Dialogue with ETHZilla CEO: Can the ETH treasury replicate the institutional path of Bitcoin?

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

Host: Ryan Sean Adams

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

Compiled by: LenaXin, ChainCatcher

ChainCatcher Editor's Summary

This article is compiled from the fifth episode of the Bankless podcast series "ETH Asset Management Companies," featuring Avichal Garg, founder of Electric Capital, and Mac Rudisill, head of ETHZilla. They discussed the reasons behind the surge in the scale of the ETH treasury in this cycle; how credit market instruments such as convertible bonds, preferred stocks, and debt accelerate capital accumulation; and how the flywheel effect of transforming Ethereum into high-quality collateral is formed from stablecoins to DeFi and then to ETH. They also analyzed the business logic that makes the ETH treasury more aligned with Berkshire-style value investing rather than short-term speculation.

Why are asset management companies so active recently? Will this wave ignite a second boom in DeFi?

ChainCatcher has compiled and edited this content.

Highlights:

• Avichal: ETFs have limitations; if maximizing returns, decentralized asset trusts (DAT) may be a better choice.
• Avichal: Leverage scale and position concentration must be strictly controlled, continuously assessing market liquidity boundaries 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 accommodate compliant assets and debt instruments.
• Avichal: If on-chain financial infrastructure is successfully built, Ethereum will achieve autonomous asset management and credit operations.
• Avichal: The current stage is similar to the consolidation period after the 1999 internet bubble; once infrastructure and user scale mature, the potential of digital finance will be truly unleashed.
• Mac: Despite differences in market resources, Ethereum still shows a prosperous trend.
• Mac: Generate free cash flow through differentiated business and continuously convert it into increased holdings of ETH.
• Mac: Currently, no ETH asset company can access such preferred markets or high-yield money markets.
• Mac: Investing in Ethereum treasury companies can provide shareholders with cash flow returns.
• Mac: The current implied volatility of Ethereum is far higher than that of Bitcoin, actually approaching the levels of Bitcoin five years ago.

(1) How Does 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 operational model is highly similar to Tom Lee's early immersive trading phase with Bitmine.

Avichal: The 5% ETH holding target set by Tom Lee may face diminishing marginal returns. Although the flywheel effect can continue to increase holdings through compounding, excessive holdings may negatively impact the ETH ecosystem. If he actively adjusts his strategy, it will provide a value recovery window for major holders like SBET and Joe Lubin, as well as ETH.

Ryan: How do you attract investors like Peter Thiel?

Mac: Unlike other ETH asset management institutions, our highlight is our collaboration with Electric Capital and Avichal Garg for asset management.

Our returns significantly outperform market peers, which is a core differentiation advantage; the deep integration with the Ethereum ecosystem constitutes another key competitive strength.

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

Ryan: Why does Peter Thiel choose to invest in ETH asset management institutions instead of directly holding ETH or Ethereum ETFs?

Mac: Investing in Ethereum ETFs requires a management fee of 1.5%-2%, while investing in Ethereum treasury companies can provide shareholders with cash flow returns. Their net asset value (NAV) includes cash and ETH holdings, and the cash flow multiplier effect can generate a premium that ETFs cannot offer.

Directly holding ETH makes it difficult to achieve compounding growth under scale effects; investing in treasury companies essentially bets on their ability to continuously generate cash flow and accelerate ETH accumulation through scale expansion.

Avichal: Investing in ETFs currently cannot be staked, which has limitations, and returns will inevitably be lower than direct staking. If maximizing returns is the goal, decentralized asset trusts (DAT) may be a better choice. They may achieve excess returns through scale effects and on-chain strategies.

For public market investors, DAT can provide on-chain yield exposure without the need for active management of DeFi; for private market investors, it avoids the technical barriers and compliance complexities of directly operating DeFi. Both types of capital may find more efficient allocation paths from DAT than from ETFs or direct holdings.

(2) Treasury Strategy vs ETF Allocation vs Purely Holding ETH: The Game of Three Investment Paths

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

Avichal: Creating or redeeming shares requires liquidation, necessitating asset transfers, buying or selling ETH, so liquidity management is necessary.

