Latest / The Income Show / Is Digital Credit Broken? | The Income Show | Ep. 7

Transcript

Is Digital Credit Broken? | The Income Show | Ep. 7 · The Income Show

0:00
This is the zone where Bitcoin is the least attractive to buy.
0:03
A lot of panic and a lot of FUD in the market,
0:05
but it's typically the best entry if you have a long-term time view.
0:10
Issuing these type of digital credit instruments,
0:12
pioneered by Saylor and Strategy,
0:15
really the perfect vehicle for a long carry trade
0:19
to express an even more bullish position on Bitcoin.
0:23
If you're bullish on Bitcoin over the long term,
0:25
you should be even more bullish on digital credit.
0:30
Hey, everybody. Welcome back to The Income Show.
0:40
This week I have on Tyler Evans.
0:41
Tyler, welcome.
0:43
Hey, Joe. Great to be here.
0:45
We've got a lot to discuss, I think.
0:47
Yes, absolutely.
0:48
This is going to be a great conversation.
0:51
I kind of want to start off broadly with Bitcoin.
0:53
Of course, we're going to talk about digital credit.
0:55
But kind of want to start more broadly with Bitcoin first.
0:58
At the end of last year, October of last year, Bitcoin hit $126,000.
1:03
We're down to now around $65,000 Bitcoin.
1:07
During that time, the S&P 500 has done quite well.
1:10
A lot of traditional assets have done quite well.
1:13
How are you thinking about Bitcoin in this moment?
1:17
Well, I think it's fair to say now that we're squarely in the heart of what's a typical Bitcoin bear market
1:24
on kind of Bitcoin's three and a half to four year roller coaster cycles.
1:30
And I think we saw, you know, especially last year in the wake of the new Bitcoin friendly
1:38
administration in the U.S., kind of so much excitement on the institutional side with all
1:44
these new ETFs coming to market.
1:46
It kind of pulled forward a lot of that excitement, even to, you know, January of last year.
1:54
And so we've really been in a cooling down period, it's felt like, for Bitcoin for quite some time.
2:02
And as, you know, as kind of the risk capital has really left Bitcoin to chase AI and hyperscalers and neoclouds and the newest technological frontier, I feel like Bitcoin's lost that narrative a little bit.
2:20
It's gone from kind of the technological frontier to the mid-curve adoption where it's becoming a much more institutional, less retail-driven market.
2:31
and a lot of the kind of risk capital,
2:35
especially in a high rate environment
2:38
where we have seen kind of persistent inflation
2:41
and none of the materialized rate cuts so far this year
2:46
from the Fed has kind of sucked a lot of the liquidity out of Bitcoin.
2:50
And so, you know, this is the point
2:53
where it's most painful to be a Bitcoin holder.
2:56
But also if you zoom out and kind of look at the Bitcoin cycle charts,
3:01
this feels like the bottom 10% of kind of the Bitcoin trading range, especially if you look at
3:08
a lot of the on-chain indicators like the realized price or the 200-week moving average, where this
3:14
is the zone where Bitcoin is the least attractive to buy, where there's a lot of panic and a lot of
3:21
FUD in the market. But it's typically the best entry if you have a long-term time view. And I
3:29
think that just takes takes time for the market to consolidate and for the macro situation to
3:36
evolve and for the next halving to be on the horizon and for some of that risk appetite to
3:41
come back. Yeah, no, that makes a lot of sense. How do you see Bitcoin's volatility evolving over
3:48
time? Like it seems like, you know, this drawdown relative to, I guess, historical bear markets,
3:53
You know, Bitcoin's only drawn down around 50%, better than 75% and 80% maybe in the past.
4:00
How do you think about this current drawdown?
4:03
Like, is the volatility declining?
4:05
Was it because the bull market didn't go as high as people expected, and therefore the drawdown was better than people may have expected?
4:14
How do you think about Bitcoin's volatility like now and how it will evolve over the coming years?
4:20
It feels very low right now.
4:22
And I think, you know, historically looking at it over the past couple of years, it's definitely compressed.
4:30
I think that's a factor, you know, some of just the law of large numbers where as Bitcoin became, you know, a larger and larger asset class, the amount of net new flows, even though, you know, we had the ETF sucking billions of dollars of capital and sailor buying billions of dollars a week.
4:50
the net flows you need to produce that, you know, upside convexity and volatility,
4:57
you know, increased significantly. And because of that, the upside was muted. You know, I think we
5:05
went up to a place that was a lot lower than many Bitcoin believers expected. And, you know,
5:13
we've come down to a place that feels more manageable with kind of muted volatility. So I
5:19
I think that's here to stay just as this institutionalization wave of Bitcoin continues.
