Latest / Bitcoin for Financial Services Podcast / Fix the Money, Now Fix the Credit

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Fix the Money, Now Fix the Credit · Bitcoin for Financial Services Podcast

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  every dollar that goes to these credit instruments,
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  these digital credit instruments,
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  that's a dollar that does not go to traditional credit.
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  So these instruments will quite literally
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  reset the cost of capital for the credit market.
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  When they found Bitcoin, they're like, fix the money.
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  And they drew all of the attention
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  and they compared Bitcoin to US dollar.
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  And you're like, this is so much better, right?
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  This product is so much better.
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  but and now people should be looking at these digital credit products and doing the same thing
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  digital credit traditional credit this is so much better bitcoin is a currency on the internet if
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  you don't trust any other currency this is where you go it's going to outperform everything bitcoin
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  could eventually be worthless every day is a good day to buy bitcoin bitcoin reached its highest
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  price to date bitcoin hitting a new high it really has reached escape velocity there is no second best
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  Who cares about Bitcoin?
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  It's the only secure database that's ever been invented.
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  Antisocial.
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  Bitcoin is the real deal.
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  Stupid.
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  Everything is bullish for Bitcoin.
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  Immoral.
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  It's going up forever, Laura.
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  Fix the money.
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  Fix the world.
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  Investments or investment strategies. Investments involve risk and almost otherwise stated are not guaranteed.
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  Information expressed is not taking into account your specific situation or objectives is not intended as a recommendation appropriate for any individual.
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  Listeners are encouraged to seek advice from a qualified tax legal or investment advisor to determine whether any information presented may be suitable for their specific situation.
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  Past performance is not indicative of future performance. Any statements or opinions are subject to change without notice.
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  Welcome back to the Bitcoin for Financial Services Media podcast, the podcast where sound money meets professional services.
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  we explore how to build a financial system within the principles and values and ethos of Bitcoin.
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  Today we're joined by Jeff Walton, Chief Risk Officer at Strive. Let's get started.
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  Welcome back to the Bitcoin for Financial Services podcast.
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  Special guest today, Jeff Walton. How are you doing, man?
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  I'm doing fantastic. How are you?
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  Good, good. Stoked to have you on today.
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  We met in Abu Dhabi on a panel together.
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  I've been following you for a while.
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  It's been tremendous.
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  I love your work.
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  I love what you guys kind of focus on at True North, what you're doing over at Strive.
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  We'll get into all those.
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  But why don't you give the audience a little bit of a background on yourself because I think you have an interesting story.
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  Yeah, absolutely.
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  Happy to give you a quick background.
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  So hello, everyone.
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  My name is Jeff Walton, Chief Risk Officer at Strive.
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  I've got a unique background.
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  Prior to working at Strive, I was a reinsurance broker for 11 years.
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  What is a reinsurance broker?
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  I sold insurance to insurance companies to help reduce the volatility of insurance company
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  balance sheets.
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  So thinking about, I worked tremendously in the financial markets across the globe.
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  It was Bermuda, New York, London, Asia, Europe, et cetera, and the U.S.
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  and designed and transacted pieces of business
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  to reduce volatility on insurance company balance sheets.
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  So thinking about where I'm at today
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  and the seat that I'm at today,
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  what we're doing is reducing the volatility of Bitcoin.
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  So it's very similar to what I used to do
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  in the insurance world.
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  We're taking a very volatile, crude commodity
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  and reducing the volatility by creating
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  and structuring a security
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  that sits senior on our balance sheet.
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  And that is Seda.
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  Yeah.
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  And I do want to get quite a bit into digital credit.
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  I think you have some phenomenal writing on that.
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  But off the bat, man, Bitcoin is crude.
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  That feels kind of mean.
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  It's a crude commodity.
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  It's volatile.
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  It's like oil.
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  It's like, you know, it just exists.
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  It's out of the ground.
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  Yeah.
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  That's funny.
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  Yeah, actually, I wasn't even expecting to go down this.
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  But just curious, you know, kind of from the insurance background, this is fairly new to me.
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  I'm not an insurance guy.
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  I don't claim to.
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  I don't really like it.
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  But I met Phil Brage from Soder in Abu Dhabi as well.
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  Do you just kind of keep an eye on insurance markets?
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  Have you seen any interesting developments
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  with Bitcoin front?
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  Absolutely.
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  I'm fascinated with the insurance market.
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  So I studied finance in college.
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  I was really fascinated with everything finance.
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  I wanted to go work in New York.
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  I ended up getting a job in Seattle,
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  which I took in working in reinsurance.
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  And I didn't know anything about it.
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  And I ended up falling in love with it because it was a financial market that was non-correlated to the equity in the bond market.
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  Right. It was completely dependent on what happened with the weather.
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  And so, right. And what do we know about the weather in the last 10 years?
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  It's been just crazy volatile. We've had wildfires in California.
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  We've had pretty big hurricanes in on the East Coast.
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  There's been floods in Europe and the U.S. that have been massive and Australia.
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  and COVID ended up hitting insurance company balance sheets.
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  You've got war challenging insurance balance sheets as well.
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  So there's been just a ton of things
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  that have happened in the last decade.
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  And then on top of that,
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  insurance companies rely on the financial markets, right?
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  I mean, their balance sheets are comprised
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  about 80% of the balance sheet is comprised of bonds.
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  And so, you know, what happened in 22, 23
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  with the rise in interest rates,
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  We had the worst equity and bond market performance since the 1920s combined, like when looking at the bonds and the equities.
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  And so insurance companies got incredibly stressed.
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  And I was noticing this at the same time.
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  And this is kind of why how I got into the Bitcoin ecosystem is I started studying strategy as soon as they put Bitcoin on the balance sheet.
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  And I was watching these insurance companies start to fail, like the balance sheet of these insurance companies was going down and strategy was going up.
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  and it was like okay these are both balance sheet companies i need to pay attention to this i work
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  in the capital markets i need to pay attention to this and uh i ended up just analyzing it and
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  publishing my my thoughts on strategy and watching the insurance company the insurance industry
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  change and evolve and uh they were they're just unable to keep up with the times i mean there's
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  regulation and uh there's there's regulatory constraints on insurance companies and they
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  they can't hold certain assets. So for example, they can't even hold Bitcoin. You see all of these
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  challenges with inflation, CPI increase, cost of goods increasing dramatically for these insurance
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  companies. And the claims, the claims are just increasing very fast. And the insurance companies
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  can't charge rates fast enough to keep up with a rising cost of the claim. And they can't hold
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  the one instrument that would help them offset some of that rising inflation exposure in
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  Bitcoin.
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  So it became very clear, I need to go work in this space.
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  I need to operate in Bitcoin and figure out what opportunities there are to kind of fix
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  and bring some of this exposure into the insurance industry.
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  So I watch it very closely because I think it's one of the largest components of the
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  capital markets, like the insurance industry itself.
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  I think they're holding, I don't know, 10 to 15 plus trillion dollars worth of capital across all insurance companies.
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  So they're large decision makers and they hold a lot of money.
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  So trying to figure out how to how to bridge the gap and get some of that exposure into the Bitcoin world is is a pretty big focus of mine.
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  Yeah, that's amazing. Thank you for doing that.
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  We like to integrate big markets.
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  Curious, though, and from very much like a sideline observer, you know, see something here and there.
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  you know hurricane florida north carolina whatever you know do you do you think that
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  this reinsurance market is a little bit of a canary in the coal mine for you know for their
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  economic instability just with their balance sheet impairment um it's possible but it might
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  take a little little bit of time to rear its head and and the reason is um some of these
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  assets that they hold as collateral against some of these claims uh may be relatively illiquid
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  But that only becomes a problem if you need liquidity. So, right. And so the question is, like, is there an event on the horizon where, you know, some of these reinsurance contracts or insurance contracts get stressed and they need liquidity on the collateral that's posted against the transaction?
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  and that could cause a liquidity crunch.
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  But at the moment, it doesn't seem like an enormous issue,
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  but I mean, that could change quickly
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  if there's large systemic industry events
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  without government backstop or government intervention.
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  So like some of the research I did is,
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  it seems like the insurance industry
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  holds about 30% of the private credit market.
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  And we've seen a lot of the news.
