ETHZilla: Ethereum's Monster Treasury Company | McAndrew Rudisill & Avichal Garg

Host: Ryan Sean Adams

Guests: Avichal Garg, Founder of Electric Capital, and Mac Rudisill, Chairman of ETHZilla

Compiled and edited by LenaXin and ChainCatcher

ChainCatcher Editor's Summary

This article is adapted from the fifth episode of Bankless' "ETH Asset Management Company" podcast series, featuring Avichal Garg, founder of Electric Capital, and Mac Rudisill, head of ETHZilla. They discuss the drivers of the surge in ETH treasury size during this cycle; how credit market instruments like convertible bonds, preferred stock, and debt are accelerating capital accumulation; and how the flywheel effect from stablecoins to DeFi to ETH is transforming Ethereum into high-quality collateral. They also analyze the business logic that makes ETH treasuries more like Berkshire Hathaway-style value investments rather than short-term speculation.

Why have asset management companies been so active recently? Will this wave trigger a second boom in DeFi?

ChainCatcher did the collation and compilation.

Summary of highlights

• Avichal: ETFs have limitations. If you want to maximize returns, decentralized asset trusts (DATs) may be a better choice.
• Avichal: Leverage and position concentration must be strictly controlled, and market liquidity boundaries must be continuously assessed to avoid chain reactions caused by the risk exposure of a single entity.
• Avichal: The core difference between Ethereum and Bitcoin is that Ethereum can perfectly carry compliant assets and debt instruments
• Avichal: If the on-chain financial infrastructure is successfully built, Ethereum will be able to achieve autonomous asset management and credit operations.
• Avichal: The current stage is similar to the sedimentation period after the Internet bubble in 1999. Once the infrastructure and user scale mature, the potential of digital finance will be truly released.
• Mac: Despite the disparity in market resources, Ethereum is still thriving.
• Mac: Generate free cash flow through differentiated businesses and continue to convert it into increased ETH holdings.
• Mac: Currently, no ETH asset company has access to this type of preferred market or high-yield money market.
• Mac: Investing in Ethereum Treasury Companies Can Enable Shareholders to Gain Cash Flow Returns
• Mac: The current implied volatility of Ethereum is much higher than that of Bitcoin, and is actually close to the level of Bitcoin five years ago.

1. How can the ETH Treasury catch up with Tom Lee and Peter Thiel?

Ryan: Tom Lee currently holds 1.5 million ETH (worth about $7 billion). Can you catch up? What plans does ETHZilla have to accumulate a large amount of ETH?

Mac: We continue to purchase ETH from the market, and our spot reserves have reached $1 billion. Our current operating model is very similar to the early days of Tom Lee's Bitmine immersive trading.

Avichal: Tom Lee's 5% ETH holding target may face diminishing returns. While the flywheel effect can continue to compound, excessive holdings could negatively impact the ETH ecosystem. If he proactively adjusts his strategy, it will provide a window for major holders like SBET and Joe Lubin, as well as ETH, to recover in value.

Ryan: How did you attract investors like Peter Thiel?

Mac: Unlike other ETH asset management institutions, our highlight is that we cooperate with Electric Capital and Avichal Garg in asset management.

Our yield rate significantly exceeds that of our peers in the market, which is our core differentiating advantage; our deep connection with the Ethereum ecosystem constitutes another key competitive advantage.

We collaborate with numerous leading DeFi protocol founders, integrating high-yield protocols and real-world assets through Ethereum. This dual advantage of "ecosystem access + asset standardization" forms the core of our investment logic for generating free cash flow through differentiated businesses and continuously converting it into increasing ETH holdings.

Ryan: Why did Peter Thiel choose to invest in ETH fund management institutions instead of directly holding ETH or Ethereum ETF?

