Latest / The Income Show / The Future of Income Investing | The Income Show | Ep. 14

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The Future of Income Investing | The Income Show | Ep. 14 · The Income Show

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It's how the income is generated and received.
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I think the interesting part about this,
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what digital credit is trying to solve,
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is really both in a way.
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At the end of the day,
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you kind of have two different investor types
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that are kind of at odds in many ways, right?
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You have a lot of people who just want the stability
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and just want the high income.
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And then you have others that want that high compounded return
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by taking all leverage and adding risk to the securities.
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Bitcoin has no half-life.
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It's technically an infinite duration asset.
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One Bitcoin today is one Bitcoin tomorrow
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is one Bitcoin in 50 years,
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as long as everything stays the same
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with base layer protocol and nothing changes with the consensus of Bitcoin itself.
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Digital credit, this whole space is a carry trade on Bitcoin.
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Bitcoin obviously needs to go up over time for this to work.
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If Bitcoin goes down or it stays down or has no use case to the majority of people, then
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yes, this fails.
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That's obvious.
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But I think we're all in the camp that from the macro perspective, Bitcoin is going to
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continue to adopt and grow.
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hey everybody welcome back to the income show this week i have on lauren asmus lauren is head
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of investor relations at utxo management the bitcoin native asset manager owned by nakamoto
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before joining utxo in february 2025 he spent over 11 years at canterbury consulting an investment
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consulting firm advising on roughly 45 to 50 billion dollars for endowments, foundations,
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and families. Lauren, welcome to the show. Joe, thanks for having me. Looking forward to this
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discussion. Absolutely. This is going to be great. So like I mentioned, like before Bitcoin,
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you actually had a real career in traditional finance. Maybe tell us about that. You know,
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what did you do on a day-to-day basis and how did that eventually lead you to where you are today?
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Yeah. So I spent over a decade at Canterbury Consulting, like you mentioned, which is an investment consulting firm based out in Southern California that really is, you can think of a consulting firm as like an advisor for institutional type investors.
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So think family offices, endowments, foundations that can include healthcare plans, universities, arts organizations.
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It really runs the gamut of groups who have a perpetual portfolio that are looking to invest in perpetuity and think about portfolio construction in many different facets.
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And so I sat on the manager research side covering predominantly fixed income and credit during my time there.
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And that included public credit, private credit, as well as some hedge funds.
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But I had the opportunity to join UTXO about a year and a half ago to lead investor relations and really aiming to help bridge that gap between Bitcoin native, digital asset native investors,
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and kind of the institutional investors
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that are starting to learn more
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and get more involved with Bitcoin.
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Love it.
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Yeah, that's a great background, I guess.
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So you mentioned you chaired
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fixed income research within the firm.
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Can you maybe tell us about that experience in particular
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and maybe like how you think about fixed income as a whole?
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Yeah, yeah.
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I mean, how long do we have?
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I can speak for a whole hour just on this alone,
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but I'll keep it brief.
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So maybe just to take a step back,
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If you think about how an institutional investor thinks and operates, they have different buckets.
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They have their public equity bucket, which could include large cap equity, small cap equity, international equity, emerging market equity.
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And they typically diversify that across different types of mandates.
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So that can be actively managed strategies, passive strategies that follow the S&P or another type of passive index.
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and then you have fixed income credit alternatives, right?
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Which is private equity, private credit.
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And so if you look at the typical institutional portfolio,
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they're trying to allocate across different buckets
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in ways that make the most sense
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for their risk return parameters, right?
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So different investors have different return requirements,
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different risk retirement requirements,
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and so forth.
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For fixed income, I'd say the majority of investors
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on the institutional side,
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they think of fixed income as a volatility mitigator.
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And so we all know of the traditional 60-40 portfolio.
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I think we all know that that no longer really works.
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But if you kind of think about the first step of kind of asset allocation across equity and fixed income,
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fixed income was the diversifier to your risk assets, which was typically equity.
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And the goal was to reduce volatility.
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And so if you look at my time there at Canterbury,
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we look across the whole fixed income universe.
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So that would include public fixed income,
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U.S. Treasuries, agency bonds,
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mortgage-backed securities,
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down to corporate credit,
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which includes public high yield,
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bank loans, labor loans,
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and then to more illiquid
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or alternative strategies within credit.
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So that would include long-short credit hedge funds,
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private credit.
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And so we took a holistic approach
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to really the whole fixed income universe.
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And so how it operates at a firm like that
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is you have these different mandates
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that fit in different parts of the portfolio
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and you're creating kind of this mosaic
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that leads you to a certain return,
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certain risk in a diversified way.
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And so our job in the manager research role
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was to underwrite different managers,
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different strategies that had key competency
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or expertise on these different parts of the asset class.
