Latest / The Income Show / A Quant Explains Why STRC Isn’t At $100 | The Income Show | Ep. 23

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A Quant Explains Why STRC Isn’t At $100 | The Income Show | Ep. 23 · The Income Show

0:00
Where do you see digital credit going from here?
0:02
I'm very bullish on the entire concept.
0:05
The entire concept is extremely sound.
0:07
Just the idea that you have an asset that does really well,
0:10
and then you're now issuing credit against that asset
0:13
to buy more of the asset that does really well.
0:16
This works and it mathematically makes sense.
0:19
In the long term, I expect the variable rates
0:22
would probably be able to come down
0:24
without interrupting the price.
0:25
But the fixed, and this is what makes the fixed rates
0:28
really important. It's that if you think the variable rates are going to come down,
0:33
then what you want to be buying for the long term is the fixed.
0:36
Strategy spent a lot more capital buying back STRC than buying Bitcoin. Should or would
0:42
common shareholders get concerned about that? For an investor looking into this,
0:47
I would want to make sure that every dollar is spent efficiently. I don't want to see any waste,
0:53
basically. If we're talking about buybacks at 98 cents on the dollar, I would think that is
0:58
waste. I wouldn't even want a single dollar of buybacks of that.
1:09
Hey, everybody. Welcome back to The Income Show. This week I have on again,
1:14
Allard Peng. Allard, welcome. Hey, man. Great to be back.
1:18
absolutely glad to have you back let's start with strc so we had you back on a while back and
1:27
three months ago strc had crashed into the low 70s it was like a digital credit mini bear market
1:35
so to speak and then last week it closed above 99 and it's close to back back to being at par but
1:43
it's still not quite there.
1:46
What do you think is preventing it
1:47
from kind of crossing the finish line
1:50
and being at 100 again?
1:52
Yeah, this is a good question.
1:55
I feel like everyone's talking about this
1:57
within this space.
1:58
I think the answer is just very simply
2:01
that the investor base
2:03
that is setting the price at the margins,
2:07
like the trader base that is doing that,
2:09
it needs to fully rotate over
2:11
to what I would just call long-term holders,
2:15
for lack of a better word.
2:18
When the crash happened,
2:20
I think what happened was,
2:22
first off, you had a lot of leverage
2:23
that was like holding it.
2:27
And then as the crash happened,
2:29
all of these leveraged positions
2:30
were forced out of their positions.
2:33
So who then stepped in?
2:35
It's these distressed buyers, right?
2:37
They're looking for opportunities.
2:39
And what do these people want?
2:41
They're largely not in it for the buy and holds.
2:44
They're in it for the trade.
2:45
So we could call them swing traders for lack of a better term, right?
2:49
So at this point, their swing has reached the destination or pretty close to the destination.
2:55
So now they're getting off the swing.
2:57
So I think it's really just a rotation of that shareholder base that is actively setting the price at the margin.
3:07
Of course, price is set at the margin.
3:09
So whatever activity is happening around the switching between which parties are largely in control of the price and in control of the trading activity, that behavior is going to inform how the price moves.
3:27
So yeah, like ultimately we're getting to a point
3:32
where as it nears par, the buyers that were buying it
3:36
for the trade, they're now getting off
3:38
and they're selling into the buybacks
3:41
because obviously the company is also doing quite a bit
3:44
of buybacks to try to bring it back up to par.
3:49
So yeah, I think that's broadly what's happening
3:51
and you're just gonna see this churn play out.
3:54
And once the churn is fully complete and the buy and hold investors come to largely control the price, that's when I see it.
4:04
That's when we return to power and issuance can resume.
4:09
Yeah, it seems very logical.
4:13
Yeah, I mean, like rewinding back to July when we had the crash, it seemed like the crash, you know, as you previously pointed out,
4:19
was driven partially by leverage traders that were just getting liquidated on DeFi,
4:26
but also on normal TradFi brokerages.
4:30
Do you think that that leverage is rebuilding again or no?
4:38
I think because of the way strategy handled this crisis,
4:43
I think it won't rebuild to the point that it did last time.
4:48
Okay, so let me go into what exactly they did.
4:52
So they, for one, and this move I largely support and agree with,
4:57
I think they made the right move here, which was to not raise the dividend.
5:03
They decided to do buybacks, which is kind of a dividend in another way.
5:08
We could talk about that later.
5:10
But just that piece in isolation to forego raising the dividend
5:16
in order to bring the price back to par,
5:18
that I think was a really good decision and it really discourages that type of moral hazard if
5:26
you will that that would obviously result if you do promise to always raise the dividend to bring
5:33
that price back to par at all times so in that sense like this probably discourages the same
5:40
amount and extent of leverage build up that happens I guess another kind of variable which
5:46
I hadn't thought of before, but just pop into my mind just now.
5:49
The float is now 20% less than it was before.
5:53
We had about $10.5 billion worth of STRC pre-crash.
6:01
And then now we're almost at par, but now we have about $8.5 billion worth of STRC.
6:10
So it's like the float literally decreased by about 20%.
