trade at a discount to their intrinsic value. That’s what activist investing is for: You buy some stock, you call up the board of directors, and you say “please realize the intrinsic value of this company so I can get paid.” In general, with operating businesses, this can be a complicated and debatable process, but with investment funds it is more straightforward. There is a classic business of “closed-end fund activism”; Boaz Weinstein’s Saba Capital Management is perhaps its best-known player. There’s some closed-end investment fund, a pot of stocks or bonds or whatever whose shares trade on the stock exchange. The fund’s shares trade at a discount to its net asset value, for various reasons. (The fund’s price capitalizes the fund’s fees, the fund’s investors don’t trust management, etc.) An activist buys a bunch of fund shares and pushes for a change in management. If the activist succeeds, the new management liquidates the fund — at net asset value — and hands the money back to investors. If you buy the fund at 80 cents on the dollar and liquidate at $1, you make 20 cents.

A DAT is — well, I suppose I can’t say “a DAT is just a closed-end fund for crypto,” because that is somewhat controversial, and DATs will tell you that actually they are operating businesses and it’s silly to confuse them with investment funds. But here in the second sentence of this paragraph I can tell you that obviously a DAT is just a closed-end fund for crypto, come on. So the obvious trade is:

1. Buy a stake in a DAT that trades at a discount to net asset value, and
2. Agitate for the DAT to liquidate its crypto and give the money back to shareholders.

In 2025, you could make money by popping crypto into a pot and selling it on the stock exchange; in 2026, you can make money by popping the crypto back out of the pots. Finance is great; it gets you coming and going.

Empery Digital Inc. is a very 2025 crypto treasury company. Less than a year ago, it was called Volcon Inc., and it was an “all-electric, off-road powersports vehicle company selling Volcon electric two-wheeled E-Bikes and motorcycles, utility terrain vehicles, or UTVs, also known as side-by-sides, and golf carts.” Its market capitalization was a few million dollars. In July, it announced a pivot in which some investors agreed to put in $500 million of cash and Bitcoin to form a crypto treasury company. That was an absolutely standard trade, back then: Volcon provided a public stock market listing, the investors provided the crypto, and the stock market provided a premium. The market cap peaked above $700 million.

But then, of course, (1) the DAT premium collapsed and (2) the price of Bitcoin also came down; Empery managed to do its buying near the peak. Today it reports a cost basis of about $117,517 per Bitcoin; Bitcoin is trading below $75,000 this morning, oops. Empery has 4,081.39 Bitcoins, $7 million of cash, $105 million of debt and 36.93 million shares outstanding. [3]  At a $75,000 Bitcoin price, that’s a gross asset value of about $313 million, and a net asset value (less debt) of about $208 million, or $5.64 per share. The stock closed yesterday at $4.64 per share, about 82% of net asset value.

So one trade might be: Crack open the pot, sell the Bitcoin at 100% of net asset value and give the money to shareholders. And Empery is doing some of that. It announced on Monday:

While the Company’s valuation continues to remain at a material discount to NAV, management will maximize share repurchases, funded by sales of bitcoin, incremental drawdowns on our debt facilities or a combination of the two based on the Company’s leverage ratios and valuation relative to NAV. This process began on Friday and is expected to continue. Sales of bitcoin on any given day will be made in coordination with contemporaneous share repurchases, to the extent practicable, to effectively lock in the accretion as securities laws limit the number of shares that can be repurchased on any given day.

But there is also some activism. Last month, ATG Capital Opportunities Fund filed a Schedule 13D reporting a 5.6% ownership interest in Empery; by last week that stake was up to 10.4%, though ATG has not disclosed any particular activist plans. Just in case, though, yesterday Empery adopted a poison pill in response to ATG, to “reduce[] the likelihood that any person or group could gain control of the Company through open market or private accumulation of Empery Digital shares without appropriately compensating shareowners for such control.”

Also yesterday a guy named Tice Brown filed his own 13D, along with a letter to the board of directors:

I personally own 9.0% of Empery Digital Inc. I intended to passively own this security and enjoy the convergence of its price to its underlying NAV. Due to recent interactions with its CEO Ryan Lane, and the outrageous entrenchment of management by a poison pill today, that intention has changed.

I am calling for the immediate resignation of Ryan Lane, the immediate replacement of the entirety of the Board of Directors of Empery Digital Inc, and the immediate sale of all Bitcoin with the proceeds immediately returned to shareholders. ...

This entity has one real asset, and it can be instantaneously liquidated and returned to shareholders with the push of a button. Shame on the Board for letting this foolishness continue.

Perhaps we can look forward to a wave of activism and proxy fights at discounted DATs. There are a lot of colorful characters in DATs, so the proxy fights might be fun. I suppose that if you run a digital asset treasury company in 2026, you might want to keep it going, hoping that the 2025 magic will come back and you’ll trade at a premium again. But if you start investing in digital asset treasury companies in 2026, the discounts are the whole point.

