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Coin Stories with Natalie Brunell
Adam Back Part 1: From Cypherpunk to Corporate Bitcoin Treasury Leader
00:58:25
In this 2-part interview, Bitcoin legend Adam Back explains why he recently launched his own Bitcoin treasury company, BSTR, and what it means for investors. We cover Strategy’s playbook, MetaPlanet’s rise, and how these new corporate structures...
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- [00:00]
Adam Back
If you're doing any other form of investing, that's long term. If you can't outperform bitcoin, you should stop and buy bitcoin. And then what does that mean for a company? It means you should put your cash reserves in bitcoin. It's very, very hard. Very few companies over the long term have even come close to keeping up with bitcoin. We all know the metrics of the history, right? Best performing asset class of the last 15 years, 10 years, 5 years. Pick anything you want.
- [00:25]
Interviewer 1
Right.
- [00:32]
Interviewer 2
Hey, everyone. Welcome back to the show. So excited to be joined this week by the one and only Adam Back. Adam, it's been a few years since we've recorded. Thank you so much for taking the time to return to coin stories.
- [00:45]
Adam Back
Yeah, thanks for having me on. I think that was in Miami at one of the huge bitcoin conferences right after Covid, where everybody blew off steam and there were 30,000 people there or something, right?
- [00:55]
Interviewer 2
Yeah, 20, 22. Well, so much has happened since. So I would love to get your, your, your take on, like the developments in the space and specifically talk about your bitcoin treasury company investments. And you are the CEO of the bitcoin standard treasury company. So maybe let's start right there. Why did you decide to lead one of these companies yourself?
- [01:17]
Adam Back
Yeah, I mean, I had been investing in them personally going back relatively early, and I'd explain the sequence of events that led me to find that to be an interesting thing to do. And through investing them and then talking to the management teams and trying to understand what drives the valuations and try and work out how I might. What I might think is a fair value because they're a new structure, a new concept in a way, so you can't use directly, let's say a PE ratio model in a sector or something.
- [01:55]
Interviewer 1
Right.
- [01:56]
Adam Back
Which people have developed over years for traditional product and service companies. So with that thinking, over some years, I developed views on, well, probably better if they do this or that. And I talked to some of the management teams and tried to persuade them that it'd be good. And they didn't necessarily agree. So I was finally, okay, maybe we should do it ourselves. So myself and a few early bitcoin investors put together process. I think the whole process took 36 days from kickoff with Cantopitzgerald to the initial phase wrapped up. So it's kind of very rapid process. We're trying to get it done before 4th of July, but that, that was just too much with a holiday. So we did it you know right after and then of course once it's you know once that is closed the it gets announced in a you know in a specified legally controlled way. Some some documents are filed with the SEC which people can look at on the SEC website. It's linked from BSTR website and so bstr.com that's where is where you can look and then you can just click on the SEC link or our Twitter and then yeah so that that's the start of it. I mean maybe if we do you want to do first talk about this but it might be better to talk about my path into investing in treasury companies because that probably motivates some of.
- [03:43]
Interviewer 2
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- [05:22]
Adam Back
Yeah. I mean my initial reason actually was I, of course Michael said was the pioneer and nobody followed him, to my surprise, for quite a few years. Right. They, they started running annual seminar days for company execs to provide the playbook and the accounting and all the factors that went into enabling them to do it, to help other public companies do it. And it took a surprising number of years before any other public company entered the space actually. So that was a little bit surprising to me. But once Michael Saylor started doing it, I thought, you know, this is. Bitcoin's got a lot of mission oriented stuff in it.
- [06:04]
Interviewer 1
Right.
- [06:05]
Adam Back
People are going out of their way to, you know, explain bitcoin to extended friends and family, people they encounter and doesn't do them any direct good, but they want everybody to enjoy bitcoin and benefit from it.
- [06:17]
Interviewer 1
Right.
- [06:17]
Adam Back
So I thought what MicroStrategy was doing now strategy was a useful new track on that.
