Beat bitcoin on the way down – now he is chasing the rally

Bitcoin climbed above $81,000 on Tuesday, reaching its highest level since mid-May. The timing could hardly have been better for ACE Digital. The company makes the calculation simple in its half-year report: the first half was the crash test. Now comes the speed test – keeping up when bitcoin runs, without letting risk off the leash. The objective is to increase value per share.

«Everything else is secondary», the report states.

This week, the upside test began in earnest.

Lost NOK 16.2 million

ACE Digital reported operating revenue of NOK 37.5 million in the first half, up from NOK 3.3 million a year earlier. The figures do not, however, represent ordinary underlying revenue growth. Income came mainly from sales of bitcoin and bitcoin options, while the corresponding cost of goods sold amounted to NOK 48.6 million.

The operating loss was NOK 14.8 million, while the net loss came to NOK 16.2 million. Cash fell from NOK 27.6 million at the turn of the year to NOK 8.3 million. Net cash flow for the half was negative by NOK 19.3 million.

Within its treasury strategy, however, ACE performed better than its passive benchmark.

The two capital raises carried out in connection with its stock-market listing brought in NOK 77.2 million. Invested directly in bitcoin, that sum would have bought around 65 bitcoin. ACE uses that holding as its long-term benchmark.

Bitcoin fell from NOK 882,667 to NOK 581,268 during the first half. A passive holding of 65 bitcoin would therefore have lost NOK 19.59 million. ACE’s active treasury strategy lost NOK 10.75 million – a loss that was NOK 8.84 million, or 45 per cent, smaller.

In other words, the strategy clearly beat bitcoin on the way down. The question was what would happen on the way back up.

Joined the rally as bitcoin took off

Hagen says the treasury strategy generated a positive contribution of around NOK 4.3 million between 30 June and Monday 24 August. Ace Funds contributed a further NOK 1.7 million, while the preferred securities added roughly NOK 700,000.

The combined contribution was therefore approximately NOK 6.7 million when bitcoin was trading at around $79,000.

– This includes a negative currency effect of around NOK 1.8 million from the weakening of the dollar. A passive holding of 65 bitcoin would have suffered a corresponding currency effect of around NOK 3.2 million, Hagen says.

The figures show that ACE participated in the rise, but also that it has so far lagged the passive benchmark.

Based on bitcoin’s value at the end of June and Hagen’s own estimate of the currency effect, a passive holding of 65 bitcoin would have gained around NOK 10.2 million by Monday. The stand-alone treasury strategy’s contribution of NOK 4.3 million therefore represented approximately 42 per cent of that rise.

Including Ace Funds and the preferred securities, the combined contribution of NOK 6.7 million amounted to around 66 per cent of bitcoin’s rise. That is not, however, a like-for-like comparison of the treasury strategies, as the fund and the preferred securities are separate parts of ACE’s capital allocation.

– We have not been left standing on the platform

Hagen nevertheless argues that the scenario he has feared most – bitcoin leaving ACE behind while the company has no exposure – has not materialised.

– The platform I feared is the one where you have no position when the train pulls out. That is not where we are.

According to Hagen, ACE’s direct bitcoin holdings have risen from 1.55 bitcoin at the end of the first half to 7.1 bitcoin, without the company buying bitcoin in the spot market.

The increase reflects the settlement of derivative positions. Positions moving in ACE’s favour add bitcoin, while positions moving against it reduce the holding. In the half-year report, the company said its holdings had been rebuilt to 4.18 bitcoin after the balance-sheet date.

Effective exposure within the treasury strategy is now around 39 bitcoin. Of this, 7.1 bitcoin is owned directly, while the derivatives have an estimated price sensitivity equivalent to roughly 32 bitcoin.

Including exposure through Ace Funds and the preferred securities, Hagen estimates that the company’s consolidated effective exposure exceeds 50 bitcoin.

That should not be confused with ACE owning more than 50 bitcoin. Most of the figure represents calculated exposure through derivatives and other bitcoin-related instruments. The preferred securities do not track bitcoin one-for-one either. It is Hagen’s estimate of total effective exposure, not a statement of holdings.

– The important point is that this is not a static figure. Exposure moves with the market and is adjusted through the derivative positions. The past week has been active, with significant trading as the market has moved rapidly, Hagen says.

Pursuit of upside

ACE also owns out-of-the-money call options expiring in December. The options were bought in the spring and have become more significant as the bitcoin price has risen.

The company is also considering positions extending into 2027, but has not yet entered those trades.

Hagen acknowledges that ACE’s pursuit of upside has come at a cost.

– Several of the false rallies in the spring cost us money because we increased exposure as the market rose, only for it to reverse again.

ACE is therefore positioned for further gains, but with the spring’s false starts still fresh in mind.

– I am always afraid of having too little exposure. That is a fear that comes with this strategy, Hagen says.

Kept warm through the crypto winter

Ace Funds fell 13 per cent in dollar terms during the first half, compared with a 33.3 per cent decline for bitcoin. The fund therefore outperformed bitcoin by around 20 percentage points during the period. It remains closed to external investors.