6:12
percent um that probably also plays um some kind of role into it right um so yeah like
6:20
ultimately the leverage i don't think it'll build up to the extent that it did before
6:26
but i'm not ruling out um you know the possibility that something like it could happen in the future
6:34
because uh obviously this is a very good instrument in terms of its ability to pay
6:40
yield in a stable fashion and I would say a sustainable fashion and that just encourages
6:46
leverage over time. So I think something like this could happen again but the near-term effects of
6:52
the response by the company has been favorable towards discouraging like immediate leverage
6:59
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7:04
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7:09
support us is simple like this video and subscribe to the channel that's it now back to the conversation
7:15
yeah i kind of want to get in you brought up buybacks you brought up like the possibility
7:19
of them raising the dividend rate which you know as of recently they did not and it seems like they
7:24
seem committed to to kind of not doing that to keeping it steady as is when it comes to like
7:29
those two tools how do you think about those in particular like when should one be used why would
7:37
you pick one or the other and how does it you know relate to the par target price yeah um so
7:46
buybacks and dividends are very much uh they're economically they could be economically considered
7:55
the same thing in that in both cases the company has it had cash and then it gave the cash over to
8:03
some shareholders so now the company no longer has cash so in that case like they are economically
8:09
identical in so far as how many cash left the company okay the difference between them results
8:18
in a few things the one is like in the case of a dividend obviously the investor has to pay a
8:24
separate income tax now in the case of digital credit this is mitigated by the rock status of
8:30
which is, you know, so that's good, right?
8:33
That allows for that equality between buybacks and dividends to become more persistent In in the case of uh and so with buybacks you also have um so the other difference i would say is is it goes into the heart of what the which investors
8:55
actually get the money right so the dividend is the investors that hold get the money and the
9:02
buybacks is the investors that sell get the money.
9:06
So like deciding between buybacks and dividends
9:09
is really like picking,
9:11
okay, which investor base do I want to give the money to?
9:14
Because either way, the money is going to leave the company.
9:17
So it's like which investor base does,
9:19
like actually gets the money.
9:21
Now, personally, I would like to reward
9:23
the investors that hold.
9:25
I don't want to,
9:26
but I probably don't want to
9:28
to reward the investors that sell, right?
9:31
So to that point, like that's one point towards dividends.
9:37
With buybacks, the reason why like traditionally
9:41
why companies might do a buyback
9:42
is because of some of the signals of sense, right?
9:45
So why would you do a buyback?
9:48
Well, the signal sent is, well, the stock is undervalued
9:52
and that's why I do a buyback.
9:54
So that also is another part of it.
9:57
With dividends, you know,
10:00
like in terms of digital credit their credit instruments they're supposed to
10:03
pay on some kind of coupon or dividend or interest right so so this is something
10:09
that's very natural but outside of preferred stock you might have let's
10:14
just call them a common stock of ordinary corporations dividends is also
10:19
kind of viewed unfavorably sometimes because dividends might be associated
10:25
with okay the company is running out of reinvestment that's why they're paying
10:29
the dividend so so that's like another connotation of it within the traditional
10:34
analysis of of investments and companies so like that's kind of the
10:42
distinction over there as it relates to digital credit yeah like I think because
10:49
buybacks and dividends from an economics perspective it's still just
10:54
cash leaving the company and it's just based on which investors actually get
10:58
the cash um this becomes an important question because you do have to ask okay how much buybacks
11:06
is too much and i would actually argue that um frankly they didn't need to do uh buybacks at all
11:15
like i i don't think it was good to do the amount of buybacks that they did because functionally
11:23
what's going on is you're creating a total shareholder yield on strc and let me just define
11:30
total shareholder yield remember how i talked about cash leaving the company so cash leaving
11:36
the company would just be the numerator for that total shareholder yield number and then um well
11:43
specifically it'll be cash leaving the company and entering into the pockets of that class of
11:47
shareholders that's your numerator and your denominator is just you could call it the market
11:53
cap of that class of shares right so that's your total shareholder yield so it basically includes
11:59
both dividends and buybacks now your total shareholder yield is uh i mean if you annualize
12:06
the numbers it's something crazy it's like far higher than like 60 apr um based on like you know
12:13
all of the buybacks that have happened already.
12:16
So you could think about this as like,
12:18
you know, are you using a,
12:21
are you willing to use a total shareholder yield
12:24
of like over 60% in order to bring the instrument
12:29
back to par, like in this short amount of time?
12:33
You know, like for me personally, right,
12:35
when I answer this question, I would say no,
12:37
like I would definitely not be willing to do that.
12:39
But, you know, like I think every company is run in their own unique ways.
12:45
And this is just something that management feels is appropriate.
12:49
So that's what it is.
12:51
So I guess like in a perfect world, your perspective would have been buybacks can be okay to like send a signal and kind of show like, hey, market, we think this is undervalued.
13:04
But you don't necessarily need to overdo it.
13:07
And it seems like you may think strategy has kind of overdone it.
13:11
But you also don't think that they should have necessarily raised the dividend rate.
13:15
Is that kind of a correct summary?
13:18
Yeah, exactly.
13:19
Like in terms of the buybacks, I think STRC is the wrong instrument to do the buyback on.
