Latest / The Income Show / BITCOIN IS DOWN 50%. WHAT IS HAPPENING? | The Income Show | Ep. 5

Transcript

BITCOIN IS DOWN 50%. WHAT IS HAPPENING? | The Income Show | Ep. 5 · The Income Show

0:00
It's the bear market year. This is what happens. I'm not too worried about it. These are the best
0:03
times to stack Bitcoin if you're going to buy Bitcoin. Something very specifically happening
0:07
right now, which is a CapEx build-out of AI. And this is a once-in-a-epic type of thing that I think
0:14
if we're not happening right now, tech stocks would probably be much lower than they are.
0:18
What risk-free rate right now is entirely dependent on government printing money.
0:22
Government issues treasuries, has a coupon on it. Where does that coupon come from? Printed money.
0:26
Yeah, maybe someone comes from taxes, but for the most part, printed money.
0:30
Hey, everybody.
0:40
Welcome back to The Income Show.
0:42
This week I have on Brian Brookshire.
0:44
Brian, welcome.
0:45
Thanks for having me on, Joe.
0:46
It's good to talk to you and catch up again.
0:49
Absolutely.
0:49
Great to have you on the show.
0:52
Brian, I kind of want to start out with what we're seeing in markets.
0:55
you know we've seen bitcoin sell off pretty substantially and for for the audience we're
1:01
recording this on june 4th this will probably get published next week so maybe a week from today
1:07
um but as we're thinking about markets today on june 4th you know bitcoin has sold off pretty
1:12
substantially and even digital credit has has started to sell off obviously not to the same
1:17
degree as bitcoin but uh it has sold off as well brian like how are you thinking about bitcoin and
1:23
digital credit in this moment? Sure. I think, you know, whenever Bitcoin has these days where it
1:28
sells off 10%, everyone feels like the sky is falling, the world is ending. But, you know,
1:32
Bitcoin recovers, it bounces back. You know, in a couple of days, a lot of people feel as bullish
1:38
as they ever did. So, you know, it's the bear market year. It's what happens. I'm not too
1:45
worried about it. These are the best times to stack Bitcoin if you're going to buy Bitcoin.
1:48
and you know as far as digital credit goes
1:51
you know these are the times when we see also
1:55
you know stretch and these are the times when those tend to sell off
2:00
in sympathy with Bitcoin not too surprising
2:03
but we've also seen those consistently repagged so not particularly
2:08
concerned about those either so you know as far as I see it you know we're just
2:11
we're in one of those windows of volatility that Bitcoin tends to have and
2:15
you know this is the year for for for bitcoiners to stack who like to stack and then you know as
2:22
soon as probably the next few years once we get turned around as another bull market
2:26
everyone will be very happy yeah i mean it's it's definitely you know can feel
2:32
like a lot of chaos in markets uh you know bitcoin's volatility is unlike really anything
2:38
else i guess like how are you thinking about like this bitcoin bear market that we're currently in
2:44
Like, is this a is this going to be a V-shaped bottom where we come back significantly?
2:49
Or is this going to be like we go sideways or even possibly down for, you know, an extended period of time?
2:56
And then we kind of slowly recover.
2:58
Like, how are you thinking about that?
3:00
This bear market feels more like a capitulation in time to me than anything.
3:05
Because it's mostly grinding sideways.
3:08
I mean, yes, it's down from the highs.
3:10
But even where we're at now, it's not even 50%.
3:14
Well, I guess maybe it's about 50% from the highs,
3:17
but it's not the 80% drawdowns we've seen in the past.
3:20
Maybe we go lower.
3:21
I kind of don't think that we really do.
3:23
There's a lot of supporting price structure around that 60K range
3:26
that I think makes it difficult to push much lower than that.
3:30
It's possible we sweep the low.
3:32
But it's hard for me to see us going substantially lower
3:36
than the current range,
3:38
much below that, say, high 50K range.
3:40
I would have a hard time seeing that.
3:42
And I think even that would take a lot of effort to get down there.
3:45
So as far as Bitcoin bear markets go,
3:48
I mean, typically it takes about a year from the previous high
3:51
for Bitcoin to fully reset and for the new bull market to begin properly.
3:58
So if you look at the last high, say that was Q4 of 2025 around October,
4:04
So perhaps around October this year is when the new market will really start in earnest.
4:09
You know, if it happens earlier than that, I don't think anyone would complain.
4:13
But, you know, I think you just you always have to have as your base case that things aren't different this time.
4:20
And so far, in terms of the highs and the lows, timing really is not different.
4:24
It's a little bit more muted than prior cycles.
4:25
But, you know, that's fine.
4:29
Bitcoin is still on the overall up into the right trajectory.
4:32
so yeah that's basically how we see things right now in terms of how this bear market is going
4:37
and my base case is the four-year cycle repeats and you know as soon as we're done
4:46
grinding out this bear market which I think is mostly like I say capitulation and time going
4:51
sideways than it is more so than as big of a drawdown we've seen in the past once that process
4:58
is done everyone's had a chance to stack as much as they want to stack then um then i would you
5:06
know expect next time to not be different and for the bull market to start and repeat the cycle again
5:11
yeah it's that sounds pretty pretty accurate to me as well i mean it it's it yeah it's fascinating
5:18
to just think about you know the bitcoin cycles people obviously said like the four-year cycle
5:23
was was dead now it's like it's kind of here uh and and now we're we're in the spare market
5:30
obviously this is the income show so i do want to ask you a lot about digital credit but i do
5:35
want to ask a couple more questions i think on bitcoin first i think obviously being the the
5:40
foundation of digital credit um like i think one thing that's interesting over the past i don't know
5:47
I guess probably a year or 12, 18 months at this point is like stocks and gold and other assets have done like quite well.
5:55
Yet Bitcoin is kind of, you know, down 50 percent from all time highs.
6:00
And this bear market kind of, you know, if it is bottoming right now, it's not really bottoming in line with other global assets.
6:09
where like historically, you know, look back to 2022 or 2018 or even like 2015-ish,
6:17
like it kind of correlated very closely with like global risk assets.