Mac: Investing in an Ethereum ETF requires a 1.5%-2% management fee, while investing in Ethereum Finance allows shareholders to benefit from cash flow. Its net asset value (NAV), which includes both cash and ETH holdings, can generate a premium when combined with the cash flow multiplier effect, an advantage that ETFs cannot offer.

Directly holding ETH makes it difficult to achieve compound growth under economies of scale. Investing in financial companies is essentially a bet on their ability to continuously generate cash flow and accelerate ETH accumulation through scale expansion.

Avichal: ETF investments currently cannot be pledged, which is limited and will inevitably yield lower returns than direct staking. If you're looking to maximize returns, decentralized asset trusts (DATs) may be a better option. They can achieve excess returns through economies of scale and on-chain strategies.

For public market investors, DATs offer exposure to on-chain returns without the need for active DeFi management. For private market investors, they avoid the technical barriers and regulatory compliance complexities of direct DeFi operations. Both types of capital may find more efficient allocation paths in DATs than through ETFs or direct cryptocurrency holdings.

(II) Treasury Strategy vs. ETF Allocation vs. Simply Holding ETH: The Game of Three Investment Paths

Ryan: Can independent asset management companies use 100% of ETH for staking to gain full profit advantages?

Avichal: Liquidation is required when creating or redeeming shares, and assets must be transferred, buying or selling ETH, so liquidity management is necessary.

If a conservative strategy is adopted, one can follow the practices of BlackRock or Bitwise and retain 20% to 25% of ETH on the balance sheet to mitigate against possible liquidation risks. However, if regulatory changes lead to the freezing of some ETH and the simultaneous demand for redemption, serious problems could arise.

Therefore, under current rules, even if ETFs are allowed to pledge in the future, their performance is likely to be worse than direct pledging.

Ryan: Is the general rise in government bonds related to institutional investment strategies?

Mac: One of the reasons why institutions choose Treasury bonds is that they have high liquidity and mature micro-strategies, and their daily trading volume ranks among the top 50 in US stocks.

Another key factor is economies of scale. For example, holding $100 billion in Treasury bonds generates significantly higher cash flow than a smaller holding. Investors view this compounding cash flow as a highly profitable venture, offering the opportunity to capitalize on the underlying asset's upside potential. Consequently, despite disparities in market resources, Ethereum continues to thrive.

Avichal: Saylor's innovation lies in building a completely new capital base: the credit market. Large institutions can provide funds at an interest rate of approximately 10%, and borrowers can invest the funds in assets with an annualized return of 30%-40%, creating an arbitrage opportunity.

The core of this strategy is to purchase high-yield assets with low-cost financing, repay debts through asset appreciation, and expand the scale in a circular manner.

In the capital market, institutions such as sovereign wealth funds indirectly gain leveraged Bitcoin exposure by holding related instruments, and their performance even outperforms direct Bitcoin holdings. This is driven by the pursuit of profit and innovation in financial instruments.

Mac: Every day, our Bitcoin holdings increase in value by 16 cents per share. If we compare it to the Anit Zilla strategy, our percentage return is higher.

Similar situations exist at other Ethereum financial companies. Currently, Ethereum's implied volatility is much higher than Bitcoin's, and is actually close to Bitcoin's level five years ago.

The partnership between debt capital markets investors and Ethereum Funding enables us to issue convertible bonds at low interest rates. Investors seeking both volatility exposure and the upside potential of Ethereum are attracting significant capital.

Ryan: Has Saylor fully leveraged the potential of financing instruments like convertible bonds? Has he fully factored in the demand for convertible bonds in the cryptocurrency market?

Mac: Yes.

Ryan: Does this mean that the convertible bond financing space has been exhausted? Are there still similar opportunities for other Ethereum asset management companies?

Mac: He recently issued preferred stock fully collateralized by Bitcoin, similar in structure to Morgan Stanley's money market products. Investors can earn a 9% yield without sacrificing Bitcoin's upside potential.