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And so I spent, like I said, a decade doing that work,
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underwriting managers, underwriting their strategies,
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see how they operate, how they compare and contrast
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relative to other managers out there in the universe.
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So it really gave me this really great holistic view
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of just the asset management industry,
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how it operates and how people operate within it.
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And during my time there,
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I went down the Bitcoin rabbit hole personally.
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A lot of us on the research side did as well.
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um it's funny you know at the time there's still very vote to talk about bitcoin and digital assets
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you know this is you know 10 years ago or so to now where it's not so i mean that's something else
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we can talk about in terms of that evolution but um in general that's how it operates at these
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firms is you're really trying to find these actively manager passive strategies that fit
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these specific sub segments of the portfolio and my job was to do that with the segment
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segment. Lauren, you mentioned that the traditional 60-40 portfolio is broken. I think a lot of
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people in Bitcoin understand that. I'm curious, one, how would you explain in simple, clear terms
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why you think that it doesn't work the way that it used to? And then two, do you think that most
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institutional investors would agree that the 60-40 portfolio is broken?
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So I would say that most institutional investors agree with Bitcoiners that the 60-40 portfolio is broken. You've seen really this advent of private equity, private credit, other alternative strategies to try to mitigate the fact that you're having low to negative returns in fixed income and very modest returns in equities.
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And part of it, I think, is the fact that we were able to ride down this yield curve for 30 plus years, you know, from the 80s to, you know, to right after the GFC.
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And, you know, now I would argue we're in a very different paradigm where you have inflationary pressures, you have an uptick in real rates.
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And so, yes, I mean, most institutional investors, they've carved out more and more exposure into alternatives.
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which is predominantly private equity, venture capital, and private credit.
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But essentially, this is something we could probably talk about a little bit as well.
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It's still ultimately equity and credit at the end of the day.
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And I think Bitcoin offers something very, very different from that,
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which a lot of investors are still trying to navigate and understand themselves.
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Yeah, absolutely.
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That does make sense because obviously the rise of private equity and private credit has been massive.
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but still as you kind of mentioned it seems like institutional adoption of
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Bitcoin has been accelerating but you know it's nowhere near possibly where
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where it could be in the future so I guess maybe like rewinding back to your career you know you mentioned you personally discovered and tried to understand Bitcoin many years ago What was it that like clicked for you that made you interested in it
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Yeah, I think, I mean, part of it was, you know, you look at this new asset go up considerably in price and that catches everybody's eye.
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And then you start asking, why is that the case?
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and and at the time is interesting you know we were looking at um uh these strategies that we
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kind of deemed as liquid alternatives and so uh going back to the point of of the 60 40 or kind
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of getting away from the 60 40 um you know these alternative strategies that behaved differently
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from a risk return perspective relative to your generic equity and credit exposures and i looked
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at bitcoin and and uh and said well this is like the ultimate liquid alternative it's 24 7 traded
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uh it is a completely different um technology completely different uh asset uh from everything
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else in the portfolio uh it offers these and even at the time uh you know these correlation benefits
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uh to the rest of the portfolio you know this is something we should be looking a little bit more
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into um and then you start going down the rabbit hole of of understanding the macro side and
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understanding fiscal deficits and the debt problem we have. And then it gets down to the core of,
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well, maybe this whole foundation of how things were built and how we think about investing in
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risk is completely turned up on its side's head. And so it's interesting. I think there's a lot of
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people in the Bitcoin industry that came from a fixed income background because they saw
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how the macro landscape was from a fixed income perspective. Matt Cole, I know, has mentioned
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this several times right during his time at caliper's on the fixed income desk um so so that
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was part of is is one it was the price action that piqued my interest then it was trying to understand
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how bitcoin works how it operates and then it starts questioning your assumptions that you
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really weren't um questioning before or taught at school uh and made you kind of rethink uh and have
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self-reflection how things actually work out in the world in the economy um and so went down the
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proverbial rabbit hole.
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And then kind of to the point that I made earlier,
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you know, back then you couldn't even bring up
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digital assets or Bitcoin.
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To when I left, you know, there's a lot of discussion
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about digital assets, a lot of discussion about Bitcoin.
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We had a digital assets working group at the firm
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by the time I left for UTXO.
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And so that evolution has definitely taken hold.
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And I think we're in the next inning
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of institutional adoption, you know,
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really over the next five, 10 years.
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what do you think the next inning of institutional adoption of bitcoin and bitcoin powered assets
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will look like obviously you know michael saylor has been a huge proponent of this concept of
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digital credit so maybe we can start to get into that and kind of how you think about that
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yeah and i think it's back into the the the whole concept that investors have different risk return
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requirements and needs, right? When you think about creating a portfolio for an investor,
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you have to understand their ability to take risk and you have to understand their willingness to
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take risk. And risk can be seen in many different ways. You know, people think risk as absolute loss
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of capital. Other people think of risk as volatility. And it really depends on where
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you're at within your stage in life, the company or the organization stage of life,
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and what makes the most sense relative to the other assets in your portfolio.