Here are two problems:

1. SpaceX would like to do an initial public offering, preferably in June, preferably a really big one. It would like to raise, say, $50 billion at a $1.5 trillion valuation, so it will need to sell as much stock as possible to as many people as possible.
2. A lot of people would like to invest in, approximately, “the stock market.” They invest in broad market index funds because they want to own all of the companies passively, without thinking about it. You cannot achieve this goal perfectly: For instance, right now, it is very hard to own SpaceX, because it’s a $1.25 trillion company that does not trade publicly. But it would be nice to get as close as possible. For instance, when SpaceX does start trading publicly (in a few months), it would be nice if it was immediately plopped into your index fund.

The obvious solution to both of these problems is “index funds should buy, like, 20% of the SpaceX IPO.” Then SpaceX will get more orders in its IPO, so it can sell more stock at a higher price. And then index funds will immediately give their investors what they want, which is exposure to the entire stock market, 2% of which might soon be SpaceX. [4]

The world mostly does not work that way, though: Newly IPO’ed companies are mostly not included in the big indexes immediately, so big index funds mostly don’t buy them at IPO. Instead, the company sells stock to other, active investors, and then later the company is added to an index, and then some of the early investors turn around and sell their stock to the index funds. There is a slow diffusion from the company to the index funds.

For a big enough company, everyone can anticipate that diffusion, and so the company’s IPO bankers can sort of think “well in a few months there’ll be a lot of index demand, and we can tell our IPO buyers that, and that will increase demand for the IPO now.” But there is some friction and imprecision there. It might be easier to just sell the stock directly, in the IPO, to the index funds. There are counterarguments. It might not be easier; the index funds might not be set up to buy in IPOs. [5] The “seasoning” of the company after the IPO might serve some useful purpose in protecting the index investors from flash-in-the-pan companies. (We talked yesterday about the risk that index funds could be “the ultimate buyer of last resort — the final dumping place” for pump-and-dump scams.) But, you know. Probably a little easier, at least some of the time.

Bloomberg’s Lu Wang reports:

The owner of the Nasdaq 100 Index is proposing to speed up the inclusion of newly listed, large-cap firms in the widely followed equity benchmark as a flurry of technology giants are slated to go public this year.

Dubbed as the “fast entry” rule, the planned revision would allow a new listing to join the Nasdaq 100 after the first 15 trading days, Nasdaq said in a statement. That’s way shorter than the current waiting period of at least three months.

The move highlights pressure on index providers to adapt to a world where companies wait much longer to list, putting enormous amounts of market value in play as soon as they enter public hands. Among companies expected to make initial public offerings this year is SpaceX, whose potential $1.3 trillion valuation would make it one of the biggest companies in the Nasdaq 100.

“There could be concern that passive funds will be missing out in a scenario where the new stock does rally even further and then requires higher turnover when adding it in,” said Kaasha Saini, head of index strategy at Jefferies. “The proposed change would make the index more representative of the market in a timely way.”

In the olden days, “companies that have been public at least three months” was a pretty good proxy for “all of the public companies.” This June, it won’t be.

Elsewhere in big IPOs:

Federal Housing Director Bill Pulte signaled on Tuesday that the administration could back off plans to undertake an initial public offering of Fannie Mae and Freddie Mac but stressed that President Donald Trump will make the final decision.

“President Trump keeps options on the table — all options at all times,” Pulte said on Fox Business when host Maria Bartiromo asked him about the potential for public offerings of the government-sponsored mortgage giants. “But the reality is, we don’t have to do that.”

We have talked about potential Fannie and Freddie IPOs a few times recently. One point I would make is that for more than a decade, people have gone around saying “the status quo can’t last, eventually Fannie and Freddie have to get out of conservatorship and return to normal ownership,” and I have gone around saying “no they don’t, the status quo is fine, nothing needs to change,” and I have been right every time so that’s fun.

Another point I would make here is that the number of multiple-hundred-billion-dollar companies looking to go public in 2026 is unusually large, and it’s possible that, what with SpaceX and OpenAI and Anthropic, nobody has time for a largest IPO ever from Fannie and Freddie. We’ve got an AI boom to worry about here! The mortgage companies can wait, again.