13:25
Like there's stride, which is very low below par.
13:29
There's strike, which is very low below par and has an option to convert to common.
13:34
so like both of these instruments are far far far more accretive to do a buyback on like at
13:42
current prices right um now like you know when strike when stretch had corrected all the way down
13:50
to like 75 um when it was like around lower 80s i i had written a post i was like yo we should
13:57
definitely just like take the cash reserve and just do a buyback right now on stretch of course
14:02
because at that time they didn't have
14:03
the digital credit monetization program.
14:06
So when it goes down to something like 80 cents on the dollar,
14:10
yeah, I think now it's very appropriate
14:12
to do a buyback on that.
14:13
But right now we're talking about buybacks
14:16
at like just 2% discount from par,
14:19
which I think, you know, obviously this is somewhat subjective,
14:23
but I think 2% off from par is pretty,
14:27
it's pretty low of a discount to be doing a buyback on.
14:32
Yeah, I mean, I think last week, strategy spent a lot more capital buying back STRC than buying Bitcoin. It may have been like nine times more dollars were devoted to STRC rather than Bitcoin. Like, at what point should or would common shareholders get concerned about that?
14:52
I mean, I think, I feel like that's a really difficult
14:58
and almost like a personal question in a way,
15:02
but it's like everyone has their own point for this.
15:06
I think just in general for management, right?
15:11
And it's also not completely in my place
15:13
to make this suggestion
15:14
because I'm not sitting in that seat.
15:17
But I just think in general,
15:19
like for an investor looking into this,
15:21
I would want to make sure that every dollar spent efficiently, right?
15:25
So like I don't want to see any waste basically.
15:29
If we're talking about buybacks at, you know, 98 cents on the dollar,
15:34
I would just, I would think that is waste.
15:37
So I wouldn't even want a single dollar of buybacks like that, right?
15:42
But again, that's every investor kind of makes that decision.
15:45
And if you are an investor, you've by default delegated that decision making to management, right?
15:51
So that's just how it goes.
15:55
Yeah, that makes sense.
15:57
A topic that I've seen like CJ, who I greatly admire at Strategy, kind of bring up recently is the idea that once the dividend rate or dividend yield reaches a certain level, it can kind of turn some investors off.
16:11
Do you agree with that or do you disagree with that?
16:14
Yes, I absolutely agree with that.
16:16
I think it even goes back to what we were talking about at the very start of this call,
16:23
your first question.
16:25
Basically, like, who were the buyers initially?
16:30
It was probably people super attracted to the yield.
16:34
They also thought that, oh, the yield will just keep going up if it goes down from 100.
16:40
And so I will be covered no matter what.
16:42
So I'm just going to leverage loop this thing.
16:44
So it attracts a crowd that behaves like that if you put the yield too high up.
16:54
So I think like, you know, your traditional buy and hold investors who just want something
16:59
stable and doesn't want anything too crazy, they're going to look at that, feel a little
17:04
suspicious, and they're not going to go for it.
17:06
And then the crowd that you do attract are going to be the people that will create a
17:12
market environment and a set of market conditions that allow for greater volatility which you did not want for your credit instrument So I think what CJ is saying over there is completely on point
17:26
Yeah.
17:28
Yeah.
17:29
Thinking back to, so like back in June, July,
17:33
when digital credit was kind of crashing,
17:36
like definitely makes sense that a lot of,
17:39
you know, speculators got in, people leveraged up.
17:43
They were for sellers at a lower price.
17:45
do you think the market will over time like learn from that like in hindsight i should have bought a
17:51
lot of strc and digital credit at the bottom because there were a lot of just four sellers
17:57
for no real underlying like credit like the credit wasn't necessarily getting worse the dividend you
18:06
know the dividend reserve still there was being added back the the bitcoin balance sheet was all
18:11
still there is really just in hindsight for sellers that were having to sell at the bottom
18:17
well next time this could possibly happen would the market not learn or would buy new buyers step
18:25
in this time that may not have stepped in last last time yeah i i think that's an interesting
18:31
point and um it can definitely happen like that uh it also doesn't have to happen like that so
18:38
That's all I can really say on that.
18:40
I think it's like we can say maybe it will end up a little bit different next time
18:45
and maybe it won't, which I know it's not that useful of an answer.
18:51
Where do you see digital credit going from here?
18:54
You mentioned STRC hit a little over $10 billion.
18:59
It's now back to $8 billion.
19:01
Obviously, Strive, we've made a lot of movements recently in the digital credit space.
19:06
Do you see this continuing to grow exponentially?
19:09
Do you see a lot more capital coming into the space?
19:12
How do you kind of see this playing out
19:14
over the coming months and years?
19:17
Yeah, like I'm very bullish on the entire concept.
19:24
I said this in the last time we had this chat.
19:27
Like the entire concept is extremely sound.
19:31
Just the idea that you have an asset that does really well, and then you're now issuing credit against that asset to buy more of the asset that does really well.
19:42
This works and it mathematically makes sense.
19:47
And like all the real risk is in the different implementation details, like how in the many different ways that you could mess it up.
