Beta, encountering cash flow

Written by: Prathik Desai

Translated by: Block unicorn

“The farther you look back, the farther you can see ahead.” — Winston Churchill

The current state of Digital Asset Vaults (DATs) bears a striking resemblance to the closed-end funds of the United States in the 1920s. People bought shares of closed-end funds, which then purchased stocks in the public market. Investors indirectly obtained the beta returns of these stocks and paid a premium for it. The speculative premium of these funds once rose to as high as 30% above net asset value (NAV), until the 1929 stock market bubble turned the premium into a discount. Investors ultimately came to a painful realization that this kind of investment approach was not worth it.

When I read this, I felt a sense of familiarity—as if everything we’ve seen in the DAT ecosystem over the past few months. It’s hard not to see the similarities.

DATs based on Bitcoin (for example, Strategy) provide leveraged returns tied to BTC prices. Investors pay a premium for this. When cryptocurrency prices rise, this flywheel effect gets to work; but when the market crashes, the effect breaks down just as well. The key to whether DATs can keep functioning through market cycles lies in what they appreciate in relation to. Most cryptocurrency vaults centered on BTC and ETH are leveraged bets on the underlying cryptocurrencies’ price increases.

But what if the token price is closely tied to the income generated by its ecosystem? What if it has almost no correlation with uncertainty? Ideally, what if it’s negatively correlated with the performance of other asset classes during periods of macroeconomic uncertainty?

In today’s in-depth analysis, I will use a HYPE-based digital asset strategy (DAT) company as an example to explore why DAT asset selection determines the sustainability of a digital asset strategy.

The DAT journey of Hyperliquid Strategies (ticker: PURR) began with the formation and holding of Rorschach LLC, a special purpose acquisition company (SPAC). The company then merged this SPAC with Sonnet BioTherapeutics through a reverse merger. Sonnet BioTherapeutics is a biotechnology company listed on NASDAQ that was struggling at the time, and its flagship anti-cancer drug had been looking for commercial partners for years.

This was essentially the same strategy as the one Twenty One Capital previously used in its BTC project, when BTC was supported by Tether, Cantor Fitzgerald, and SoftBank.

At inception, PURR held 12.6 million HYPE tokens worth $583 million, as well as $305 million in cash. Earlier this year, the company spent $129.5 million to buy an additional 5 million HYPE tokens.

But why should Hyperliquid Strategy achieve better results than previous DATs?

Different vaults

In the first wave of DATs, the packaging form itself was an innovation. Companies could swap BTC for ETH, or ETH for SOL, and the model worked well. This is because its flywheel effect was built on a premium relative to the company’s net asset value (NAV). It didn’t matter what the underlying assets were. As long as DAT shares traded at a premium, investors would buy in, expecting higher returns from token price appreciation.

However, when the market struggled to recover from the largest single-day crypto liquidation in the industry, this bet turned around.

Although the liquidation was sudden, occurring after U.S. President Donald Trump issued new threats of trade tariffs against China, DAT’s predicament was not entirely unexpected.

A few months before the liquidation event, we wrote that there was risk in the DAT model of Bitcoin vault leader Strategy:

“This strategy performed well during the Bitcoin bull market, because capital appreciation was favorable for buying more Bitcoin, and rising market caps also drove a surge in earnings reports. However, the sustainability of this model depends on continued market access and rising Bitcoin prices. Any sharp drop in the broader crypto market would quickly reverse second-quarter performance, while fixed expenses such as debt interest and preferred stock dividends would continue.”

Fast forward to mid-November, and we saw real-time concerns about DAT over the past few months: falling mNAV, slowing Treasury bond purchases, and falling stock prices of DAT companies.

The issue with this strategy is that all three major vault assets—Bitcoin (BTC), Ethereum (ETH), and SOL—share a common, tricky flaw: they do not generate cash flow themselves. Their price increases depend entirely on how people trade these cryptocurrencies. And that trading is driven by many factors: ETF fund flows, institutional investors’ interest, discussions in online forums and communities, and investors’ perception of BTC’s role as “digital gold” within the macroeconomic landscape.

Admittedly, ETH and SOL do offset the problem of slow token appreciation through staking rewards. But staking rewards are paid in newly minted tokens. Each time ETH and SOL pay staking rewards, they dilute existing token holders’ equity to pay validators.

Funds holding these assets (whether BTC, ETH, or SOL) operate similarly to closed-end funds holding a single non-dividend-paying position. The only way they make money is through token price appreciation or an expansion of the NAV premium. The former is affected by market volatility; the latter is driven by market narratives.

While both Ethereum and Solana generate transaction fees, only a relatively small portion of that revenue is returned to token holders. In 2025, Ethereum’s on-chain fee revenue was about $515 million, while Solana’s was $645 million. Most of it does not reach token holders; instead, it is either captured by validators or offset by newly issued tokens.