6:22
But this time it seems to not be doing that, perhaps.
6:25
Do you have any thoughts on kind of like this dislocation between Bitcoin and like stocks and gold?
6:32
Well, I think particularly with stocks that we're seeing the, you know, the risk appetite we're seeing in stocks,
6:39
I think is not like prior cycles.
6:41
There's something very specifically happening right now,
6:44
which is a CapEx build-out of AI.
6:47
And this is a once-in-a-epic type of thing
6:52
that I think if we're not happening right now,
6:55
tech stocks would probably be much lower than they are.
6:58
But as it stands, it's a liquidity suck
7:01
that's just coming from everywhere.
7:02
So that's, I think, part of why we see Bitcoin
7:06
perhaps not be as exciting as it was in 2025.
7:09
also because you know so much capital is being drawn in from the ai trade and you know even just
7:16
looking what's happened in the past few months we didn't really see a major um you know tech
7:23
major you know stock market bottom even though we've had you know war on iran and all these other
7:28
things happening i mean yes the market did good did go down for a little bit um but then it just
7:34
ripped right back up to all-time highs again and so i have to think that a lot of that is just you
7:39
of the AI trade, you know, genuine, genuine productivity improvements coming out of the
7:44
development of AI, you know, pushing markets forward. But, you know, it's not going to be AI
7:50
trade forever. At some point, the stocks are going to get extended. And when people are looking to
7:57
rotate capital, they're going to look around at what's not extended. And, you know, Bitcoin is
8:02
going to be one of those things. Yeah, I definitely agree with that. It does seem like AI is sucking
8:08
a lot of wind out of everyone's sales that's not even remotely near the AI sector, whether
8:13
that's Bitcoin or housing or other various assets.
8:18
One thing that you've brought up recently that I found pretty funny and fascinating
8:23
and I agree with is it seems like there's a segment of the Bitcoin community that is
8:29
bullish on Bitcoin, but then thinks digital credit itself is unsustainable and won't work.
8:37
and you've called it, I think, like Schrodinger's BTC.
8:41
Can you kind of expand on that idea?
8:44
Yeah, I mean, there's a contingent of people
8:47
that are continually posting,
8:48
you know, Bitcoin's going to a million dollars this year,
8:51
it's going to a million dollars next year,
8:52
it's going to a million dollars by 2030.
8:55
Mega candles loading.
8:56
But then you tell them about someone
8:58
who's going to pay a 10% dividend to buy Bitcoin
9:01
and they go, whoa, whoa,
9:02
that's just going to fall apart right away.
9:05
I mean, there's, surely there must be a little bit of cognitive dissonance inside that thought
9:11
process there.
9:12
I mean, if you were going to tell me, you know what, I don't really believe in Bitcoin,
9:14
so this isn't going to work out.
9:16
Okay, that's at least a logically coherent position.
9:18
If you're going to say, okay, I just don't think Bitcoin will appreciate it 10% per year.
9:22
You know, I like it, but I don't think it's going to appreciate 10% per year.
9:24
Okay, that's a logically coherent position.
9:27
But, you know, don't tell me you think it's going to a million dollars next year, but then
9:31
it can't keep up with this 10% dividend.
9:34
That makes no sense.
9:36
So yeah, that's really what I was calling out
9:38
is strodingers Bitcoin.
9:40
It's simultaneously going to be the best performing asset
9:42
in human history going to the moon tomorrow.
9:46
But somehow this 10% dividend thing is going to fail.
9:49
I mean, no, come on, get real.
9:52
Yeah, it's kind of like an interesting,
9:54
it's fascinating to watch, honestly,
9:56
because it's like the credit investors,
9:59
like they don't even necessarily need bitcoin to appreciate at the 11.5 percent rate or the 13
10:05
percent dividend rate like because the balance sheet of these companies is so large in terms of
10:11
bitcoin relative to the dividend obligations that they owe bitcoin can actually appreciate like
10:16
eight percent per year and that would that appreciation would offset like 100 of the current
10:23
dividend obligation so it's like you know if you think about like an eight percent kager for bitcoin
10:28
over the next, from 2026 to 2031,
10:33
like last calculation I did,
10:35
it was like $99,000 per Bitcoin.
10:37
So like, you know, you mentioned like people
10:39
have the position that, oh, Bitcoin's going
10:41
to a million dollars next year or the year after,
10:44
but like you don't even necessarily
10:45
need to have that position.
10:47
I would imagine like most people in the Bitcoin community
10:49
think Bitcoin by the end of 2031
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would be above $100,000.
10:55
I mean, like, and so it's just funny,
10:57
You really don't even have to have a pretty serious Bitcoin bull case to think that this might actually work.
11:05
I mean, even just Bitcoin back to previous all-time high would be almost 100% from here.
11:10
Yeah.
11:11
Even if we make it halfway there, that's 50% up from here.
11:14
So all Bitcoin bought around these price levels would be massively in profit if that's how it plays out.
11:23
And so, yeah, I mean, it's a thesis that plays out over time.
11:32
I mean, you have to have your assumptions about what you think Bitcoin is going to do.
11:35
But I mean, it just makes me ask the people who say these types of things,
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do you really believe that Bitcoin is going to do what you think it's going to do?
11:44
Because if you do, then this type of a number shouldn't really matter that much.
11:48
In terms of the overall stack and the rate it has to appreciate to cover the dividends, obviously, I think you wanted it to appreciate more than the dividend rate.
11:59
Because if not, that's kind of slowly leaking value from the common stock.
12:04
But the other thing to consider is, let's say you do have a 20% move, a 50% move, 100% move.
12:10
Well, the next year, the move that you need to cover the dividends relative to prior baselines is lower.
12:22
Because the Bitcoin is compounding, but the dividends are not.
12:27
Right now, strategy owes $1.7 billion a year in dividend payments.
12:31
If the issue no further stretch for the rest of the year, it's still going to be the same $1.7 billion next year.
12:40
It doesn't compound.
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The interest is not growing.
12:43
It's the same.
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It's simple interest.
12:45
It's not compound interest.