19:57
and there's also many different ways where you could do really well with it so you know I think
20:05
largely I don't I don't think the the actors in the space right now are making like just
20:14
terrible decisions I think all the decisions are largely good like for example like Strive
20:21
expanding out into SATs is I think that's a really good decision I don't
20:26
think you should be locked down into a single instrument and ideally you want a
20:32
fixed rate type of instrument and also a variable rate instrument and it speaks
20:37
to different kinds of audiences right just raising more capital from different
20:41
investor profiles so and you have also like the implied entry of metaplan it's
20:51
into the space as well, right?
20:52
Like they are now, they have a US entity.
20:55
It looks like they tried to make the prefs work in Japan
20:58
and they realized it's easier actually
21:01
to just take over a US company
21:03
and then issue it in the US.
21:06
Yeah, so there's many of these moves that are happening.
21:09
And I think ultimately these are varieties
21:13
of financial products.
21:14
And when you have competition like this,
21:16
you create better products for the market, for consumers.
21:20
so that will be kind of how this goes as well and so the overall trend of digital credit i think is
21:27
it's very positive um outlook for it um there's also these layer three solutions like i guess
21:35
like we'll just call them layer three solutions right with digital money and digital yield
21:39
these are products that financial products that are now being built on top of
21:44
digital credit. And I think there's a lot of different implementations of it. I actually
21:50
published a research article on Bitcoin for corporations, specifically talking about these
21:56
things and just looking into the different archetypes of the L3 solutions that we're seeing.
22:02
And it's very, very interesting. And there's a lot of room for creative entrepreneurs to come in
22:09
and create useful things in that space as well.
22:13
And so you can think about that as an auxiliary ecosystem
22:16
that exists on top of digital credit
22:19
and it's going to amplify the effect
22:22
and overall influence of digital credit, right?
22:25
So all of these things are extremely favorable for it.
22:29
I don't see anything that's like very dangerous
22:33
besides, I guess, like just poor implementation practices.
22:38
But I also think it's tough to like do something really wrong here because it is kind of like a simple concept.
22:47
So just do the simple stuff really well and make sure to have integrity and people don't lose trust.
22:53
It should be OK.
22:56
On the topic of the layer three kind of products that are being built on top of digital credit, you know, digital money, digital yield.
23:04
Is there anything in particular that like really captivates your interest?
23:09
Is there any particular model that you're like, wow, that could really catch on?
23:13
And are they built yet?
23:15
Are they not built yet?
23:17
How are you thinking about that?
23:19
Yeah, this is a very interesting topic because so right now I would say I've broadly stratified
23:32
the different implementations into two archetypes.
23:36
Okay, so, and I'm basically naming them,
23:39
like, but others might think fit differently,
23:42
but this is just like my names for them, right?
23:43
So like type one, I would call them debt-based tronching.
23:49
Okay, so debt-based tronching, and that is just,
23:52
there's some credit quality,
23:55
sorry, credit quality is the wrong word,
23:57
but like there's some aspect of credit
23:59
that is involved over here,
24:00
where somebody is borrowing something,
24:03
the collateral in this debt-based tranching architecture
24:07
is the digital credit instrument.
24:10
And the tranching nature of it
24:12
is that you have a senior tranch and a junior tranch.
24:14
The junior is leveraged long, the underlying collateral.
24:18
The senior is principal protected
24:19
via the junior's presence of capital.
24:22
It's really just the Bitcoin treasury company model,
24:25
but duplicated one layer up, right?
24:28
So Bitcoin treasury companies, the junior tranche is your common equity, your amplified Bitcoin.
24:35
Your senior tranche is your preferred equity, right?
24:40
So like preferred equity is more principle protected as senior and you have the stable dividends, right?
24:47
So that same architecture of tranching, you just apply it one level up, replace the Bitcoin with the digital credit.
24:57
and now you have the two things that result from it is what like Michael
25:02
Saylor for example has called this digital money and digital yield the
25:05
digital money is your senior tranche that is created via the structure then
25:10
digital yield is your junior tranche it's like this amplified yield of the
25:15
digital credit amplifying digital credits yield that's your junior tranche
25:19
and a higher risk higher return so that's that's that implementation in and
25:28
of itself we have seen a few different versions of it pop up right so so like
25:33
to just go on to the examples UTXO management has a fund but it's preferred
25:41
income fund where it has a portfolio of digital credit instruments it also runs
25:47
potentially alpha generating strategies on top of it.
25:51
And it's a dual class fund.
25:53
So you have a senior, you have a senior class
25:56
and you have a junior class And the senior class has a pretty principle protected and stable seven and a half percent apr right and then your junior tranche or your junior share class um is effectively leveraged along
26:10
the underlying digital credit strategy of the fund so that's one implementation of your debt-based
26:19
tranching structure right another implementation is what's going on in tokenization and in defy
26:26
So for this one, there's like Saturn and Strata.
26:29
So Saturn creates the tokenized STRC
26:33
and the Strata creates basically the tranching structure.
26:38
That's the name of the protocol.
26:39
It's likely just a nod to the fact
26:41
that it stratifies the risk return profile.
26:44
That's why it's called Strata
26:45
into a junior tranch and a senior tranch.