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There's no one size fits all.
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I think that's the same for investing in Bitcoin on behalf of these entities.
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A lot of them can't have a 50 vol asset in the portfolio.
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I mean, there are many times where we had kind of unique assets
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that behave very differently from other things in the portfolio
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as maybe a 50 basis point, 100 basis point position.
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But then you end up spending half the meeting with the client talking about it because it behaved very differently or had a huge volatility event.
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And so a lot of the investing around volatile assets is tough for these institutions because it just takes a lot of mindshare and time relative to other parts of the portfolio.
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So I really think the next evolution is the products that are being created by Strategy and Strive and incorporating Bitcoin in different risk return parameters to where investors can get exposure in a way to the asset class, but in a way that fits what they're looking for.
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and I know there's a lot of discussion out there right now about
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well why don't you just buy the Bitcoin and it's like well
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these groups literally just can't buy the Bitcoin. There's a reason why
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I think Saylor has said this over 97% of institutional capital is
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mandated to invest in equity or credit. It's literally stated in their
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investment policy statement that they can't deviate from that and so
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I think that's something that's worth bringing to attention to as well.
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how would an institutional investor so i'm thinking like back to traditional credit and just
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any sort of like fixed income like product you know typically it's provided by a company or
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corporation or government and like there's cash flows involved obviously you know bitcoin treasury
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company is a little bit different where it's like there's not necessarily a lot of future cash flows
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are involved but there's a massive balance sheet full of this perfectly scarce liquid asset that
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can cover the dividend obligation for potentially decades to come like is that a a big step for them
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or is that something that they can understand or like how would you go about maybe explaining that
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to certain institutional investors yeah yeah it's a good question and that's really the crux of it i
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always get the question well bitcoin has no cash flow so how can i analyze it or or think of a
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terminal value for it if i can't underwrite the cash flows and the answer is you're right you can't
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You can't use a DCF model to understand the value of Bitcoin.
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But you have to look at it from a foundational perspective.
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You know, one, do you think we're going to increase or decrease our fiscal deficits or our debt load?
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Not just in the U.S., but globally.
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If your answer is they're going to increase or even just stay consistent, Bitcoin has a place as a role relative to other fiat currencies and monetary issues that we're going to continue to have globally.
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um and so if that's the case you would think that bitcoin would have more and more adoption
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grow grow bigger have a return that outpaces um the current uh cash flow denominated yields that
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people are demanding today and so i put it very simply it's digital credit this whole space is a
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carry trade on bitcoin bitcoin obviously needs to go up over time for this to work if bitcoin goes
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down or it stays down or has no use case to the majority of people, then yes, this fails.
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That's obvious. But I think we're all in the camp that says, look, you know, from the macro
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perspective, Bitcoin is going to continue to adopt and grow and gain more and more share for more and
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more investors and people out there. And so that's how I put it. I try to put it in their terms of,
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look, it's a carry trade on Bitcoin. Maybe thinking back to the concept of the 60-40
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portfolio, I think many retail investors may think of growth investing and income investing
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as two different buckets. And it seems like maybe over the last 50-so years, that income
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investing has kind of become less popular and people more focused on high growth technology
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like investing. What do you think of that evolution? And does, you know, this, these,
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these products like play a role in the future of income investing?
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Yeah, that's a good question. I would actually argue that income is just as interesting and
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important to people, but it's how the income is generated and received. And I think, I think the
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interesting part about this, of what digital credit is trying to solve, it's really both in
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in a way.
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And people are trying to solve both in different ways.
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So if you look at what's happened with SGRC
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and just the complex in general,
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last several months, we had a very big volatility event,
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very big drawdown.
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And that was because you have people who are trying to generate high growth returns from a product that is giving you high income And that always leads to a situation where you have people who over lever take on too much
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risk and then are forced out or liquidated. And obviously there's other things we talk about
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relative to how that occurred and why that occurred. But at the end of the day, you kind of
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have two different investor types that are kind of at odds in many ways, right? You have a lot of
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people who just want the stability and just want the high income. And then you have others that
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want that high compounded return by taking all leverage and adding risk to the securities.
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And so you're right. Investors typically separate out growth versus income. And that's why
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with fixed income, the whole name of the game from an institutional perspective was just to
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not lose money and to reduce the volatility as much as possible. It doesn't matter if you're
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losing purchasing power over the next five, 10 years. The goal of that bucket was to make sure
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you don't lose that principle in nominal terms.
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And then you make it up on the other side
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with your growth bucket.
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So that's where I think digital credit
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could be very interesting
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because I think you can potentially
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get a little bit of both.
