Inside Upexi’s SOL play: staking yield and locked token deals

Upexi is the largest public company holding Solana tokens and uses a SOL strategy to build its holdings and generate additional revenue through staking. In an interview with crypto.news, Upexi CEO Allan Marshall explains why the company executed a large equity private placement to build a crypto treasury, citing MicroStrategy’s playbook and a more accommodating U.S. policy backdrop.

Upexi markets itself as a “new institutional gateway to Solana’s (SOL) speed, scale, and rapidly growing ecosystem.” But it isn’t alone, as it joins a handful of rival companies also building Solana treasuries, while dozens of other public entities are focusing on other coins.

Speaking to crypto.news, Marshall discusses strategy and market perception. He notes that Upexi is focused on accretive capital raises, staking, and discounted, locked SOL purchases rather than venture investing. He also discusses how the company measures progress through an “adjusted SOL per share” metric designed to remove timing and leverage effects.

We also discuss the company’s risk management strategies, which include a buy-and-hold approach, no hedging, disciplined use of leverage, and custody with qualified providers.

The entire interview transcript is below:

crypto.news: Upexi is now the largest corporate holder of Solana with over 2 million SOL in treasury. Why did you make such a dramatic shift now? Was there something specific that happened in the past few months that gave you the confidence to commit so heavily to a crypto treasury at this time?

Allan Marshall: Upexi did the first large-scale equity private placement to create an altcoin treasury, and there were two key items that led us to adopt this strategy.  First was a growing appreciation for all the value that MicroStrategy has created, as it has been the best performing stock in the US since it adopted a Bitcoin treasury strategy in August 2020.  Second was a more accommodative US administration, which moved from a headwind to a tailwind and gave us increasing confidence that such a strategy would work.

CN: With so many crypto assets available, what makes you believe SOL is the best reserve asset for Upexi’s needs? Did you consider any alternatives, and if so, what unique advantages did Solana offer that others did not?

AM: We view Bitcoin as the best monetary asset and Solana as the best high performance blockchain.  Going with Solana over Bitcoin not only enabled us to be a first mover rather than a follower, but also enabled us to be underpinned by an asset with more potential upside, all else equal, with Solana’s market cap at just 5% that of Bitcoin’s.  In addition, being underpinned by Solana enables additional ways to create value, such as staking to earn an 8% yield making the treasury into a productive asset as well as buying locked Solana at a discount for built-in gains for shareholders.

CN: Upexi is sitting on an unrealized gain of $142 million. Can you provide a breakdown of this figure, for example, how much came from SOL’s price appreciation versus strategic actions you took, such as buying discounted tokens or earning staking yield?

We have not reported it broken down but the gain is a combination of all the tools we have to create value. Staking, SOL appreciation from early and strategic buying both liquid and locked tokens. 

You basically invented a new financial metric, “adjusted SOL per share,” to measure your treasury performance. How exactly is this metric calculated, and why do you think it’s a better indicator of value creation than the more recognized SOL per share or even NAV? In practical terms, what exactly does the current 0.0197 adjusted SOL per share figure tell investors?

We detailed the adjusted SOL per share metric in the table from a [Sept 11] press release.  We believe this is a better metric than a basic adjusted SOL per share as it adjusts for items that can heavily skew such a calculation such as investment timing and leverage.  For example, a company can raise $100m, buy $1m of SOL one month, and buy $99m of SOL the following month to claim their basic SOL per share increased by 99x over that time, but this was more due to the small initial purchase than due to value creation.  The company could then borrow $100m and buy SOL with it in a subsequent month to claim their SOL per share then doubled, though this was due to leverage rather than the main value accrual mechanisms.  Our adjusted SOL per share metric adjusts for items like these to measure the value creation from accretive issuances, staking, and discounted locked SOL purchases.

The 0.197 adjusted SOL per share tells investors how much in adjusted SOL is underlying each share of Upexi common equity.  The investor can see how this develops over time to measure the efficacy of Upexi’s treasury management operations, and can convert the adjusted SOL per share by multiplying by the price of SOL to see how much of a premium our stock is trading at relative to the value of our cryptocurrency (on an adjusted basis).

CN: Over 53% of your SOL holdings are locked tokens that were purchased at a mid-teens discount to spot prices. Can you explain what these locked tokens are and why Upexi chose to buy locked tokens at a discount? What benefits and risks do locked tokens bring in terms of built-in gains for shareholders, and how long before those tokens become liquid?

