How the Next Crypto Winter Could Trigger a DAT Meltdown

Transcript

The next crypto winter will be a nuclear winter because what'll happen is these DATs will trade at discounts. Now the hedge funds come in, they go, "Okay, we can just go raise 2 3 4 5 billion, whatever it is. We'll buy up the company, but we're going to short before we buy it up and then we're going to dump it on the market and get extra leverage and we're going to shank the price down 90%." >> Couple of things here. one like the eternal problem of the DAT is that they don't have an internal call it price stabilization mechanism like the ETFs have with the create destroy mechanism for shares. So if I'm like think about your average like canonical DAT which is basically I'm a public equity vehicle.

I'm going to go buy some assets and what I'm going to do with those assets is like throw them in the room behind ROM with the books and just leave them there. And what that means is that the resting price of that thing should be the assets inside of that less the future cash flows that they're going to be paying out to like management, custodians, expenses, etc. Eg. They should trade at a discount. And your view of how big the scalping is going to be and how well they're going to do accumulating those assets should influence what that is. The problem that creates is that a lot of people who can do those things themselves are then in a position where they can make money by consuming these things in M&A, right?

Which is why you're going to start seeing this happen because if I'm not trading at a discount and I'm another DAT and I can buy one that's trading at a discount, I'm essentially just monetizing that gap. That I think is the benign version. The less benign version is that I am somebody like Coinbase with my own institutional custodian or I am like a hedge fund and I look at that thing with a large gap and go ah I could just take that thing wipe it out sell the assets and make the money and so >> it's going to happen it's going to happen it's in a downturn the mnav multiple is going to compress for a lot of them and you're going to have one maybe two big players in each in each in

each uh space each >> caveat on that I like I wrote one of my newsletters on this a while ago I think there's two types of DATs that will survive one is there are a few places in the world where DATs are a form of regulatory or tax arbitrage that's not the United States but it can be elsewhere totally get it there like tax optimization is a very real thing you should probably do it generically speaking >> one example that's metaplan in January in Japan correct for listeners who And so number two is DATs. I think this is kind of where Vinnie's going that have an operating model and cash flow and can consume other things be it DATs or other cash flowing businesses. Those are likely to be the one big one that

remains. So if any of these DATs survive, I will jokingly say over time they start looking more like an accumulation company, right? The most familiar of which is Bergkshire Hathaway, but there are others that exist in the world like you know that do M&A serially to bring things in and create value or quite frankly just have an ETF. >> Yeah. Look, I I think uh it's it's quite phenomenal that we had the first DAT which was MSTR and then we had a a proliferation of DATs over the last three months combined with the spa craze and now we're talking about MNAV compression and the you know uh the collapse of these deaths. I mean that was they came quick, they left quick.

Welcome to crypto. That's what it is. Yeah. Look, I agree with your observations. Uh you know, you don't need that many debts. Like I think a lot of this is liquidity seeking. You know, you you have insiders that can wrap these and put them into public markets. And I think the liquidity that's offered by US public markets, which is significant. Um no, that's not all of them. I don't think the intentions are nefarious. I think there are a handful of very high quality DATs with great opera like Andrew Keys I think is like a very high quality high integrity individual who's thinking about staking yield. How do you maximize that? And he's invested alongside that with you know his personal reputation. But I

think in other cases you you really have to question like what are the motivations? What what are people really trying to do? Is there a back-end transaction somewhere where there's liquidity? You know, you have to keep your wits about you. >> Yeah. I gotta say the the best business to be in right now is I guess investment banking because you can make money um selling all the placements and then you can make money um >> well the flip side >> speed dating and putting these companies together. >> You're right. The flip side to that though is the quote be careful of Wall Street sells. The other you know that's what you're saying. You know like Wall Street says when the ducks are quacking feed the ducks, right? That's so a lot of ducks are quacking. They're getting fed. And you know, we've talked about before that when you see a peripheration