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And that's kind of what we tried to solve
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at UTXO as well with the strategy
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that we launched last month
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of a two-tronch system
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where you have a senior tronch
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that pays out a fixed return
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and really tries to minimize the principle
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volatility and then a junior that takes on more of the mark-to-market risk, the volatility,
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but is aiming for a higher compounded return. It's kind of what Michael Stowe has referred to as this
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layer three on digital credit. Yeah, let's maybe dive in further to that layer three that you guys
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are building. Who are the typical investors that might want a senior tranche of digital credit and
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a junior tranche of digital credit.
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Do these tranches have like a certain duration
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or are they also perpetual?
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Like how do you see this kind of playing out?
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Yeah, and I think to your point,
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it's going to evolve over time, right?
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This is still very early days.
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I mean, digital credit is only 15 months old,
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12 months old.
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You know, it's very early.
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But this, what we've created is effectively perpetual.
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So if you think about it,
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The junior sleeve itself is taking on all the market to market volatility.
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It's taking on all of the risk or predominantly most of the risk.
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And by doing so, taking capital, investing in digital credit securities and aiming for that high mid-teens return.
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And so we view that akin to like a long short, traditional long short credit fund or a special set strategy that's aiming for these higher credit oriented returns.
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but with a little bit more volatility attached.
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Sitting above that is the senior,
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which is really for that income investor
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who doesn't want any volatility at all
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or any mark to market.
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And so they are effectively the first priority
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in the waterfall of returns
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that come down from the portfolio.
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And so with the credit enhancement
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of the junior underneath.
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And so it's really bifurcating the risk
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and the returns for two different investor types
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by using digital credit as underlying portfolio collateral.
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How big do you think the market for creating the senior tranche
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and the junior tranche could be over time?
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I get obviously still early days and it's evolving greatly,
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but how large could it be?
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Yeah, I don't know if I can give you an exact number,
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but I mean, the fact that digital credit is already $16 billion
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dollar uh asset class and you know this could be this is even a fraction of that you know that's
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you know potentially several billion dollars in size down the road um i think there's also i know
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that uh jeff walton from your team has talked about this too about other structured credit
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rated credit products that could be eventually built on top of digital credit
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um and i think the the advent of more issuers coming to the space there will be different flavors
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uh different ways uh different issuers approach it but it'll all be kind of considered within this
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digital credit pref equity universe and so as that grows as you have more diversification across
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different issuers um you get to really expand the ways you can diversify the structured products on
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top of that um so i mean i view the you think about traditional structured credit structured
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products out there right you have mortgage-backed securities you have collateralized loan obligations
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CLOs, you have asset-backed securities.
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This could be another sleeve that is alongside those other structured products, legacy structured
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products that have grown to trillions and trillions in size.
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So it's really as big as the Bitcoin network grows and the adoption of Bitcoin grows.
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I think this could be a direct subset of that.
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Mm-hmm. Another like common critique, I guess, of digital credit is the idea like, okay, well, if you want low volatility and Bitcoin's upside, why not just buy a small portion of Bitcoin and hold a bunch of cash? What would be like your counter argument to that?
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yeah i mean that's not how institutions think right they um it's it's different risk at the
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end of the day that you're incorporating together right there's a different risk profile with digital
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credit than there is with bitcoin than there is with treasuries than there is with bitcoin plus
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treasuries um yes maybe you get a similar risk return uh number aggregate number but your
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journey of getting that is going to look very different between the two.
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And we ran into this several times in my former role where you had some managers out there that
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were equity managers, but then they would hold a large portion of their strategy in cash.
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And I looked at that and it's my opinion. I said, why am I paying this manager
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a fee to hold a large position in cash themselves? Like, yes, I understand they're trying to get a
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certain risk return profile, but like, I'm not going to pay a fee on cash, right? Like go manage
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the equity portfolio. I'll handle the cash and the charge exposure myself in a separate bucket.
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So it goes back to this bucketing exercise, right? You have different buckets,
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different places where you put different types of investment strategies and digital credit offers
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its own risk return profile that has its own pathway itself. On this topic, I guess, like,
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What do you think is the biggest potential unlock for a pension fund endowment or one of these larger institutional investors to get exposure to some sort of Bitcoin?
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Like you mentioned, like digital credit, obviously, in of itself, these perpetual preferred equities, $16 billion market in like a year or so.
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Obviously, that's possibly one way.
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Your fund is another way.
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Is there any other like new, creative, unique way or is that like, you know, are those few ways enough to where as time goes on and these products just simply build a track record and Bitcoin continues to exist and eventually go up over time?
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Is that enough to where the floodgates will open?
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It's a good question.
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I think there's going to be more and more options as time goes on, as Bitcoin continues to institutionalize.