12:46
So if the Bitcoin is appreciating faster than that, then the Bitcoin that they bought with it needs to appreciate at a lower number next year.
12:57
because the percentage increase you need to get from, say, $100 to $110 this year,
13:03
okay, that's a 10% increase.
13:05
But from $110 to $120, that's a little bit less than a 10% increase.
13:11
And the higher up you go the less and less and less you need to go up to hit your target So yeah it think it a very underappreciated aspect that you got a compounding asset against a non liability
13:25
Yeah, it's definitely a fact that a lot of people
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probably kind of seem to miss at this point.
13:32
Another thing that's kind of been a hot topic
13:33
is Saylor selling at 32 Bitcoin
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or whatever the exact number was
13:39
to kind of inoculate the market.
13:43
What do you make of that?
13:44
Is that a good thing for the digital credit holders?
13:48
Is it good for Bitcoin?
13:49
Is it bad for Bitcoin?
13:51
What do you make of that?
13:52
So I think a lot of the things that strategy does surprise people
13:56
because I think it surprises people new to the stock,
14:00
people who haven't really been following it
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and don't realize that strategy has done things before,
14:03
and selling Bitcoin is one of those.
14:04
In 2002, it's the end of the bear market.
14:07
Strategy sold some Bitcoin for tax-less harvesting.
14:09
and now you know four years later that same playbook came back on the menu selling some
14:16
bitcoin for for tax loss harvesting you know they might maybe they'll use some to pay dividends in
14:21
the future but um you know the thing they they kind of signaled the most during the the earnings
14:26
call was the uh the ability to take advantage of the deferred tax liability and um those are the
14:32
types of things that you know they they they should do if there's a clear mathematical benefit to doing
14:36
it. But you see this all the time. You know, when strategy fired up the ATM in 2024, most people
14:42
didn't realize that strategy had been using ATMs for the entire life of the company. And yeah, I
14:49
think, you know, you kind of look back to the history of the company. Did selling Bitcoin
14:53
tank the company before? Did that blow up the company before? No, it's back now. Price is much,
14:59
much higher than it was then. Did Bitcoin die when strategy sells the Bitcoin? No, it didn't.
15:04
Four years later, Bitcoin is at a much higher price.
15:08
And strategy is selling 32 out of over 800,000 Bitcoin.
15:11
I just don't think it's that big of a deal.
15:15
So Bitcoin will be fine.
15:17
Strategy will be fine.
15:18
I'm not concerned about either one of these things.
15:21
Do you think that the sell-off that we're...
15:25
You know, it's interesting, I guess,
15:26
like looking back at Stretch in particular,
15:28
like there have been moments where Bitcoin sells off sharply
15:30
and then it, you know, Bitcoin goes, you know,
15:34
kind of maybe bottoms and goes sideways for a little bit,
15:37
but stretches of returning to par, at least historically.
15:41
Like, do you expect that to kind of happen again?
15:43
And if so, like, why do you think it has sold off,
15:48
you know, so hard multiple times if like, you know,
15:51
a few weeks later, it just goes right back to 100?
15:55
I think the market just tends to overreact.
15:57
you know you see these sellouts happen in times of bitcoin stress and people freak out i think that
16:03
the strategy is going to implode and then it doesn't they realize everything's going to be okay
16:06
and they did the price back up again and one thing that is also a little bit different about
16:13
stretch is that and it would also be true for sata the lower the price goes the higher the
16:20
effective dividend rate is so the you know cheaper you're able to buy it so it's you know it's self
16:25
healing somewhat in that regard, that there's an incentive to bid it back up closer to par,
16:32
assuming you're okay with the credit risk. And you also have to look at the cyclicality of it,
16:39
that the way these work is that they sell off after the exit of a date, and then they ramp back
16:46
up into the next exit of a date. Of course, that's going to change a little bit once the dividend
16:51
schedule changes. Right now, strategies on a monthly
16:53
schedule are going to shift to
16:55
a semi-monthly schedule starting soon.
16:58
And of course, you know, SEDA is switching to
16:59
daily soon, which I think is going to be very interesting
17:01
because it's going to break up,
17:04
completely destroy this
17:05
whole cyclicality aspect of
17:07
ramp into the XDIV
17:09
and then sell off.
17:11
And the more frequent dividends,
17:13
I think, are also interesting because it's going to disincentivize
17:15
selling. Like I was seeing yesterday, there were
17:17
something like $100 million shorts
17:18
on stretch.
17:21
it's going to be a much less appealing instrument to short
17:24
when, first of all, the EV of shorting for a share
17:30
just isn't that high to begin with.
17:32
But you've also got to pay the borrow rate on it.
17:35
You've got to pay a daily dividend on it
17:37
because if you're short,
17:38
you owe the person who loaned you those shares the dividend.
17:42
So it's just not a very appealing short.
17:45
You've got all these costs associated with it.
17:46
And for what?
17:48
You make a 2% or 3% move?
17:51
There's lots of better ways to do that.
17:53
So I do think that the prices will recover to par,
17:58
and maybe it will take a dividend hike.
18:00
Maybe it will just take time with people realizing
18:02
that strategy is not going to blow up like it didn't blow up
18:05
any of the other times.
18:07
Yeah, I think we get back there, and the system recovers,
18:10
adjustments are made, and life moves on.
18:13
Yeah.
18:15
Thinking back, I guess, over the last year,
18:18
I believe Stretch came out in maybe July of 2025, so it hasn't even been out for 12 months.
18:24
I believe it's raised over like $10 billion of capital.
18:28
Are you surprised with the pace that Stretch has grown at?
18:33
And how much faster do you think it could grow, assuming obviously it comes back to par?
18:41
I've been very impressed with how much they've been able to raise, particularly over the past few months.
18:45
because last year that was very much part of the conversation
18:49
that if Bitcoin were to go into a bear market,
18:54
that would spur demand for stretch
18:56
and less strategy by Bitcoin at bear market prices,
18:59
which previously they had difficulty doing
19:02
because they were using convertible bonds,
19:04
which are very difficult to issue in a bear market.
19:07
And that thesis very much played out.