26:49
And the senior is the digital money.
26:51
The junior is the digital yield.
26:53
So that's another,
26:54
it's also the same concept of debt-based tranching but it's done using a different wrapper it's done
27:01
using a different um structure right utxo is a regulated hedge fund structure uh with strata
27:06
plus saturn this is a smart contract on crypto rails um so that's debt-based tranching right
27:13
archetype one and i'd say like archetype two is what i call um full reserve spendable balances
27:22
and this is really just when i say full reserve this does not imply that the last thing is
27:31
fractional reserves right it's not like that and when i say full reserves i just mean that
27:36
the shares are held in an unencumbered way and the spendable balance of the cash value that
27:45
you know is available to you for use is fully backed one-to-one by existing unencumbered shares
27:53
held on the spot right so so one example of this um you know like so i would say this right like
28:00
we're not seeing um i guess exact versions of that as i described but i would say there's
28:07
softer versions of that so one softer version of that might be a digital credit etf so like orange
28:14
BTC they just came up with this digital credit ETF launched in Brazil it holds SATA and STRC
28:21
it uses a future strategy to do a currency hedge to pay the yield in Brazilian reals so that is
28:30
that that's that's a full reserve spendable balance type of structure because none of those
28:38
shares are encumbered in any way and they represent an asset value that is fully backed one-to-one by
28:46
the existing shares held on the spot and you are able to somewhat spend from it because at the very
28:52
least you can sell the shares move the money to a bank account and now you can spend from it
28:56
right so uh i guess technically you could also say like saturn itself is a version of that because
29:02
if you tokenize the STRC and then you don't put it into a stratifying protocol now you have the
29:10
raw STRC tokenized and it becomes spendable because theoretically you could send that token
29:15
to someone else right so all these things are kind of emerging those are the two archetypes
29:21
that I think is like important to monitor and yeah it does seem like the debt-based
29:29
the debt-based tranching structure, archetype one,
29:33
is the thing that is seeing a lot more usage right now.
29:39
Yeah, that makes perfect sense.
29:41
Do you foresee like a third or fourth archetype ever emerging?
29:46
Like, is there any other possible structure or concept that you can imagine?
29:52
Or right now, is it basically limited to those two ideas?
29:59
of more uh i think i think like anything though will probably fall into those two categories
30:07
because all i've really said is like uh are the shares encumbered or not right like um and if
30:15
they're encumbered then there's some kind of debt-based nature to it um and if they're
30:20
unencumbered then it's some kind of like this full reserve nature to it so i i think it would
30:25
probably fall into one of the two but i'm definitely open for a third category and like if
30:30
someone watching this would like to comment on that like i'd be very happy to consider it right
30:35
i like it um yeah earlier you brought up you know the the difference between these variable rate
30:43
preferreds and the fixed rate preferreds obviously like stretch and and say that very popular with
30:50
variable rate strive obviously then come back just came out with a new fixed rate which market
30:56
do you think is larger is it the variable rate or the fixed rate at a high yield
31:02
um i think the data shows the fixed rate is higher i think generally people like fixed rate
31:13
more and the idea of it is it just seems more certain and I think income like if you're going
31:20
to invest in income in the first place you're probably going to want something that is more
31:27
certain and and if the dividend if the nominal dividend payment is like set in stone then I
31:33
think that just makes people feel better about the whole situation so so I think that is like
31:39
the praxeological reason for, you know,
31:43
why fixed is probably more preferred.
31:45
And then just, it seems like most credit instruments
31:49
out there are in fact fixed.
31:51
Like a bond usually is like a fixed coupon, right?
31:55
Or a preferred stock, frankly,
31:57
most preferred stocks that are fixed dividends.
32:00
So even like a company, for instance,
32:03
if they were to issue a dividend
32:06
and they want their common stock
32:07
to kind of be within that category
32:10
that kind of competes with fixed income,
32:13
then they would try to put out a high dividend,
32:16
make sure that they have the proper payout ratio for it
32:20
and they can cover it and make it reliable.
32:24
There's a whole category of stocks,
32:27
at least in the US, called dividend aristocrats.
32:30
These are companies that have paid dividends
32:32
for a very long time.
32:33
And I think there's even a category
32:36
for if you consecutively raise your dividends over time.
32:39
So that concept of having something fixed,
32:42
it's not gonna change,
32:43
or at least it's not gonna change by going down.
32:45
If it goes up, like the investor is happy with that.
32:48
But that entire meta of it's gonna be fixed
32:54
and there's gonna be no variation to it,
32:58
that's probably much more attractive
33:00
and the market for it seems to be much bigger.
33:04
Yeah, I mean,
33:05
thinking about like the variable rate concept of digital credit,
33:10
you know, it's like the value from that,
33:13
I'm curious if you agree with that,
33:15
the value from that is like,
33:16
well, how much of a low vol product can you actually create, right?
33:20
Like, you know, I remember before the STRC collapse,
33:25
you know, they would,
33:26
Sailor might post something along the lines of,
33:28
hey, like this was a zero vol asset over the last seven days
33:33
or the last 30 days.
33:35
And, you know, obviously then it wasn't a zero vol asset.