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um you know we're we're working on something specifically at utxo which we think can be
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another tool and option which we hope to announce you know relatively soon um but i do think that
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the etfs obviously opened up what was a big unlock for institutions to get involved um
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actively managed strategies or more people just actively managing around the bitcoin ecosystem
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will help um and if you think about it from an institutional perspective when you create a
25:04
portfolio, a lot of the underlying subsegments are actively managed because what you're effectively
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doing is offloading some of that fiduciary risk to those managers themselves, right? You're saying
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you're the expert in this mandate. I'm trusting you to manage the risk and return of that mandate.
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And if you don't fulfill that, then you're fired, you're terminated. But if you do,
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it's like, that's the whole point of why I'm paying you a fee. And so what you see from these
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as large as digital types,
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it's very tough in many respects
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just to have direct passive exposure.
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I think there will be several groups that will,
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and my opinion is that they should I think you should just have spot passive Bitcoin exposure because the correlation benefits and the return benefits all are positive across a diversified portfolio
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But you, as an end of the day, it goes back to like, where do you place this different exposure?
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Like, where do you place Bitcoin? Like, this was the question we always had is where does it fit?
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Is it a real asset? Is it a venture capital asset? Well, it's not really VC because it's liquid. It's
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not really a real asset because it's digital. And so it goes back to this nomenclature of
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needing to fit certain things in certain buckets. So I think as more active management
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comes apparent, as there's other types of ways to incorporate Bitcoin in different types of
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securities, it will become easier and easier for different groups to allocate based on
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those kind of predetermined buckets. If you could go back to like Canterbury
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consulting or just another like large uh you know consulting firm that advises institutions on asset
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management or just institutions themselves but they're not like in the digital asset community
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and they're maybe not you know super into bitcoin what do you think their response would be to
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hearing about strc for example for like the first time i think there needs to be a level of bitcoin
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education first uh you need to understand these groups need to understand bitcoin first and
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And then, and it's kind of this whole, I think Jeff Walden from your team has talked about this too, right?
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Yeah, like the one in a hundred people understand Bitcoin, like the one in a hundred people understand Bitcoin and understand MSTR.
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And then you could argue maybe the one in a hundred people understand MSTR and you're like truly understand digital credit right now.
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And that's just the adoption cycle taking place.
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But I really think it starts with education on Bitcoin, what it is, what it isn't, getting comfortable with that.
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I mean, in many cases, the talks that we have, it's a wide range of education and knowledge.
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We have groups who have been allocating to the space for a long time or personally and understand Bitcoin.
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And we have groups that just haven't taken the time to learn about it.
27:49
And that's not no fault of their own.
27:50
Everyone's super busy with other parts of the portfolio and just with their lives and everything where it's our job as an industry to continue to educate on Bitcoin.
27:59
And then I think it moves into the other aspects, right? It moves into the treasury companies and corporatization, financialization of Bitcoin, and then to something like digital credit.
28:10
What did you make of the volatility in STRC and digital credit broadly like this past summer?
28:18
Like it seems like Bitcoin obviously sold off significantly.
28:22
There was a liquidation type event within digital credit.
28:26
Maybe can you kind of maybe explain the underlying dynamics of that?
28:30
And do you know, now these products are starting to recover back closer, closer to par.
28:35
Do you think that was like an existential event for this?
28:39
Or was it like just a temporary hiccup?
28:41
Like, how are you thinking about that?
28:44
Yeah, I really think there was a mismatch of expectations.
28:47
that led, it was kind of the catalyst
28:51
that led to the drawdown that we saw
28:52
in digital credit and, you know,
28:54
more specifically, STRC.
28:57
I think those expectations have definitely been revived.
29:02
And I think the credit framework
29:04
that strategies come out with is really great
29:06
of having just, you know, this is the USD reserve.
29:09
This is how we're going to grow it.
29:13
This is why, you know, this cash reserve
29:15
is earmarked for the dividends.
29:16
I just think there was a mismatch of expectations, especially around that cash reserve, how it was used to effectively retire the converts.
29:26
That just mismatched with current investors' thoughts on how it actually would have been used at the company level.
29:33
So I think having this framework that strategies come out with has been really good.
29:38
And it's reflected in the price, right?
29:39
The market has reacted positively to that framework objectively.
29:42
um so i i guess i'd like from it's still very early days it's a nascent asset class nascent
29:50
security a lot of folks are learning uh real time um but i think the most important thing that you do
29:57
as a as a investor as an issuer is to take the market's feedback because the market uh will tell
30:05
you whether something's a good idea or a bad idea uh ultimately so um yeah yeah i think ultimately
30:12
it's great that the framework's in place now.
30:15
And
30:16
yeah, I think
30:18
just being
30:19
humble and kind of taking what the market's
30:22
giving you
30:22
is really the way forward.