of new issuance, that is a contra signal. So you have to make sure that you don't top tick the market on a on a stupid deal. That that's what happens around this time of this is the kind of stuff that happens, right? >> Vinnie, are you guys invested in debts? Is that part of or or even just individually? >> Um well, so we you at Precious Capital, we you know, we we don't invest in debts. Uh not not yet. We're we're delta neutral ob fund. Uh I think that's offer some interesting arbit arbitrage opportunities but you have it's hard to unwind them right. So you can you can bet one way on the on the multiple and you could say the compression will happen but it doesn't mean it unwinds uh

and you can get hold of the like you could you could short a debt that's sitting at 1.3 times multiple and it could start trading at a discount eventually which is fine. and you'll make you'll make money on the spread. But, you know, it's it's you have to, you know, I guess it's just you guys get it like unless that there's distributions, unless you can actually redeem the shares for the underlying, it's very hard to just OB to AB that as a as a as an OB fund. >> They have to buy SPA. You know, they're going to buy SPA. Just measure who's going to buy what spot. Look at it by >> Yeah, but but there's there's there's there's some I've got some liquidity concerns with what I'm seeing in the DAT space. And I think that what what Sailor is doing is he's overleveraging

um Micro Strategy by bringing out all these additional instruments on top of MSDR, right? And so everyone like while there's liquidity in the market, everyone's kind of going along with it like but like no one no one who's actually saying and maybe there are people speaking out about it, but like everyone's just going running with it right now and everyone's kind of you know like MSDR is trading I think I last saw 1.6 maybe 1.5 1.6 six times uh assets which is kind of crazy and he stacked up all these debt instruments on top of that. Um if Bitcoin like this is like this is this is the the spicy take which nobody wants to talk about. You know Ram saying like hey you know Bitcoin 107's a buy, 110's a buy, whatever. What happens if Bitcoin drops

to 50 or 60? Oh, that'll never happen. Okay, I I've been around I've been around the block a long time. If Bitcoin goes down to 50 or 60, you know, Micro Strategy starts to look extremely vulnerable and you know, like I I think at some point it could blow up, but like yes, it's it's dependent on Bitcoin. >> If Bitcoin breaks like 99, you're supposed to sell, you're supposed to get out. No one's saying buy at 107, then hold on, you know, until till 60. >> No, but but but no, no, no, but that's not how it gets gets communicated. That's not the narrative in the market.

You know, everyone is like cost average into Bitcoin. Buy Bitcoin no matter what. >> No, I but I I was going to say, Rob, you don't say that, but a lot of people do say buy Bitcoin at any price and literally never sell. >> Yes. >> Um, with with that said, >> there are plenty of people who will be unwinding DATs. It's not trivial, but the thing to understand is they will not be retail investors, and it may not be good for the retail investors when they get involved with unwinding these things. like, yeah, I I guess I would put it to people this way. Unless you yourself are one of them, you might not want to be in a trade with an activist hedge fund trying to unw behind the scenes like, oh, I don't know, shorted all the tokens already

when they bought the thing to lock in a discount and then they're going to go wage war on that company. Like people think I'm joking, but I used to work at 100% and I've seen like I'm going to remind people that they will do stuff like we're just going to sue you until your insurance company drops your DNO insurance and then go after your board members personally just to exhaust everybody to force you out. Or you have maniacs who have done things like, and this is not an exaggeration, stolen military vessels from sovereign nations to collect on debts coming after these things. like who they will get it done.