5:26
I think there's also some persistent volatility being harvested out of the market now that provide an additional compressive force on top of that.
5:37
And we're seeing that even this week with the launch of the iShares Bitcoin Yield ETF product, which is a systematic kind of volatility harvesting call overriding strategy.
5:51
And so a combination of, you know, actively managed funds like that, you know, products like MSTY that were harvesting volatility from strategy, as well as the sophistication of Bitcoin native financial players who may be doing their own volatility strategies on top of it and trying to monetize that for their balance sheets.
6:13
It's like all those forces converging have really dampened the volatility.
6:19
And I think, you know, that's probably here to stay.
6:23
And it's probably inevitable part of Bitcoin really maturing into a global asset class.
6:31
On the topic of income, let's talk about digital credit.
6:34
But maybe like first, can you kind of explain like your high level perspective of how you're thinking about digital credit at this moment?
6:43
Well, at this moment, it's an interesting conversation because we've had a pretty significant standard deviation event here in the pricing and the volatility associated with digital credit instruments like STRC and SATA.
7:07
You know, how we really conceptualize these is it's the issuing these type of digital credit instruments pioneered by Saylor and Strategy.
7:22
It's really the perfect vehicle for a long carry trade to express an even more bullish position on Bitcoin.
7:31
And I think the beauty of digital credit and why Saylor in particular is so focused on these instruments is you get to match the duration of the view you want to express on Bitcoin.
7:43
When you're financing yourself with, you know, equity capital, you have an infinite duration.
7:50
But when you're financing yourself with corporate bonds or convertible bonds or Bitcoin backed debt facilities, all of those have maturity lifetimes that don't allow you to express that full full view that are one year, three year, five year, maybe even 10 year facilities.
8:10
but where you have a real refinancing cliff or role risk associated with putting on that leverage or that carry trade.
8:18
And so having a perpetual preferred instrument like STRC gives you the ability to express a perpetual, you know, bullish position on the Bitcoin market.
8:30
And that why we seen you know Sailor grow stretched to the tune of billion with the product not even a year old today to get that long permanent non capital to express a bullish position Who do you think from your perspective
8:51
that digital credit is for? I've seen different people suggest different things. Some people see
8:58
it as like a bridge between you know the 99 percent that doesn't own any bitcoin to bitcoin
9:06
or bringing bitcoin like one step closer to those people others see it as like okay well i have
9:12
bitcoin it's collateral i can borrow against it buy digital credit run this carry trade in that
9:18
case it might be for bitcoiners like how do you think about like who digital credit primarily
9:23
appeals to? I think it's a long evolution and we're obviously very early into this game
9:33
in terms of who it appeals to today versus who the ultimate target market for these types of
9:41
instruments. In my mind, the ultimate buyer of digital credit type products is really large
9:52
locked capital pools that will require this to have a multi-year track record, maybe a credit
9:58
rating, maybe packaged into different instruments that come with a fixed duration or different credit
10:03
profiles. But it's for the capital that's trapped inside, you know, retirement systems and pension
10:10
funds and insurance companies that's invested in fixed income yield seeking type instruments today
10:18
that by virtue of their mandate, those pools of capital have little or, you know, majority no ability to buy Bitcoin today within those.
10:31
And so if you're working for a large pension fund and you're the Bitcoin guy inside that shop, you know, getting Bitcoin through your investment committee is going to be a challenge even in the institutional world we live in today.
10:50
even just to match the mandate. If your mandate is to invest in fixed income and credit, or you
10:56
need a certain liquidity and yield profile to match your obligations, your insurance payouts,
11:05
whatever those obligations look like. And so I think that's the ultimate buyer for digital credit
11:12
type products. Getting these things to a liquidity, a scale, a credit worthiness, a credit rating,
11:19
covered loss ratios, all the language I think that Jeff Walton articulates so well about
11:27
how to fit these types of instruments into a fixed income allocators worldview.
11:33
So that's where we're going in the future.
11:35
I think we haven't tapped any of that market today.
11:39
And that will take quite a while in terms of maturity and comfortability and size and
11:45
liquidity and, you know, the perceived riskiness of those instruments. I think who it really serves
11:52
today is obviously a very retail focused market, given the ownership stats we can track across
11:59
these products. And I think it appeals to a lot of Bitcoiners, even like myself, who may
12:07
keep the majority of their portfolio concentrated in Bitcoin or common equities and things that give
12:16
them that convexity to Bitcoin exposure, but where this is an alternative way to almost harvest the
12:24
volatility of a Bitcoin long position in an instrument that expresses the same worldview.