He used his cash holdings as collateral to pay interest of approximately 4% to 10%, and used the $500 million raised to directly purchase Bitcoin to pay the proceeds. This innovative tool was de-convertible within two weeks.

Ryan: Will Saylor be able to obtain similar funding opportunities repeatedly? Do other Ethereum asset management companies have the same conditions?

Mac: Currently, no ETH asset company has access to this type of preferred market or high-yield money market.

Avichal: This is similar to BlockFi, but on a larger scale and for institutions. Saylor borrows money against Bitcoin, paying 9% interest, and then uses dollars to buy more Bitcoin. If the debt maturity is long enough, this arbitrage strategy can be very valuable.

His core competency is tapping into the vast pool of capital in the capital market. By offering a 9% rate of return (higher than the 4% in the money market), he can double his operational capital by attracting only 1% of the market's capital.

If interest rates fall, a 9%-10% yield will become even more attractive. It is expected that within 6-12 months, ETH asset companies may also enter similar funding pools.

Ryan: If ETH Funding follows MicroStrategy’s lead and enters the debt capital markets, will it face similar risks as BlockFi?

Avichal: Rehypothecation risk is a core issue exposed in cases like BlockFi. When collateralized assets are withdrawn and repeatedly borrowed, circular leverage is formed. This model has caused multiple crashes in the DeFi space.

The real risk lies in maturity mismatch and liquidity pressure. While the capital market provides a way to repay old debt through the issuance of new bonds, this mechanism may fail if market confidence is shaken. For the Ethereum ecosystem, if a single entity holds an excessively high proportion of assets, it will pose systemic risks to the underlying protocol. The combination of excessive concentration and high leverage is extremely dangerous.

Therefore, it is necessary to strictly control the scale of leverage and position concentration, continuously assess the market liquidity boundaries, and avoid chain reactions caused by the risk exposure of a single entity.

Ryan: Why does this leverage opportunity exist? Who are the buyers of these micro-strategies, like bonds?

Avichal: We need to distinguish between the financing targets of MicroStrategy and ETH Capital. The former has covered multiple channels of capital such as convertible bonds, high-yield bonds, preferred stocks and money markets; while ETH Capital currently relies mainly on traditional convertible bond investors.

Currently, most ETH convertible bonds are fully cash-collateralized. Holders enjoy the right to convert when the stock price rises in the future, and the issuer obtains the option to increase cash on the balance sheet, so the risk to shareholders' funds is extremely low.

Overall, ETH Funding is still in its early stages of fundraising, far from reaching MicroStrategy's level of diversified capital utilization.

Ryan: When financing capabilities are expanded to cover multiple channels such as convertible bonds, high-yield bonds, preferred stocks and money markets, who are the actual buyers of these debt instruments?

Mac: The global high-yield market trades trillions, if not hundreds of billions, of dollars per day. Buyers are looking for opportunities like these with high-margin, recurring cash flows, leveraging their investments. They must redeploy capital to generate substantial interest income.

They are still chasing yield.

Ryan: How much excess return could a buyer of a corporate debt instrument investing in ETH earn?

Avichal: Debt repayment capacity depends on the ratio of ETH holdings to debt. For example, if every $1 billion of ETH corresponds to $200 million of debt, the interest coverage ratio is very high and the risk is controllable.

The core breakthrough is that credit markets now recognize Bitcoin and ETH as legitimate collateral.

Ryan: Have Bitcoin and Ethereum been formally classified as "high-quality liquid collateral" by global capital markets? If so, do they hold the same status as traditional high-quality collateral? Do other assets possess the same level of collateral properties?

Mac: Real estate, oil, and most commodities are considered high-quality collateral due to their liquidity, and securities portfolios have long been the preferred target for bank loans. Now, Bitcoin and Ethereum have been included in this category, becoming collateral assets recognized by the capital market.

(3) Why have asset management companies been so active recently?