By the end of last week, Ace Funds was up 15.8 per cent since inception, according to Hagen, while bitcoin was down 29.5 per cent in dollar terms. The fund’s maximum drawdown was around 19 per cent, compared with approximately 46 per cent for bitcoin.

The objective is to deliver an annualised return of between 15 and 20 per cent over time, with lower volatility and smaller drawdowns than bitcoin.

– In a powerful bitcoin bull market, the fund will naturally lag bitcoin. That is a consequence of its design: we give up some of the upside in order to reduce the downside, Hagen says.

He rejects the idea that the fund should be regarded as a direct competitor to bitcoin.

– It is Ace Digital’s diversification within the bitcoin ecosystem – a more conservative way of taking bitcoin risk.

The fund is not open to external investors, but the comparison remains relevant to ACE Digital’s shareholders. Ace Funds is part of the company’s capital allocation, and its performance contributes to the value Hagen is tasked with creating per share.

Buying Digital Credit

An increasingly important part of ACE’s strategy is its investment in preferred securities issued by Michael Saylor’s Strategy. According to the half-year report, the positions held by ACE Digital and Ace Funds generate around NOK 2.3 million in annual distributions.

Ace Funds has, among other things, analysed STRD, the most junior of Strategy’s preferred securities. When the analysis was written on 3 August, STRD was trading at $59.59 against a par value of $100.

Its annual distribution of $10 produced a current yield of 16.8 per cent, while a move to par would have delivered around 68 per cent upside. The analysis also calculated 2.6 times coverage of senior debt and preferred capital, with $38.6 billion in ordinary equity serving as the first-loss cushion.

Since the analysis was written, Saylor has strengthened liquidity further. This week, Strategy raised $2.01 billion by selling MSTR shares. Of this, $300 million was added to the earmarked USD Reserve, taking it to $5.10 billion, while a new and more flexible USD Cash balance reached $1.59 billion. A further $136 million was used to repurchase STRC.

Strategy therefore has $6.69 billion in cash liquidity – almost as much as the $6.75 billion in long-term debt it reported at the end of June. That takes much of the force out of criticism that Saylor’s model is acutely vulnerable to a liquidity squeeze.

Hagen says STRD’s current yield had fallen to around 13.9 per cent by the time of his response, following the rise in its market price.

– Not better than bitcoin

He nevertheless rejects the premise that STRD or the more senior STRC is better than bitcoin.

– They are not better than bitcoin. They are something different. Bitcoin gives you direct exposure to the bitcoin price, with all of the upside and all of the volatility. STRD and STRC provide recurring cash flow, but you also give up the direct bitcoin upside and take credit risk against Strategy. It is not risk-free income.

The two instruments also perform different roles. STRC trades closer to par and pays twice a month. STRD offers a higher current yield, but ranks lower in the capital structure and trades at a substantial discount.

Within Ace Funds, the idea is that cash flow from these instruments can, among other things, be used to build additional bitcoin-related exposure.

– The credit generates income. Part of that income can be reinvested in bitcoin-related instruments, Hagen says.

STRD is perpetual and non-cumulative. If the board suspends a payment, it does not accrue as a claim that must be paid later. Nor does the instrument have a maturity date forcing its price back to $100.

It is also junior, concentrated in a single issuer and dependent on Strategy retaining access to the capital markets.

For STRD to be priced towards its $100 par value over time – after climbing from $60 to $73.50 since Investornytt spoke to Hagen – he believes the market’s required yield on this junior risk must fall towards 10 per cent.

– For that to happen, the market must have confidence in Strategy management’s ability to manage the balance sheet and its assets, while the company continues to have access to the capital markets. That is the core of the credit case.

Strategy may also repurchase its own preferred securities, as it has already done with STRC. That can support the market price, but it is no guarantee and does not replace a maturity date.

mNAV has gone stale

In his commentary, The Honey Badger of Wall Street, Hagen argues that mNAV, the widely used metric for bitcoin treasury companies, has become a stale lens when viewed in isolation.

In his view, Strategy is no longer simply a container for bitcoin that can be valued according to its premium to net assets. It has become a capital-allocation machine that actively moves money between bitcoin, cash, ordinary shares, convertible debt and preferred capital, depending on where relative value is greatest.

Ace Funds disclosed that, at the time of the analysis, it owned 9,000 STRC and 2,270 STRD. Hagen says both the fund and ACE Digital have since bought more STRD.

A split in the bitcoin church

Bitcoin’s institutionalisation has shifted an increasing share of price discovery into ETFs, derivatives markets and bilateral trades outside the open crypto exchanges. But power over capital flows is not necessarily the same as power over the network itself.

That distinction was brought into sharp focus by BIP-110 earlier in August. Formally called the Reduced Data Temporary Softfork, the proposal sought to tighten Bitcoin’s consensus rules temporarily, making it more difficult to store images, text and other arbitrary information on the Bitcoin blockchain.