12:32
You know, if you're bullish on Bitcoin over the long term, you should be even more bullish on digital credit.
12:41
But it gives you a different risk reward profile and it, you know, funds income to pay for living expenses, obligations to create financial freedom if you can build a large enough position in these instruments.
12:59
And so I think you'll probably find a lot of individuals who are holding maybe 80% Bitcoin or equities, kind of their risk assets and want some income on the side.
13:13
And, you know, digital credit pays better than any comparable money market funds, treasury bills, types of fixed income products with a different risk profile, but one that you can accurately underwrite if you are in the weeds of Bitcoin and you already have a strong thesis and conviction about what Bitcoin is going to do over the next decade.
13:37
I want to ask you specifically also about what's happening with STRC right now. I guess like for
13:45
the audience, you know, we're recording this on June 17th. We'll probably end up publishing this
13:50
sometime next week. So we got a little time in between when we're recording this and when it
13:55
will go live. But right now, I believe like STRC is around $91, $90. Like, how are you thinking
14:01
about this volatility? Should, you know, is the volatility in digital credit concerning to you?
14:07
Is it like to be expected?
14:09
How are you thinking about that?
14:12
You know, I think we are recording this at a very interesting time.
14:17
I've been watching the STRC tape all day long as it's really come under a lot of pressure
14:24
since Bitcoin had its last leg of the sell-off down below 60K recently here.
14:32
So, you know, I think volatility is to be expected with just the maturity of these instruments and kind of the size and scale and really the limited set of market participants who are participating in these products.
14:52
I think it's a confluence of events that have really put pressure on STRC this week, one of which is that we're between the ex-dividend windows.
15:07
And so there's a window of a couple weeks here where folks betting against it can short without having to incur the cost of paying that dividend.
15:19
And so I think there's some short pressure in the market.
15:22
I think there's a lot of kind of whiplash from just how quickly the sequence of events that strategy executed on the capital market side in terms of drawing down their USD reserve to repurchase converts, which is a creative action on paper, but kind of hit their liquidity profile.
15:48
And, you know, at face value, seems like you're trading 11.5% obligation for a 0% obligation that matures down the road, as well as strategy, you know, testing the waters by selling 32 Bitcoin into the market.
16:05
And I think the speed at which they executed on all those things into what's already a pretty negative Bitcoin market in terms of sentiment and momentum cascaded here and is causing a little bit of a crisis of confidence, which is reflected in the STRC price today.
16:24
for like you i guess personally or or your fund that may or may not be an investor in digital
16:32
credit and just for other i guess like digital credit investors what do you think is like the
16:38
number one priority for you when it comes to like ensuring the credit quality of strc or or any sort
16:47
of like digital credit vehicle like is the usd reserve dividend reserve is that like a very high
16:53
a high priority? Is it the convertible notes that have a maturity wall at some point in the near
16:59
future? Is it like just the amount of Bitcoin on the balance sheet? Like, how do you think about
17:03
like evaluating what's really important? And like, you know, for a specific issuer, what do you wish
17:09
that they might be doing for any issuer? Like, what do you wish that they might be doing that
17:13
they may already not be doing Well I think it a combination of all three of those things that you touched on I think it really depends on what your strategy is
17:29
Within our funds, we hold and trade some digital credit instruments and having some volatility in those products is actually more exciting for us because it creates opportunity, creates mispricing.
17:42
But if you're someone who is just counting on consistent yield and you bought at 100 bucks, you know, expecting $11 of dividends, you know, over the next year and it's traded down $9 has wiped out most of your expected income from the product.
18:00
It's painful today.
18:01
And so I think some creative financial engineering is needed to bring confidence back to the market and to get closer to the stated $100 par value of these instruments.
18:16
I think it's a combination of those three things you touched on.
18:20
You know, ultimately, we're underwriting these from a credit buyer's perspective, which is, you know, what is what is the expected probability that the liabilities on strategies balance sheet, which is the converts that sit higher in the capital stack?
18:39
and it's the other perpetual instruments that are higher in the capital stack than than STRC was the probability that the, you know, the equity doesn't cover the liabilities of the company.
18:53
And looking from that perspective, even with Bitcoin prices at a 50% drawdown here, you know, strategy has an incredibly strong balance sheet and they've proven themselves through past bear markets to be able to withstand storms like this.