Ryan: Why did ETH asset management companies suddenly emerge in large numbers after May 2024? Is this directly related to the clarification of regulations?

Avichal: Regulatory clarity is a key driver, along with market recognition of the long-term value of ETH and the DeFi ecosystem. The accelerated progress of stablecoin legislation, primarily based on Ethereum, further validates ETH's inevitability as infrastructure.

Ryan: Anything else related to that?

Avichal: Application demand drives ETH purchases, which in turn drives up ETH prices, creating a positive cycle. Market understanding of Ethereum's nature is deepening, and ETH's attributes as an asset are becoming widely recognized. This shift is similar to the cognitive evolution of Bitcoin in 2019.

Ryan: Is ETH replicating Bitcoin's institutionalization path (2019-2024) and becoming the "next Bitcoin"? Can the market accommodate multiple mainstream crypto assets at the same time?

Avichal: History often repeats itself, not simply repeats itself. Over the next three to five years, the market will gradually realize that ETH possesses the characteristics of 100% digitalization, endogenous nature, ultra-low inflation, a stablecoin foundation, and an efficient DeFi ecosystem, all of which are tacitly endorsed by the US government. From a purely capital perspective, ETH and Bitcoin meet similar value criteria, but current capital still favors Bitcoin.

Why hasn't the market fully recognized ETH's regulatory compliance and technical and economic advantages? In fact, ETH's market capitalization reached $350 billion on its 10th anniversary. The capital market will eventually wake up. ETH meets all the criteria for rational investment, so why isn't it included in the portfolio?

Ryan: Does the core logic of ETH asset management companies rely on the long-term rise of ETH prices? How can we prove the correlation between the growth of stablecoins and the increase in ETH value?

Avichal: Many countries around the world are facing significant inflationary pressures, with approximately 20%-25% of the population experiencing a base inflation rate of 6%-8%. Against this backdrop, the market urgently needs a financial system denominated in US dollars, globally accepted, with institutional-grade security, and immune to unilateral intervention by local or US governments. The Ethereum DeFi ecosystem is actively building such a system through stablecoins and supporting mechanisms.

The use of stablecoins has fueled demand for DeFi, and as a mainstream collateral and ecosystem reserve asset, demand for ETH has grown accordingly. Users use ETH as collateral for lending without third-party custody, further driving up ETH demand and prices and attracting institutional participation.

Institutional behavior in turn feeds back into the stablecoin market and on-chain asset flows, forming a closed-loop flywheel. This model leverages Ethereum's smart contracts and collateralization mechanisms to achieve systemic self-reinforcement, fundamentally different from Bitcoin, which lacks a closed stablecoin ecosystem.

Ryan: What does the future of stablecoins depend on?

Avichal: The future of stablecoins depends on specific use cases and the needs of market participants. For example, Tron or other fast Layer 1 chains, stablecoins will indeed exist on these chains and serve specific scenarios.

However, institutional users prioritize censorship resistance and trusted neutrality. If they are fully within US jurisdiction, they may opt for Layer 1 solutions from companies like Circle or Stripe. These solutions, similar to the Silvergate SEND network, provide efficient infrastructure for regulated entities.

However, many countries are reluctant to submit entirely to US jurisdiction. For example, under the Eurodollar system, when both parties to a transaction are reluctant to use their own currencies, they choose to use the US dollar as the settlement unit. In this situation, decentralization, high stability, and the ability to operate continuously become key advantages.

(IV) Ethereum vs. Bitcoin: The Value Storage War and Differences in Institutionalization Paths

Ryan: How do you prove to the market that ETH is not only a store of value asset, but also that its properties are superior or different from Bitcoin and other traditional value assets?

Avichal: The concept of a store of value makes sense both economically and logically. Its core characteristics include portability, divisibility, durability, and verifiable scarcity. Bitcoin and Ethereum meet these requirements and are superior to gold in many of these dimensions.