AM: Solana Foundation sold tokens to investors, typically cryptocurrency venture capital firms, early on to raise money for things like protocol development and for developer grants.  However, as it was still early on in Solana’s development, these tokens were locked. Hence, investors are not able to use them freely in DeFi and they do not trade on an exchange (only OTC).  Upexi is able to buy locked tokens at a mid-teens discount, that vest and become liquid on a monthly basis, generally through January 2028.  As we do not plan to sell Solana, there is no reason for us not to buy locked tokens to take advantage of the discount for investors.  Moreover, locked tokens still early the ~8% staking yield, and when the mid-teens discount is put into yield-equivalent terms, we are nearly doubling the staking yield.  So buying locked Solana at a discount is a great way for us to great built-in gains for shareholders and increase the staking yield in a risk-prudent manner.

CN: It goes without saying that holding any single-asset crypto treasury comes with volatility. How do you approach risk management for your SOL holdings? Do you hedge for downside protection, or are you all in with full confidence that downturns will reverse? In more practical terms, how do you reassure investors that the company won’t overexpose itself if Solana faces a major correction?

AM: We have a buy and hold strategy, and given our view that Solana will generally increase over the medium-term, we buy when we have the funds to do so and we do not hedge.  We seek to maximize value for shareholders in a risk-prudent fashion, so we will not take on too much leverage, we will not do crazy degen trading onchain, and we only use qualified custodians while diversifying amongst them.  We believe this not only positions us well for any market environment, but is also a strategy that resonates with both crypto and traditional investors alike.

CN: Does Upexi have any plans to move beyond simply holding SOL? For example, are there advantages to investing in projects or builders within the Solana ecosystem to complement your SOL holdings? Or do you see concentration in Solana as core to your strategy?

AM: We do not have any plans to move beyond holding and staking spot and locked Solana and engaging in accretive capital issuances. We believe the three value accrual mechanisms of accretive raises, staking, and discounted locked Solana purchases are so powerful that it doesn’t make sense to deviate from that at all.

CN: Upexi’s stock trades at around 0.7 times its basic NAV of the SOL treasury. Why do you think the market is valuing Upexi at a discount to its crypto holdings? What steps can be taken to close that valuation gap so that the stock price better reflects the underlying holdings? I saw that SharpLink announced a share buyback program as an acknowledgment that its stock is below its NAV. Would you consider a similar move?

AM: There are a number of items that make a basic mNAV calculation misleading, and as such, we do not believe that it represents the true underlying valuation that the market is ascribing to the company.  Here, we have published a “Fully-Loaded mNAV” metric that adjusts for items like leverage, cash on hand, pre-funded warrants, etc., and we believe is the most accurate valuation measure for Upexi.  Here, we are currently trading at 1.4x.

CN: I noticed that management has been active at investor conferences, including presentations at Needham, Canaccord, and H.C. Wainwright. Can you discuss how traditional finance audiences and investors are reacting to your crypto treasury strategy? What are the most common questions or concerns you hear from institutional investors and analysts?

AM: The knowledge level of traditional investors varies quite considerably, with many of them looking into cryptocurrencies and crypto-related stocks for the first time.  As such, the most common question we receive is ‘what is the difference between Solana and Bitcoin?”.  Another common question we get is “why Solana?”.  All that said, traditional investors do appreciate how powerful the model is and that cryptocurrencies may have more positive than negative catalysts, such as incoming US market structure legislation, all coming together to offer what is likely a very asymmetric risk-reward in our stock.

CN: Upexi joins a fast-growing list of public companies embracing a crypto treasury strategy. What do you think is driving this wave of corporate crypto treasury strategies? How does Upexi’s approach compare to the OG in this strategy, which was the first to hoard Bitcoin?

AM: Upexi did the first large-scale equity private placement for an altcoin treasury, and since there have been over 150 to follow.  The popularity of the model is likely coming from the success of companies like Upexi, which is making more companies want to adopt similar strategies and investors looking to make outsized returns. 

Upexi employs MicroStrategy’s main value accrual mechanism in accretive capital issuances, but also adds others such as staking to earn an 8% yield making the treasury a productive asset and buying locked Solana at a discount for built-in gains for shareholders.  We are also underpinned by an asset that we believe will similarly be an end-game winner, but at just 5% the size, so our view is that there is much more  potential upside in our treasury asset than for MicroStrategy.

CN: And last, as a follow-up to the prior question, are you concerned that that company’s exclusion from the S&P 500 index invalidates the investment thesis that resonated well with traditional stock investors?

AM: No, we are not concerned.  The S&P Index Committee has discretion on which companies it adds to the index, and MSTR may still be added in the future.  It has added other firms that own Bitcoin in the past like COIN and SQ. We do not think the fact that it wasn’t added during the recent quarterly rebalancing means much.