19:11
So that's the long term view. But I think the short term view, the cash reserve really, really helps give confidence in the short term and the optionality that it gives the issuers to be able to wait out the market if markets turn further south.
19:33
And it's unattractive to issue common equity or raise new converts.
19:40
And, you know, selling Bitcoin puts pressure on the entire balance sheet.
19:44
If you have 18 months of cash in the bank, you know, historically looking at, you know, the Bitcoin cycles, that gives you the ability to just wait for a long time for market conditions to improve.
19:59
But as strategy cut that from 18 months to six or seven months of cash reserve, that's causing people to definitely tense up when they saw that headline published.
20:16
That's not to say that strategy is in a bad spot here.
20:20
And we've seen them even in this very negative Bitcoin market over the past few quarters, be able to raise hundreds of millions, if not billions of dollars a week out of the market on their common ATM, even without selling any Bitcoin.
20:36
And so that gives us a lot of confidence and they still have very strong capital markets positioning.
20:44
But just being in a position where the clock is ticking for you to kind of need to do something, need to raise capital somehow versus having, you know, years of the ability to sit on your hands and wait for the market to turn in your favor.
21:03
definitely puts you in a different position.
21:08
Yeah, it's a really great point
21:10
that I think a lot of people seem to miss.
21:12
And Saylor does sometimes say that.
21:13
It's like, you know, he has the option to just do nothing.
21:17
And, you know, the dividends will be paid for,
21:20
you know, assuming Bitcoin doesn't absolutely crash,
21:23
you know, massively from here,
21:25
the dividends should be paid for like a very, very long time
21:28
as he has the capital on the balance sheet to do so.
21:30
But maybe like taking a step back
21:32
and like thinking about digital credit
21:34
from like a more big picture perspective
21:36
and specifically looking at like
21:38
the variable rate digital credit,
21:41
which still in the grand scheme of things,
21:43
you know, hasn't been out for more than a year.
21:46
I think Stretch came out of July of 2025.
21:48
So it's not even one year old.
21:50
Like, how do you think about the performance
21:53
from when it initially launched to today?
21:56
Like, did it exceed your expectations?
21:59
Is the volatility, like Bitcoin is down
22:02
maybe like around 50% or 45% from its all-time high,
22:06
stretched down 9%, say to around par.
22:10
Like, have these digital credit instruments
22:12
like surpassed your expectations
22:14
in terms of their performance
22:15
and their ability to raise capital?
22:18
Or has it kind of been what you expected?
22:22
Well, yeah, zooming out,
22:24
I think you'd have to be crazy
22:28
to not say that stretch in particular
22:30
has been a massive, massive home run.
22:33
And, you know, this past week,
22:36
week and a half of volatility,
22:38
notwithstanding, which, you know,
22:40
I should also mention isn't a new phenomenon.
22:44
We've seen stretched trade down to 92,
22:48
91, 92 range approximately,
22:52
you know, once a quarter
22:54
as it's maturing and building liquidity.
22:58
And so, you know, by those means, it's still up from where it launched, where it IPO, where it started trading.
23:08
And this is in a trading range that we've definitely seen time and time again.
23:14
And we've seen Stretch recovered $100 par in every one of those cases.
23:20
But to just zoom out and again, look at those metrics in terms of preferred equities as the comparable landscape, seeing the stats that Fong walks through on their investor presentations about the size, the growth, the liquidity, the capital raising.
23:42
I mean, this product has still been a home run and is a transformational story in capital markets.
23:50
And so I think that's something that strategy, I expect them to continue to lean further in and to make those changes, whether it's their capital allocation or their cash reserve or the dividend rate to support this product.
24:05
and, you know, growing a product from zero to $10 billion,
24:14
notional outstanding in less than a year,
24:17
is an astonishing accomplishment, no matter how you look at it.
24:23
Yeah, I completely agree with that.
24:26
You know, Saylor talks a lot about this idea of digital money
24:29
being built on top of digital credit.
24:31
So, you know, digital credit strips volatility and return away from Bitcoin.
24:37
His idea is digital money strips the remaining volatility away, ideally, away from digital credit and obviously strips a little bit of return as well.
24:48
What do you make of that?
24:49
Like, do you think, are you a fan of this, like, building financial applications on top of digital credit?
24:55
And how do you think about it broadly?
24:58
I am a big, big fan broadly.
25:00
And I think there's a whole design space around other types of, you know, variable rate preferred perpetuals that's interesting to explore.
