Adam Back has endorsed a new term to be used to value bitcoin (BTC) treasury companies like MicroStrategy, MetaPlanet, Semler Scientific, Twenty One, or Nakamoto: mNAV months-to-cover.
The term somehow forecasts the number of months it will take a company to “cover” or “make up” for its otherwise high multiple-to-net asset value (mNAV).
For new readers unaccustomed to the world of public companies holding magic internet money, these companies often trade at a multiple of their so-called net assets, which are just BTC.
Even though public companies don’t have a net asset value, a controlled term, Bitcoiners have colloquially appropriated the fund management acronym NAV and assume the company’s BTC equals its NAV.
Moreover, they refer to the value of the company’s BTC as its NAV even if that BTC is encumbered or the company has other debts.
Anyway, the formula to calculate mNAV months-to-cover — further abbreviated “MmC” — is to divide mNAV multiple by the company’s BTC yield per share.
Read more: MicroStrategy wannabes and the return of mNAV mania
MmC: mNAV Months-to-Cover
Yield per share, expressed as a percentage like 10%, is the amount of BTC that a company adds to its NAV per year. Typically, companies adjust this yield for share dilution so that a company cannot simply sell more shares to artificially increase its yield.
Assuming that a company’s mNAV and BTC yield per share will hold constant into the future — and that’s an incredible assumption — the valuation metric MmC forecasts the number of months that the company’s BTC “yield” will need to bring the mNAV down to one or equal to its BTC holdings.
The problems with this metric are apparent.
To seasoned readers, it should be immediately obvious that the second variable (BTC yield) is a derivative of the first variable (mNAV).
Therefore, the formula is recursive, circularly claiming that a company’s overvaluation and its ability to capture its overvaluation will not only remain constant into the future, but can be meaningfully calculated.
The major assumption of MmC is that the overvaluation will persist at all. BTC yield predominantly involves the company capturing its own mNAV via share, debt, dividend, and preferred offerings.
For example, MicroStrategy has issued three series of preferred shares (STRK, STRF, and STRD), which earn dividends, are senior to common stock, and hinder the ability of the company to use its cashflow to buy BTC.
It’s only able to offer these preferreds on such favorable terms because the company trades at an mNAV above one in the first place.
In this way, BTC Yield is a de facto derivative of mNAV due to various corporate actions adding debt and financial obligations onto its future operations. Calculating something against a derivative of itself is recursive and unhelpful.
Because every BTC treasury company conducts financial actions to capture its own BTC Yield, the overlooked assumption of MmC is that the mNAV can persist in spite of the company’s own efforts to capture its mNAV and transform it into BTC yield.
The derivative of itself looks even better on smaller companies
The second weakness of MmC is that this metric always favors smaller companies, which disproportionately enjoy higher mNAV rates and BTC yields due to their fledgling status.
If any investor were to use MmC by itself, they would consistently avoid established companies like MicroStrategy while preferring the tiniest startups with higher mNAV and BTC yield rates.
In this way, the metric is unhelpful for investors looking for the best risk-adjusted return. Simply defining startups with faster growth rates using complicated mathematics doesn’t mean that startups are actually better risk-adjusted investments.