19:10
They were able to issue billions, billions,
19:12
with a B of stretch
19:16
into the bear market here to buy Bitcoin,
19:19
what I would consider very attractive prices.
19:22
So yeah, that's been great.
19:24
In terms of where things go from here,
19:26
I think right now we have to look at
19:28
is there's a couple of different things.
19:30
There's a cliff, I think, probably three years out
19:32
that right now people look at the holder base
19:37
and say, oh, it's 80% retail.
19:38
Why isn't institutions here?
19:40
are institutions not just interested or what's going on?
19:44
And I think part of what's happening there
19:46
is that there's a three-year cliff
19:47
before a lot of institutions can even entertain the idea.
19:52
It's just on their compliance,
19:54
they have to check out boxes,
19:55
three-year track record, three-year history.
19:58
If it doesn't have that, it doesn't matter what it is.
20:00
They can't even touch it, can't even think about it.
20:03
So right now, I think we're in this seasoning period
20:06
where it is mostly retail,
20:09
Then you also have the capital groups of the world and the other institutions who are, you know, okay with being early to it.
20:17
Perhaps not as much size as they will be later on, but still here now.
20:21
And I think that just continues to grow.
20:24
We've also got stablecoin projects building on it.
20:26
I'm advisor to Saturn Credit, which is building a stretch-powered, you know, offering on DeFi.
20:34
and I think probably just those projects alone
20:38
will create billions,
20:41
easily billions in demand.
20:45
And there are other projects than Saturn too,
20:48
but I think there's probably room
20:49
for two or three billion dollar projects
20:53
that will each hold, say collectively,
20:56
somewhere between five and $10 billion worth of stretch.
20:58
I think that's very much possible.
21:01
And that, I would say a few months ago,
21:03
that would have doubled.
21:03
It's not quite as much now, but yeah, I mean, potentially double the stretch issuance just in DeFi.
21:09
That's a possibility.
21:10
When you start unlocking bigger pools of capital in, you know, TradFi, in some of the more conservative places,
21:18
then I think that's really when, you know, the floodgates are open.
21:23
You know, that's where you're looking at, you know, trillion-dollar TAMs.
21:27
Of course, there's not going to be a cap rate of that trillion-dollar TAM,
21:30
But that's where I think this scales, you know, 10x, maybe 100x.
21:35
And, you know, I see all that coming over the next few years.
21:38
And, you know, assuming, you know, Bitcoin continues on the trajectory that it's going on, which, you know, despite the bear market, it's still overall up to the right.
21:48
I think as long as that marches on and, you know, institutions have time to get comfortable with the product and see its season, then I usually see another couple orders of magnitude of growth.
21:58
not just for strategy, but for the entire category of digital credit.
22:03
When you think about, I definitely want to ask you about Saturn
22:07
and this whole concept of building, quote-unquote,
22:09
digital money on top of digital credit,
22:12
which is built on top of Bitcoin.
22:13
So these layers of different assets
22:16
that are stripping the volatility away from Bitcoin, of course.
22:21
But I guess first I want to ask you about
22:23
the volatility of digital credit itself.
22:27
like how important is it that digital credit like remains very close to 100 or do you think it's
22:35
okay for it to like move around a good bit you know like you said stretched going down to 95 for
22:42
example or or is it like critical that like it stays pegged and pays the dividend or is like is
22:48
it more important to just make sure the dividends are paid like how do you think of of uh of all that
22:54
I think it depends probably what investor segment you're looking at.
23:00
For a project like Saturn, they actually have their risk fairly well segregated.
23:09
They have just the plain stable coin, which is backed by treasuries.
23:13
And then if you stake it, then you get higher yields from, you know, powered by digital credit.
23:20
So with that type of risk segregation structure,
23:23
obviously they don't want it to de-peg.
23:25
They want it to stay fairly close to $100.
23:27
Nobody wants it to go down.
23:29
But there's a little bit more of a buffer in there
23:32
in case you get some wobble.
23:37
And for other parties, I think for retail,
23:42
probably it's more important that it stays close to the peg.
23:46
Also, I'd say retail is probably more sensitive
23:48
because if you're holding this,
23:49
if you're thinking about it like a money market account
23:52
and this is money you want in there,
23:54
let's say for three to six months,
23:55
you're going to pull it out
23:56
for whatever you're going to pull it out for.
23:58
You don't want to stick it in
23:59
and then it drops 3%
24:00
and then it's like three months worth of dividends.
24:02
You've got to wait to get back.
24:04
You want it to be a little more stable than that.
24:07
If you're an institution,
24:10
then what is your time horizon?
24:13
If you're an institution
24:14
who would otherwise be buying,
24:16
let's say, you know, six to seven year bonds,
24:19
bonds six to seven year maturity,
24:21
you're more concerned just about, you know,
24:23
the dividends coming in timely.
24:26
The, you know, the time when you're really going to care about
24:28
whether it's at par or not is at the end of that period
24:33
that you plan to hold it unless you just roll it over.
24:37
So that's, you know, that's definitely something
24:39
you're going to think about.
24:41
But, you know, in the interim period,
24:43
it's more about is the dividend coming in on time?
24:45
And, you know, at that time when, you know, the liability, whatever that six to seven year period, whatever is due at the end of that, that they have to match liability match against, you know, there's ways that that can be hedged against.
24:58
So there are other ways around a potential, you know, deep egg scenario that can be handled.
25:04
Of course, you know, it's better for everyone if it just stays flush 100 bucks.
25:08
But, you know, how important that is to you versus the dividends, I think just depends who you are, what your time horizon is for holding it.
25:15
And, you know, what you're how how soon your liquidity needs potentially are.
25:21
Do you think digital credit like brings new people into like learning about Bitcoin and understanding Bitcoin?
25:29
Or do you think that it's like this new product that confuses people?
25:35
And, you know, there are two. I think I would split it up by investor cohort.
25:40
For for retail, you know, I question whether Stretch does much to bring retail.
25:45
into the Bitcoin ecosystem, or at least in terms of does it get them interested in buying
25:51
Bitcoin directly?