It's just >> the next the next crypto winter will be a nuclear winter because what'll happen is these DATs will trade at discounts. Um and I'm not saying all DATs are bad, but there'll be a lot of DATs that would acquire a lot of coins for a certain for a certain project. They will trade at a massive discount. Now, the hedge funds come in, they go, "Okay, we can just go raise two, three, four, five billion, whatever it is. We'll buy up the company, but we're going to short before we buy it up and then we're going to dump it on the market and get extra leverage and we're going to shank the price down 90%. And >> interesting point. So, I had a chat with a person who's perhaps the most active in that. The way you make money in the DAT strategy is by making decisions on

to participate in the pipe or not. >> No, no, no, no. We talking about pasta. >> I I I will just that was a quick here's here's an alternative in so look suppose you're trading at a discount to m nav discount. So this person who's a very prolific investor in dats and I I actually made the point you guys are making this is what he said. He said I disagree with his response because I know you guys are probably going to be on my side as well. I'll share his thought process. He said, "Look, if you're trading at a discount NAV, then what you do is you sell the spot asset that you've been accumulating and buy back your shares because that's a value creating mechanism."

>> But Sailor specifically said he won't do that, by the way. >> Sailor won't. But the argument is that these other >> Okay. So, so but here's the problem. When you've got a couple of percentage points of the float, >> Yeah. the moment you start selling and people are watching those wallets the the market front runs. >> So that that's why I disagree with the response. You're right because look if you're that accumulating >> let me just give you the let me give you the mechanism here. Okay. And I haven't announced the details yet but I am working on a couple of debts. So these are things that I'm I'm I'm thinking about very very carefully.

>> It's just you me Vinnie and maybe like 10 or 20,000 other friends. So >> it's between us 5,000 people. >> No no no no. I again like I mean it'll come out very soon but like I won't say which ones or what I'm doing exactly but here's here's an example of a risk factor in a DAT. I come to you Rahm you're running your whatever XYZ DAT and you're trading at a discount because the market's really weak right now. I get you to sign a um uh an LOI where I would buy the debt because you're trading a discount and you can't offload. At the same time, I'm busy basically selling the the coin, shorting, sharing the coin. So, I have more negotiating leverage with you because your MNEV

multiple is now negative and getting bigger and bigger. So, you then like, you know what, the price you offered me yesterday, it's actually good because it's 20 or 10% more than what it is today. I'll take it. You sell it. Meanwhile, so that happens now. I've acquired those coins, but I've actually but now I'm unwind the deck and sell them into the market more and layer on my short deeper. And by the way, the way they do this is they use a combination of puts and and spot shorting, right? So with deep out the money puts, you basically just need to delta hedge it down. So So you you don't need all those coins. You say, "Okay, give me sell, you know, go to an OTC desk, sell me a 30% out the money put, and then negotiate the contract with you." And then those

puts basically go deep into money once you start offloading the debt. These guys are going to make a killing unwinding these debts. >> Who are these guys? What's the hedge funds? >> Hedge funds. Wall Street. Wall Street is going to make so much money on the way down. >> Are you are you talking >> next crypto? The next crypto meltdown will be a nuclear crypto streets of the world. Be specific here. Like what? I'm not going to I'm not going to point out specific hedge funds, but there are guys out there who will basically short the out of the crypto market. The moment the the moment the damn bursts 99K, whatever number you want to use, >> it's going to cascade.

>> I don't I don't disagree with that by the way. I there's look I So my response was individual who's not on the show to get him back, but is that these these are pro-yclical markets. So there's what reflexivity on the way up and reflexivity on the way down. So the the person's argument is like look if you're trying to discount NAV then you sell spa buy back your shares you close the gap. But the point is if you bet again you can't you can't you can't >> Yeah. Yeah. Yeah. Then the spa market comes undone and then your debt starts to go to zero too. It's like trying to uh bail water out a boat and the boat's taking on more water. It's just not going to. So I I agree that's the risk and I think you you could get you know

things like the next GBTC, the next ETH. >> It's going to happen. I my my prediction is there'll be one max two DAT winners per per major token and then that's it. You're going to have a very few >> actually I would say like the long tale of DATs with limited sponsorship and limited adoption, most of those won't even have a a great DAT behind them. I think the majors will like four. Salana, Bitcoin, Ethereum, Hyperliquid. That's about it. Good luck. >> Yeah. Although I am interested in the long tail now. I mean, especially since some of the bigger ones are getting saturated. And I mean it's it's it's almost like at that point you almost like bet on all the horses where like at some point you just try to launch as