30:27
Thinking
30:27
very big picture from a
30:30
macro lens, you know,
30:32
we really haven't had a
30:34
huge recession
30:36
like event since, you know, 2008,
30:38
2009. You had
30:39
COVID March 2020, but
30:42
The market very quickly was met with a wave of liquidity and government spending.
30:48
What do you make of the prolonged, I guess, bull market that we've been on?
30:53
Are we in a new era where any sort of speed bumps immediately get met with government spending more or the Federal Reserve loosening monetary policy?
31:05
Or will we have another major, major recession again?
31:11
How are you thinking about that?
31:12
Yeah, I do think that managing recessions and credit events is a top priority, even though it's not the stated priority of the Fed and Treasury and the government, right?
31:29
I think, and we've seen it in many different times across the last, you know, almost 20 years or I guess 18 years now, you know, since the GFC of just how fast the Fed and how fast monetary and fiscal accommodation will come in to protect against a credit event.
31:54
Could we get to a point down the road where it just becomes completely untenable and the wheels fall off?
31:58
We could.
31:58
I have no idea when or if that could potentially happen. But I also think part of it is risk being offloaded in different ways. And so if you think about kind of the GFC and the credit event around that, right, you had a lot of these banks that were bailed out, you had a lot of risk on these bank balance sheets.
32:18
a lot of that risk has been now really put into the public sector or into the investment community,
32:26
right? Think about the growth of private equity, the growth of private credit. You've taken the
32:29
risk that were on these balance sheets of these banks and moved it to investors through funds or
32:37
through their balance sheets directly. And so I think part of it is the risk being moved away
32:47
from the banks and to other investors.
32:50
You kind of diversify it that way.
32:53
But no, I mean, you look at credit spreads today,
32:56
I think they're at almost all-time tights.
32:59
I think high-yield credit spreads around 280 bps,
33:01
and I think the median is around 450 last time I looked.
33:04
And so it seems like the majority of investors
33:10
that think that there won't be a credit event.
33:12
I think part of that is because they believe
33:14
there is this backstop that's going to come
33:16
from a fiscal or monetary side. Yeah, that makes perfect sense. On the topic of credit spreads,
33:23
like how do you think about valuing like something like stretch and digital credit?
33:30
Is a credit spread like valuation method appropriate or how would you think about it?
33:37
Yeah, it'll be interesting to see how these dynamics shape out as digital credit grows. I
33:43
right now it's it's tough to give it a credit spread because you don't have a maturity or
33:49
duration on these securities um and you don't have cash flows um whereas these other you know
33:56
traditional high yield bank loan securities they're based on sofer which is a floating rate
34:00
uh benchmark plus a spread and the higher the spread the more inherent risk the market is
34:06
is applying to that company and to that security.
34:11
So, and then at the end of the day, it's like, well,
34:17
these securities, these digital credit securities are really set at,
34:21
the issuer level, right? The dividend rate is set at the issuer level. So maybe there is a security
34:27
that comes down the road where it's based off of SOFR plus a spread and you kind of just let it
34:30
float. But yeah, it's tough because you're trying to think about the long-term category of Bitcoin
34:38
and then you're trying to think about what you're getting paid today from these securities and
34:46
whether those obligations can be met over time from that category of Bitcoin.
34:51
But it's tough to really model it out because you don't have a duration or maturity.
34:55
So I guess my roundabout way, my rambling from this is that I'm not sure.
34:59
I don't know.
35:00
They'll be just to see how it all plays out.
35:04
Yeah.
35:04
I mean, thinking about like the evolution of this whole space, like it seems very clear,
35:09
like the layer three that Saylor has termed, that's like actively evolving quickly.
35:15
and there's, you know, you guys are building things and other people are as well. But even
35:19
like the layer two, you know, this whole concept of digital credit, I mean, like you said, it's not
35:23
that old. Stretch didn't come out, I believe, until like July of last year. But the other
35:30
products came out a few months earlier. But it seems like Sailor is very focused on Stretch
35:36
in particular. And it's like he's going kind of like all in on that concept. But theoretically,
35:41
there could be other issuer-led products,
35:44
or it could be like,
35:45
maybe they remain the same
35:47
and the way to build duration
35:48
and other, you know,
35:50
important credit-like metrics
35:53
is on layer three.
35:54
Do you have a, like,
35:55
is there, do you think
35:56
there's a better layer two type product
35:58
that issuers can build?
36:00
Or do you think all of like the innovation
36:01
should be done on like layer three?
36:05
Yeah, that's an interesting question.
36:07
I think the innovation
36:08
will first happen on layer three
36:10
because I think it's easier to,
36:12
you know, to think about
36:13
how to like add maturity ranges
36:15
or duration ranges
36:16
or kind of create like a term structure
36:18
on layer three from digital credit.
36:19
I think why layer two works as perpetual
36:22
is because the underlying asset's perpetual, right?