As for whether one would rather own art, farmland, platinum, or ETH? Many may reinterpret the rationale for ETH within this framework. Gold and art have no absolute intrinsic value; their uniqueness stems from human consensus and cultural preferences. This is exactly the same logic that defended Bitcoin a decade ago.

Store-of-value assets are not the only ones.

Ryan: Since ETH is superior to or at least not inferior to Bitcoin in terms of functionality and value storage properties, why is its price performance still lagging behind Bitcoin in this cycle?

Avichal: The next round of token issuance will take time to develop. The retail market is already quite large, but it still needs a new round of capital injection. The Bitcoin community has performed well in this regard, especially in attracting institutional participation, which is partly due to DAT.

Mac: Due to compliance restrictions, investors previously had to sign extensive documentation to purchase Bitcoin through banks, and Ethereum ETFs were even directly banned by compliance departments. Therefore, IBIT became the first approved Bitcoin ETF, and many large bank clients have allocated Bitcoin through MicroStrategy's brokerage accounts.

In contrast, Ethereum ETFs were only launched for trading at some major banks in recent months. While Ethereum's practical applications are developing at a faster pace, its institutional adoption is still in its infancy. This reality suggests that regulatory compliance and capital inflows into Ethereum are still in their early stages.

Ryan: What is the difference between the Ethereum Treasury and the Bitcoin Treasury?

Avichal: Ethereum's network architecture creates abundant on-chain profit opportunities. Bitcoin is considered digital gold, and investment logic is based on faith and the expectation of price growth. Ethereum, on the other hand, requires simultaneous investment in network expansion, including the underlying protocol, multi-layer scalability, and ecosystem development.

The most critical difference is that Ethereum can perfectly carry compliant assets and debt instruments. When Wall Street institutions begin to use its mechanism, the scale of assets involved will far exceed the scope of Bitcoin. This is the core advantage of Ethereum's financial model.

(V) ETH investment strategy, what is the key to project success?

Ryan: What kind of yields are you looking at? What are your expected yields?

Avichal: The core question is how much risk one is willing to take. We have a comprehensive risk framework in place, including considerations for LRT options that are slightly higher than the base staking. There are interesting opportunities in the RWA space, with an attractive risk-reward ratio.

For the ETH ecosystem, only a few million dollars are needed to guide the new protocol, and around 15% of tokens are used to drive ecosystem development. As an investor, active participation is more valuable than passive holding.

Mac: The core value of current market education lies in the fact that most institutions still lack the motivation to gain in-depth understanding, but they will eventually wake up over time.

Ryan: Is there a price trigger mechanism and scale limit for the ETH purchase strategy? Will excess liquidity be used for allocation?

Mac: We adopt a regular fixed-amount strategy to continuously build ETH positions, and arrange positions based on medium- and long-term bullish expectations, without pursuing short-term timing.

Ryan: How to define the reasonable range of total market value premium under stable conditions?

Mac: Finance company stock prices are linked to Nasdaq liquidity and have recently experienced fluctuations due to the AI ​​market. A reasonable MNAV valuation range is 1.7-2x, potentially exceeding 3x in a bull market. A bear market may see valuation compression, creating buyback opportunities.

Ryan: How do you assess the risks posed by insufficient liquidity and high fees in investment tools like BitMex?

Mac: The initial financing cost of this business is high, but the operating cost is extremely low after it is scaled up. It can manage large-scale assets with a small amount of manpower, achieving high net profit margins and significant operating leverage effects.

Ryan: Can we achieve a Berkshire-like cash flow generation model by holding ETH Treasury bonds?

Mac: That's the reason I'm betting on buying these stocks. The actual business is operating very well because of the free cash flow earnings.

Avichal: The Ethereum ecosystem has accumulated approximately $60 billion in TVL and boasts numerous core developers deeply involved in the technology's evolution. Our current strategic focus is reintegrating ETH assets into the on-chain ecosystem, reducing our reliance on the traditional Wall Street financial system through tokenization and the development of an on-chain credit market.