If a conservative strategy is adopted, one can refer to the practices of BlackRock or Bitwise, retaining 20%-25% of ETH on the balance sheet to address potential liquidation risks. However, if regulatory changes lead to some ETH being frozen while facing redemption demands, it could trigger serious issues.

Therefore, under current rules, even if future ETFs allow staking, their performance is likely to lag behind direct staking.

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

Mac: One reason institutions choose government bonds is that they have high liquidity and mature micro-strategies, with daily trading volumes ranking among the top 50 in U.S. stocks.

Scale effect is another key factor. For example, the cash flow generated from holding $100 billion in government bonds far exceeds that from smaller holdings, and its compounded cash flow is viewed by investors as a high-profit business, with opportunities to gain from the appreciation of underlying assets. Therefore, despite differences in market resources, Ethereum still shows a prosperous trend.

Avichal: Saylor's innovation lies in building a new capital base, namely the credit market. Large institutions can provide funding at about 10% interest, while borrowers can invest it in assets yielding 30%-40% annually, creating arbitrage opportunities.

The core lies in financing low-cost purchases of high-yield assets, repaying debt with the appreciation of assets, and continuously amplifying scale.

In the capital market, sovereign wealth funds and other institutions indirectly gain leveraged Bitcoin exposure by holding related instruments, often outperforming direct Bitcoin holdings. Behind this is the pursuit of profit by capital and the innovation of financial instruments.

Mac: Each share of Bitcoin holdings appreciates by 16 cents daily; compared to the Anit Zilla strategy, our percentage return rate is higher.

Similar situations exist in other Ethereum treasury companies. The current implied volatility of Ethereum is far higher than that of Bitcoin, actually approaching the levels of Bitcoin five years ago.

The collaboration mechanism between debt capital market investors and Ethereum treasury companies allows us to issue convertible bonds at low interest rates. Investors are both seeking volatility exposure and optimistic about Ethereum's appreciation potential, and the combination of both can attract significant capital.

Ryan: Has Saylor fully utilized the potential of financing tools like convertible bonds? Has he fully absorbed the demand for convertible bonds in the cryptocurrency market?

Mac: Yes.

Ryan: Does this mean the financing space for convertible bonds has been exhausted? Do other Ethereum asset management companies still have similar opportunities?

Mac: He recently issued preferred stock fully collateralized by Bitcoin, structured similarly to Morgan Stanley's money market products. Investors can earn a 9% yield without sacrificing the appreciation potential of Bitcoin.

He pays about 4%-10% interest using the cash he holds as collateral and uses the $500 million raised to directly purchase Bitcoin to pay the yield. This innovative tool achieved de-convertibility within two weeks.

Ryan: Can Saylor replicate similar financing opportunities? Do other Ethereum asset management companies also have the same conditions?

Mac: Currently, no ETH asset company can access such preferred markets or high-yield money markets.

Avichal: This is similar to BlockFi but on a larger scale and aimed at institutions. Saylor borrows against Bitcoin as collateral, pays 9% interest, and then uses dollars to buy more Bitcoin. If the debt term is long enough, this arbitrage strategy is highly valuable.

His core ability is to tap into massive funds in the capital market. By offering a 9% yield (higher than the 4% in the money market), he only needs to attract 1% of that market's funds to double the operable capital.

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

Ryan: If ETH treasury companies emulate MicroStrategy to enter the debt capital market, could they face similar risks as BlockFi?

Avichal: Rehypothecation risk is the core issue exposed in cases like BlockFi. When collateral assets are withdrawn and re-lent, it creates a cycle of leverage, which has led to collapses in the DeFi space multiple times.

The real risk lies in maturity mismatches and liquidity pressures. Although the capital market provides a way to repay old debts by issuing new ones, once market confidence wavers, this mechanism may fail. For the ETH ecosystem, if a single entity holds too high a proportion of assets, it poses systemic risks to the underlying protocols. Excessive concentration and high leverage are extremely dangerous.

Therefore, leverage scale and position concentration must be strictly controlled, continuously assessing market liquidity boundaries to avoid chain reactions caused by the risk exposure of a single entity.

Ryan: Why are there such leverage opportunities? Who are the buyers of these micro strategies, such as bonds?