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  we've seen a lot of the news about like the challenges in the private credit market you know
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  the the uh the holders of private credit running to the exits and the the companies that created
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  the private credit instruments are you know shutting the gate you can only have you can
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  only pull out five percent per quarter or whatever that number may be so there's definitely um
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  a flight to de-risk on the private credit market but i guess the again the question becomes like
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  is it default risk or is it liquidity risk?
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  And we're still figuring out
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  what exactly that looks like.
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  Totally, yeah.
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  Important distinction
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  and interesting development nonetheless.
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  I do want to circle back to True North
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  and when you were kind of pivoting
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  from insurance to Bitcoin,
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  how'd you get started in that?
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  Were you working your job,
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  started the podcast, started doing research?
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  So tell us about that story.
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  Yeah, I was in my basement publishing independent research about Bitcoin and MSTR and how companies can hold it and what it means.
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  Basically, just talking about capital.
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  And I've got this unique perspective in the capital markets.
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  And I became super frustrated when I would go talk to folks in the insurance industry.
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  And I would just get laughed at, you know, like the government's going to shut it down.
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  I got every FUD piece you could possibly think of.
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  The government's going to shut it down.
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  You know, they're going to make another one.
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  I just got laughed at every time I brought it up.
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  And so I was like, okay, I need to go find other people that are talking about this.
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  So I started talking about it on X.
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  I met Ryan.
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  We started doing a couple of shows together.
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  And we just talked about analysis, right?
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  What does this mean?
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  What does this look like?
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  What should this company be valued at?
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  Like, how can we start to think about this?
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  And we were really like the only people that were talking about it at the moment.
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  This is back in 2023, 2024.
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  And then the price of Bitcoin moved.
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  And the strategy's balance sheet just started getting larger and larger very quickly.
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  I think when we started talking, it was about a $4 billion company.
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  They had about $2 billion of Bitcoin on the balance sheet.
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  And now they're a $50 billion company and they've got $50 billion of Bitcoin on the balance sheet.
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  So we kind of forecasted that this was going to happen.
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  We didn't forecast the amount of growth that they were going to have so quickly and then the products that they were going to build on it.
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  We always understood that there was going to be, they could use this capital as collateral and start to transform this into other opportunities.
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  And that's the Perpetual Preferred Digital Credit Securities that they've created here.
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  And we were at the forefront of just analyzing every single one as they came out.
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  And I brought a group of people together.
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  We've called it True North.
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  And this is back in October of 24.
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  and so we started talking about mstr capital collateral is like all of the people that were
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  you know really focused on this topic and we ended up turning it into a weekly podcast we've now run
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  i think 62 episodes in a row uh and have rolled it into strive the company i now work for and it's
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  the effective media arm or media brand of our publicly traded company yeah it's so cool man
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  Like, just occasionally I get asked by folks who's like, well, how do I get a job in Bitcoin?
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  How do I start working in Bitcoin?
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  Quite honestly, I don't know anybody who started working in Bitcoin that didn't do the proof of work first,
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  like start doing content of some sort, find their niche.
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  And I think you're an amazing example of that.
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  It's very cool.
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  Yeah.
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  I mean, I left the finance world.
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  I had a really high paying, safe, stable job.
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  and and I and I left it to work in Bitcoin without another job lined up and when I left the finance
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  world my uh my past boss like they thought I was lying they thought I was going to a competitor
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  they were like I was like I quit and I like I I can't do this anymore I'm gonna go focus on Bitcoin
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  and they're like what are you talking about you quit and and it's like what competitor are you
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  going to and they like they they were very focused because I had some like anti yeah I had some like
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  non-compete clauses in my contract.
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  So they were like laser focused.
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  They're like, you're going to go to a competitor and, you know, we're going to sue you.
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  And it was like, I'm not, I'm not going to a competitor.
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  I'm just going to go work on Bitcoin.
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  And so, yeah, it was a, it was a contentious moment and people were definitely bewildered
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  that I, that I left to go work on Bitcoin.
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  Oh man, that's, that's unfortunate, but funny in hindsight, that's pretty good.
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  I gave him an opportunity to like, I think for,
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  four months prior, I went to the CEO and I was like, talked about some of the things I was working
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  on. And I said, Hey, let me work on Bitcoin. This is a, this is a really big opportunity. And I showed
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  him like, here's the four-year compound annual growth chart. Like, look at it. It's always
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  positive every single return period. Like I can underwrite this. And the response was that that
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  looks like a scam. And I was like, okay, I'm out of here. I got to go somewhere else. Do you know
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  if they've taken a position on Bitcoin? No. So they're going to get lapped. Yeah.
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  Yeah. So they were the fourth largest reinsurance broker at the time. And, you know, now our company is sponsoring Risk World. So we will be at Risk World on May 3rd through 6th in Philadelphia.
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  This is like the premier insurance conference every year where the thought leaders in the risk world are going to be at that event.
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  And so I'm on stage.
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  I've got a case study that I'm going to talk about Bitcoin and digital credit and talk in this realm and this arena of people that will likely be very bewildered that this exists.
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  So, yeah, no, it will.
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  There's a lot of work to be done.
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  And it's really fascinating when you start to like put the relativities together and show people like, look, like Bitcoin's a $1.4 trillion asset.
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  It's the 11th or 12th largest asset on the planet.
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  That's like ignoring JP Morgan.
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  Like what are you doing?
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  Like you're ignoring.
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  It's actually, sorry, I did this math yesterday.
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  It's ignoring JP Morgan and Visa combined.
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  jp morgan's at 800 billion dollar company visa is like a 500 billion dollar company and the value
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  of bitcoin is more than jp morgan and visa combined so it's like okay this is a money company and a
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  transaction settlement company combined and this company's this decentralized commodity is bigger
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  than both of those like you should probably pay attention to it and uh usually it's that fact that
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  kind of like gets at least a little bit of a light bulb but yeah it's well totally i saw that tweet
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  and i loved it and it sounds like i was wondering sounds like you picked those two companies
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  intentionally because if i'm talking to a skeptic about the value of bitcoin everybody forgets the
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  network you're they you know drastically discounted and they don't understand you know bitcoin's two
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  things asset and network asset secures the network network powers the asset i was like well what do
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  value you know visa that's always like my go-to and they're always like uh so the fact that you
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  picked like this like pseudo asset manager asset and like the the payment network i thought that
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  was brilliant and it's so true it's like okay what are we we doing you know bitcoin's proof
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  itself you know time and time again but it's an interesting transition i want to talk a little
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  bit about this i want to get more into capital markets but yeah i feel like your slogan is you
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  risk is mispriced and obviously i feel pretty comfortable saying we're in a bear you know
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  down 50 ish percent from all-time highs i feel personally like the sentiment is awful but it's
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  weird talking to clients because bitcoin fundamentals itself have really never been
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  better and so how are you kind of assessing our current state of the market knowing that and
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  knowing likely to the risk is most priced here.
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  Yeah.
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  So I'll give you a perspective of how I think about it
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  and kind of how our company thinks about it.
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  We are long-term underwriters of Bitcoin.
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  So we are underwriting the structure and the network itself.
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  So to your point, I think the fundamentals,
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  like price is one element of a risk analysis, right?
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  You've got all of the other variables
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  and all of the other variables are rating environment,
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  infrastructure, products built around it,
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  companies that are involved in it,
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  the global game theory dynamics,
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  all of these pieces, all of these components
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  come into underwriting a long trajectory of Bitcoin And the landscape has just completely changed from where we were in the last bear market 2022 right I mean Morgan Stanley Bitcoin ETF just launched today
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  BlackRock Bitcoin ETF was the most, it was the fastest ETF to $100 billion ever.
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  It was BlackRock's number one revenue driver last year on the ETF side.
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  Morgan Stanley is now coming in the door and they have access to, you know, thousands of wealth advisors.
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  and they're going to be offering this new product to all these wealth advisors that previously maybe
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  didn't have access to it or they had access to the BlackRock product. You've got these digital
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  credit instruments, which are absolutely exploding. I think strategy is now on five or six billion
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  dollars of STRC that they've now issued. And it's just growing like a weed. This instrument is
• 18:57
  trading hundreds of millions of dollars a day with a one to two penny spread and a higher yield than
• 19:02
  anything else in the rest of the market. It's just like, it's an incredible product that has
• 19:08
  just huge, a total addressable market. So we've got, you've got the, and then the regulatory
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  constraints are pretty much removed with the exception of the Basel III rating standards. So
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  if, if that even, if that changes, that's even more like hyper bullish into the future, right?