If the on-chain financial infrastructure is successfully built, Ethereum will be able to achieve autonomous asset management and credit operations. The value of this long-term ecosystem development lies not in short-term market cycles, but in over a decade of technological accumulation and community consensus. When the public chooses on-chain financial products, they are more likely to gravitate towards those that truly embrace on-chain concepts.

Ryan: Is the community multiplier effect a key condition for the success of a project?

Mac: I think being in the top three ETH fund managers is one thing, but what really sets us apart is our return generation and how we run our business. Because I think once the market sees that in a few months or quarters, we will be very different from other asset managers.

(VI) Crypto Market M&A Wave and Cycle Evolution: From Bear Market Arbitrage to Long-Term Value Reconstruction

Ryan: Do you foresee some consolidation in this market over the next few months or years? When do you think that activity will pick up?

Avichal: The market is likely to see mergers and acquisitions, especially in the next bear market cycle. Companies with market capitalizations below $1 billion are vulnerable to aggressive investors. When share prices fall below net asset value, arbitrage can occur. Investors can acquire shares at a discount and then profit from forced liquidation, pocketing the difference.

In a similar case, Michael Saylor may acquire ETH Funding Company and then sell his ETH and increase his Bitcoin holdings, thereby clearing out competitive assets and achieving capital transfer.

Ryan: What stage is the current cryptocurrency cycle in? Is it still following the historical bull market patterns? How much room is there for this round of upside?

Avichal: The cyclical trend is mainly related to the capital flow brought about by interest rate cuts.

Ryan: Are cryptocurrency cycles primarily driven by liquidity?

Avichal: Historically, these assets have low liquidity. While a four-year cycle mechanism does exist, it's challenging to implement. As venture capitalists, we focus on long-term trends, spanning ten years, rather than short-term trading. The current cycle could be extended to around 4.5 years due to external events.

The maturity of Wall Street's capital market may change the traditional cyclical pattern, but the history of gold ETFs shows that the sustainability of capital inflows may far exceed expectations.

Ryan: Do you have any thoughts on where ETH's price is headed by the end of this year or over the next 18 months to three years?

Avichal: Short-term price predictions are extremely difficult to achieve. Our core strategy is to predict when an asset's value is extremely low and its potential value could reach more than ten times its current level. Even with uncertainty about the timing, as long as the core logic holds, there is room for long-term error. The key is to determine "if the underlying logic holds, the value will ultimately far exceed the current level," rather than chasing short-term fluctuations.

Ryan: Do you expect your assets to grow 10x, 25x, or 100x? Do you agree with Tom Lee's view of a 100-fold increase?

Avichal: If Bitcoin, as digital gold, were to be benchmarked against the $20 trillion gold market, its price per unit could reach millions of dollars. If Ethereum, with its current $400 billion market cap, were to achieve the same benchmark, it would have room for 50-fold growth. History has proven that technological innovation expands the total market capacity, so its actual potential could far exceed static estimates.

Failures often stem from underestimating market potential, while successes often far exceed initial expectations. If Ethereum truly achieves global digital value storage, its potential could surpass traditional approaches. Internet accessibility will create a market of unprecedented scale. When digital assets are easily accessible to everyone, existing valuation frameworks will become completely obsolete.

Ryan: Why choose physical gold as a reference for value storage? Should the potential user base of digital assets far exceed the number of gold holders?

Avichal: Taking stablecoins as an example, when users find that assets can generate returns, even if they only allocate partial positions, it may drive the scale to quickly surpass the traditional banking system.

The current stage is similar to the sedimentation period after the Internet bubble in 1999. Once the infrastructure and user scale mature, the potential of digital finance will be truly released.

The industry may be entering a window of maturity similar to the internet's period from 2005 to 2008. With infrastructure and awareness in place, long-term visions may become a reality.