- [06:26]
Interviewer 1
Right.
- [06:27]
Adam Back
So he'd hit on the idea of a company using Bitcoin as a, you know, in, in a period of high inflation and quantitative easing as a way to protect their cash reserves from inflation. Yeah, I think it's purely defensive and, and he's been, you know, very transparent and talked at great lengths about the thought process along the way. So you can kind of, if you, if you listen in, read some stuff, listen to some videos, over time you can get quite clear picture of the thought process that got him into Bitcoin at all in the first place.
- [07:08]
Interviewer 1
Right.
- [07:08]
Adam Back
Because his resolution to buy Bitcoin personally and then work through the process of buying it in the company was his first entry into Bitcoin. It wasn't like an old person who's been in bitcoin for years. And that was really because of the, as defensive as you say, because of the COVID era, whereas enormous amounts of quantitative easing, the interest rates were pushed to super low. And for anybody kind of looking at investments, of course you're aware of the asset price inflation and you'll have a view on whether the government official inflation metrics match reality. And there are independent organizations that try to truflation and things that try to put a number on it. But it depends what you're talking about. It depends if you're talking about the average person's basket of expenditure or if you're talking about savings type money and things you might want to buy with that, like real estate. So if you're talking about that, I think the inflation rate is even higher. Yeah. And that's the area that Saylor is focused on because operating market strategy for a great many years in the business intelligence sector. And I think he might actually be the longest continuous public market CEO in the US or something.
- [08:41]
Interviewer 1
Right.
- [08:41]
Adam Back
Because he.
- [08:42]
Interviewer 2
I think so.
- [08:43]
Adam Back
Public company CEO kind of, you know, interesting story when it's pretty young, which, you know, I'm sure people can find if they look around for it. But anyway, saying, you know, he, he had five. I think the company metrics at the time, it's market cap going back a few years before they got into bitcoin, varied between 1 and 2 billion. You know, they had, I don't know, I think something like 500 million revenue. They had 500 million cash reserves. And you know, it's like 1700 staff, something like that. You'd have to look on the website and 500 million cash reserves to get them through market cycles to fund new product initiatives or pivot. I think they have a kind of web transition now where they're trying to do war web and then they're trying to do AI. So it's continuously evolving this kind of business rates keep up with the times and what people expect. So they've got to have a cash reserve to get through market conditions and to take product initiatives that are bold. And so he got pretty concerned during COVID that, wait a minute, that 500 million next year it's going to be 425 in inflation adjusted terms. And this is terrible. Run that for 10 years and we will have lost 90 plus percent of the spending capacity and the reserve capacity of the company. And so I think he was holed up chatting with a friend because travel was difficult. And Eric Weiss, who is a fund manager, you've probably spoken to him at times.
- [10:21]
Interviewer 2
Yes.
- [10:24]
Adam Back
He suggested that they were looking about anything that could buy real estate, could buy gold. Public companies can't necessarily buy some types of assets. And Eric Weiss said, well, what about bitcoin? So then they went down the bitcoin rabbit hole and then Saylor personally bought bitcoin and went through the process of getting the company into it, which was kind of elaborate. I think they offered, you know, a kind of buyback offer. Like this is a, a pretty dramatic strategy shift at the company that they offered to buy back the shares at a favorable price for anybody who didn't want to, you know, participate in that. And so they got a bit of shares bought back and then like 275 million, something like that. They immediately bought bitcoin with. And he went on, you know, went on the Financial news shows to explain what he did and why I did it.
- [11:17]
Interviewer 2
Right.
- [11:18]
Adam Back
And I watched that with interest and I had the expectation that you'd see him on the financial review shows for a couple of days and that would be it. He'd go back to his, you know, managing his strategy business. But that was really not what happened. Exactly.
- [11:32]
Interviewer 2
It's hard to believe that was five years ago, August 2020. And what a transformation. He's now the ultimate speaker and educator for bitcoin.