Avichal: It is necessary to distinguish between micro strategies and the financing targets of ETH treasury companies; the former has covered convertible bonds, high-yield bonds, preferred stocks, and money markets across multiple channels, while ETH companies currently mainly rely on traditional convertible bond investors.

Currently, most ETH convertible bonds are fully cash-collateralized structures, where holders enjoy the conversion rights when stock prices rise in the future, and issuers gain the option to issue cash on the balance sheet, posing very low risk to shareholders.

Overall, the financing stage of ETH treasury companies is still in its early stages, far from the diversified capital utilization level of micro strategies.

Ryan: When the financing capability improves 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 has daily trading volumes reaching hundreds of billions or even trillions of dollars. Buyers are looking for opportunities like this with high-profit recurring cash flows, leveraging operations. They must redeploy funds to achieve substantial interest income.

They are still pursuing yield.

Ryan: How high can buyers of debt instruments from ETH treasury companies expect to achieve excess returns?

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

The core breakthrough is that the credit market now recognizes Bitcoin and ETH as legitimate collateral.

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

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

(3) Why Are Asset Management Companies So Active Recently?

Ryan: Why did ETH asset management companies suddenly emerge in concentration after May 2024? Is this directly related to regulatory clarity?

Avichal: Regulatory clarity is a core driving force, while the market's long-term value recognition of ETH and the DeFi ecosystem is also key. The legislative process for stablecoins is accelerating, primarily relying on Ethereum, further validating the necessity of ETH as infrastructure.

Ryan: What else is related to this?

Avichal: Application demand drives ETH purchasing behavior, subsequently raising ETH prices and forming a positive cycle. The market's deepening understanding of Ethereum's essence, with ETH being widely recognized as an asset, this shift is similar to the cognitive evolution of Bitcoin in 2019.

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

Avichal: History tends to be similar rather than simply repeating. In the next three to five years, the market will gradually realize that ETH possesses characteristics such as 100% digitization, intrinsic nature, ultra-low inflation, a stablecoin foundation, and an efficient DeFi ecosystem, and it has the tacit approval of the U.S. government. From a purely capital perspective, ETH and Bitcoin meet similar value conditions, but current capital still prefers Bitcoin.

Why has the market not fully recognized ETH's compliance and technological economic advantages? In fact, ETH reached a market value of $350 billion at its 10th anniversary. The capital market will eventually awaken; ETH meets all rational investment conditions, so why not include it in allocations?

Ryan: Does the core logic of ETH asset management companies rely on the long-term rise in ETH prices? How do you argue the correlation between stablecoin growth and ETH value enhancement?

Avichal: Many countries globally face significant inflationary pressures, with about 20%-25% of the population experiencing a base inflation rate of 6%-8%. In this context, the market urgently needs a financial system priced in dollars, globally applicable, with institutional-level security, and capable of avoiding unilateral intervention by local or U.S. governments. The Ethereum DeFi ecosystem is spontaneously constructing such a system through stablecoins and supporting mechanisms.

The use of stablecoins has spurred DeFi demand, and as ETH serves as a mainstream collateral and ecosystem reserve asset, its demand grows accordingly. Users can borrow without third-party custody by collateralizing ETH, further driving up ETH demand and prices, attracting institutional participation.

Institutional behavior, in turn, feeds back into the scale of stablecoins and the liquidity of on-chain assets, forming a closed-loop flywheel. This model relies on Ethereum's smart contracts and collateral mechanisms to achieve self-enhancement, fundamentally differing from Bitcoin, which lacks a closed-loop ecosystem for stablecoins.

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, in the case of Tron or other fast Layer 1 chains, stablecoins will indeed exist on these chains and serve specific scenarios.

However, institutional users place greater importance on censorship resistance and trusted neutrality. If users are entirely under U.S. jurisdiction, they may choose Layer 1 solutions offered by companies like Circle or Stripe, which are similar to the past Silvergate SEND network, providing efficient infrastructure for regulated entities.

But many countries are unwilling to be entirely subject to U.S. jurisdiction. For instance, in the logic of the European dollar system, when both parties in a transaction are unwilling to use their local currency, they will choose to settle in dollars. At this point, decentralization, high stability, and continuous operational capability become key advantages.