25:10
I think there's a whole world of products on top of an instrument like Stretch that are interesting to explore.
25:17
I think, you know, the big realization there and that the market's really demonstrating for us this week is even with the tools that an issuer like strategy has to try to set a trading range or a target par value at $100, you still need additional market forces there.
25:43
And there's things that an issuer can't do that, you know, third party market participants could do.
25:51
And so you know if you holding a digital credit instrument like stretch for your very near term liabilities and it cash you might need tomorrow or a week from today Even this volatility down down 9 in a week is is is too much to stomach for the return profile
26:14
And so being able to securitize or stratify digital credit instruments into different risk reward volatility tranches that have maybe a better fit for certain market participants is something that I think will inevitably come to market.
26:37
And it's something that we're working on at UTXO Management that we're launching some new products around.
26:43
I also think the just the packaging of these products, you know, as preferred perpetual equities is inherently limiting in the types of buyers that it that it maybe restricts the asset class to.
26:59
And so, you know, the success and growth of Stretch, notwithstanding having it as a term product that has a maturity or that has a credit rating or that is more cleanly defined as a fixed income bond-like instrument would open up new classes of buyers.
27:22
And I think, you know, strategy themselves isn't really in a position to do that as an
27:28
issuer, but the various ETFs and funds and CDOs, CLO type structures out there can take
27:36
this and build it as part of a portfolio that includes some diversification or includes
27:41
some tail risk hedging and create novel yield instruments out of it that have higher or
27:49
lower payoffs.
27:50
And if there's one thing that Wall Street is really good at, it's that packaging, that bundling and unbundling of these building block instruments into all sorts of exotic securities that are a match for new investor classes.
28:06
Yeah, it makes a lot of sense.
28:08
What do you make of like the like small subset of Bitcoiners that kind of have been outspoken against digital credit?
28:17
Do you think like that their perspective is misguided? Do you think that there's some truth to their argument? Like, how are you evaluating that?
28:25
You know, it's the type of discourse that inevitably flares up during a bear market for Bitcoin when the industry loves to turn on itself in many ways, whether that's over technological disagreements in Bitcoin or whether it's capital markets in this case.
28:48
I really don't read too much into it.
28:54
And I think from the Bitcoin philosophy, especially kind of the crypto anarchist libertarian roots of the Bitcoin movement, I think digital credit is entirely fair game.
29:10
As long as obviously you're making appropriate disclosures and not misrepresenting the product and are accurate and truthful in how you describe it, which should be the bar we all hold ourselves to.
29:26
But when I see people taking pot shots at Stretch where Saylor is borrowing indefinitely at 11.5% to buy Bitcoin and then turning around and pitching some credit card or Bitcoin line of credit or secured lending product where you're borrowing against Bitcoin at a lower rate that's secured by your Bitcoin to pay your living expenses.
29:55
Those are two sides of the same coin, in my view.
30:00
And unfortunately, we don't live in a world yet where we can rely on Bitcoin exclusively.
30:06
And so novel ways to draw that cash into the ecosystem.
30:11
I'm a fan of all the experimentation.
30:15
Yeah, what do you make of all just like the, you know, not even just digital credit in particular, but like inviting kind of within the Bitcoin community?
30:23
It kind of seems like that's been a, whether it's shoes people are wearing or, you know, different proposals to like, you know, the technology side of Bitcoin or obviously like digital credit is a big one.
30:38
Like, is this just like normal bear market activities?
30:43
Is it, you know, we've had a prolonged, if you look at from the peak of 2021 to today, 2026, you know, Bitcoin happens to be flat over a five year period.
30:52
And obviously, you know, that occurred from 2017 to 2022 as well.
30:56
But is this, you know, infighting and kind of like relentless debate, at least it feels like, just due to poor Bitcoin market?
31:05
Or is it like well-deserved infighting?
31:09
I think it's something that happens every Bitcoin bear market.
31:14
It's just what's the topic du jour for people to argue over when sentiment's in the gutter and everyone's feeling depressed and there's no new capital coming to save Bitcoin.
31:31
And so what flavor that takes on changes every cycle all the way back from the block size wars and the Bitcoin cash fork, which was way more toxic and vitriol filled than the discourse today.
31:45
I think part of that, too, is a little bit of a leadership vacuum around Bitcoin, you know, notwithstanding treasury companies and Michael Saylor, but leadership vacuum on the technological side that we've seen develop.
