Understanding the Flaws of the mNAV Metric

The concept of mNAV, originally defined as ‘market cap to bitcoin/digital asset value,’ is criticized for its lack of utility. Cipolaro argues that this metric does not account for the diverse business operations of treasury companies beyond simply holding crypto assets.

For traders and investors, mNAV, also referred to as the multiple of net asset value, is employed to assess company valuations, influencing decisions on buying and selling shares. However, companies with crypto holdings exceeding their worth may trade at a discount, while those with greater value than their crypto holdings often trade at a premium.

Why mNAV Is Misleading

According to Cipolaro, mNAV is misleading and, at worst, disingenuous. A significant flaw is its failure to recognize the full scope of operations and assets of crypto treasury firms, such as those of Strategy Inc. with its software sales arm.

Cipolaro emphasizes the importance of net asset value (NAV) in evaluating digital assets per share. He suggests that if a crypto treasury can generate yield, it can issue equity at a premium to its NAV, offering a key metric for investors.

Debt Complications in mNAV Evaluation

Another significant issue with mNAV is its inclusion of “assumed shares outstanding,” which often encompasses convertible debt not yet converted. Cipolaro argues that treating convertible debt as equity is inappropriate from both an accounting and economic perspective.

Convertible debt holders typically prefer cash over shares in exchange for their debt, making it a more complex liability for digital asset treasuries than simply issuing shares. Cipolaro describes this as “volatility harvesting,” where companies are incentivized to maximize equity volatility.

Implications of the Strive and Semler Merger

Cipolaro’s remarks coincided with Strive Inc.’s acquisition of Semler Scientific, marking a first in the crypto treasury sector. Semler shareholders receive 21.05 shares of Strive per share, while Strive shareholders benefit from a NAV/share step-up, essentially a yield.

Although the merger appears beneficial, with Semler shareholders receiving stock valued above the NAV per share of both the existing and new entity, the ultimate trading value of the stock remains uncertain. This will depend on the premium or discount to NAV that investors apply.

As of the previous Friday, Strive’s NAV per share stood at $1.14, with the merged entity projected to have a NAV per share of $1.32. Cipolaro notes that predicting the final trading position of the stock is challenging.

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Bitcoin’s price has fluctuated between $70,000 and $54,000 over the past six months, maintaining a largely rangebound trading pattern. While this has frustrated some investors, Cipolaro points out that it demonstrates Bitcoin’s underlying strength. A significant factor influencing price pressure in Q3 was the resolution of major bankruptcies, including the Mt. Gox case. The redistribution of 204,000 Bitcoins (worth over $12.6 billion) and sales from U.S. and German governments also contributed to the pressure on the market. However, Cipolaro highlights that the fear of these coins hitting the market had a larger effect on prices than the actual sell-offs.

Traditional asset classes outpaced Bitcoin in Q3, benefitting from lower interest rates. Gold hit all-time highs, adding more competition to Bitcoin’s status as a store of value. Still, Bitcoin remains the best-performing asset in 2024, maintaining a lead over equities, gold, and real estate on a year-to-date basis.

Looking ahead, NYDIG is optimistic about Q4. Historically a strong quarter for Bitcoin, Cipolaro identifies catalysts like the upcoming U.S. presidential election as potential triggers for a price surge. According to NYDIG, a Trump victory could offer substantial gains for Bitcoin, but the cryptocurrency could also thrive amidst post-election market instability. Additionally, demand for U.S. Bitcoin ETFs, which pulled in $4.3 billion in total flows, continues to support Bitcoin’s price, with BlackRock’s iShares Bitcoin Trust leading inflows.

Cipolaro concludes that despite the headwinds, Bitcoin is positioned for a robust Q4, thanks to its low correlation with traditional assets, providing unique diversification benefits for investors.

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