(4) Ethereum vs Bitcoin: The Battle for Value Storage and Differences in Institutional Paths

Ryan: How to prove to the market that ETH is not only a value storage asset but that its attributes are superior to or distinct from Bitcoin and other traditional value assets?

Avichal: The concept of value storage makes sense both economically and logically, with core characteristics including portability, divisibility, durability, and verifiable scarcity. Both Bitcoin and Ethereum meet these criteria and outperform gold on multiple dimensions.

As for whether one would prefer to own art, farmland, platinum, or ETH? Many may reinterpret the rationality of ETH within this framework. Gold or art does not have absolute intrinsic value; its uniqueness stems from human consensus and cultural preference, which is entirely consistent with the logic used to defend Bitcoin a decade ago.

Value storage assets are not the only category.

Ryan: Since ETH excels in functionality and value storage attributes compared to or at least is on par with Bitcoin, why has its price performance lagged behind Bitcoin in this cycle?

Avichal: The development of the next round of token issuance takes time; the retail market has reached a considerable scale, but it still requires a new round of capital injection. The Bitcoin community has excelled in this regard, particularly in attracting institutional participation, which has been significantly aided by DAT.

Mac: Due to compliance restrictions, investors previously had to sign numerous documents to purchase Bitcoin through banks, while Ethereum ETFs were even directly prohibited by compliance departments. Thus, IBIT became the first approved Bitcoin ETF security, and many large bank clients configured Bitcoin through MicroStrategy's brokerage accounts.

In contrast, Ethereum ETFs only began trading at some large banks in recent months. Although Ethereum's actual application development is progressing faster, its institutional adoption is just beginning. This reality indicates that Ethereum's compliance entry and capital inflow are still in the early stages.

Ryan: What are the differences between Ethereum treasury and Bitcoin treasury?

Avichal: Ethereum's network architecture creates rich on-chain yield opportunities. Bitcoin is viewed as digital gold, with investment logic based on faith and price growth expectations; whereas Ethereum needs to bet on network expansion, including underlying protocols, multi-layer scaling, and ecosystem development.

The most critical difference is that Ethereum can perfectly accommodate compliant assets and debt instruments. When Wall Street institutions begin to utilize its mechanisms, the scale of assets touched will far exceed that of Bitcoin, which is the core advantage of Ethereum's financial model.

(5) ETH Investment Strategy: What is the Key to Project Success?

Ryan: What kind of returns are you focusing on? What is your expected return?

Avichal: The core question is how much risk one is willing to take. We have established a comprehensive risk framework, considering slightly higher than baseline staking LRT solutions. There are interesting opportunities in the RWA space, with attractive risk-reward ratios.

For the ETH ecosystem, only a few million dollars are needed to guide new protocols, promoting ecosystem development through around 15% token incentives. As investors, active participation is more valuable than passive holding.

Mac: The core value of current market education lies in most institutions still lacking the motivation for in-depth understanding, but they will eventually awaken over time.

Ryan: Does the purchasing strategy for ETH involve price trigger mechanisms and scale limits? Will excess liquidity be used for allocation?

Mac: We adopt a regular fixed-amount strategy to continuously build positions in ETH, based on mid-to-long-term bullish expectations for positioning, without pursuing short-term timing.

Ryan: How do you define the reasonable range for total market value premiums in a stable state?

Mac: The stock price of financial companies is linked to Nasdaq liquidity, recently showing fluctuations influenced by AI market trends. The reasonable valuation range for MNAV is 1.7-2 times, with bull markets potentially breaking through 3 times, while bear markets may present valuation compression opportunities for buybacks.

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

Mac: The initial fundraising cost of that business is high, but once scaled, operational costs are extremely low, allowing for the management of large-scale assets with minimal manpower, achieving high net profit margins and significant operational leverage.

Ryan: Can holding ETH treasury bonds generate cash flow in a manner similar to Berkshire?

Mac: This is my reason for betting on buying these stocks. Due to free cash flow returns, the actual business operation of this company is doing very well.

Avichal: The Ethereum ecosystem has now accumulated about $60 billion in TVL, with many core developers deeply involved in technological evolution. The current strategic focus is on re-integrating ETH assets into the on-chain system, reducing reliance on traditional Wall Street financial systems through tokenization and the construction of on-chain credit markets.

