Ether Treasury Companies: Which Are Superior, And Why

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Remember: It’s Big Money Rules Now

by Alex King and Yimin Xu, Cestrian Capital Research, Inc.

Our mission here with this Big Money Crypto service is simple.

Everything just changed in crypto.

The GENIUS Act has legitimized an already-underway move by asset managers to tokenize assets (meaning to create bespoke digital contracts with claims on those assets - a parallel to the creation of the joint-stock company). Tokenization requires a database of record to store who owns which contracts and what those contracts entali. The database of record is the Ethereum blockchain. To use the database - ie. to have the database process transactions - you need to own Ether, the only currency accepted as payment by the Ethereum blockchain for transaction processing. Ether is supply-constrained (by consensus, not by algorithmic constraint) and so, all other things being equal, the price of Ether should rise over time.

We have on our hands right now the creation and rise of a number of companies calling themselves “Ether Treasury Companies”. The leaders are BitMine Immersion Technologies ($BMNR) and SharpLink Gaming ($SBET); there is then a longish tail of other names most of which are already public, plus one public company in the works being The Ether Machine, slated for a merger with the SPAC Dynamix Corp ($DYNX).

The “Ether Treasury Company” strategy is simple; they are single-asset investment companies. They raise money by issuing equity or debt; use that money to buy Ether; report the quantum of Ether that they own; rinse and repeat.

There is nothing new about an investment company - the above business model could be used to accumulate coal, or U.S. dollars, or uranium, or anything else. The goal of all investment companies is to trade with as little as discount to the underlying net asset value as possible - and when they can, to trade at a premium to the net asset value.

Typically, investment companies trade at a discount to NAV, for many reasons but which include:

• It can be difficult to verify the NAV outside of management’s own reporting. If an investment company were accumulating coffee beans, could you really independently verify their beans holdings and value, or would you have to rely on what management tells you?
• All investment companies have some kind of operating expenses to pay and may also charge investors fees in exchange for managing the assets in question. Fees and expenses are a drag on the share price vs. the NAV per share.

Sources of premium to NAV are few but may include:

• The company being able to source new acquisition opportunities in the asset in question at below-market prices.
• The company being able to obtain a yield on the assets it owns.
• The company regularly generating additional value over and above the NAV in between reporting periods, by e.g. buying signifcant quanta of the target assets such that shareholders front-run each NAV announcement and bid the price up.

In the event of multiple investment companies in any one sector - as is the case in the Ether sector - then typically one would expect the superior picks to be those with:

• The most reliable management teams which can be trusted to report NAV acccurately.
• Lower fees and operating expenses.
• Superior ability to to obtain the maximum yield from the assets.
• Superior ability to raise capital with relative ease in the debt and equity markets.

Finally, liquidity of the stock of the treasury company itself is important. I am not sure we can say “highly liquid names get a premium to NAV” but it is certainly preferable as an investor to own more rather than less liquid tickers.

Today, the Ether market is in its infancy, but if truly tokenization develops as it could, we can expect Ether to become a much more complex industry. Already, for instance, the yield one can obtain on Ether varies according to how you achieve it - in the same way as U.S. dollars. If you place your dollars in a low risk environment, you can expect to be paid a low yield (interest rate) for that; in a higher risk environment, a higher yield. Ether is similar; there are already some complex yield-enhancing schemes available albeit with increased risk to principal, and simple scale alone can mean a better yield available than it is to small investors.

In my view, the spoils in the Ether Treasury Company sector are going to accrue disproportionately to skilled capital markets operators. Technical knowledge of the Ethereum protocol and the fineries of yield extraction, where to find stressed pools of Ether available to buy, etc, will all offer an edge early on. But if in the end Ether does in fact become Big Money - as I think it will - then the skills required to successfully run an Ether Treasury Company - meaning an Ether Investment Company - are going to be little different to those required to run any investment company. These skills have been hundreds of years in the making and are well honed in capital markets today.

So let’s look at the pool of Ether Treasury Companies today.

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