- [11:41]
Adam Back
Yeah. And I mean, so I think the first surprise was, okay, they did it and then he continued to talk about it. Okay, he's got very enthusiastic about bitcoin and he wants to talk about that and kind of promote the concept of other companies doing it on all the financial news shows and talk about the bitcoin strategy more than the intelligence business. Right. And then they started buying more. So they kept doubling down, right? They take on corporate bonds and then more corporate bonds. And then the price fell a bit and they bought more corporate bonds, price fell some more. They took a bitcoin collateralized Silvergate loan and they just, you know, you'd think they got to be tapped out and they just kept going.
- [12:24]
Interviewer 1
Right.
- [12:24]
Adam Back
So the high conviction I thought was sort of encouraging for other companies, right. That, you know, it's like the, you know, Boeing makes a new aircraft and to demonstrate confidence, the management team goes on the maiden flight, right? So it's kind of like that. He's out on a bridge, jumping up and down, going at it in a fast paced way where people keep being surprised that they found a way to do more.
- [13:00]
Interviewer 1
Right.
- [13:00]
Adam Back
So that was kind of captivating. And so somewhere in that, you know, once they were repeat buyers and they're then starting to try and encourage other companies to follow. I got into that thing I mentioned, which is actually this is pretty good. It's a good use case for companies that didn't have the concept articulated at the time. But what the way ISIS came to see it, think about it more recently, is bitcoin's the hurdle rate, which means if you're saving investing, if you're a fund manager, like a hedge fund manager, sometimes you're collecting a management fee. But the bigger part of the compensation is the success fee or the carry, and that is how much you make. But if it's some kind of fixed income type of product, people don't want to pay you a success fee in the percentage terms on the US treasury rate because they can get that at what's considered the zero risk.
- [13:55]
Interviewer 1
Right?
- [13:56]
Interviewer 2
Right.
- [13:56]
Adam Back
So they'll often agree to put a hurdle rate, which is something you could get all day long, low risk and subtract that. So, and you know, so typically the hurdle rate is going to be based on the U.S. treasury rate or something. But with Bitcoin, I'm thinking, well, no, that's, that's incorrect. Bitcoin's a hurdle rate. If you're doing any other form of investing that's long term. If you can't outperform Bitcoin, you should stop and buy Bitcoin. And so, and then what does that mean for a company? Well, you know, it means you should put your cash reserves in Bitcoin because you're not going. It's very, very hard. Very few companies over the long term have even come close to keeping up with Bitcoin because the historic rise has been so meteoric. And we all know the metrics of the, of the history, right? Best performing asset class of the last 15 years, 10 years, 5 years to pick anything you want, Right. I mean, very short term, not so much because you've got macro volatility, market drawdowns in the cycle, but any kind of like, you know, 8 year, 10 year, 12, 15, it's just clearly being everything. And so, yeah, anyway, so with that I thought that's a good mission. How can, how can an individual help? And I hit on the idea, well, if we buy some of his shares, like individuals and other bitcoiners buy up some of his shares, and if Wall street doesn't understand it, the fund managers, mutual funds, people who hold big baskets of shares would maybe not understand it or take a dislike and hurt the share price. And the bitcoin has collected. It's not very big compared to Bitcoin at that time.
- [15:44]
Interviewer 1
Right.
