DeFi Development: Picking Up SOL At The Right Price

Summary DeFi Development's early Solana pivot gives it a low cost basis, positioning for significant upside if SOL adoption continues and momentum ￰0￱ from staking, validator revenue, and discounted locked SOL purchases support accretive growth, but dilution risk from capital raises remains a key ￰1￱ current mNAV premium has compressed, reflecting cooling sentiment; this limits accretive SOL purchases but may offer an attractive entry point for risk-tolerant ￰2￱ should weigh dilution risk, premium compression, and Solana conviction to decide if DFDV's pullback is a value opportunity or a warning ￰3￱ of companies pursuing a crypto treasury strategy have seen heightened volatility lately as the crypto market cools off from the weeks-long ￰4￱ Development (NASDAQ: DFDV ), one of the early movers in adopting Solana ( SOL-USD ) as a treasury asset, has seen over 70% decline from its April high when the pivot to SOL strategy was first announced, which followed their rebrand from ￰5￱ Saylor’s Strategy ( MSTR ) was the first mover in the crypto treasury strategy, having bought Strategy's first Bitcoin ( BTC-USD ) in August 2020 at $11,653 per ￰6￱ has doubled down on BTC as a strategic asset, effecting a series of fundraisers and BTC purchases.

Strategy’s BTC holdings now stand tall among institutional holdings at around 3% of Bitcoin's total supply. Strategy's early mover status means it has dollar-cost-averaged its Bitcoin purchases and now benefits from an attractive cost basis, compared to some other companies that have added BTC to their balance sheet but joined the train much later and now need BTC to move much higher from current levels to be able to generate ￰7￱ off from high DFDV, BMNR, SBET (Seeking Alpha) Naturally, several firms eyeing a crypto treasury strategy these days believe that they might be late to the party on BTC, but might not yet be late to buy top altcoins as a strategic asset; hence, the recent explosion of corporate crypto treasury strategy with an altcoin-heavy ￰8￱ ( ETH-USD ) and Solana have been the next best choices for most ￰9￱ that announced a crypto treasury strategy in the first half of this year have seen very lofty valuations, leaving investors grappling with attractive entry points when analyzing these ￰10￱ this piece, I’ll look at DFDV from an investor’s perspective with the goal of assessing the real trade-off between the price drawdown, broader market momentum, and potential ￰11￱ Development’s Early Pivot Creates an Attractive Cost Basis Like every other investment narrative, crypto treasury stocks have seen the initial “fear of missing out FOMO” ￰12￱ comes the cool-off phase where fundamentals (in the context of treasury companies, this implies yield generation and accretive growth on a per share basis) become a more critical factor for most ￰13￱ cool off in market sentiment towards treasury asset companies is currently palpable, as we witnessed an over 20% drop in DFDV price on Tuesday despite announcing a $125 million raise for SOL ￰14￱ who have been following crypto treasury companies can recall that it was a different story just months ago, when an equity raise for the purpose of adding crypto assets to the balance sheet meant immediate ￰15￱ pursuing crypto treasury strategies all converge on one thesis of long-term asset appreciation, but to each there are still differentiating approaches to how they operate their treasury business, with the end goal of optimizing and creating value for ￰16￱ based on the crypto assets that make up the treasury portfolio, each company develops metrics to leverage from the crypto asset’s ecosystem and generate yield, to create value for ￰17￱ Development's focus on the SOL ecosystem means it can leverage tools like liquid staking and DeFi yield strategies to make its treasury as accretive as ￰18￱ in analyzing DFDV, I think the focus should be on these ￰19￱ purchase price and history (DeFi Development) First off the bat, DeFi Development’s early SOL pivot keeps it at an advantageous cost ￰20￱ seen in the preceding chart, which shows the SOL purchase history against the price of SOL as of the time of purchase, reveals the early ￰21￱ 57% of DeFi Development's SOL purchases are under $150, meaning ~800,000 SOL (worth ~$167 million at current SOL price of $209) out of the current total SOL holding of 1,420,173 SOL (worth ~$297 million).

I think the insight to draw from here isn't one to be generalized but rather personalized based on investors’ specific risk ￰22￱ one of the key questions is whether, as an investor, this is the cost profile you want to ￰23￱ in a portfolio where over half of the SOL purchases were under $150, now that Solana is trading around $200, how do you size upside from your point of view? In my own view, I think the low average cost of the total SOL holdings provides a substantial buffer and a foundation for significant unrealized gains (especially, since SOL is yet to break all-time price this cycle), which is a crucial metric for future ￰24￱ I think the current setup for SOL is constructive and has only been capped because Bitcoin dominance still looks strong despite the recent rally among ￰25￱ in Solana also looks strong and points to rising adoption, especially because of the focus on mobile Web3 tech initiatives, which I discussed in a separate Solana article earlier this month.

What's good for Solana is good for DeFi ￰26￱ the key differentiator, which is an edge for DeFi Development's SOL strategy, is that the company is not just dipping its toes but going all in into the Solana ￰27￱ Development runs its own Solana validator, after the purchase of a Solana validator business in ￰28￱ this move the company earns staking rewards and other protocol-native revenue (like transaction validation fees DeFi Development earns from being a validator on the Solana network - much like how Bitcoin miners earn BTC as block rewards for mining blocks). This revenue from staking and fees compounds yield for the treasury and for ￰29￱ Development’s Treasury Metrics and Market Perception Investing in crypto treasury companies has introduced a new set of financial metrics unique to the crypto treasury model that may be unfamiliar to traditional ￰30￱ far, I’ve analyzed DeFi Development's cost basis based on its current SOL holdings and the purchase price, and found that the fact that over 50% of holdings were bought below $150 is a significant advantage, because it anchors the company to an attractive cost ￰31￱ for investors, the decision point is more of a personal preference: whether this cost profile aligns with how you want to gain exposure to Solana’s upside.