25:53
I would say it's probably mostly the other way around.
25:56
People who like Bitcoin already are, you know, potentially want to have a separate part of
26:03
their holdings that are less volatile.
26:05
They want some of that volatility strip.
26:07
They want a little bit more, you know, reliability.
26:09
They don't want to have their entire holdings and something that could be down 50% next year.
26:15
Even if it is up 300% the next year, they don't want it to be down 50% the next year for, you know, like their entire holdings.
26:23
I think it's different at the institutional level, though, you know, particularly depending on what type of institution it is.
26:30
That a lot of these institutions that you know if you a fixed income fund you never going to buy Bitcoin You never going to do it because by mandate you can But you might be interested in some of the yield that if Bitcoin has the price action that we all think it will
26:49
you might be interested in a slice of that yield if it pays better than what your comps are.
26:54
If everything else in your fund is, say, a bond that pays 5% or 6%, and leveraging the power of Bitcoin returns, you can buy another instrument that pays 10%, well, that's double.
27:10
It's twice as much as you were getting before.
27:13
So there's a real appeal there.
27:17
And I think that that is really the lens I tend to think about this from.
27:22
It's not so much stretch as a vehicle for bringing retail.
27:30
It's not a top of the funnel, bring retail into the pipeline,
27:32
eventually they'll end up buying Bitcoin.
27:33
I just don't think that's how it works.
27:34
I think this is more of a funnel for money from TradFi
27:38
or people who otherwise wouldn't be holding that Bitcoin
27:42
to take those dollars and redirect them into Bitcoin on corporate balance sheets.
27:47
To me, that's how all the pieces fit together.
27:49
yeah it's it's an interesting you know debate like i i definitely agree that it's like all right if
27:56
you look at the like stretch itself or digital credit itself and you see like the high yield
28:01
the relative relatively stable price even if it falls to 95 or whatever it might fall to it's like
28:06
that's obviously going to be like enticing to retail and institutional investors um but but
28:13
it's also like my only pushback with what you said was like it's only been around for 11 months at
28:19
this point i like i think from my perspective maybe so far you're exactly right and like we're
28:25
seeing okay like people just buy digital credit and like they may not even touch bitcoin but like
28:31
over the long run if if it continues functioning and bitcoin is you know above 99 000 in 2031
28:37
i could see a scenario where they're like wait a second like how does this actually like
28:42
it's powered by bitcoin i don't fully i never really fully understood how but it keeps working
28:48
maybe I should start learning about Bitcoin.
28:50
Do you foresee maybe that happening in the future
28:53
or is it like people are just going to hold this
28:56
and never think about it in too much detail?
29:01
Yeah, I feel like I can keep defaulting back
29:04
to the same position,
29:05
but I think it depends on the investor cohort.
29:08
If it's a younger person,
29:09
they're probably going to be more interested
29:11
in getting some raw Bitcoin.
29:14
If it's a retiree who's 70 years old
29:17
and just wants a fixed income into retirement.
29:21
Maybe it draws that type of person into holding some Bitcoin also,
29:25
but I think it's just a different ask.
29:28
So, yeah, I mean, I could see this being a pipeline for people going,
29:33
okay, yeah, I would like to know more about this.
29:35
Where does this yield come from?
29:37
Why are they able to pay so much more for it?
29:41
Yeah, I mean, it's possible that that type of pathway exists.
29:44
I think you know especially for you know younger people who are going to be more likely to be buying
29:51
high volatility assets so um yeah sure yeah it's uh your Schrodinger's bitcoin kind of remind me
30:00
it's like this is almost like Schrodinger's yield like in a way it's like okay anyone in TradFi like
30:06
the media is like okay like this this can't work like this is not this is not possible because if
30:11
it works, like they need to rethink everything that they've ever learned about money.
30:16
And like, that's a, that's a pretty, pretty big deal to like wrap your head around.
30:21
So like, I don't know, that's just kind of another interesting thought.
30:25
Yeah.
30:25
Well, you know, it's a completely different system.
30:27
I mean, basically, you know, the quote unquote risk-free rate right now is entirely dependent
30:32
on government printing money.
30:35
The government issues treasuries, has a coupon on it.
30:39
Where does that coupon come from?
30:41
Printed money.
30:42
I mean, yeah, maybe some of it comes from taxes, but for the most part, printed money.
30:47
And this Bitcoin is, you know, digital credit is a completely different setup.
30:52
Companies issuing it have the asset on their balance sheet.
30:57
It's based on actual collateral held.
31:00
It's not based on, you know, future earnings.
31:02
Of course, the collateral needs to go up.
31:04
The entire system, you know, the one thing that couldn't happen is you couldn't, you know,
31:10
you could not replace treasuries,
31:12
fully replace the treasury system
31:14
with a digital credit system.
31:16
And I don't think that would work
31:17
because you have to have more buyers of Bitcoin
31:21
than you have of digital credit buyers
31:24
because you can't just be digital credit buyers
31:26
in the system because that, you know,
31:28
the price appreciation has to come from somewhere.
31:31
And that price appreciation has to come from,
31:32
you know, more people buying, using, holding Bitcoin.
31:36
So I think that ecosystem ultimately has to be,
31:39
you know, larger than the digital credit ecosystem.
31:42
Yeah.
31:44
Lots of different ways to think about it.
31:46
Yeah.
31:47
Since you brought up Saturn earlier,
31:49
and you kind of mentioned briefly,
31:50
like how it like functions,
31:53
can you kind of go into detail?
31:54
Because it seems like that's been like,
31:56
obviously a new frontier.
31:57
I mean, digital credit itself is a new frontier,
31:59
as we mentioned, like it's only been around for less,
32:01
you know, stretch at least,
32:03
has only been around for less than 12 months.