- [15:44]
Adam Back
Bitcoin's market cap is probably A trillion and MicroStrategy was a few billion. So it's tiny. So it doesn't take that many bitcoiners to buy a small percentage of their bitcoin savings, convert that into microstrategy savings. So I figured, you know, well, if we, if we did that, we could support it. Right? We, if, if the traditional finance doesn't believe we do, we'll buy the shares and, you know, we'll provide a kind of, I think it's important for a company to have good shareholders, basically. Right. So that's what I started. I'm also a somewhat active trader, but I only really trade bitcoin. And when you end up being all in, it's pretty hard to trade Bitcoin. So then I, I thought, you know, hit on the idea of using it as a swing trade so you could, you know, sometime in there. The M Nav concept was put together by MicroStrategy itself, I think, and just the market cap divided by the net asset value that Bitcoin hold and that can vary between, I don't know, one and a half and three and a half or something like that. You can, you can, can find graphs of the history. So it occurred to me that you could, you could watch it for a while, see what ranges it got to sell some Bitcoin and buy it when you think the M Nav is low. And then, you know, when you think the M Nav is getting a bit high relative to previous history. You could sell the MicroStrategy shares and buy back your own Bitcoin at a higher price, but end up with a few more Bitcoin than you started with. And so that becomes an interesting trade. A microstrategy has inside it some leverage, right? But unlike a leverage position on a derivatives exchange where you've got there's a liquidation price implied, which is risky microstrategies, you've outsourced the leverage to them, right? So the reason they can outperform Bitcoin, other than these corporate actions, which we can talk more about, you know, the bonds and so on, is also partly because they have leverage and because of the flexibility of the things a public company can do, or even a private company to some extent, they are able to negotiate and have very, very hard to liquidate leverage. And if a price is going up in the long term, that can pay dividends. So that was my thinking for buying and then start to swing trade it. And later I, you know, that's, that's all I did for a while because I think that's all there was basically. Right. And late later I got, I know somebody called Batara ETO who is on the board of Meta Planet, got to know him personally and he was earlier investor in Blockstream. Completely different separate company to pstr. And he, he actually, it turns out, was the fellow who told metaplanet the same thing. You know, the similar genesis story as Eric Weiss to Michael Saylor, like, why don't you buy bitcoin? So it was Batara that told them, why don't you buy Bitcoin? So I think their story was Butara is his own VC fund and he also has real estate investments. So I think the conversation started about would you like to buy a hotel? I forget who Was buying from who? And you know, it was Covid. So similar kind of timeframe. It was after Covid had impacted the hotel business because occupancy dropped off a cliff.
- [19:36]
Interviewer 2
Yep.
- [19:36]
Adam Back
They had to cut back because they had presumably a public company like that has financing. They had to start divesting and selling properties in a bad market because real estate is not doing well in that environment. And so they were not in a good shape and they freely admit it. So you know, it's not talking bad of them, it's just the, the market conditions. They found themselves in it and so they had a bit of money and one, one hotel like a kind of business travels hotel in Tokyo and they're in trouble. You know, I think, I think it's like close to wind down the business and pay everybody out what's left or kind of scenario.
- [20:11]
Interviewer 1
Right.
- [20:12]
Adam Back
So and, and then they were having a conversation with Patara about you know, the hotel and he says why not Bitcoin? So I don't know, you know, the blow by blow, but they went for it.
- [20:23]
Interviewer 1
Right.
- [20:24]
Adam Back
And so Batara contacts me and asks me, do you want to buy some founder warrants in metaplanet?
- [20:35]
Interviewer 2
Oh wow.
- [20:35]
Adam Back
And it already been running for a while, so it had an M Nav and it was actively traded. And the Japanese market, you know, people don't necessarily realize, but Japan's market is the second biggest in the world by like GDP. I think it's 130, 140 million population and different countries have different appetites for retail trading. Japan, Japan is extremely active in retail trading. So there's a lot of people that are actively trading all kinds of stuff and it gets quite volatile. I think they're applying leverage. So it's a pretty high volatility, risk taking audience.
- [21:15]
Interviewer 2
And there's a disadvantage to buying spot bitcoin because of the capital gains tax there. So you have even more activity in the equities.
- [21:23]
Adam Back
Right, Exactly. I mean that I think was something that particularly helped Meta Planet being the tax regime, which was and still is unfriendly to bitcoin. I mean there's some prospect it may improve in the next year's some, you know, political discussion, elections and things like that. But for the moment they still have, I believe it's 55% tax on Bitcoin, capital gains punitive.
- [21:50]
Interviewer 1
Right.