Only 51 of 2,016 blocks – 2.53 per cent – signalled support. When BIP-110 nodes began rejecting otherwise valid blocks that lacked the required signal, they split onto a minority chain.

That chain produced its own version of block 961,632 and then block 961,633. Mining then effectively stopped.

The episode illustrated both sides of Bitcoin’s power structure. A node operator can choose which rules to enforce. But unless miners, exchanges, wallets and economically significant users follow, the operator risks not changing Bitcoin, but merely forking itself out of the network.

Is bitcoin’s future wearing a suit?

The question for Hagen is therefore how far the growing power of institutions truly extends: can they not only move the price, but also set the rules?

– No, I do not think so. Institutions can dominate capital flows and exert considerable influence over price discovery, but that is different from setting the rules. Bitcoin’s consensus rules are enforced by nodes and users, not by the size of your capital. You can own a very large amount of bitcoin without gaining a vote over the protocol – and that is precisely part of Bitcoin’s strength.

What has changed, according to Hagen, is how much trading now takes place outside the traditional spot market.

– An increasing share of institutional trading takes place in the OTC market, including in connection with flows into and out of the ETFs. Large orders therefore do not necessarily have to hit the open exchanges in the same way as before. Capital can significantly affect the mechanics of price discovery. The network’s consensus rules are another matter.

ACE has put its own Bitcoin full node into operation. It has downloaded and verified the entire blockchain and validates new blocks against the protocol rules, without relying on a third party to tell the company which chain is valid.

Hagen says the node runs Bitcoin Core. He has read the arguments on both sides of BIP-110, but takes a conservative position.

– My view is quite simple: Bitcoin works as is. A significant part of its strength lies in the predictability of its rules. I am therefore generally conservative about protocol changes. Continual changes, however well-intentioned, may over time weaken precisely the predictability and trust that make bitcoin worth owning.

The Achilles heel of self-custody

Institutionalisation also raises a more practical question: who should actually hold the keys?

The issue took on renewed relevance in early August, when around 1,816 bitcoin, worth approximately $114 million at the time, were stolen from addresses linked to Coldcard wallets. A flaw in older firmware had generated some seed phrases with far less entropy than expected, allowing private keys to be reconstructed without physical access to the devices.

The attack shook the bitcoin community. There was also a certain irony in the fact that it hit the hard core of bitcoiners who swear by cold storage and live by the mantra “not your keys, not your coins” – supposedly the safest form of custody.

Separately, Hagen had previously been recommended a Coldcard wallet by someone he regarded as an expert in secure self-custody. He will not go into detail about what happened, and stresses that the lesson was not about the product itself.

– It was about operational risk and people. There are many people who speak with great authority about things in which they have limited practical experience. It is only when something goes wrong that you discover whether the security structure actually works.

ACE therefore does not self-custody its bitcoin. The company uses regulated counterparties and deliberately diversifies across custodians and jurisdictions.

– Not your keys, not your coins’ expresses a genuine point about counterparty risk. But for a professional capital manager, the question is not simply who holds the key. It is whether you have a robust, verifiable structure that can withstand the failure of a single link.

Self-custody does not remove risk – it moves it

– In practice, you exchange counterparty risk for operational risk. Where the greater risk lies depends on the expertise and systems of the person who will actually handle the keys.

For many investors, Hagen therefore believes that a listed spot ETF such as BlackRock’s IBIT may be more practical than cold storage. The investor gains liquid exposure to the bitcoin price within an established financial framework, without having to secure private keys personally.

He nevertheless stresses that IBIT and ACE Digital are not comparable products.

– IBIT is a bitcoin wrapper providing spot exposure. Ace Digital is an actively managed listed company with several value drivers.

Nor does Hagen dismiss the counterargument that ETFs reintroduce custodians, regulatory risk and financial intermediaries – precisely what Bitcoin originally made it possible to bypass.

– The counterargument is real. A wrapper reintroduces intermediaries, custody structures and counterparty risk. It is a genuine trade-off against one of Bitcoin’s original ideas.

He will not prescribe who should hold their own keys.

– That must be up to each individual, based on what they are actually capable of handling securely and the amount of money involved. For us, as professional capital managers, the solution is regulated counterparties and diversified custody. For others, the answer may be entirely different.

The upside test is not over

The first half showed that ACE’s active strategy could limit losses in a falling market. Recent weeks have shown that the company is not without exposure when bitcoin rises either.

But as of 24 August, the stand-alone treasury strategy had captured only just over 40 per cent of the rise in the passive 65-bitcoin benchmark. Including Ace Funds and the preferred securities, the reported value contribution amounted to roughly two-thirds of bitcoin’s gain.

ACE was not left standing on the platform. But it did not catch the express train either.

The call options expiring in December could provide stronger participation if the rally continues. The company can also increase its dynamic exposure. The risk is that ACE again raises exposure after a false start – and is caught out if the market reverses.

One good week therefore does not determine whether the model works through an entire cycle. That is also Hagen’s point.

– The difficult test is not capturing one good week. It is participating in the upside over time without giving all the gains back if the market turns.