32:05
But digital money, you know,
32:07
this like lower volatility, I guess, digital credit is kind of being built on top of digital
32:13
credit. How does like Saturn, for example, work in practice and kind of maybe explain it to someone
32:19
that like has no idea what you're talking about? Yeah. So, you know, if you're familiar with
32:25
stable coins, maybe I'll start from the beginning and not assume people are familiar with stable
32:30
coins. So stable coin is a tokenized representation of a dollar, essentially. And the way stable
32:37
coins have traditionally worked in the past with companies like Tether, Circle, USDT, and USDC,
32:43
is they're backed one-to-one in their treasuries with government treasuries, just paying fixed
32:50
coupon. That's how they back it. And the way Saturn works is, okay, what if instead of holding
33:00
treasuries, which are paying 3% to 4%, we held digital credit, which is paying 10% to 13%?
33:07
and there's a big delta to capture there.
33:12
Of course, in practice, it's not 100% backed by digital credit.
33:16
Like I said, there's two different products that Saturn has.
33:19
One is the USDAT, which is just the regular stable coin.
33:23
That's backed by Treasury.
33:25
It's like an ordinary stable coin.
33:27
And if you stake it, you have SUSDAT,
33:29
which then that's when capital rotates into digital credit.
33:34
And I like the way they've got it set up
33:36
because by staking it,
33:38
you've got a little bit more of a commitment
33:39
to holding the product.
33:41
And that incentivizes saving
33:45
versus just pulling versus...
33:49
And on top of that,
33:54
DeFi is a big ecosystem
33:56
where pieces latch on to other pieces
33:59
and there's different systems.
34:02
And so one of the things that on another platform
34:05
what they've done is tranche exposure to SUSDT.
34:10
And so you can get not just plain SUSDT,
34:13
but you can get that tranched out into a senior tranche and a junior tranche.
34:17
And so if you wanted even more stability,
34:20
let's say you're, okay, I don't want that 5% drawdown.
34:24
I want the guaranteed payout.
34:26
I don't want to suffer any of those things.
34:30
There's a senior version, which strips out more volatility
34:34
for a slightly lower dividend.
34:36
And then there's a junior tranche,
34:38
an equity layer,
34:39
which takes the brunt of the excess volatility.
34:43
And there's different ways that,
34:45
of course, if you go further out into DeFi,
34:48
you've got people looping these things
34:49
and leveraging them up over and over and over again.
34:52
But that's a different story.
34:55
So basically, you've just got these different pieces.
34:57
You've got the plain stable coin,
35:00
which is just backed by Treasury
35:01
or selecting any other stable coin.
35:02
You've got the stake variety,
35:03
which is paying yields reduced by digital credit.
35:07
And then within that, you've got the subdivisions of a junior and a senior tranche that you can participate in
35:14
that basically is just yield splitting, just a different allocation of the yields from digital credit
35:23
to smooth out volatility for the senior holders and give higher risk reward for the junior holders.
35:32
and I should point out these products are not currently available to
35:36
United States citizens unfortunately it's international offerings only at this point
35:41
yeah it's a fascinating development so like there's I guess different variations of stable
35:49
coin of the international only stable coin and then it can be tranched further into like higher
35:56
risk higher reward lower risk even even lower volatility I guess like one thing like when you
36:02
mentioned stable coins broadly like i've always been kind of fascinated and interested in like how
36:08
rapid like tether and usdc2 grew like i believe they're you know combined it's like a 200 billion
36:15
dollar plus market at this point and neither of those stable coins pay any yield so it's just like
36:22
a dollar that earns no no yield do you foresee like this digital money whether it's saturn or
36:30
like a tranche of Saturn or, or, or any sort of digital money, like product, like being a superior
36:37
version of Tether and USDC, which is like a 200 plus billion dollar market today? Um, I, I want to
36:47
be careful about, so not financial advice at all, but you know, I would already consider the products
36:52
that are out there. You know, I would consider the state version of Saturn's superior to that.
36:58
that's my opinion um because it's just basically what you've got you've got a stablecoin like
37:05
product with digital credit like yield um so you know not not not financial advice or
37:12
solicitation to buy securities or any of that stuff um just just my opinion it's it's a
37:18
it's a spirit product already um and that was one of the things that you know i was excited to uh
37:23
come on as an advisor for for the project as soon as they told me about it thought yeah
37:27
sounds like a great idea you guys should absolutely build that so what do you think makes the best
37:34
uh version of the stable coin is it like the pure like the stake just simply the staked version of
37:41
saturn or is it like the the senior tranched version like you know i'm thinking like tether
37:46
and usdc i mean people are very and in like a dollar in a bank account like people want literally
37:52
no volatility with those products.
37:54
And so is the senior tranche of the Saturn token the best?
38:01
Or are people just going to eventually maybe get comfortable with less volatility?
38:07
Or with some volatility?
38:09
Yeah, I think it probably is something that comes down to your threshold for risk-reward.
38:13
The senior tranche, last time I checked the rates, I think it was around 7%.
38:19
I'm not sure if I'm quoting that right.
38:20
But that's a little bit lower.
38:22
You know, there's a tradeoff.
38:23
There's a tradeoff for the reduction in volatility.
38:26
And I think that's really an unsettled question is, you know, how much volatility is the average person willing to trade off for yield?
38:36
Because, you know, are you willing to trade off, you know, four percentage points of volatility for four percentage points of yield?
38:45
You know, I don't know.
38:46
Maybe.
38:46
Maybe not.
38:47
I think that's an unsettled question in terms of, you know, market participants.
38:50
and you know i think looking more broadly what i also find interesting about these projects is i
38:59
think the the you know the tranching of these projects is something we will see brought to
39:03
also trad fi markets i think there's going to be an appetite for you know tranching these for
39:10
trad fi markets and making products that have you know no very no volatility in the principle
39:18
in exchange for a lower yield,
39:22
having an equity layer,
39:23
like any traditional aspect security,
39:26
having an equity layer
39:27
who will absorb the volatility
39:30
in exchange for levered returns
39:32
on the underlying.
39:36
And I think that probably
39:39
within TradFi markets,
39:41
that zero volatility product
39:43
will be very popular.
39:44
perhaps even more so than just the plain vanilla,
39:51
we see I think that is the type of product structure that could really take off And the other thing that I would say about it is that there are different ways to repackage it
40:02
You know, one of the things you always hear Jeff Walton talking about is the insurance industry.