36:24
Bitcoin has no half-life.
36:25
It's infinite duration.
36:26
It's technically an infinite duration asset.
36:28
One Bitcoin today is one Bitcoin tomorrow
36:30
is one Bitcoin in 50 years
36:32
as long as everything stays the same
36:33
with the base layer protocol
36:36
and nothing changes with the consensus
36:37
of Bitcoin itself.
36:40
And so I think that's why it's so unique is every other credit instrument tied to a business or tried to an asset has some sort of maturity and Bitcoin doesn't.
36:54
So I do think that a lot of that duration or maturity will happen first on layer three.
37:01
But who's to say, I mean, maybe someone comes out with a layer two way to make this work.
37:08
I think what's also interesting is that you have groups of investors out there that need to have
37:13
maturities and need to have duration on the underlying assets to invest in it as a credit
37:17
instrument so I think you know there's going to be some thought on how to create I mean maybe it's
37:23
a synthetic maturity or synthetic duration on on these types of assets kind of akin to like a
37:28
private equity firm that has different vintages of investment right you you have your fund one
37:34
and then maybe five years later you come out with your fund two and then maybe five years later you
37:37
come out with your fund three maybe something along those lines happens at the layer three level with digital credit Another topic that is commonly talked about is a credit rating whether that on layer two or
37:49
layer three or however you put it. Is that a really big step forward for institutional investors
37:55
if there were to be credit ratings on any individual product? I think they are. And I
38:02
that's what strategy is really focused on is to um potentially get i mean we'll see
38:08
potentially get a credit rating on something like strc but more importantly how to improve their uh
38:12
their company credit rating um because that does unlock another wave of institutional capital at
38:18
different thresholds you know there are certain investors that can only invest in ig rated uh
38:24
securities or ig rated companies um and that unlocks different pools of capital along the way
38:30
So I think improving the credit quality across the company or having one on security does open up a larger pool of capital, ultimately.
38:38
And part of that too is diversification, which I think is why this industry has talked about really wanting more issuers and more securities to come in.
38:48
Because you need a diversified base of securities and issuers to get the diversification requirements required to have something on a structured credit product that has potentially an IG rating.
39:01
So, yeah, I actually don't think the space grows unless we have more issuers come to market over time.
39:08
Do you think Stretch, if it would ever be possible, Stretch in its current form could ever achieve an investment grade rating or would it have to be a variation of it or something different?
39:22
Ooh, that's a good question.
39:26
I don't know.
39:27
I think it would require having the credit rating agency having some view on Bitcoin itself.
39:35
you know because i think we've heard from the agencies that they don't view bitcoin as a asset
39:42
if i'm not mistaken and so if i'm if i'm thinking about this correctly they looked at strategies
39:49
balance sheet and didn't give the credit for them holding you know 50 billion dollars plus of
39:54
bitcoin um and that's how the credit rating was assigned so i think there's going to have to be
40:01
something there at the traditional credit rating agencies where bitcoin is viewed as a capital
40:07
asset um and and i think that's why that's why you always hear about this digital capital narrative
40:14
out there yes bitcoin is money we all believe bitcoin is money um but it is also capital
40:20
and so i think there's going to have to be some education and some adoption of that standard
40:26
before you could see something like a, you know,
40:30
a credit rating on a product like this.
40:32
That's just me.
40:33
It's been balling.
40:34
Yeah.
40:35
Yeah.
40:36
Yeah, definitely.
40:37
Yeah, I mean, I guess thinking back to that,
40:40
like how important is, so for example, say,
40:45
maybe not Stretch, but say like a senior tranche
40:48
of Stretch or digital credit broadly
40:51
did somehow achieve an investment grade credit rating.
40:55
obviously it would yield lower likely.
41:00
Would that like immediately open the floodgates Like would investors just be all over that especially if like the yield of it was higher than a typical investment grade bond even if investors like are
41:12
still like what's you know they don't fully understand bitcoin or do you think it still
41:16
takes like a high uh an appropriate rating plus everyone like having a really good understanding
41:22
of bitcoin yeah well i think it gets down to diversification requirements because i think you
41:27
can potentially achieve an IG rating on something that is diversified, right? If you think about
41:32
CLOs, all the CLOs are below IG rated, right? They're levered loans issued by companies that
41:41
have a below IG or junk rating that need financing for five. But the reason why CLOs work and why you
41:50
have different tranches is because you're pulling together hundreds of different loans together.
41:53
And through that diversification, you're parsing out the risk and you're getting your AAA, AA, you know, MEZ equity from that CLO tranche itself.
42:03
And so I think there is a world where if we do have more issuers, we have more digital credit instruments out there where you can create something similar, where you have potentially all these below IG or unrated securities.
42:16
But as a cohort, you can potentially achieve an IG rating on the top tranches of the securitization itself.