32:05
And the entire Bitcoin market shifts so much from being a developer-driven, tech-driven focus to being a financialization and institutional game that BlackRock is dominating with their IBIT ETF.
32:26
And so that turnover and culture and personalities and focus and what people care about inevitably leads to some of that infighting.
32:38
And, you know, as we joke, we always like to crucify our heroes in Bitcoin or don't become the main character of this cycle.
32:50
So I think number going up improves that drastically.
32:55
But until then, there's plenty for people to argue about.
32:59
Yeah.
33:00
I guess continuing to think about broad adoption of Bitcoin.
33:04
So not just Bitcoin, I guess, in particular, but like Bitcoin powered products like digital credit.
33:10
What do you think is like the, for like from an institutional perspective or just like a retail but high net worth individual perspective,
33:19
Is it like the lack of volatility that digital credit is trying to provide relative to Bitcoin?
33:27
Is that like the main selling point or is it like the higher yield relative to traditional yields?
33:34
Is that a more appealing like selling point?
33:37
Like which of those like low volatility, high yield do you think is more important or is it just simply a balance of the two?
33:45
I think where it's really resonating today with buyers is on the yield, on the cash flow side and kind of stripping out the volatility.
34:01
But I almost see that yield being the principal thing that's attracting people to buy these types of products today and have, you know, a cash flow component that's coming in that you can use to DCA into Bitcoin or you can use to fund your living expenses or making essentially transforming Bitcoin from a capital appreciating asset class into a
34:31
an actual income yield producing asset.
34:35
I think that's the biggest transformation
34:37
that's resonating with people.
34:40
How to, you know,
34:42
live off Bitcoin, if you will, as it's transmuted through this digital credit intermediary.
34:52
How do you think about comparing digital credit in particular to like the private credit market?
34:58
You know, like we talked about, there's volatility in STRC in particular right now,
35:03
but at least it's public and we can see the volatility, right?
35:07
How do you compare just, you know, digital credit broadly to private credit market?
35:12
Well, I think the strategy team lays this out very well.
35:19
But if you look at private credit as an asset class and, you know, the big funds, the Blue Owl type products, you know, you see yields that are very comparable for a product like Stretch today in the market with a vastly different risk profile in terms of with private credit.
35:43
you have a lot of illiquidity. You have, you know, loans to private companies where those are
35:52
term loans and the loans themselves aren't liquid. And so you're stuck holding to maturity or to
35:59
default. So you have a lot of illiquidity. You have much higher leverage or, you know, loan to
36:09
value type ratios for these companies for software companies than you do with a company
36:16
like strategy today. And you have kind of this black box collateral package where the loans are
36:22
secured by, you know, factoring or receivables or inventory that may be auto parts or maybe
36:33
shipping containers or maybe some sort of commodity that the you know in event of a default
36:42
and the actual liquidation process whether you to be able to verify whether you actually have
36:49
the claim on that property or whether it was also pledged to other lenders on under multiple liens
36:55
on it and then what the what the liquidation value of that asset really is how much does it cost to
37:01
out and recover it? What's the realistic market price to be able to wholesale your auto supplies?
37:09
Like there's so much of a black box that you have to sift through to really be able to assess
37:16
the quality of the collateral package and the financial state of the borrowers from you. And so
37:24
So that's private credit, illiquid, not transparent, similar yield, where with digital credit, with a product like Stretch, you have liquidity.
37:38
It's exchange traded.
37:40
You may not like the price it's trading at today, but it's liquid.
37:43
There's the ability to find a buyer to be able to rotate in and out of it at any time.
37:49
It's available to everyone, not just accredited investors or qualified purchasers.
37:55
And you have complete transparency into the balance sheet backing the company.
38:00
What exists above you in the capital stack, how much Bitcoin the company holds.
38:05
You can tell what the market price of Bitcoin is at any given time.
38:09
you can, you know, with five minutes and an Excel file, assess the credit worthiness and your own
38:16
odds that, you know, the company is solvent. And so that's a radically different picture. And when
38:23
you compare the same yield profile across those two, I'll tell you, one of the two is mispriced.
38:29
And it's up to you to figure out which is which. Yeah. I guess in particular, how do you think
38:37
about assessing the credit worthiness of digital credit.
38:42
Like, you know, we talked about the USD reserve, debt maturities,
38:46
you know, Bitcoin on the balance sheet.
38:48
Like, do you try to forecast a Bitcoin CAGR?
38:51
Do you try to forecast Bitcoin volatility?
