DAT Companies vs. ETFs: Key Differences for Investors

Blockchains and cryptocurrencies were initially designed to allow people to “be their own bank.” With Bitcoin, a user can generate and secure their own private keys, which control access to their account. Direct access to the blockchain eliminates many of the intermediaries of the traditional financial (TradFi) system.

However, directly holding cryptocurrencies requires a certain level of technical knowledge and risk acceptance. Investing in Digital Asset Treasury (DAT) companies or crypto Exchange-Traded Funds (ETFs) offers investors the ability to indirectly hold crypto and benefit from its price growth without having to manage it themselves.

A DAT company, like MicroStrategy, is a company that is defined by buying and holding crypto. For example, MicroStrategy became famous for the fact that it has frequently raised funds to purchase more Bitcoin, taking advantage of the growth in the cryptocurrency’s value.

DAT companies offer an indirect method for investors to gain access to Bitcoin. If an investor buys stock in a DAT company, increases in the value of Bitcoin or other cryptocurrencies held by the company will cause its stock to rise as well. As a result, the investor reaps some benefits from their exposure to Bitcoin even if they don’t own any directly.

Crypto ETFs are another way that investors can indirectly hold Bitcoin and other cryptocurrencies. Some companies have gained permission to offer ETFs that are pegged to Bitcoin or Ethereum. When people buy into the ETF, the issuer purchases additional crypto to match the number of shares issued.

These ETFs can be purchased like any other ETF available on traditional exchanges. By making crypto available in this way, ETFs lower the bar to entry of “owning” crypto, even if the investor doesn’t directly hold and manage the crypto themselves.

At a high level, DAT companies and ETFs are similar in their ability to offer indirect exposure to crypto for investors. In both cases, the value of an investment is directly tied to the value of the cryptocurrency held by a DAT company or tracked by an ETF.

However, there are significant differences between the two investment options, including:

In general, ETFs generate returns based on the appreciation in value of the cryptocurrency that they track. This limits the amount of money that an investor can make using them.

DAT companies are less restricted in their operations, which can offer more potential opportunities for increased returns. For example, DAT companies can offer leveraged exposure or trade at premiums when compared to the size of their treasury. They can also issue dividends and use their held crypto for staking, lending, or yield-farming, allowing them to make additional profits using their treasury. As a result, the potential return on investment may be higher with a DAT company than with an ETF.

ETFs are financial instruments that operate under strict regulations designed to protect investors against potential risks. This limits the risk exposure for investors to potential price drops and issues with custodianship of the assets held.

DAT companies, on the other hand, have a much greater degree of flexibility in how they operate, which allows them to participate in activities like staking and yield farming. While this has benefits, it also means that poor management of the company could negatively affect its value and introduce additional risks to investors.

ETFs are designed to closely match the value of the underlying asset that they track. They also permit direct market redemption and arbitrage. As a result of these, ETFs tend to have higher liquidity and price stability.

DAT companies, on the other hand, don’t allow redemption of shares for underlying assets, and various factors impact their share value. As a result, they may have lower liquidity and less stable share prices.

Crypto ETFs operate similarly to any other ETF, which have clear regulatory requirements and tax structures. As a result, reporting responsibilities for issuers and investors are relatively well-defined.

DAT companies operate similarly to other companies in terms of income taxes and dividends. However, they may be subject to additional regulatory requirements if they participate in activities such as staking, yield farming, leverage, etc.

One of the primary benefits of DAT companies and crypto ETFs for investors is the fact that they don’t require investors to hold crypto directly. This means that individuals or companies can gain exposure to crypto assets without worrying about managing and security private keys and protecting against social engineering and other cybersecurity threats.

However, introducing a level of abstraction only transfers these responsibilities to the DAT company or ETF issuer. While these organizations may hold assets directly — making them responsible for implementing digital asset security best practices to secure their holdings — often they decide to work with a custodial provider, like Coinbase.

The decision to entrust significant crypto assets to a third-party custodian can create additional risks since these organizations are major targets for cyber threat actors. Before doing so, it’s vital to perform due diligence to ensure that these providers have implemented the required security controls, processes, and procedures to secure the assets in their care.

Investing in DAT companies or crypto ETFs provides the opportunity to diversify portfolios and reduce risks by investing in an asset less coupled to fiat currencies. However, doing so can also carry risks based on how these assets are managed or secured by the issuing organization. Before investing in DAT companies, investors should perform their due diligence to ensure that they have selected the best available offering.

DAT companies and ETF issuers also have significant security responsibilities, since mismanagement or inadequate security could result in substantial losses. Additionally, since these organizations operate under strict regulations, companies could face regulatory penalties or legal liability.

Halborn offers consulting services designed to help companies ensure that their security infrastructure and processes align with industry best practices and regulatory compliance. To learn more, get in touch.