33:40
And so do you think that like, would the variable rate,
33:44
like could it be much larger if it can actually maintain
33:47
like not a zero vol or ideally zero vol,
33:50
but like very low vol?
33:51
Or is it, that's not that important.
33:55
What's more important is like,
33:57
can you just pay a high relative yield?
33:59
Doesn't matter if it's variable fixed.
34:00
Like that's kind of the key idea.
34:02
um yeah i think it's like this though that i don't know if there the attraction of it was
34:11
because of the variable rate i feel like it was more so because of the promise that
34:18
we were going to try to hold the price very close to 100 and it's that idea of if i want
34:25
to be out of the position i can reliably get my principal back right so so now it's like i'm kind
34:32
I kind of have the security of a bond in that, like, you know, I could probably sell a bond
34:37
at close to face value, assuming the issuer is very credit worthy.
34:42
but like I could probably get it at face value
34:46
or a discount to it subject to the time value of money, right?
34:51
But because this is a perpetual instrument,
34:54
they were going to use financial engineering
34:56
to ensure that that was possible.
34:58
So I think that was the core attraction,
35:01
not really the fact that it was variable rate
35:04
or even that it was high rate, right?
35:07
I do think high rate is attractive
35:08
But I think the main selling point of it was just this thing's always going to be at $100.
35:15
That is, that's very attractive.
35:19
And if we go back to the idea of certainty, right?
35:23
So all we've just replaced is like we've replaced the certainty of income with the certainty of the principal price or the spot price or whatever spot price will exist in the future.
35:35
So we've swapped out one version of certainty for another.
35:40
And I think that was attractive because what really happened was there was another version of certainty that people really liked, the certainty of price, which I think that's very attractive.
35:53
Now, sorry, what was the second part of that question?
35:56
really just breaking down like what is attractive in these instruments whether it's like the
36:02
variable rate the fixture rate um yeah yeah yeah i mean the other thing is like you know your tax
36:09
um the tax implications for return of capital um if you do the after tax math the east are
36:18
pretty much one of the best uh credit instruments you could be holding and i think right now
36:23
especially you benefit from just how misunderstood it is so there's this higher credit risk premium
36:32
that's put into the dividend rate so i do think digital credit investors today are probably like
36:38
being overcompensated for the risk that they're taking i think in actuality the risk isn't that
36:44
big but the return for taking on that risk right now is quite big because of how the market is right
36:51
now so there is a you know there's that like early after um opportunity over here um you know
37:00
and in the in the long term like i expect the the variable rates would probably be able to come down
37:06
without interrupting the price uh but the fixed and this is what makes the fixed rates really
37:14
important it's it's that you know if you think the variable rates are going to come down
37:19
then what you want to be buying for the long term is to fix them.
37:24
How do you see the variable rates evolving?
37:27
Like kind of like we talked about, strategy seems adamant, you know, not adjusting it.
37:32
Both Strive and strategy, you know, want their variable rate one to be at 100, be at par.
37:40
Do you see rates dropping over time as Bitcoin goes up?
37:44
Do you see rates rising?
37:46
How do you see that evolving?
37:47
yeah i mean i think it's it's very possible for it to drop um now in the past i have said that like
37:56
if it doesn't like in the past i've said this like i've said like okay if it doesn't drop it
38:02
means that these instruments did not succeed i think that might be a little bit strong um
38:08
although i still kind of subscribe to that view in some way i think that ultimately um obviously
38:14
we want the instruments to be extremely attractive and if it's extremely attractive then people will
38:19
buy it and if the demand is big enough it means that you're able to lower the rate and you'll
38:26
still have sufficient demand to meet your issuance your issuance desires right so that becomes
38:33
ultimately the the test like if you get to a point where the demand for these instruments is so big
38:40
you can always just sell at 100 and there's a point where you don't even want to sell more
38:47
because you don't want the BTC rating to get too low so the only lever you have left is hey look I'm
38:53
gonna have to lower the rate guys and then you guys will figure it out amongst yourselves and
38:58
that becomes like an option that the company can pull now that being said like I do agree that
39:04
where things are right now it could probably stay at these rates for a very long time
39:09
just because one, I think a lot of the investor base
39:14
at the very least has an understanding
39:17
that these rates should be like this for quite a long time So if that understanding is ever reneged upon then now you create a potential issue
39:28
So keeping the rate where it is
39:30
becomes an important thing
39:33
to maintain market stability, right?
39:37
But as that base kind of shifts over time,
39:40
as the instrument grows
39:41
and you have more people buying it
39:44
and more people being able to look at its long track record,
39:48
and that only comes with time.
39:51
But like once you have that situation,
39:53
now you can freely lower the rate.
39:56
And if you can freely lower the rate
39:58
and not have the price become impacted,
40:02
then this is something that obviously makes sense to do.
40:05
Because like, why wouldn't you reduce
40:07
your cash obligations, right?
40:09
So yeah, does that make sense?
40:13
Yeah, it does.