many of these little Dows as possible, corner a decent part of the market cap, and if you get the next hype, you get the next something, you're going to make you're going to make a killing and hope it'll offset. But but there is some there is there are some unique and again I'm looking at some of these there are some unique opportunities for certain tokens. So so think about what is a debt? It's a regulator. It's an arbitrage. It's a bridge between capital markets that exists in 401k funds in you know the money that's not sitting in crypto. It's sitting in sort of in the financial markets and and getting into a crypto that's only listed on crypto exchanges. And so if you can find one where it's, you know, very undervalued, widely distributed, maybe it's at

all-time lows, that's probably a better one that something that's at all-time highs and and and everyone has already got it, right? Or has access to it. So So there are there are these arbitrage opportunities, but but micro strategy and Bitcoin is the bell weather for our industry. And so until the until the bow breaks, everything's fine. Like I think we're in a good >> one just in defense of micro strategy. Look, they're using nonreourse debt and they've been selling bonds with converts at a 0% interest rate. >> So I don't I don't think the debt capital stack is is corporate.

>> Okay. Okay. How does Micro Strategy pay the interest on the debt? >> Look at the interest rate on the bonds. I mean they have 0% converts out there. >> Oh no, no, not all of them. Something about 11%. They got some 11% 12% as well now. Yeah. Did they sell more common shares to do that? >> Well, that that that's not great. We we should, you know, bring on someone that's looked at the entire MSTR debt stack and take >> No, the argument is it's in five years from now or three years from now, so it doesn't matter right now. I'm like, I don't think so. We go through we go to a financial crash or crisis.

>> I think your general idea is correct. Look, there's this concept called the Minsky hypothesis uh developed by H Minsky. It's an extraordinary framework. I see heads nodding also if there but I'll add up briefly. So the concept is that at the beginning of a of a market run you underwrite assets to free cash flow. The unlevered free cash flow is enough to motivate a purchase. Maybe that's 8% 12% 14%. Then as the market gets going that assets priced higher yield is lower to get to your target return. You use a use some leverage. Okay. So now you say, "Oh, I can get to my 8% bogey, 12 or 14%." But I've added leverage to the system. And obviously we've seen a

levering of assets including Micro Strategy. And then what happens in phase three, it's comparable based analysis. That means you say, "Oh, you should buy it because the public comp is 60 times earnings. Therefore, it's a bargain because this is at 42 earnings." So that's actually a form of greater fool theory. You're betting that there's some marginal buyer who's a sucker that's going to buy. And so Vinnie's point is that some of these assets are transitioning from phase two to phase three because they're kicking out the can to the future and there's going to be some buyer in the future. The problem is that's all reflexive. There is a buyer in the future. If it keeps going up, but if it doesn't keep going up, then there's no buyer in the future. You can't presume that. Well, I was going to

say you've kind of hit on the problem with DATs trading at an MNAV premium, right? Like this is the sort of tale of the Minsky theory is that it like if you listen without being overly like mean here. If you listen to most people like trying to explain why their dad should trade at an MNAV premium, it's a version of the old joke in mathematics of part one a miracle happens part two, right? It's like guys, right? That's, >> you know, it's it's like explain to me how using leverage causes your underlying asset to become more valuable over time, right? Like you could buy more of it. I get that. That's how leverage works to cool, totally good.

But like >> say more and they just can't. So to me, >> yeah, >> part of part of why I've been skeptical of most of the DATs and again there are subset like there are a handful of DATs with things like operating cash flow. Okay, maybe you're going to work. But for anybody who's in the asset part that's trading at a premium, you're in the final phase of Minsky already. And we all know how. >> I I agree. It reminds me of the old joke about the economist on an island with a can of soup. And someone asked the economist, "How you going to get off the island?" Well, assume a assume a can opener. That's what you're saying. Like, assume 10x. If we get the 10x, we're going to 20x. And aren't we going to 10x? Well, look at MSTR here.