• 19:29
  So we feel comfortable and excited about the structure of Bitcoin, everything that's happening around it, on top of the fact that banks can't even hold it as regulatory capital, insurance companies can't hold it as regulatory capital, and effectively the largest capital allocators on the planet can't even hold the thing.
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  and if that if that changes that kind of kicks this kicks the door even further open but i would
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  i struggle to say that we're early anymore i mean this is a 1.4 trillion dollar asset
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  and it's it's fallen 45 and stabilized it's fallen 50 plus and stabilized at 1.4 trillion dollars
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  it's bigger than jp morgan and visa combined and and you've got the infrastructure is continuing
• 20:16
  to build and the demand, you could see, you could watch the IBIT flows, the IBIT flows continue to
• 20:21
  increase. Like people aren't net sellers, people are net buyers of the IBIT ETF. The miners, it
• 20:27
  seems like the mining infrastructure, there's a lot of miners that are selling Bitcoin at the
• 20:31
  moment to kind of pivot and shift over into AI. Hash rate is still relatively the same, like it
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  hasn't seen a massive drop off, despite the price going down, which is also really fascinating.
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  and uh yeah everything that we see is structurally long-term bullish and particularly you look at
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  monetary supply we've got a war in iran you think about like the the challenges in the rest of the
• 20:56
  credit market the challenges in the rest of the equity market you've got ai coming in and really
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  challenging uh a lot of the financial infrastructure here in the future so again yeah we we think
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  we are structurally long-term bullish here and i don't think the setup has ever been better
• 21:14
  i'll love to hear that do you want to double click on the basil accords this is something i
• 21:21
  talk about my book with gold and i'm afraid it's like the sound money threat because yeah i don't
• 21:27
  think it's so basil three which took them like a decade to like hash out but you know finally moved
• 21:32
  gold to i could be get my order here run but like a risk risk weighted asset of like tier one and i
• 21:39
  I think it was like tier three.
• 21:40
  So, you know, back in the day, you know, even like mid 20th century, you know, you had to essentially every dollar of gold you held on your balance sheet, you could count for like 50 cents of it or something.
• 21:53
  It was like, OK, so this is the, you know, humanity's premier, you know, store value for essentially our entire existence.
• 22:02
  And you guys are going to discount it.
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  But that was really eye-opening to me when I started digging into that because, okay, if they did that for gold, how long is it going to take for them to accept Bitcoin?
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  I'm not sure the game theory is in their favor to accept Bitcoin.
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  I don't think the game theory is in their favor to accept gold.
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  Obviously, that affects banks specifically who are very large capital allocators.
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  Do you worry about that?
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  Is this just a variable you're not too concerned about?
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  it's it's a variable that uh if it if it happens it's very it's incredibly structurally bullish
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  even more bullish if it changes at all like right now it's zero so there's zero credit like banks
• 22:43
  get zero credit insurance companies get zero credit rating agencies give zero credit for
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  example you look at strategy they were just given a b-minus issuer credit rating and the s&p
• 22:52
  uh from s&p b-minus issuer credit rating from s&p and they cited the basil you know risk weighting
• 22:59
  at 1,250% for Bitcoin, basically meaning that it's zero. They get zero risk weight for it. So
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  strategy with $8 billion of debt on their balance sheet was given a B minus issuer credit rating,
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  and they gave the $50 billion of capital on their balance sheet zero credit.
• 23:17
  If they give it 5% credit, let alone 50, right? Let alone 75, right? They give it 5% credit.
• 23:27
  the the uh the rating increases right like that the amount of capital that can come in the door
• 23:35
  on any of these type of instruments is is going higher and i i think so so when we're underwriting
• 23:44
  this it's like it's already the worst it could be like they can't make it they can't make it worse
• 23:48
  right it's already zero so any any improvements uh makes it makes it even better so
• 23:54
  So I think the other thing about the game theory here, the United States wants to lead in Bitcoin, right?
• 24:04
  They want to be the Bitcoin capital of the world.
• 24:06
  And I think there's some incentive for the U.S. to establish their own rating framework for Bitcoin specifically and potentially for all other cryptocurrencies.
• 24:17
  So the real challenge, I think, at the moment is that all cryptocurrencies are lumped into one bucket.
• 24:23
  it's all crypto 12 12 250 risk waiting now if you if you rate one of them do you start need
• 24:33
  needing to rate the other ones do you rate ethereum do you rate solana do you rate fartcoin
• 24:38
  right like how far do you go and i think that's a you open a can of worms if you start doing that
• 24:43
  and obviously you start to lose a little bit of control it kind of depends on like how like how
• 24:48
  a country is structured around it. Like, do they have a strategic Bitcoin reserve? How do they view
• 24:53
  that? Do they actually like the strategic Bitcoin reserve? Like how integrated is the Fed? Like,
• 24:57
  there's a lot of politics that goes behind it, right? The Fed is integrated with the banks,
• 25:01
  banks are integrated with politics. And so it'll be interesting to see how it plays out. But
• 25:08
  I'm hopeful that something changes on that front, but I'm not going to hold my breath.
• 25:15
  yeah yeah that i think that's totally fair i'm happy you brought up uh strategies s&t rating
• 25:22
  because i'm wondering if these institutions just get replaced because of pure incompetence
• 25:30
  oh for like uh yeah for for rating the issuer credit yeah i mean all i could think of is the
• 25:38
  big short right that lady with uh the big glasses on and she says like uh well if i if i don't rate
• 25:43
  this instrument and you know they're going to go across the street uh and go get rated by moody's
• 25:48
  or whatever you're right right like the people that are smart in finance they don't work at
• 25:53
  rating agencies like why would you work at a rating agency that's like zero zero upside uh
• 26:00
  like it's it's just not the best talent isn't working at the rating agencies so like i'm not
• 26:07
  surprised if they go slow or they move move very slowly here the the really fascinating thing is
• 26:14
  that they should be underwriting and creating a risk model around bitcoin and it's the most
• 26:20
  transparent asset like it's more transparent than anything like you can actually create a very
• 26:26
  sophisticated risk model around bitcoin using all of the data uh available to you and it's and it's
• 26:32
  mark to market 24 7 365 so like theoretically that should be easier to quantify and easier to
• 26:39
  create a risk model for than than anything else uh and it's a 1.4 trillion dollar assets like
• 26:44
  then there's a company that holds 50 billion dollars worth of this stuff like i just don't
• 26:48
  i don't get why you wouldn't start focusing on this stuff um meanwhile they'll they'll rate like
• 26:55
  I don't know a bond from like quick creek concrete for two million dollars uh triple b or you know
• 27:05
  whatever that may be like they they can spend a lot of time and energy on things that are very
• 27:10
  opaque and challenging to quantify with like very uh very vague inputs but yeah I think it's just
• 27:19
  going to take some time we've had we've had some conversations with some of the rating agencies and
• 27:23
  And they're like, yeah, we haven't started our Bitcoin risk model yet.
• 27:27
  And it's like, OK, let's talk about it.
• 27:31
  Like, let's have a conversation.
• 27:32
  So that's part of the goal at Risk World, actually, is to, you know, start to open people's eyes to the fact that this asset exists.
• 27:42
  And like what we're doing is really is really fascinating.
• 27:45
  And it's worth some time and attention for people to pay attention to.
• 27:49
  Totally. No, that's exciting.
• 27:50
  I might have to go just to see you dance on some graves.
• 27:52
  Yeah, that's the hope.
• 27:54
  Quick side tangent here.
• 27:57
  We're just curious.
• 27:58
  Ledin's bond.
• 28:00
  Yeah, I've been trying to find some details on how this is working.
• 28:04
  I haven't just like some press releases.
• 28:06
  Have you looked into this at all?
• 28:07
  Yeah, I've looked at the Ledin because they got a rating.
• 28:10
  They got a rating on there.
• 28:11
  It's like the first Bitcoin instrument that got a rating.
• 28:14
  And I think it's like, I think it's B-minus or it might just be B. I'm not exactly sure.
• 28:20
  It's a good rating.