38:53
Like you as an allocator are there more specifics as to how you think about the risk the credit risk associated with digital credit You know how we back into it a couple of different ways
39:09
I mean, the most obvious one that I think is simple, but is very insightful.
39:16
It's just to run the math in terms of the liabilities.
39:21
A company like Strategy has outstanding.
39:23
How much convertible debt they have?
39:26
It's published on their website.
39:28
How much liquidation preference do they have above you in the capital stack?
39:33
It's published on their website.
39:34
And then you can back into at what Bitcoin price does the assets exactly match the liabilities
39:43
for you to get paid in full your $100 liquidation value
39:48
on the stretch preferred stock.
39:51
And so you can do that math.
39:53
I forget exactly what it is.
39:55
It's around $15,000 per Bitcoin today.
40:00
And so you can do that math and say,
40:02
as long as Bitcoin is above this number,
40:06
even in a liquidation scenario,
40:08
here's how much I would get back.
40:11
Would I get 80 cents on the dollar?
40:12
Would I get 100 cents on the dollar if strategy was forced into bankruptcy?
40:18
And then you can look at what are all the levers that they have to avoid that and how long would that process take?
40:27
Obviously, with the digital credit products, you know, a huge advantage for the issuer compared to a typical bond is they have the option to suspend dividends.
40:39
They may be cumulative. They may be non-cumulative. They may come with different covenants. But in a scenario where the company is under a lot of financial pressure, they could suspend the dividends or delay a payment.
40:54
I think that would be hugely negative for the price and the perception around these instruments.
41:03
But if a company needed to do that to avoid bankruptcy, they absolutely would and could.
41:11
And so underwriting those type of type of instruments, as well as, you know, looking at kind of that tells you like the BTC coverage, how much are the assets and excess of liabilities today?
41:27
And then I think my favorite one, you know, is really what Strategy publishes in terms of the growth of Bitcoin they need annually to cover all their dividend liabilities.
41:45
And it's around 3% today.
41:47
And so if you if you are able to underwrite that from, you know, the middle of a bear market here that that Bitcoin barely ekes up at 3% a year, which would put us, you know, not back to all time highs for decades.
42:06
Strategy is still able able to cover all their dividend obligations without growing or without shrinking their balance sheet, just set a steady state profile.
42:15
And so if you have any conviction around Bitcoin, I think that's a pretty easy thesis to understand and underwrite.
42:25
Do you think we're going to see more digital credit issuers from here?
42:29
Obviously, like right now, it's strategy and strive.
42:34
Will there be others that have publicly traded live digital credit?
42:40
I'm confident we will see more.
42:43
coming probably soon this year.
42:46
You know, we've seen MetaPlanet make some moves on this front
42:50
to get out their own digital credit products with the launch,
42:54
the announcement of Mercury and Mars that are not publicly traded yet,
42:58
are institutional-only products today.
43:02
We've seen some recent news from a couple of the European Bitcoin treasury companies
43:08
that have put out proxy statements or share shareholder votes on matters around rearranging their capital structure amending their articles to enable the creation of a type of preferred share
43:26
similar to digital credit.
43:28
And so as more and more companies bring those to shareholder votes, proxies, I think it's
43:35
pretty clear uh bread crumbs being laid that there are more folks um uh seeing the success
43:42
of sata and of stretch uh who will look to take these products global especially
43:47
and maybe one of the final more final questions uh that i can ask you is like how do you think
43:53
about digital credit in the context of intro interest rates set by central banks around the
43:59
world you know like in the united states you know there's been pressure to lower interest rates over
44:04
time people are feeling it you know when it comes to like buying houses and whatnot at this point
44:09
um if rates go lower how do you think that that would affect digital credit and then if rates go
44:16
higher like how do you think that would affect digital credit that um that's something that we've
44:23
we've spent uh some some time debating over the last couple months and i think you know bitcoin
44:28
itself is at a really interesting spot where, you know, Bitcoin has been under a ton of
44:36
pressure the past six months.
44:40
And a part of that or a common thesis I hear repeated is that, you know, there's been no
44:49
rate cuts.
44:50
Liquidity conditions are still tight, even though you see the stock market making new
44:54
highs.
44:55
There's, you know, that risk capital is waiting for rates to come down to go out on the yield curve into more speculative perceived riskier assets like Bitcoin.
45:11
And I think there's some truth to that, especially from an allocator standpoint.
45:14
But when you zoom out and look at, you know, the fundamentals of Bitcoin and the reason why Bitcoin was created, the fiscal situation of the United States has not gotten any better in the last six months.