40:14
I'm curious, how has your thinking evolved
40:17
on how you evaluate like the risk of these dividends not being paid at some point in the
40:24
future like you mentioned btc rating is is that like one of the primary metrics that you look at
40:29
is it years of dividend coverage is it like specific investor protections that are unique
40:35
to each instrument how do you evaluate the risk um yeah so i put out a paper on
40:45
at Bitcoin for Corporations.
40:48
It's called like the quant framework
40:49
for digital credit risk.
40:51
And this is something that like
40:52
anyone can go and download.
40:54
It's free.
40:55
And really I've like,
40:57
what I've done with this paper
40:59
is I decomposed the yield
41:02
into different categories.
41:05
So obviously yield can be decomposed in this way
41:08
because yield itself is just compensation
41:11
for taking on risk.
41:12
and the first category is just the risk-free rate so once you subtract that out the remaining
41:20
is the risk premium and the risk premium has to come from certain risks that you take on
41:25
i'd say the main risk uh though i i would say this right like i use main risk i don't mean this as
41:32
the biggest risk i'm just saying main risk as the perhaps the first risk that comes to people's mind
41:38
would be the Bitcoin risk, right?
41:40
So this is the risk that Bitcoin seriously underperforms
41:43
and it makes these credit instruments
41:48
like undercovered from an asset coverage perspective.
41:51
So that is Bitcoin risk.
41:53
And I think I would argue that Bitcoin risk
41:55
is best measured by looking at the options market for Bitcoin.
42:01
And you have like options market now through IBIT
42:05
that go two years out.
42:07
So you can look at the options on IBIT that expire in two years at a put strike price that corresponds to the current BTC rating of the instrument.
42:22
So give an example of what that means.
42:24
Let's say you have a BTC rating of 2x.
42:26
This means you need Bitcoin to cut in half in order to be undercovered.
42:30
So what is the put option?
42:32
how much insurance do you have to pay
42:34
in order to insure against that happening
42:38
so that would be the put option
42:41
that is 50% out of the money
42:43
that expires in two years
42:44
and you could take that number
42:46
and you could turn it into a measurement
42:49
of the implied risk that you'd be paying
42:53
that you'd be getting paid
42:55
in order for you to take the Bitcoin risk
42:58
and if you take out the Bitcoin risk
43:00
what's left as risk
43:02
Well, now it's like governance-related risk.
43:07
That's probably a big one.
43:08
And that's, I think, more so gets to the heart of your question, which is the question about dividends, right?
43:16
For this, I think also a part of that can be relegated towards Bitcoin risk.
43:23
because I would argue that if Bitcoin has a really bad time,
43:27
then governance is such that like it almost forces their hand
43:31
to have to suspend dividends.
43:33
But of course, if you have a cash reserve,
43:35
then now that becomes something that changes that calculation.
43:39
So that's kind of how I see all of the moving pieces, right?
43:43
And I think when you adopt that kind of framework,
43:46
you can now look at the risk
43:49
and slap specific labels and quantities into,
43:55
first off what kind of risks are you willing to tolerate And then whether you believe you being compensated adequately for those risks that you do tolerate So governance is important
44:09
The Bitcoin forward-looking price is perhaps the most solid,
44:13
quantifiable thing that you could put a number on.
44:18
The cash reserve, I think of the cash reserve like this.
44:21
It's like the cash really is just options that the company has.
44:26
but I don't like I also feel like it's one of those situations where if the cash if it really
44:34
comes down to the point where you know you have to start using the reserve to pay the dividend
44:38
we're already in a really bad spot and you've probably you're probably like underwater on on
44:44
the price of the digital credit instrument so that also like I don't really know I haven't thought
44:50
much about like how to really think through that when when you're basically already underwater so
44:55
now it's almost like, okay, even if I'm still getting paid the dividend, there might be an
45:02
aspect of, oh, who cares? Because I'm already down maybe 30, 40, 50% on the underlying credit,
45:07
right? So that becomes a different conversation over there. But I think ultimately, you have,
45:16
again, the idea of the digital credit and the way it is structured, everything is a very sound
45:23
concept because you have this capital asset that we think is going to do really well.
45:28
And if you don't think the underlying capital asset is going to do really well, then this
45:33
just is not the asset class for you to begin with.
45:37
So I don't know if I completely answered your question, but like, what do you think?
45:43
Yeah, no, I think you did.
45:44
I mean, you brought up Bitcoin risk, which I agree.
45:47
Like that's the there's certainly a multitude of risk for all of these instruments.
45:52
But one of the critical ones is obviously Bitcoin.
45:57
Like, is it going to appreciate over time?
46:00
What degree is it going to appreciate over time measured in dollars?
46:06
Where are you thinking now around Bitcoin?
46:09
Like, is it entering a bull market?
46:14
Like, where's Bitcoin going to be in a few years?
46:17
And like, kind of like, why do you think that?
46:18
I'm bullish on Bitcoin.
46:23
I'm still very, very bullish on Bitcoin.
46:24
I see it as in the last, let's just call it like 18 months,
46:31
like Bitcoin has obviously been the weakest asset out there,
46:35
weakest macro assets.
46:37
Everything has really done well.
46:40
Bitcoin hasn't done well.
46:42
And it's just one of those things where I think capital markets moves
46:45
in these like ebbs and flows.