• 28:21
  it's one of the best best ratings that a bitcoin instrument has ever gotten now if you look at the
• 28:26
  structure of it it's effectively like a fully collateralized no loss no loss situation alone
• 28:32
  so the the probability of loss on the instrument is just so incredibly low because you get liquidated
• 28:38
  at a at you know a 85 loan to value or whatever it may be so it looked like when you and it's
• 28:45
  denominated in fiat so you think about the the view the viewpoint of the in the regulator is
• 28:50
  looking at the capital infrastructure of the deal. It's fully collateralized. There's a margin
• 28:55
  liquidation at whatever the percentage is. And so the capital should be there as long as
• 29:01
  Bitcoin remains liquid, which I mean, it's trading $60 billion a day. So I'm not surprised it got
• 29:08
  a rating, but there's still an enormous gap between that getting a rating and the strategy
• 29:15
  your strive prefs getting a rating it's uh they're fundamentally different products uh with
• 29:21
  different like covenants and features than like a perpetual preferred equity totally and i want to
• 29:28
  start tiptoeing your way into capital markets here and so just starting you're kind of the base layer
• 29:35
  these digital asset treasury companies that's iphone big phone treasury companies everybody
• 29:40
  else seems to call them dads what do you think of that moniker i don't really get it i don't really
• 29:44
  like it it's like these are these are just balance sheet companies like who cares what the who cares
• 29:49
  what the treasury is in right like yeah are we gonna are we gonna start calling the uh all of
• 29:54
  the other companies in the market fats fiat asset treasuries right like uh like come on what what
• 30:01
  are we doing here like we're just balance sheet companies we just have a we just have a better
• 30:04
  asset like okay you're gonna create a moniker for us like all these other companies are fiat
• 30:08
  companies or i guess human capital companies human capital treasury companies it's funny man but
• 30:14
  The majority of my clients are Bitcoiners and you know, Sailor is obviously a great spokesperson for Bitcoin. He's done some amazing stuff with strategy. I'm pretty agnostic on Bitcoin treasury companies. I obviously like to monitor and, you know, participate in the space.
• 30:34
  But, you know, one of the things I do try to tell them is like, look, I know you understand Bitcoin.
• 30:41
  I know you're enthusiastic about Bitcoin.
• 30:42
  You know, there's real Bitcoiners, right?
• 30:45
  I try to tell them, it's like you're wading into fiat games.
• 30:49
  And there's a lot of things that happen in public markets that you're probably not privy to, that somebody else has an edge over you, that, you know, you think your strategy is just simply a lever, you know, play on Bitcoin.
• 31:02
  and you don't understand all the other, you know, dynamics and market forces that kind of exert itself on this, like, subsector of an industry.
• 31:11
  So you sit in a very, you know, unique role, chief risk officer at a publicly traded company.
• 31:17
  What are some of these fiat games that you've seen so far in the marketplace?
• 31:22
  Oh, yeah, there's just, there's a lot of opaque trading that happens, right?
• 31:26
  I mean, there's dark pool, there's dark pool trading, there's hedging that happens.
• 31:31
  A lot of the trading volume is a function of hedging in the derivatives market.
• 31:35
  So you can see the spot price move and what's actually going on here.
• 31:40
  It's hedging in the derivatives market or big dark pool trades, ETFs that are moving capital around.
• 31:46
  So it's an opaque.
• 31:48
  The equity market is opaque.
• 31:52
  But that being said, I think the Bitcoin treasury companies, all of them as a whole,
• 32:00
  each individual one represents a different risk return profile based on their operating business
• 32:06
  and how they manage their treasury so i view them as uh and you can kind of see this in the
• 32:15
  trading volume as well so like you look at you look at strategy and kind of what they've created
• 32:19
  by by creating a low volatility instrument that that by design makes the common stock a high
• 32:27
  volatility instrument.
• 32:28
  Like there's a conservation of energy in the volatility, like within the valuation of the
• 32:33
  company.
• 32:35
  And so what that does is that creates different expressions of Bitcoin.
• 32:40
  And so when you think about like how the dynamics of like the trading environment works, even
• 32:50
  hedging on Bitcoin, you got people that are longing Bitcoin and shorting Bitcoin, they
• 32:54
  may use these other assets that are liquid as a hedge.
• 32:57
  Like they may be hedging their Bitcoin exposure with MSTR exposure. They may be longing their Bitcoin exposure with MSTR exposure because it is a relatively pure expression of amplified Bitcoin. And so I see that continuing to evolve as these companies start to do different things.
• 33:18
  I mean, some of the smaller companies with smaller Bitcoin holdings, I mean, you've seen the price of the stocks go down tremendously and they're very illiquid at the moment, but that doesn't mean they're dead, right? They still have capital. They could do things with that capital. And what they do with that capital will create a different risk return profile into the future.
• 33:37
  I mean, what we've got now, 150 publicly traded companies that hold Bitcoin.
• 33:43
  Five years ago, there was one.
• 33:45
  And how many are there five years from now?
• 33:48
  I don't know, three.
• 33:49
  I bet 500, right?
• 33:52
  It probably 5Xs as many of these companies start to see Bitcoin as a store of value in the future.
• 34:02
  So, yeah, this market is evolving.
• 34:06
  There's definitely fiat games that are being played in the equity market, but these companies aren't dead. They have capital and many of them have more capital than a lot of the other fiat treasury companies that are out there with a similar type of market cap.
• 34:20
  So I think the industry has gotten absolutely hammered in the bear market, but it's almost like the industry has absorbed all the Bitcoin treasury companies have absorbed all of the excess volatility that historically would have gone into Bitcoin.
• 34:36
  So I think when it does move the other direction, that will, you know, come to bear up.
• 34:42
  Yeah, that's really interesting insight.
• 34:45
  I appreciate you sharing that.
• 34:47
  Our last couple of guests on the pod have mentioned something along the lines of, you know, they don't even think Wall Street has really come to Bitcoin yet.
• 34:56
  I think James Lavish wrote an interesting article, you know, kind of theorizing about the price action of Bitcoin.
• 35:02
  and a lot of Wall Street's involvements will be in like,
• 35:05
  you know, the basis trade,
• 35:06
  and you know, so you're buying spot ETF,
• 35:09
  you know, selling the futures.
• 35:10
  But do you think that argument has any validity to it?
• 35:15
  What, that Wall Street's still not here?
• 35:18
  Yeah.
• 35:19
  Yeah, I do, I do.
• 35:21
  I mean, you just look at the scale of capital
• 35:23
  in the capital markets
• 35:24
  and it's still a relatively small asset, right?
• 35:29
  I mean, $1.4 trillion relative to
• 35:31
  what's the equity market 100 100 trillion what's the bond market 300 trillion what's the real estate
• 35:36
  market uh 200 300 trillion like these are these are enormous pools of capital and what's gold
• 35:44
  35 trillion dollars i think the there's a lot of room to grow and i think the uh the products
• 35:56
  these digital credit products that we've created here are they're a bridge for some of that capital
• 36:01
  to come in the door and expand that Bitcoin ecosystem.
• 36:07
  And really what I've seen already
• 36:10
  is that these instruments have created,
• 36:12
  have minted new Bitcoiners.
• 36:15
  So people, I've talked to a few people
• 36:17
  and I've told them about these preferred equity instruments
• 36:19
  and they bought them and held them for a little while and they like wow this is cool And then they like I going to look into Bitcoin more And I just got a text last week It was like
• 36:31
  hey, I bought my first Bitcoin. I'm like, oh, let's talk cold storage, right? Let's talk next
• 36:37
  steps. So it's providing an avenue for other people to start thinking about this marketplace.
• 36:45
  And I mean, honestly, some of this stuff just is going to need a track record.
• 36:49
  Even the Bitcoin Ibit ETF, it was launched, what, January of 24?
• 36:54
  Yeah.
• 36:55
  January of 24.
• 36:57
  So it's now two years old.
• 37:00
  Once that hits a three-year track record, there's likely more people that are going to be buying it.
• 37:05
  Because, you know, typical traditional finance, a lot of companies have a track record requirement.
• 37:14
  Something's got to be around for at least three years before they can even look at it, right?
• 37:17
  Like they've got a screener on all of the instruments they could buy, and it's like, sort by greater than three years.
• 37:23
  And like after three years, IBIT will pop in there, you know, and these digital credit instruments are now approaching a year old.
• 37:31
  After two more years, those are going to start popping in there.
• 37:34
  And that's going to open the door for a lot more capital that could come in.
• 37:38
  So, yeah, I think it's still kind of early days for Wall Street getting in the door.