40:08
And that's just because of quirks in the way the NIC ratings work, the private credit and equity are treated differently.
40:19
So you could have the same instrument, you know, same risk, same yield.
40:25
Maybe it's not exactly the same, but just by virtue of the fact of one being equity and one being credit,
40:32
there's, you know, a 20, 30x difference in the risk-based capital charge on those.
40:38
That seems exorbitantly high.
40:41
um but you know that's that's that's another reason why i think you know different
40:49
tranched versions of these products with volatility stripped credit protections added
40:54
um could potentially be you know big within tradfi since we're talking about digital credit
41:02
and digital money like i definitely think we should ask or i want to hear your perspective
41:06
on like what are like the real risks like how does this because you know people hear about the
41:11
you know you mentioned like seven percent like senior trunch uh return on on sat the saturn usd
41:17
like people be like what how is this possible right like you know i'm earning like three percent
41:22
or zero percent in in my in my bank account so like maybe it's helpful how does this how does
41:28
this break from your perspective maybe like you can answer it two ways like one how does like
41:31
digital credit break? And then two, like, how does digital money break? Well, digital credit,
41:37
at the end of the day, it comes down to Bitcoin. You know, either we're right about Bitcoin or we're
41:40
not. And if we're right about Bitcoin, then digital credit is fine. And if we're not, then it isn't.
41:46
I think it really, it's really as simple as that. You know, in terms of digital money,
41:51
it really is the same route. You know, does Bitcoin continue on to be an integral part of
41:57
the future global financial system.
41:59
If it does, price has to go up.
42:02
It can't become an integral part
42:04
of the future global financial system
42:05
and price just stays where it is now.
42:07
That's not how it's going to work.
42:11
So I think the other day,
42:12
it really just comes down to Bitcoin.
42:14
Does Bitcoin continue its, you know,
42:16
its long, slow march up to the right?
42:19
If it does, and we're right about all that,
42:21
then digital credit is going to be,
42:24
you know, a booming, growing product category.
42:27
And digital money built on top of it is going to be a booming, growing product category.
42:31
I guess like can you maybe dive in like what does Bitcoin need to do?
42:34
Because someone might hear that like, oh, Bitcoin needs to go up into the right.
42:37
Well, it's like doesn't, you know, do you think Bitcoin needs to go to a million dollars next year?
42:42
Or is it like does the dollar just simply need to continue being debased and like, you know, all kind of major assets as long as Bitcoin like slowly goes up into the right?
42:52
Is that sufficient?
42:53
Like how do you, you know, how do you weigh that risk or how do you think about it?
42:57
Well, I think, you know, Strive CEO Matt Cole pretty well the other day gave me the comment, something like, we get the question of what happens when the party stops?
43:06
Well, what is the party stopping?
43:09
I think for Bitcoin, the party stopping is the Fed stops printing money.
43:16
Any takers, anybody want to bet that the Fed's going to stop printing money?
43:19
I'm not taking that bet.
43:20
so uh you know as long as monetary supply keeps expanding which it always has throughout the
43:27
entire history of the dollar um you know you get you get minor periods of reversal but for the most
43:32
part it's monetary supplies up into the right um you know you get your average money printing of
43:38
something like nine percent per year so you know if you figure even a bitcoin so let's just say
43:43
even just bitcoin kit pace with average money printing in theory that's a nine percent per year
43:48
but if you grow adoption on top of that
43:51
I figure the penetration
43:53
right now is
43:54
I don't know what 5%
43:56
I don't have a hard figure for that but
43:58
if you go out and you walk around to your local
44:01
cafe and you say anybody here got Bitcoin
44:03
probably not that many hands going to go up
44:05
so
44:06
as numbers like that increase
44:09
as the numbers of holders increase
44:10
as the sizes of their allocations increase
44:12
I think those are the types of things that
44:15
drive
44:16
higher numbers for Bitcoin.
44:21
And certainly, if all those things come to pass,
44:25
then a rate of growth that should exceed the dividend
44:28
quite comfortably.
44:29
What do you make of people that have suggested
44:33
that this looks like Terra Luna?
44:35
I guess for those that don't know or weren't around
44:38
or don't remember, Terra Luna was like a,
44:41
or UST, I believe, was like a stable coin
44:44
that was supposedly backed by this other token called Luna.
44:49
And at some point it was backed by a little bit of Bitcoin.
44:53
Is this like Terra Luna from your perspective
44:55
or is it very different?
44:57
I think it's entirely the wrong comparison.
45:00
And the reason why is the underlying mechanisms
45:03
are completely different.
45:06
And the way Terra Luna worked
45:07
is you had Luna paratraded against UST.
45:10
and the idea was that
45:12
if it started to
45:14
de-peg that
45:15
people would arbitrage Luna
45:18
against USTA to bring it back to peg
45:20
and that works within very
45:22
small tolerances
45:23
but once you get say past
45:26
a 1% de-peg
45:27
the incentives flip and the
45:30
incentive is to abandon ship
45:31
and the further away you get from the peg
45:34
the more the incentive is to abandon ship
45:36
until the whole thing just blew apart
45:37
and
45:39
and it's not the first time we've seen
45:42
an algorithmically stabilized peg
45:44
blow up like that.
45:46
I think it was
45:47
a precious metals pegs
45:50
coin or something.
45:51
There was a couple other coins before that blew up.
45:53
They were using algorithmic pegs.
45:55
It's just a terrible mechanism.
45:58
But digital credit is
45:59
completely different.
46:01
It's not two circularly
46:04
referenced assets trading against each other.
46:07
It's
46:08
You know, Bitcoin on the back end, you know, it's pegged to growth rate of Bitcoin.
46:13
You know, and the Bitcoin price is not dependent on the stretch price.
46:18
It's not a circular pair trade.
46:23
And so for digital credit, you know, if you get a DPEG event, Bitcoin is really not, you know, stretch DPEGing does not cause DPEG Bitcoin to do anything.
46:33
It's not, you know, it's largely relevant to the Bitcoin price.