By contrast, the Hyperliquid protocol generated nearly $1 billion in fees last year. Even more compellingly, 97% of those fees were returned to HYPE holders through buybacks funded by the protocol.

Hyperliquid currently has average daily trading volume of $5 billion to $7 billion, with average monthly trading volume of about $200 billion, generating approximately $73 million in annual fee income from trading activity. Therefore, every dollar traded on Hyperliquid helps strengthen the fundamentals behind HYPE’s valuation.

This makes HYPE vaults feel less like a place to store BTC or ETH while waiting for market valuation, and more like receipts for fees earned from derivatives exchanges.

Any listed wrapper holding HYPE—including the HYPE recently held by PURR—is essentially a bet on the price of HYPE. Their organizational structure is the same as that of vault companies for BTC, ETH, or SOL. This allows us to view them from the same perspective. However, given the fundamental factors driving the token’s price, I am more optimistic about HYPE vault companies.

PURR’s stock price reflects an indirect claim on the present value of all cash flows generated by Hyperliquid’s derivatives business.

You don’t have to take my word for it. Hyperliquid has proven this multiple times recently.

A proven case

During last month’s U.S.-Israel war, both risk assets and traditional markets experienced volatility. HYPE rose 40%, while the S&P 500 and Bitcoin performed weakly. The former fell 3% to 5%, while the latter rose 5%.

Since the largest crypto liquidation event on October 10, HYPE’s price has risen by about 60%, while BTC’s price has fallen by 40%.

This is not a coincidence. Volatility driven by uncertainty is bad for passive value storage methods, but good for derivatives exchanges. Uncertainty prompts traders to hedge their positions. Liquidation events impose costs on both sides of the trade. The factors that erode Bitcoin vault strategy net asset value (mNAV) actually favor traders who inject more funds into the trading venue.

This bear market, which has pushed Bitcoin and Ethereum vaults toward the brink, has also generated record trading volume and fees for Hyperliquid’s ecosystem. Bitcoin and Ethereum vaults can only wait for the market to fall past the crisis, while Hyperliquid’s profits thrive in this environment.

Hyperliquid’s HIP-3 market further reinforces this argument by bringing traditional assets—including metals such as silver and gold—onto the blockchain, enabling investors in financial markets to express views across asset classes.

I believe this is the biggest reason why HYPE’s DAT strategy is different from others.

No one is safe

PURR’s DAT strategy is still a bet on Hyperliquid’s price. Hyperliquid could lose its original market share to competitors such as Lighter and Aster, or to some protocols that have not even been conceived yet.

However, what builds confidence despite these challenges is the choice of underlying assets. PURR’s institutional backers market their DAT strategy as “the only way for U.S. investors to participate in HYPE.” But if funds are approved to issue a HYPE spot ETF, the entire DAT strategy could become obsolete. 21Shares and Grayscale have already filed applications.

Earlier DATs had to worry about how to maintain their NAV premium. That depended on market sentiment and investors’ confidence in the model. The HYPE-based DAT only needs to answer one simpler question: can Hyperliquid continue to be profitable? This depends more on weekly fee data, potential market share, and the protocol’s roadmap—which includes the upcoming HIP-4.

All of these are data points analysts can use to make informed decisions. Analysts may still be wrong, but their judgments are supported by data.

Here is a counterpoint.

What if Ethereum and Solana surpass Hyperliquid in fee income? That’s not impossible. But considering that Hyperliquid returns earnings to HYPE holders through buybacks, the situation becomes much more complicated.

Although Ethereum returns some fees to ETH holders, that portion is fully offset by the new ETH it issues to validators. Solana’s fees all go to validators, and only a tiny fraction ultimately reaches Solana holders. To reach the same level of token yield as Hyperliquid, both would need to overhaul their underlying tokenomics. Meanwhile, network activity would have to be several times higher than current levels. None of these changes can be done overnight.

Even if this happens, I believe the same argument still holds. I don’t think HYPE will always be the only successful asset in DATs. I believe that DATs built on assets capable of delivering sustained income to holders will have longer lifespans than those built on assets that cannot generate ongoing returns.

These two models are fundamentally different. First-generation DATs (debt financing protocols) expect investors to believe in the stories they underwrite, while the second generation expects investors to believe in cash flows.

The closed-end funds that survived the 1929 bubble were the ones that could continue paying dividends during market downturns. Everything else was just a packaging of speculation.

Hype-driven, sporadic DATs may eventually fade away like other DATs. No one can predict when. But criticism of them will likely focus on market share, fee stability, and other fundamental business metrics. At least it won’t end with a “see, I told you so” tone like the BTC DAT collapse.

That’s all for today; see you in the next article.