• 37:43
  But I mean, Morgan Stanley just launched a Bitcoin ETF today.
• 37:45
  And, uh, I think, yeah, it's, I'd say it's early days, but it's no longer early in Bitcoin
• 37:53
  terms, right?
• 37:54
  Like it's, we're here.
• 37:56
  We're here.
• 37:57
  Yeah.
• 37:57
  It's so funny when you kind of have like some sort of understanding, like the
• 38:00
  belly of the beast that is finance is just crazy.
• 38:05
  This is like a year ago, but with all like the tariff per fuffle, you know, it was
• 38:09
  conversations like, oh, Bitcoin's decoupling, you know, the stock market was
• 38:13
  get direct and Bitcoin was like send even.
• 38:15
  I was just thinking to myself, like how, how long would TrapFi need historical data to
• 38:21
  say, finally say it's like, oh, Bitcoin's decoupled.
• 38:24
  I was like five, 10 years.
• 38:26
  It was like, this is going to be so long.
• 38:27
  Yeah.
• 38:28
  Yeah.
• 38:29
  Might take a while.
• 38:30
  Yeah.
• 38:31
  Um, okay.
• 38:32
  No, I think that's, that's a great step.
• 38:34
  You know, you remind me, uh, you know, Jesse's Meyer graphic.
• 38:37
  I just absolutely love like the global store value, um, asset graph.
• 38:42
  And I think it's one of the best ways to describe the value proposition for Bitcoin.
• 38:46
  I love how people have been putting the pumps on there for the different strategy products.
• 38:51
  Okay, they're sucking out of this market, sucking out of that market.
• 38:54
  Leading up to digital credit here.
• 38:56
  So what do you feel like a Bitcoin strategy company kind of needs to accomplish to become a preferred equity issuer?
• 39:08
  Yeah.
• 39:09
  So there's a certain size and scale that you need.
• 39:12
  you need a balance sheet that's relatively clean, at least for us, right? When we issued SEDA,
• 39:19
  we were about the smallest size that you could potentially be with a fully clean balance sheet.
• 39:23
  And I think at the time we had around $700 million of Bitcoin on the balance sheet.
• 39:27
  This is back when Bitcoin was priced at $110,000, $111,000. And we were looking to issue
• 39:34
  $200 million of notional capacity at that point in time. So that would put us around like a
• 39:42
  a 20% amplification ratio. So we were effectively the smallest potential issuer. But one of the
• 39:47
  reasons we were able to do it is we didn't take on any convertible debt. So we had zero debt on
• 39:53
  our balance sheet. We had a fully clean balance sheet when we started. And so in order to issue
• 39:58
  a perpetual preferred equity, it had to be a certain size. We had to get a bank to bank us
• 40:03
  and agree on doing this and taking the risk of getting the deal off the ground and into the
• 40:07
  market. I think there's possibility that some other smaller deals can be done with smaller
• 40:12
  companies, but it requires a little bit more risk-taking, maybe some different banks to be
• 40:17
  in the loop on those deals and getting those deals off the ground. It's possible. It's just,
• 40:23
  it's difficult. The other thing is building a credit profile, right? So there's got to be
• 40:30
  a track record of operating in the markets. Like for us, one of the reasons that we were successful
• 40:36
  is that we were an asset manager.
• 40:39
  Like our company, it's been around since 2022.
• 40:41
  We managed $2.6 billion of asset.
• 40:43
  We've got assets, we've got ETFs,
• 40:45
  we've got a whole asset management business.
• 40:48
  And we've got like 31 employees that work at Strive
• 40:52
  that help run the operating business.
• 40:56
  And my background in the insurance market,
• 40:59
  Matt Cole's background at CalPERS,
• 41:00
  he ran a $70 billion bond portfolio.
• 41:02
  Ben Pham, our CEO, used to work at Citibank
• 41:04
  and has worked with Vivek and all of his finance deals.
• 41:09
  Ben Workman worked in distressed credit
• 41:11
  at the large big firms, right?
• 41:14
  So we had a very institutional team
• 41:17
  that is credit worthy in building a story.
• 41:20
  So that's what's helped us get this off the ground.
• 41:23
  That's what's helped us with our follow-on offering.
• 41:26
  We now have $437 million for this outstanding.
• 41:30
  We use that to retire the debt when we acquired similar.
• 41:33
  so it's uh you know we're building this credit profile we're building a track record and that
• 41:38
  takes time operating the markets and communicating with investors uh every step of the way yeah
• 41:45
  totally no small feat in team should be you know stoked about that and so why don't you share with
• 41:53
  the audience like your thoughts on digital credits because i think you might be like
• 41:56
  the foremost voice you know in the industry talking about this stuff right now aside from
• 42:01
  Michael, yeah, for sure. Thank you. Digital credit is, let's talk about it, right? Digital credit is a perpetual preferred equity instrument that's paying an annualized yield payable monthly.
• 42:16
  So Strategy's got one, STRC. Strategy has several. They've got several perpetual preferred equity instruments, but they're really focused on Stretch, STRC.
• 42:24
  And we've got one, SATA, and they're both monthly payable perpetual preferred equity instruments.
• 42:31
  They've got annualized APRs, so you can look at what the yield is on an annualized basis.
• 42:38
  And they've got very fascinating structures.
• 42:41
  The goal is to maintain a stable trading price at $100 par.
• 42:46
  So right now you look at Stretch, Stretch has been pegged right at $100 par.
• 42:49
  If the price of the instrument goes above $100 strategy and strive, we have the ability to issue new shares into the market.
• 42:57
  If the price falls below $100, then we can, there are several things we could do to increase the price.
• 43:06
  One of them being increasing the interest rate on the instrument.
• 43:09
  And then the other is just, you know, increasing the amount of people that are interested in the instrument and talking about the risk, talking to investors, et cetera.
• 43:16
  So the really fascinating thing is it's created an incentive profile for people to come in and ARB
• 43:23
  anytime the price falls below the PAR amount.
• 43:27
  So one thing that's been really fascinating to see is how little volatility there has been around PAR for STRC.
• 43:37
  So anytime the instrument falls below $100, let's just say $99.99,
• 43:42
  there's somebody that's arbing that one penny spread that difference in the other direction
• 43:47
  to bring it back up to par and they have increased effective yield yeah because it's
• 43:53
  increased effective yield but think about it as like just harnessing harnessing a penny
• 43:58
  on every atm transaction like it's it's a good business if if you know if you know that the risk
• 44:06
  return profile of this instrument is really good and there's going to be demand regardless at 100
• 44:13
  you're going to go arb a penny right you're going to go from 99 99 you're going to buy it and you
• 44:19
  and when there's a seller at 100 or when there's a buyer at 100 you're going to sell it at 100
• 44:24
  you're going to make that penny spread and the downside risk the downside risk of running that
• 44:29
  arb trade is you're holding an instrument that's paying you 11.5 percent annualized
• 44:33
  right like that's the incentive structure so like your downside risk is that you're getting paid
• 44:40
  to make the arb and so you think about like the equity infrastructure of the market
• 44:45
  like high frequency trading is a thing it's it's exploded in the last you know 20 years
• 44:51
  and uh there's a lot of high frequency trading happening in the equity market
• 44:55
  and just arbing pennies here and there right it's all about speed it's all about quickness
• 45:00
  of trading how close you are to the new york stock exchange like all of that stuff right
• 45:03
  Right. And so, but, but the downside risk of doing it in the, in the traditional equity market
• 45:09
  is that you lose your principal. And, and so you've got to take a lot of principal risk.
• 45:17
  And now, now that that principal risk has evolved, right? Like your, your downside risk is that
• 45:22
  you're holding an instrument that's paying you 11 and a half percent. I mean, you could take the
• 45:25
  downside risk of Bitcoin, but if you're long Bitcoin, this is a, this is a structurally very
• 45:30
  interesting arbitrage opportunity that exists in the market. So that's what's kind of providing
• 45:35
  this dampened volatility is that you've got people that are coming in and arbing the spread
• 45:39
  and the difference over time. So that's been something that we've been noticing and
• 45:43
  it has been evolving over time. Like this has never existed before. We've been doing a lot
• 45:49
  of analysis of like who's sitting there? Who's, well, one, who's buying it at $99.98? Who's selling
• 45:55
  it at 99.98? Who's selling it at 99.99? And trying to think through like the actual infrastructure
• 46:01
  of the architecture of the people that are holding the instrument, which is totally fascinating.