46:47
I don't want to use the word cycle here because like I feel like someone might think like that's what I'm saying
46:52
It's not what I'm saying. Like what I really just mean is
46:55
Some like at any given moment in time if you look in the last one year
47:00
You're gonna have a rank up of assets of like what did well, right?
47:04
Like you might have silver has done really well or gold has done second best and then like S&P 500 has done this much and then
47:10
International stocks next right and and you'll always have this rank up and
47:14
And right now, when we do this rank up, Bitcoin has just done the worst.
47:19
And I think that ranking always changes.
47:23
And that's kind of what I mean.
47:25
Like there's these ebbs and flows where right now, Bitcoin is just at a very weak position
47:31
compared to the relative performance against the other macro assets.
47:36
So it is like relatively more oversold than everything else.
47:42
that's to me like it's like this is where you would buy it because this would be a relative low
47:48
type of situation right so you want to buy low and you want to sell high um so that's kind of
47:55
that's kind of how i see it right now for for the next uh year or two right so this is
48:01
we're in the lows and the upside right now is good because theoretically two years from now you
48:08
would do the same look back and Bitcoin would now be ranked very high on that list. Does that kind
48:15
of make sense? Like if that list is constantly changing, then two years later, if Bitcoin's
48:19
ranks really high on that list, you're talking about Bitcoin outperforming. So that's kind of
48:24
like the two-year outlook. I think it will outperform like basically all other assets just
48:29
because it has underperformed all other assets very recently. Now, if we go further out than that,
48:37
I think the macro becomes really important because the like the U debt situation I feel like everyone talks about this and you know agree with that discourse It just it not sustainable and ultimately they gonna have to print a bunch of money
48:51
and Bitcoin is the only thing that's scarce.
48:55
It's the only real thing that is scarce.
48:58
So that has a very powerful long-term macro tailwind
49:03
behind it just by that.
49:05
um there's also the tailwinds of so right now you have banks are starting to offer you know ways to
49:15
buy bitcoin they're partnering with crypto infrastructure providers to custody bitcoin
49:21
and stuff like that all of these things are all these things are ways for bitcoin to gain a greater
49:29
foothold within the traditional financial system and as that happens you inevitably get to a point
49:36
where you know the the the way people think about risk around the asset and all of the metrics and
49:44
all of the um institutional herding behavior around this asset they all start to work in
49:51
bitcoin's favor and i think one very solid place where where i think we can eventually start to see
49:58
progress is in the basal risk weightings so i think as the basal risk weightings become friendly
50:04
towards bitcoin um now this becomes an asset that banks can start to hold on their balance sheet and
50:11
not be penalized heavily for and so that becomes a very big um catalyst so that's kind of secondary
50:18
to i won't call it secondary but it's like it's orthogonal to the um other catalyst of the macro
50:25
tailwind right that is a specifically bitcoin specific catalyst because bitcoin right now is
50:32
in a relatively weak position compared to other assets insofar as acceptance and as acceptance of
50:39
it as widespread acceptance of the increases um that also becomes a very big tailwind so
50:45
i think all of these forces are kind of coming together and yeah like it bodes really well for
50:52
Bitcoin. And of course, like, you know, the topic of our chat, digital credit, it's another thing.
50:58
It's just another avenue that's kind of bringing more money into Bitcoin and giving Bitcoin another
51:04
tailwind. So, yeah. Yeah, I think that's a good way to frame it. There are a lot of potential
51:11
tailwinds for Bitcoin. Allard, this has been a great conversation. Do you have any like final
51:17
closing thoughts you want to leave the audience with?
51:19
uh no man like i you could give me something to talk about but like i not nothing off the top
51:30
yeah well i think i think we covered a lot like we covered digital credit we covered bitcoin so i
51:36
think this is probably a good spot to close it out but uh i appreciate you coming on again i think
51:41
this is a another great conversation we went in depth into a lot of uh different subtopics within
51:47
digital credit which is great yeah for sure um yeah i'm really excited about this stuff and
51:53
yeah there will be more content and research notes that we have coming out at bitcoin for
52:00
corporations especially around um just digital credit and the stuff being built on top of it
52:06
i guess one thing i could mention is uh about msci like obviously they decided to um do what they did
52:14
at Bitcoin for corporations, we kind of fought the fight against them.
52:19
In this case, they ended up deciding to throw out the treasury companies anyway.
52:25
You know, ultimately, these are things that, these are just problems that will come and go.
52:32
We are coming up with like indexes on our own.
52:37
So like we're pioneering this digital credit index.
52:40
You can kind of see it on the website right now, Bitcoinforcorporations.com.
52:45
As more digital credit instruments come into existence, they'll eventually be added to the index.
52:52
And you can kind of track the positions, track these performances over time.
52:57
And it's a very, it'll be a valuable thing to have, I think, in the space because the existing index providers seem to be not friendly to Bitcoin right now.
53:08
so it is an important resource for us to have these types of things
53:12
agree that'd be great and I definitely look forward to reading your next research report
53:20
you put out a lot of good stuff so Allard thanks so much this has been this has been awesome
53:24
thanks Joe