Now, the next important metric in analyzing DFDV is the mNAV (market to net-asset-value), which tells us whether DFDV trades at a premium or discount to its SOL per share, and ultimately how accretive or dilutive its capital raises are. I've used a similar metric in the past called the price-to-hold, which is basically the same metric as mNAV, as they both measure the relationship of stock price to underlying ￰32￱ only nuance is that mNAV captures a broader picture of the company's assets, including non-crypto assets in some cases, while price-to-hold focuses strictly on the underlying crypto ￰33￱ metrics for valuing crypto treasury companies are still evolving and new variations are being introduced as adoption ￰34￱ is even a Solana-specific metric called solNAV (which further narrows the scope, capturing only SOL holdings), purportedly for valuing Solana treasury ￰35￱ snapshot (DeFi Development) DeFi Development's headline mNAV currently looks attractive at just 1.12x ￰36￱ there is a nuance ￰37￱ the mNAV looks attractive depends on investors’ personal risk tolerance and generally hinges on market perception.

A high premium often indicates periods of high optimism, like in April when the pivot to SOL was first announced and the crypto treasury narrative was broadly gaining momentum. Currently, I believe sentiments have shifted for DFDV, and there is a cool-off among crypto treasury stocks; hence the low ￰38￱ the low headline mNAV valuation as either a sign of fading momentum or an opportunity with lower entry risk is all based on investors' personal ￰39￱ me, in this case, the low premium signals fading ￰40￱ it is important for DFDV to maintain a certain level of premium to be able to continue its accretive SOL ￰41￱ higher the premium, the more accretive the SOL per Share becomes on each SOL purchase, because shares are sold at higher valuations for purchase of SOL.

A low premium means limited accretion, and if this were to get to parity (1.0x) new SOL purchases would add no incremental SOL per ￰42￱ the premium were to fall below parity, each new purchase would be outright dilutive, reducing SOL per Share instead of increasing ￰43￱ treasury companies have a complex capital structure because of the mechanics of capital raises to fund treasury asset ￰44￱ is also equally important to consider the fully diluted mNAV, which accounts for all potential share dilution from convertible debt and ￰45￱ DFDV’s case, fully diluted mNAV is 1.35x, and fully diluted SOL per Share is 0.0483, a significant drop from the headline 0.0675 SOL per ￰46￱ investors, the takeaway is ￰47￱ headline mNAV shows the immediate market perception, but the fully diluted mNAV shows the true economic exposure once all potential dilution is factored ￰48￱ you factor in dilution, the SOL exposure per share is meaningfully ￰49￱ decision should weigh whether the company’s ability to compound SOL through more accretive purchases staking and validator rewards offsets this dilution risk over time.

Tuesday's announcement of a $125 million equity offering was deemed dilutive by the market and perceived as potentially not accretive to the SOL per Share because the raise price of $12.50 was below the current market price of DFDV shares (around $20 at the time). Hence, the drop from ~$20 to ~$15 earlier this ￰50￱ should note that DeFi Development also buys locked SOL in a private placement where it negotiates with owners of SOL currently locked in staking and acquires them lower than the current SOL spot ￰51￱ in this particular equity offering, DeFi Development will receive a combination of cash and locked SOL tokens as consideration. Hence, even if the offering price was lower than DFDV market price, the discounted locked SOL could still be accretive to SOL per Share depending on the effective blended purchase ￰52￱ said, market perception for treasury companies hinges on the ability to constantly raise funds at a higher premium to underlying ￰53￱ becomes difficult in a crypto bear market or when sentiments generally shift, forcing the companies to raise funds at discounted ￰54￱ doesn't command the premium to NAV it commanded in April when it first announced its ￰55￱ has also been the case for several crypto treasury companies I've covered.

DFDV’s mNAV to Enterprise Value further shows this premium contraction clearly in the chart below, showing how the multiple has compressed since the April ￰56￱ premium compression is at its lowest since the April ￰57￱ to Enterprise Value Trend (DeFi Development) With momentum now easing off on crypto treasury companies, analyzing them now requires casting a wide ￰58￱ the analysis will throw in metrics from all angles, and investors will pick what to emphasize based on their preference, risk tolerance, and conviction on whether these stocks can command lofty premiums ￰59￱ At current levels, DFDV is beginning to look attractive again due to its early SOL pivot which gives a low average cost basis, the strategy of sourcing and buying locked SOLs at a discount, and yield from staking and validator revenue, which together create a foundation for accretive ￰60￱ risks stem from potential dilution as the premium narrows, a cooling sentiment towards crypto treasuries, and compressed premiums to NAV, which could limit upside on new SOL ￰61￱ should balance these factors with their risk tolerance and conviction in Solana’s adoption to make the ultimate decision on ￰62￱ mNAV has narrowed and the valuation looks attractive, it's a two edge ￰63￱ the one hand, this potentially affects accretive purchases as raising funds at higher market prices will be difficult thereby affecting how accretive future SOL purchases ￰64￱ on the other hand, it could mean the market is undervaluing DFDV at the moment and the pullback from highs could be another entry opportunity, creating potential upside for the investor if momentum returns.