• 46:07
  So anyway, that's kind of digital credit in a nutshell. It's a perpetual preferred equity
• 46:11
  instrument with paying high yield. And it's got a very fascinating credit infrastructure,
• 46:18
  incentive infrastructure. And the risk profile of the instrument is super fascinating as well,
• 46:23
  because these instruments are sitting senior in the capital structure.
• 46:27
  So you think about capital structure.
• 46:31
  Capital structure has been around for hundreds of years.
• 46:35
  It's been around for hundreds of years.
• 46:37
  Debt is senior in the capital structure,
• 46:39
  and then you've got perpetual preferred equity,
• 46:40
  and then you've got common equity is the most junior.
• 46:42
  So in the event of a liquidation,
• 46:46
  like the common equity holder holds a residual claim
• 46:49
  on all of the assets on the balance sheet.
• 46:51
  In the event of a liquidation,
• 46:52
  debtors get paid out first, preferred equity holders get paid out second, and then anything
• 46:56
  that's left goes to the common equity holder. Generally, in a liquidation scenario or bankruptcy
• 47:01
  scenario, the common equity is worthless and all of the assets go to the debtors and the creditors.
• 47:07
  So by structuring this instrument, senior in the capital structure, it inherently makes it
• 47:14
  less volatile. It is less risky. It is less risky than the common equity because there's just one
• 47:24
  more instrument that's senior to you in the common equity. So what they've done is they've monetized
• 47:29
  the position in the capital structure as collateral. It's not the Bitcoin. The Bitcoin
• 47:37
  is on the balance sheet. The Bitcoin is the company's Bitcoin. But the position in the
• 47:41
  capital structure is now the collateral. I want to be senior in that capital structure. And so that
• 47:47
  is, that's what's created this risk profile, right? Like how much, how much Bitcoin do I have
• 47:54
  protecting that senior position in that capital structure? And that's, that's the risk analysis is
• 47:58
  what's the probability that the value of the Bitcoin is worth less than my liquidation preference
• 48:07
  on my perpetual preferred equity that sits in the senior capital structure?
• 48:11
  And that math is fascinating. And I've run a ton of math on the behind the scenes and we're looking to publish it here soon, hopefully, where you could look at Monte Carlo simulations. You could go backtest all historical Bitcoin history and look at how would this asset perform in different points in time in Bitcoin's history based on different drawdowns.
• 48:34
  what would the risk profile look like? Would it ever be at a point where it was stressed?
• 48:41
  What if you sold the Bitcoin in order to pay the dividend payments? You didn't even have access to
• 48:46
  the capital markets. What does that look like? And so that's the risk analysis that we're going
• 48:52
  through right now. But the really fascinating part is you can analyze it. You can analyze it
• 48:59
  24-7, 365, there's never been an asset like it ever before. If you hold a traditional bond,
• 49:08
  you have no idea the financial security of that bond until you get the quarterly results
• 49:13
  every quarter. And now you have an instrument that you can calculate the risk 24-7, 365
• 49:18
  and with high yield and a very unique, fascinating incentive structure and high liquidity
• 49:25
  and low volatility. It's like these are the perfect instruments like ever created in the
• 49:32
  credit market and that they're threatening, they're threatening dividend paying equities.
• 49:37
  They're threatening any credit instrument in the market and even just general equity. You think
• 49:43
  about the performance of the S&P 500 over the last 30 years is like eight and a half percent.
• 49:48
  These instruments are like strategies paying 11 and a half percent. Ours are paying 12.75 percent.
• 49:52
  And the risk profile is fascinating. Like you can calculate it and they're protected by, you know, a strong balance sheet. So that's kind of digital credit in a nutshell. I think it's helpful to think about these instruments kind of like, obviously I came from the insurance world.
• 50:14
  So I think about these, like what we're doing, we're a balance sheet company.
• 50:21
  We're managing our balance sheet.
• 50:22
  We're managing our liabilities.
• 50:23
  What does an insurance company do?
• 50:25
  They are a balance sheet company.
• 50:26
  They have assets.
• 50:28
  They have new capital coming in the door every time they sell a policy.
• 50:31
  And they're paying out the claims that happen into the future.
• 50:34
  It's a very similar type structure.
• 50:37
  However, we have a more powerful asset.
• 50:41
  Like we're not 80% of our portfolio isn't in bonds.
• 50:44
  You know, 100% of it is in Bitcoin.
• 50:46
  And any time, another thing that makes this whole thing work is any time one of these
• 50:53
  shares is purchased, like a new share is issued, like strategy, they issue a new share of STRC.
• 51:00
  They immediately go buy Bitcoin.
• 51:03
  Like they could do it that hour.
• 51:05
  So you think about any other finance or balance sheet company historically, like a REIT.
• 51:16
  If they went and raised capital to go buy an asset, let's just say they raised capital on their ATM,
• 51:23
  and they bring that capital in the door and they want to go buy a real estate asset, let's just say $50 million.
• 51:28
  There's not a ton of $50 million properties that you could go buy that are just liquid sitting on the market ready for you to buy.
• 51:34
  You've got to go analyze which market do I want to go into?
• 51:38
  Which property do I want to buy?
• 51:40
  Is it on the market?
• 51:41
  Do I like the cap rate?
• 51:42
  How does it compare to everything else?
• 51:44
  Like there's just so much work that needs to be done on any of these other assets.
• 51:48
  Whereas this is so simple.
• 51:51
  It's like, it's ridiculously simple and people try to complicate it.
• 51:55
  But as soon as they sell a share, they could go buy Bitcoin and have that Bitcoin in their coffers.
• 52:00
  And that capital can be deployed.
• 52:02
  And that's the power of this digital credit infrastructure is you've got a digital capital asset that's sitting on a balance sheet and liquid and verifiable.
• 52:15
  And it's now a part of the value of your company.
• 52:19
  And it happens in an instant.
• 52:20
  It's super fast.
• 52:22
  So, yeah, I'm all bowled up.
• 52:26
  You got me bowled up, man.
• 52:27
  I don't expect.
• 52:28
  Yeah, it's good.
• 52:29
  It's good stuff.
• 52:30
  I'm really a big fan of this risk-taking environment.
• 52:35
  I mean, that's what these instruments are.
• 52:38
  Our company is underwriting Bitcoin and we're taking risk.
• 52:42
  Like we are risk-taking the long-term trajectory of Bitcoin price appreciation.
• 52:48
  Yes.
• 52:49
  And that was beautifully said and laid out there.
• 52:53
  Specifically important point on the collateral piece,
• 52:57
  you know it being a part of the capital stack as opposed to bitcoin itself that's just like
• 53:01
  misconception i see all the time i do want to try to complicate it here for just a second because
• 53:07
  you know i try to uh you know fiduciary try to be objective try to be analytical
• 53:12
  i try to think for myself when claude's not thinking for me
• 53:15
  but you said i'm talking to you bitcoiners they're all about then let's just use like the
• 53:23
  MSTR flywheel here for objective.
• 53:27
  Bitcoiners, you know, get it, love it.
• 53:29
  This is the most bulletproof thing in the world.
• 53:31
  Try five folks.
• 53:32
  This is a Ponzi scheme.
• 53:34
  Yeah.
• 53:35
  So, you know, if I could kind of just like
• 53:37
  quickly sum up the flywheelers,
• 53:39
  so specifically with Strategies Preferreds,
• 53:42
  you know, they're predominantly selling like SGRC right now,
• 53:45
  using those proceeds, buying capital.
• 53:48
  Now they have this increased dividend liability.
• 53:50
  so they got to raise cash to you know satisfy that you know because they purchased more bitcoin
• 53:56
  the bitcoin yield the bitcoin per share whatever metric they want to use on their common stock
• 54:00
  likely increased so they could issue you know more shares and those common shareholders are still
• 54:04
  making out ahead even though you know they're technically diluted because they need to raise
• 54:08
  capital pay the demand liability where do you think if at all that breaks down
• 54:15
  Yeah. I mean, so mathematically, I've been focusing on the math here, right? I've been
• 54:23
  focusing on the math and what we've been doing when we've been focusing on the math is we assume
• 54:27
  that you have to sell Bitcoin to pay the dividends.
• 54:31
  Okay.