42:25
um i think leden did this with some bitcoin back loans uh earlier this year right where they
42:31
actually achieved a i think they achieved an ig rating and that was way oversubscribed there is a
42:36
thirst for yield there's a thirst for um uh a higher income oriented structure credit out there
42:43
so i think if we do get more issuers we are able to diversify you're all you're able to package
42:49
things into maturity, potentially you could have something where you have an IT rated security that
42:57
can be sold and purchased by investors. That makes a lot of sense. Maybe we can shift more broadly
43:04
towards markets as we start to close this out. You know, like S&P 500, basically, as we're recording
43:11
this, like at or pretty much near all time highs, Bitcoin still down, you know, little less than,
43:19
I guess 50% from its all-time high.
43:22
What do you make of this disconnect
43:24
between Bitcoin and S&P 500?
43:29
Yeah, I think it's a few things.
43:31
I think one,
43:33
and this is what other people have said out there,
43:35
it's nothing different.
43:36
I think the AI trade is just taking
43:37
all of the incremental risk capital
43:39
away from Bitcoin.
43:42
And it's been focused there.
43:45
I think two,
43:47
Bitcoin still is very much a nascent asset.
43:49
I know we view 1.2 trillion.
43:50
I think that's a lot of money.
43:52
But relative to a $300 trillion fixed income market,
43:56
several hundred trillion equity market,
43:58
several hundred trillion real estate market,
44:00
it's tiny.
44:02
And the goal for all of us in the industry
44:04
should be to grow the pie.
44:06
And that's going to come from very many different formats
44:09
and ways to grow it.
44:11
So I think part of it too is like,
44:13
yes, it is a macro asset,
44:14
but it's still so tiny
44:15
where you already see some disconnects
44:17
from general risk.
44:19
risk on type areas like the S or equities in general And I think if you think about the S right like it heavily weighted towards the Max 7 technology companies
44:33
AI trade is obviously taking a big part of that return.
44:37
So I have no idea where the price of Bitcoin is going to be
44:42
in the next several months,
44:43
nor do I want to make a prediction on that.
44:47
I don't think anyone can accurately tell you
44:49
where Bitcoin is going to be in the short run.
44:51
I think we all view Bitcoin in the long run to be much higher and much bigger, given its
44:57
tendons and its qualities that it has.
45:01
Yeah.
45:01
And I think just in the near term, there's just going to have to be this kind of slow
45:05
grind higher of people accumulating over the long run.
45:09
I think if you look on chain, there's been a big increase in long term holders accumulating
45:13
Bitcoin again.
45:15
Obviously, the incorporations are going to be large acquirers and accumulators of Bitcoin
45:20
over the next several years.
45:22
And so it's really just, I think, heads down,
45:25
continue to build out of a bear market.
45:27
I think that's all that we can do
45:29
and kind of have a low-type preference
45:31
on where we see Bitcoin going over the next five to 10 years.
45:36
I like that.
45:37
I think that is a very logical approach.
45:40
Lauren, any final closing thoughts on Bitcoin
45:44
or Bitcoin-powered income
45:46
or anything else that you really want to mention?
45:50
Yeah, I would just say I think the financialization and Bitcoin moving to corporate balance sheets is only going to accelerate.
46:00
I would say that having a low time preference on Bitcoin should also mean having a low time preference on this transition of more corporations and companies acquiring Bitcoin.
46:11
And I think sometimes there's a mismatch out there of people having a low time preference on Bitcoin, but not giving the same treatment to companies who are trying to acquire Bitcoin.
46:20
Um, and so, and at the end of the day, you know, Bitcoin, uh, you, you can't decide how
46:28
Bitcoin is going to be used, right?
46:30
The, the, you have a free open market that is going to assign winners.
46:33
It's going to assign losers.
46:35
And, um, that's the ethos of Bitcoin, right?
46:38
Is the fact that it's open source and anybody can interact with it how they want to interact
46:42
with it.
46:43
So, um, we're very much believers that Bitcoin is going to continue to adopt largely through,
46:49
corporations, but also individuals that are part of those corporations.
46:54
And we want to be in a position where we can help offer exposure to Bitcoin in different
46:59
ways that fit the needs of the investors out there today.
47:04
I love it.
47:05
Where can the audience go learn more about you and what you're working on?
47:09
So please feel free to reach out to us on our website, utxo.management.
47:16
we constantly update our website with new research articles materials uh we also have a newsletter
47:23
that we send out uh bi-weekly on our views on the market and where things are going within the space
47:28
um and then um you know always happy to have conversations on what we're working on
47:34
uh with individuals but if people want to reach out to us um our website utxl utxo.management is
47:40
the best way to do so awesome well lauren thanks again this was an incredible conversation
47:46
Thanks, Joe. Appreciate you having me.