45:30
It's arguably gotten demonstrably worse where, you know, we're on track to run a deficit of more than 130% of GDP.
45:42
The high rate environment makes it so that inflation has been perpetually high.
45:49
Debasement continues.
45:50
We have to continue printing money to fund this deficit in the U.S.
45:56
Like, you know, all these macro fiscal conditions and the reason why you would buy Bitcoin to opt out of that system have only gotten stronger even as Bitcoin's price has fallen here.
46:12
And so that gives me some confidence to stay bullish Bitcoin, you know, over the next year, years ahead.
46:23
And how that reflects on the digital credit products, I think there's a little bit of give and take.
46:30
Because if this was a standard, you know, corporate bond, AAA investment grade type security, you'd expect it to trade or the yield to be a fixed spread to SOFR or Fed funds.
46:45
So, you know, call it, you know, today it's trading at like, you know, SOFR plus seven.
46:52
So for plus eight, you'd expect as rates come down that the interest rate that an issuer like strategy has to pay comes down in lockstep because of that opportunity cost tradeoff.
47:08
I do think that may cut a little bit the other way though,
47:15
where in an environment where rates are coming down
47:18
and life is coming back to the Bitcoin market
47:22
and there some enthusiasm I do think you have a segment of buyers who are parking cash in digital credit waiting for the right time to reallocate to Bitcoin And so I do think as the market gets more bullish on Bitcoin again you may see in a falling rate environment you may actually see some outflows from these products to go back into those risk assets which would argue for keeping the dividend rate high
47:50
So I don't have strong confidence which way it'll go at this point.
47:54
But it will be interesting to tell, and I think it will mature into a market as the liquidity, as the credit worthiness of these instruments grows, where they do trade like an investment-grade bond.
48:07
You know, a digital credit product that has 5x over collateralization with Bitcoin should be a AAA-rated type investment-grade instrument that trades at, you know, SOFR plus 3%.
48:20
So there's a lot of compression that could come to the yields as the market understands the risk and reprices accordingly.
48:32
Yeah, track record just needs to continue to be built, it sounds like.
48:37
Tyler, this has been a really good conversation, really enjoyed it.
48:41
Any final closing thoughts on Bitcoin digital credit or just markets broadly?
48:46
uh well i'm i'm waiting eagerly along with every every other stretch holder uh to see
48:54
how the how the company responds and you know if if the dividend rate for that um product changes
49:01
this month i think you know if if uh if uh it was up to me i have the attack plan here i think it
49:09
you would require a multi-prong approach to, to rebuild some confidence,
49:14
which is a commitment to the cash reserve and more explicit guidance in terms of,
49:20
uh, how, what you plan to maintain, how quickly you, you, um, uh,
49:27
will replenish that cash reserve. I think, um, uh, you know,
49:32
a rate hike seems to be indicated by the VWAP formula that strategies
49:38
published previously and so I'm expecting to see that even though the markets not not
49:44
pricing that in completely from what I can tell today and then you know I think in another
49:53
inherent limitation we've been thinking about around digital credit is just the implicit
49:59
ceiling that these products have at their $100 par value. And so, you know, that ability of the
50:09
issuer to constantly defend $100, to constantly be selling at $100.01 means that, you know,
50:19
there's an asymmetric risk reward to shorting those instruments at par or above par once you
50:27
account for the carrying costs and the borrowed costs and the dividend costs. And so I will be
50:34
interested to see if issuers maybe change the callability language or change some of their ATM
50:40
guidance where they let the products trade above par for a period of time, even if it's a short
50:47
period of time, and change that risk calculus where folks who want to short or want to trade
50:55
the volatility around these products,
50:58
realized that it could trade over par in some circumstances.
51:02
And that would be a really interesting twist
51:04
to have in the market that we haven't seen so far today.
51:07
So stay tuned.
51:10
Bitcoin may be boring here,
51:11
but at least digital credit isn't.
51:15
Yeah, that's a great point.
51:16
And Bitcoin's usually not too boring.
51:18
So the excitingness will probably return to both
51:22
at some point.
51:23
But Tyler, this has been awesome.
51:26
This is really enjoyed the conversation again.
51:28
This has been great.
51:30
Enjoyed it, Joe.
51:31
And congrats again to the Strive team on the success with daily dividends.
51:37
So it's been remarkable to see the strength of Seda this week.
51:41
Very impressive.
51:43
Awesome.
51:43
Yeah, thanks, Tyler.
51:44
Appreciate that.