One general point that people sometimes make about prediction markets is:

1. The typical bettor at an online sportsbook loses money. You can just deduce this from first principles: The sportsbook enters into zero-sum bets with its customers, the sportsbook is a business, the sportsbook expects to make money, so the customers have to lose money. One could quibble: Perhaps this sportsbook is bad at its job and loses money, or perhaps the distribution of customer losses is weird and, like, 90% of customers make a little money while 10% lose a ton. But in rough expectation, yes, the customers have to lose money overall.
2. The typical trader of weird retail financial products — single-day stock options, contracts for difference, weird prop trading training programs, etc. — also probably loses money. On the same sort of reasoning: When you trade options or CFDs or whatever, you are facing a professional market maker who is probably paying to trade against your orders, so it must be lucrative to trade against your orders. The reasoning is fuzzier here: Financial investments are not as straightforwardly zero-sum as sports bets, and it’s conceivable that the customers could mainly make money on long-term investments even while the market makers make a spread on their trades. But, you know. For short-term risky stuff, “the customers mostly lose money” is a good bet.
3. The typical bettor at a prediction market like Kalshi or Polymarket does not lose a lot of money, at least not on first principles. The prediction market absolutely offers zero-sum bets, so nobody is making money on long-term economic growth. But the prediction market, notionally, offers zero-sum bets between customers, so every customer who loses money is exactly offset by a customer who wins money, so the customers overall do fine.

You could quibble with that last point: Kalshi charges trading fees, so in fact the customers lose money on net, but Kalshi doesn’t want them to lose in quite the same way that a sportsbook wants its customers to lose, because Kalshi isn’t quite on the other side of the trade. Another quibble is that there probably are professional market makers on the prediction markets, and the market structure might evolve to “professional market makers systematically make money at the expense of retail gamblers,” but I’m not sure we’re there yet. There do seem to be a lot of customer-to-customer trades.

I don’t think this is an especially great point in favor of prediction markets: The trading fees matter, churn matters, and in the long run “professionals systematically make money at the expense of retail” seems like a likely equilibrium. But it’s something. Anyway Bloomberg’s Denitsa Tsekova reports:

[An] analysis from Jordan Bender, an equity research analyst at Citizens, found that in their first three months, users on sites like Kalshi were losing more money than on established gambling sites like FanDuel and DraftKings, at least in proportion to the amount wagered. This cuts against Kalshi’s claims that it offers a customer-friendly way to bet on real-world events. …

Bender’s analysis showed losses on prediction markets were particularly high among the weakest performers. The bottom quarter of users lost about 28 cents of every dollar they bet on prediction markets in the first three months of adoption, compared with about 11 cents per dollar on other online gambling sites. For the bottom decile, the losses in the first 90 days climbed to 44%.

Kalshi apparently “told Bloomberg the analysis wasn’t just wrong,” but was “part of an ‘extortion’ plot by the startup behind the data,” then changed its mind to say that actually it was just wrong. I suppose it depends on how you define a “typical customer.” Per the data in the article, the median Kalsihi bettor loses 7%, while the median sportsbook bettor loses 1%. (In, I think, their first 90 days on the platform.) I suppose if the fees are high enough and the median trader churns enough, you’ll end up with a typical loss of 7%.

On the other hand, some of those 7% losses get recycled back into … free groceries? Here’s this:

Kalshi and Polymarket, which have been assailed by critics for encouraging financial risk taking by making betting more accessible, are now using the promise of free groceries to win over New Yorkers.

Kalshi, a platform that facilitates bets on real-world events, was giving out $50 worth of free groceries to customers on Tuesday, as it increasingly pushes to expand its customer base.

As that event was kicking off, Kalshi’s biggest rival, Polymarket, announced that is planning to open up its own grocery on Feb. 12 that will be “New York’s first free grocery store,” the company said on social media.

Both promotional efforts come as the companies are fighting for attention — and customers’ bets — ahead of the Super Bowl this Sunday.

I don’t really understand this promotion but I am not the target audience for it. I once said, about the crypto boom that presaged the prediction-market boom, that Sam Bankman-Fried was “in the business of funneling money from people who are going to use it poorly on gambling to, like, animal charities and pandemic preparedness and Joe Biden.” Are prediction markets in the business of funneling money from sports gamblers to free groceries for New Yorkers? Sure, whatever!

We have talked a couple of times recently about the utility of an art history degree for a financial career, and I would say to you that without a broad liberal education and a wide range of cultural references, you won’t be able to write asset allocation white papers like “Portfolio Design as Gesamtkunstwerk: The Total Portfolio Approach.” Of course that is by Inigo Fraser Jenkins and Alla Harmsworth at AllianceBernstein. It is not mostly about Wagnerian opera, but it is a little bit about Wagnerian opera:

Fundamentally, and to put it in the language of a manifesto, TPA [the total portfolio approach] is about rejecting the primacy of the asset class. Indeed, it questions whether an asset class is even a “thing.” In its holistic nature, we would suggest that the TPA amounts to nothing less than a Gestamtkunstwerk for investing. It might sound presumptuous to apply the language of Parsifal to something as pedestrian and low brow as asset allocation, but the immersive nature of TPA (at least in its ideal form) and the necessity of arriving at a synthesis of investment approaches suggest to us that the analogy is apt. Just as Wagner tried to achieve the total work of art, using TPA to direct allocation is an attempt to get close to the total possibility of what investing can achieve. 

We have talked about TPA recently, and I kind of think of it as “allocating your portfolio based on underlying risk factors rather than asset classes.” But I guess it’s a little like opera too.

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