• 54:33
  And and one thing that just so it like let just take worst case scenario Let just assume you have zero access to the capital markets Let assume you have zero ability to go raise additional capital refinance debt you know do any of those things
• 54:49
  The math is really fascinating.
• 54:52
  We've been trying to find like an amplification ratio that like how much of this credit would you theoretically need to have on your balance sheet?
• 55:00
  in order for it to technically break,
• 55:04
  even if you sold the Bitcoin,
• 55:06
  looking at historical past Bitcoin bear markets.
• 55:10
  Like if I issued 100% of my balance,
• 55:15
  if I had the ability to issue 100% of my balance sheet
• 55:18
  into digital credit at the worst possible period
• 55:20
  in Bitcoin's history,
• 55:23
  and I had to sell Bitcoin along the horizon
• 55:25
  to pay out the dividend payments into the future,
• 55:29
  at what point would my balance sheet like come back out the other side in another bull market
• 55:35
  and the numbers are staggering uh the numbers are like you know you need an amplification ratio of
• 55:43
  like 120 if the market were even able to you know let you get there which i don't think the market
• 55:49
  would even let you get to that that type of leverage ratio at that point in time so
• 55:54
  So now the caveat is if there's a period of time where strategy is selling that Bitcoin on the market to pay their dividends, like does that impact the long term trajectory in the future of Bitcoin?
• 56:06
  I guess that's where it could theoretically break down.
• 56:08
  But let's go back to what we talked about earlier, right, is strategies access to the capital markets.
• 56:14
  So what we talked about earlier was these Bitcoin treasury companies are an expression of Bitcoin.
• 56:20
  Okay. So strategy, for example, they are the 250th largest company by market cap,
• 56:27
  but they are frequently top 20 publicly traded company by volume. Okay. So that means there are
• 56:34
  people that are trading it consistently. Okay. So that's been the case since like October of 2024.
• 56:43
  They've been a top 20 publicly traded equity for the last like 20, yeah, 24 months-ish.
• 56:50
  And so why is that important? That's important because the ATM on their common stock, like they can drip out shares because the underlying Bitcoin is moving. The valuation of the underlying company is a function of the Bitcoin that's held on the balance sheet. So it has to move. It has to move based on Bitcoin moving.
• 57:12
  So what does that result in? That results in people that are hedging and leveraging and going up, going down, long, short, doing all of these different trading things. And that just increases the demand for the underlying security.
• 57:24
  so like just looking at this last week right bitcoin's down what we said bitcoin's down 45
• 57:31
  since it's all-time high on a four-day week last week um easter week strategy raised 144 million
• 57:41
  dollars on the common stock and paid out the dividend on every single one of their perpetual
• 57:45
  preferred equity instruments last week in a shortened week they raised all that capital
• 57:49
  on the common stock.
• 57:51
  And it was less than 2% of the volume traded
• 57:56
  in those four days.
• 57:58
  Wow, that's crazy.
• 58:00
  It was less than 2% of the volume traded
• 58:01
  in those four days.
• 58:02
  So strategy last week traded $8 billion.
• 58:05
  It was like $8.5 billion of volume.
• 58:07
  So I haven't seen that fast.
• 58:09
  Last week in four days.
• 58:10
  It was like a short week.
• 58:11
  And so of the dividends that they paid,
• 58:16
  a majority of those dividends,
• 58:18
  they're quarterly dividends.
• 58:19
  So they paid all of the quarterly dividends, which are larger, right?
• 58:22
  It's three months worth of dividends.
• 58:24
  Like it's larger and STRC dividend in those four days.
• 58:28
  And the stock didn't really move.
• 58:31
  Go look at the performance of the common stock.
• 58:32
  It didn't really move.
• 58:34
  So why does this work?
• 58:35
  This works because that dividend obligation is spread out over time, right?
• 58:39
  Like it's a pretty big time horizon to access that capital in the capital markets.
• 58:46
  and I don't think people really they don't really grasp that they don't really grasp that
• 58:50
  MSTR like the common stock itself is an expression of Bitcoin and as they shove more Bitcoin onto the
• 58:59
  balance sheet it creates more interest in the stock because it's larger right it gets larger
• 59:06
  and larger the market cap of it gets larger and larger because the underlying is a value is a
• 59:11
  comprised of the value of the company is comprised of the of the bitcoin that's held on the balance
• 59:16
  sheet so as the bitcoin pile grows larger the the equity should have more volume the derivatives
• 59:25
  markets should get bigger and bigger there are more people longing it there are more people
• 59:28
  shorting it uh and that's providing that you know that continuous uh demand on the common stock so
• 59:35
  that's why this this works so what we've done we've done the math as if you had zero access
• 59:42
  and we think the amplification ratio that you would need in order for this to break based on
• 59:46
  historical bitcoin prices and drawdowns of like 80 plus percent is like 120 percent
• 59:51
  assuming you've got assuming you've got zero access to capital markets and now if you assume
• 59:58
  that you've got access to the capital markets i mean like what breaks this thing i i don't
• 1:00:02
  if there's going to be interest in the common stock because it moves, it doesn't break.
• 1:00:10
  Yeah. Well, okay. And that's a great quantitative analysis and background.
• 1:00:17
  On that last point specifically, that's the only way I've been kind of able to theorize
• 1:00:22
  this breaking is way more qualitative is if, I think strategy is probably in a little bit of
• 1:00:30
  unique situation like for this but if for some reason they ever had to sell bitcoin does the
• 1:00:36
  narrative just go crazy and people have a heyday and then you get all like this group think sheep
• 1:00:41
  behavior and the fundamentals break down even well the fundamentals don't break down but the
• 1:00:46
  the narrative you know behind it you know kind of breaks down just because people are acting
• 1:00:51
  irrationally yeah it's possible right i mean they're like the fed of the future
• 1:00:55
  if you think about it right like so it it's possible i think that's why
• 1:01:00
  the thing is you can always sell it right it's it's always a you know credible threat out in
• 1:01:08
  the market that you could always sell it bitcoin trades 60 billion dollars a day the derivatives
• 1:01:13
  market is trading 100 billion dollars a day it's crazy how liquid this thing is in both directions
• 1:01:19
  buying it and selling it like you could sell you could buy five million dollars of this stuff in
• 1:01:25
  half an hour or 20 minutes like it it doesn't take long um so it's incredibly liquid so uh
• 1:01:34
  i think they need to have that threat they need to tell investors like hey we can sell bitcoin
• 1:01:39
  to protect the credit products and we will sell bitcoin to protect the credit products if we need
• 1:01:42
  to but our intention is not to i think you're probably right there is there could be some
• 1:01:48
  hysteria if there was a situation like that but that could occur 20 years from now or 30 years
• 1:01:54
  from now it's like what does the world look like 20 or 30 years from now if bitcoin's at
• 1:01:58
  20 million dollars a coin and like and they sold bitcoin in order to pay the credit products like
• 1:02:06
  who who cares right who cares like if we're in a bitcoin more bitcoin digitally bitcoin
• 1:02:12
  denominated future and more like um computerized future like does that does that matter i don't know
• 1:02:18
  i i think the probability of them having to sell bitcoin right now or at any point in the next five
• 1:02:23
  to eight years is so infinitesimally small totally yeah no great points um my last question
• 1:02:32
  for you again yeah i think you sent a very unique seat in the industry um this is something i think
• 1:02:37
  a lot about but what biggest like untapped market do you think there is for bitcoin you know
• 1:02:44
  investment product development and design and then when kind of the part two that question is
• 1:02:51
  when do you feel like we'll start seeing more bitcoin denominated investment products yeah um
• 1:02:58
  i mean right now i i'm just laser focused on this uh on the digital credit market i think the
• 1:03:04
  biggest market right now is is identifying uh pools of capital that can buy the digital credit
• 1:03:11
  products because they're largely people that wouldn't historically buy bitcoin itself
• 1:03:18
  and they now have a tool and access and ways to go buy bitcoin exposure without taking on all the
• 1:03:26
  risk right like you've now got a balance sheet company or two balance sheet companies that are
• 1:03:31
  taking on the risk of the volatility and you don't have to do it they're taking it for you
• 1:03:35
  that that's interesting and i think that market is enormous right it's five six i don't know how
• 1:03:42
  big it is but it's uh hundreds of trillions of dollars large it's the biggest total addressable
• 1:03:47
  market on the planet. And I think that's, that can bring a lot of people in the door. Now,
• 1:03:50
  now one thing that's becoming really fascinating is the, the products that are being built on top of
• 1:03:56
  digital credit. So one thing that you're, you've been working on, I think you're fascinated with
• 1:04:02
  is, um, these, uh, well, it's just Bitcoin is collateral in general, right? Okay. So Bitcoin's,
• 1:04:09
  we think I agree with you. Bitcoin is the most pristine collateral. Bitcoin's the best collateral
• 1:04:13
  that the world's ever seen.