If successful in building on-chain financial infrastructure, Ethereum will achieve autonomous asset management and credit operations. The value of this long-term ecological construction lies not in short-term market cycles but in the continuous accumulation of technology and community consensus over more than a decade. When the public chooses on-chain financial products, they are more likely to prefer those truly practicing on-chain principles.

Ryan: Does the community multiplier effect constitute a key condition for project success?

Mac: I believe that being in the top three of ETH asset management rankings is one thing, but what truly sets us apart is the ability to create returns and the way we operate our business. Because I think once the market sees this in a few months or a few quarters, we will be distinctly different from other asset management companies.

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

Ryan: Do you think there will be some mergers and acquisitions in the market in the coming months or years? When do you think such activities will rebound?

Avichal: The market may see mergers and acquisitions in the future, especially in the next bear market cycle. Companies with market caps below $1 billion are easy targets for aggressive investors. When stock prices fall below net assets, it may trigger arbitrage. Investors buy shares at a discount and then force liquidation to profit from the price difference.

In similar cases, Michael Saylor might acquire an ETH treasury company, sell its ETH, and increase his Bitcoin holdings, both clearing competitive assets and achieving capital transfer.

Ryan: What stage is the current cryptocurrency cycle in? Does it still follow historical bull market patterns? How much upward space is left in this cycle?

Avichal: Cycle trends are mainly related to capital flows brought about by interest rate cuts.

Ryan: Is the cryptocurrency cycle primarily driven by liquidity?

Avichal: Historically, these assets have low liquidity, and the four-year cycle mechanism does exist, but actual operational difficulties are significant. We, as venture capitalists, focus more on long-term trends spanning a decade rather than short-term trading. The current cycle may extend to around 4.5 years due to external events.

The maturity of Wall Street's capital markets may change traditional cycle patterns, but the history of gold ETFs indicates that the sustainability of capital inflows may far exceed expectations.

Ryan: What are your views on ETH's price movements by the end of this year or in the next 18 months to three years?**

Avichal: Short-term price predictions are extremely difficult to achieve. Our core strategy is that when asset values are extremely low, if their potential value can reach ten times the current level, even with time uncertainty, as long as the core logic holds, there is room for long-term error tolerance. The key is to judge that "if the underlying logic holds, value will eventually far exceed the current state," rather than chasing short-term fluctuations.

Ryan: What are your expectations for asset growth multiples: 10x, 25x, or 100x? Do you agree with Tom Lee's view of a hundredfold increase?

Avichal: If Bitcoin is positioned as digital gold against a $20 trillion gold market, its price could reach a million dollars. If Ethereum's current $400 billion market cap achieves a similar benchmark, there is potential for 50x growth. History shows that technological innovation expands the total market capacity, so the actual potential may far exceed static calculations.

Failure cases often underestimate market capacity, while successful cases frequently exceed initial expectations. If Ethereum truly realizes the function of global digital value storage, its potential may surpass traditional assets. The accessibility of the internet will create unprecedented market scale. When everyone can easily hold digital assets, the existing valuation framework will completely fail.

Ryan: Why choose to benchmark physical gold as a value storage reference? Shouldn't the potential user base for digital assets far exceed the number of gold holders?

Avichal: Taking stablecoins as an example, when users discover that assets can generate returns, even if only allocating a portion of their positions, it may rapidly push the scale beyond that of traditional banking systems.

The current stage is similar to the consolidation period after the 1999 internet bubble; once infrastructure and user scale mature, the potential of digital finance will be truly unleashed.

The industry may be entering a similar maturity window for the internet from 2005 to 2008. With infrastructure and cognitive readiness in place, long-term visions may be realized in this phase.

Disclaimer

The content of this article does not represent the views of ChainCatcher. The opinions, data, and conclusions in the text represent the personal positions of the original authors or interviewees. The compiler maintains a neutral stance and does not endorse their accuracy. It does not constitute any professional advice or guidance, and readers should exercise caution based on independent judgment. This compilation is for knowledge-sharing purposes only; readers should strictly comply with the laws and regulations of their respective regions and refrain from participating in any illegal financial activities.