46:35
and you know if the price goes down the incentive is actually to step in and buy the stretch
46:41
because the cheaper it goes and i'll you know i say stretch whenever i say stretch you know
46:47
digital credit more broadly the lower the price goes the higher the effective dividend rate goes
46:53
and so these products are you know to some degree self-healing um because you know there'd be the
47:00
The incentive is to step in, to bid the price back up.
47:03
And strategy, say to any potential future issuers,
47:08
they can increase the dividend rate.
47:10
And we've seen that be effective in closing them back to par.
47:16
So I think the mechanisms here are just completely different.
47:19
On the one hand, with that Terra Luna setup,
47:21
you've got the DPEG incentivizes further DPEG,
47:25
whereas with digital credit
47:28
in a DPEG scenario
47:30
the incentive is to close, is to re-PEG
47:34
and there are a lot of hedge funds that love this trade too
47:36
whenever they see stretch off 5%
47:38
they see that as candy because they think it's going to go right back to PEG
47:41
and they'll buy that all day long
47:43
Yeah, it's funny
47:46
Terra Luna, an extremely fragile system
47:51
as you pointed out and I completely agree
47:53
It still took Bitcoin going down like 60, 70% for that, I think, I believe to like blow up kind of near the bottom of the 2022 bear market, which is kind of kind of funny.
48:05
Like, it's like, OK, this very fragile thing, you know, actually like lasted maybe longer than it probably should have.
48:12
It was obviously good that it completely blew up because it was very fragile.
48:15
But in a way, it's like digital credit is almost like the opposite of that in the sense that like Terra Luna had like a huge outstanding like quote unquote stable coin supply that was not, you know, it was fixed actually at a dollar.
48:29
Like it couldn't bend at all.
48:31
And then it was like under collateralized by Bitcoin by like a pretty massive degree.
48:35
So like as you pointed out, it just kind of blew up.
48:37
Whereas like digital credit, it's kind of like the complete opposite.
48:40
It's like massively like there's a lot more Bitcoin on the balance sheet relative to the dollar credit.
48:46
That's outstanding. And like for digital credit itself, you know, there's no hard peg at a dollar as everyone.
48:52
Some people are complaining about, you know, it's kind of like an airplane wing where it's allowed to like bend a little bit and move.
49:01
And that actually makes it more like anti-fragile over the long run.
49:05
Would you agree with that, I guess?
49:07
Yeah, those are some good points.
49:08
you know
49:09
two I want to pick out
49:10
that you know
49:11
the yield they were
49:12
paying on
49:12
UST was 20%
49:14
that's substantially
49:15
higher
49:16
so
49:18
yeah
49:18
if digital credit
49:19
were paying 20%
49:20
I would be a lot
49:21
more skeptical
49:22
but
49:24
that's
49:24
you know
49:25
so one
49:26
and that
49:27
yeah that's one thing
49:28
and
49:30
oh there's another
49:33
point that you raised
49:34
I forgot what I was
49:35
going to comment
49:36
airplane wing maybe
49:37
yeah
49:38
Yeah. Oh, right. So it was about the collateralization. That's what I was thinking of. If you go back and you read the white paper for Terra Luna, that was explicitly a project. And how can we extract max senior age with a minimal collateral?
49:51
yeah so you know even before you get to any of the stuff it's like the the design from the outset
49:57
was how can we build this thing on the razor's edge so it's not really surprising that it failed
50:03
the first stress test whereas you know digital digital credit completely different you know the
50:10
collateral is like you know five six to one you know it's just completely different because you
50:16
It's always 5.61, sometimes less.
50:19
But anyway, over collateralized, not severely under collateralized,
50:22
not 30% to 40% collateral.
50:24
Yeah.
50:26
And there's also no redemption.
50:29
I believe UST, part of the problem was you could redeem it for $1 worth of Luna.
50:35
And that appears good because you have a right to redeem whenever you want.
50:41
But it's also like it made the system blow up.
50:45
So in a weird way, like not having that right kind of can make it more anti-fragile and kind of more like stable over the long run.
50:53
Yeah, that's true.
50:55
Yeah, there's it's a common misconception about stress that you see every day, but there's a credit you see every day.
51:01
They're preferred equities.
51:02
They're not they're not, you know, redeemable liabilities.
51:08
And there's positives and negatives to that.
51:10
But, you know, obviously from the issuer standpoint, that's great because you don't have, you can't be bank run.
51:18
You can't have a bank run on it because it can't be redeemed.
51:21
If you are, you know, if you want it redeemed at par today, maybe you're not as happy.
51:29
But, you know, if you hedge and you do some things around that or you buy, you know, a future, if you buy a transversion of the product, you know, there's different ways around that.
51:38
Mm-hmm. Yeah. This has been a pretty fascinating conversation, as always, Brian. Any final closing thoughts for the audience on Bitcoin, digital credit, or anything that we left out?
51:52
I think that right now, there's a lot of fear in the market, but I would say we've been here before. It happens. I see a lot of people saying, you know, I said it was never been worse. You know, I don't agree.
52:04
We haven't had, you know, 2022 at this point in time, you know, we had Celsius blowing up, we had Voyager blowing up, we had people learning what it meant to be an unsecured creditor and locked up in bankruptcy proceedings for years.
52:18
None of that has happened right now.
52:21
None of that.
52:22
So I think, you know, Bitcoin is in a stronger place than it's ever been.
52:27
Digital credit balance sheets are very strong.
52:30
They're built to withstand, you know, if we have another six months to a year.
52:35
Not that I think we're going to have.
52:36
I don't want to put fear on people by talking about six months to a year, another bear market.
52:39
But if it were to happen, the balance sheets are very strong.
52:42
They will survive.
52:44
My own view is much more optimistic than that.
52:47
But, yeah, I just think we're in a much better place here than sentiment was reflecting.
52:54
I think sentiment is actually better than prior bear markets that I've seen.
52:59
so I just
53:01
I think we're ready to go here
53:03
when Bitcoin bull market comes back I think
53:05
everything's in a very good place
53:07
I like it I think that's a great spot
53:09
to end it at Brian thanks again
53:11
this was a great conversation
53:13
thanks again for having me Joe