• 1:04:15
  Now, what's a more interesting collateral
• 1:04:18
  is senior capital position in a company
• 1:04:22
  that has Bitcoin as collateral.
• 1:04:27
  Like that's now very fascinating as well.
• 1:04:30
  Like is that a safer collateral
• 1:04:33
  than Bitcoin as collateral?
• 1:04:35
  It's a senior position in a company
• 1:04:38
  that's got all this large balance sheet.
• 1:04:39
  Now that's a fascinating perspective.
• 1:04:42
  And what can you do with that?
• 1:04:43
  So not only are these instruments really fascinating, these digital credit instruments really fascinating, the opportunity to use them as collateral is fascinating.
• 1:04:55
  And that getting into different areas of the market and the ecosystem.
• 1:05:00
  For me, I think on the five-year front, these digital credit instruments will be used as collateral in the reinsurance market.
• 1:05:07
  I know it will happen.
• 1:05:08
  It will just take some time.
• 1:05:08
  um but uh like rolling them into mortgages rolling it into student loan packages rolling it into
• 1:05:17
  uh different types of other credit instruments creating a an even more a lower volatility
• 1:05:23
  uh income product like this digital money idea that michael saylor has talked about like can you
• 1:05:30
  can you take a can you take this product that's got 11.5 percent yield or ours is 12.75 even higher
• 1:05:37
  and can you compress the volatility even more and provide like a zero volatility money layer
• 1:05:44
  that's got 10% yield or 9.5% yield and that delta in the yield is another risk-taking buffer,
• 1:05:52
  almost like another. You got layer one, digital capital. Layer two, digital credit. Layer three
• 1:05:58
  is everything that can be built on digital credit, which I think that market is enormous. I think
• 1:06:04
  there's huge opportunity there um and i i in my opinion i think that's uh a little bit of a bigger
• 1:06:13
  it's definitely a bigger opportunity than some of the bitcoin denominated stuff
• 1:06:18
  just because the number of people that can buy it is is larger than the number of people that
• 1:06:25
  are holding bitcoin that want to figure out how to how to leverage it at the moment yeah
• 1:06:30
  fascinating or exciting time to be alive man totally exciting time um we're so appreciative
• 1:06:38
  of your time anything you want to touch on that we missed no i i this is a great conversation i
• 1:06:44
  love getting some of these thoughts out because a lot of them have just been hiding here
• 1:06:47
  and uh yeah there's there's so many exciting things on the horizon
• 1:06:52
  thinking about this entire ecosystem these products are very young stretch is eight months
• 1:07:00
  old sata is six months old uh and the what what we can do with these we're still like in the very
• 1:07:08
  early days of figuring out how how to integrate these products but i encourage people to think
• 1:07:13
  about the risk profile of these instruments a lot of people just are making a bunch of noise because
• 1:07:18
  of the yield which is fair and the the volatility and the sharp ratio like strategies product there's
• 1:07:24
  a lot of attention on strategy stretch right now rightfully so the thing's trading hundreds of
• 1:07:28
  millions of dollars a day with a penny spread with like a great sharp ratio but the the relative
• 1:07:33
  a lot of people are comparing stretch and sata together which is fair right like they're digital
• 1:07:41
  credit instruments and like they're very they're very similar in structure and design uh and they've
• 1:07:47
  got a credit spread, et cetera. Now, the one thing that's fascinating, people are comparing the two
• 1:07:54
  and saying that the spread of yield needs to be higher, which is arguable. But I think the more
• 1:08:00
  fascinating comparison is not stretch versus SEDA. It's SEDA versus the rest of the credit market,
• 1:08:10
  right? Stretch versus the rest of the credit market. If we think that the risk profile of
• 1:08:15
  these two instruments like that is very low and these are uh the the the risk is a tail risk that
• 1:08:22
  these fail comparing tail risk of two instruments that are really good is very small like if if you
• 1:08:30
  think the tail risk is the same and it's very similar like the tail risk difference is very
• 1:08:34
  small but the comparison of these instruments to everything else in the credit world is a is
• 1:08:41
  i think where people should be focusing their energy and their time is look at
• 1:08:45
  all of the other bonds in the world look at all of the other credit instruments in the world
• 1:08:49
  look at private credit look at um you know hyg high yield etfs look at those instruments compare
• 1:08:55
  those start making noise about it because that's that's the real shifting capital is moving and
• 1:09:03
  drawing attention away from these historically archaic difficult to quantify risk instruments
• 1:09:10
  with very low yield compared to these significantly better featured products.
• 1:09:18
  And every dollar that goes to these credit instruments,
• 1:09:24
  these digital credit instruments, that's a dollar that does not go to traditional credit.
• 1:09:32
  and so these instruments will quite literally reset the cost of capital for the credit market
• 1:09:41
  like going to go get eight percent debt credit for you know jet blue or like name your name your
• 1:09:52
  airline right uh whatever that capital market is going to close unless the rate changes because
• 1:09:59
  is that risk profile and the return that you get for it,
• 1:10:03
  the opportunity cost is digital credit.
• 1:10:06
  Right.
• 1:10:08
  And so my theory is that these instruments
• 1:10:11
  are going to reset the cost of capital
• 1:10:12
  for the entire credit market, which is a huge idea.
• 1:10:15
  That's a kind of idea when it lands,
• 1:10:16
  you gotta like walk around the room kind of thing.
• 1:10:19
  You're like, wow, this is a big idea.
• 1:10:22
  So yeah, like I think that's where people
• 1:10:24
  should be focusing a lot of their attention
• 1:10:26
  It's very similar to how people, when they found Bitcoin, they're like, fix the money.
• 1:10:33
  And they drew all the attention.
• 1:10:34
  And they compared Bitcoin to US dollar.
• 1:10:37
  And you're like, this is so much better.
• 1:10:39
  This product is so much better.
• 1:10:42
  And now people should be looking at these digital credit products and doing the same thing.
• 1:10:46
  Digital credit, traditional credit.
• 1:10:48
  This is so much better.
• 1:10:50
  This is so much better.
• 1:10:51
  And focusing your energy on, like, why is it better?
• 1:10:54
  Why is it better?
• 1:10:54
  The risk profile is so fascinating relative to these older instruments.
• 1:11:01
  So that's like my biggest takeaway.
• 1:11:03
  It's like, it seems like a lot of people are distracted.
• 1:11:06
  Just looking at the analytics of these things, which is great.
• 1:11:09
  Like there's so many analytics you could do.
• 1:11:11
  But I think people need to focus their energy on like the comparisons between everything else.
• 1:11:20
  It's profound insight.
• 1:11:22
  Sound of the world.
• 1:11:23
  You heard it here first.
• 1:11:24
  where can the listeners find your work Jeff? Yeah so you can find us we've got truenorth
• 1:11:31
  tnorth.com we've got a new website which is great that's got all of our media if you want
• 1:11:38
  to learn about digital credit we've got a digital credit platform on there we've got some dashboards
• 1:11:41
  that we're building we want to be the digital credit hub so we want a lot of this information
• 1:11:44
  to flow up to tnorth.com and you can find me on twitter x at punterjeff and I'm around it almost
• 1:11:54
  all of the conferences. Come say hi and look forward to meeting everybody.
• 1:11:57
  Right on. Thanks so much, man. Absolute pleasure.
• 1:11:59
  Appreciate it. Thanks for having me.
• 1:12:06
  We appreciate you joining us. If you want to help build a future of Bitcoin and financial services,
• 1:12:11
  hit subscribe, leave a review, sign up for our newsletter, and share this with someone in your
• 1:12:16
  network who's integrating Bitcoin into their practice. The more professionals we reach,
• 1:12:21
  the better serve our clients. Stay sharp.
• 1:12:24
  Good summer.
• 1:12:25
  Keep going.