- [21:50]
Adam Back
And as I understand it, the tax on shares is like 20%. So it's a drastic difference. Right. So that in itself provides kind of domestic tax arbitrage. And there's a few other cases that like that have evolved going forwards. So any case, I'm, you know, I've been used to at this point microstrategy with you know, m navs in the two, you know, one and a half to I don't know, three and a half wherever it got to at that point. And Metaplanet, I think when he, you know, when he offered the arrants was like 10. And so, you know, I was like, wow, that's, I don't know if I can buy into that M nav. That's really high. There was a bit of discount on the warrants, but I was still hesitant because, because you know, that, that felt like risk, right. And so at the end I was like, okay, fine, let's, let's try it. It's. Oh wow. It's a learning experience. And the first thing I did with it is just do nothing, watch it and what it does for, you know, for a while and to see where the volatility goes. And it, you know, it fell to five times and it went back up to 10 times and then it came crashing down again. So it's hyper volatile. But of course that, that actually works quite well for the company because they are able to do ATMs like at the market selling because even at the bottom of that range at that time it has a lower range right now, which we can talk about. But even at the bottom of that range that's a very high m nerve for selling at the market. Your increase in bitcoin per share is quite, is quite effective. You know, if you sell a million dollars of shares and you can, you know, and you're holding a five times mnav, then you use that money to buy more bitcoin. The dilution is dwarfed by the amount of bitcoin you're adding. So it's quite effective.
- [23:51]
Interviewer 1
Right?
- [23:51]
Adam Back
And so of course even More so at 10 times. And then there's some Japan market specific things like their market has limit up and limit down. So I think it's below a thousand or something yen. If the price is below that then if it moves up or down more than 100 yen in a day, it will limit. And that means you won't be able to trade above or below that price. And so you know, for people who are applying leverage, that's, that's a volatility amplifier because people who are short when it's limit up, they can't buy to cover their short. And nobody's wanting to sell because the market's limited.
- [24:35]
Interviewer 1
Right.
- [24:35]
Adam Back
So nobody wants to sell below that because hey, it's limit up and the people that want to buy can't buy to close that short. And so they get, you know, they get squeezed in a dramatic way and a kind of opposite on the way down. You know, the lungs get squeezed and then it falls with more volatility than it would otherwise. And so.
- [24:55]
Interviewer 2
I didn't realize that you were such a trader of these. Adam, can I ask you real quick? We've seen a lot of the navs compress and and a lot of just really bearish sentiment around the bitcoin treasury companies. We've seen their prices tank, especially after, you know, for example, like the pipe investor lockup periods have ended. Can you share your take on just what's been happening in the treasury space at large? Because to your earlier points, I mean you've not only been trading some of these, but you're also an investor in NACA in Orange which just launched in Brazil in a French company. I mean you've invested a lot, a lot of capital in these companies. Coinstories is brought to you by Speed Wallet. Want to win one million sats just by answering simple Bitcoin trivia? The top 50 players win free sats every week and one lucky winner gets a million sats at the end of the month. Speed Wallet makes Bitcoin simple. It is the fastest growing and most loved lightning wallet that allows you to send and receive instantly, swap to stablecoins, shop gift cards, play games to earn and explore many apps. Speed is also driving real adoption. Steak n Shake now accepts Bitcoin nationwide via Speed Speed payments. Head to speed app Coinstories and use code COINSTORIES10 for 5,000 free sats. Next up, BitKey, a Bitcoin hardware wallet with multi sig security inheritance and a recovery system designed for real life. No complex setup, no seed phrase, just true self custody without the stress. Named one of Time's best inventions in 2024. Use code STORIES for 20% off at BitKey World. Up next, the Bitcoin way. There's only one way to protect your Bitcoin from government, politicians and third party risk and that is 100 my friends at the Bitcoin Way will train you how to do this the right way the first time. No compromises. Go to the Bitcoin way.com Natalie to speak with the experts about making sure your Bitcoin is secure and private. Coin Stories is also brought to you by Genius Group, a Bitcoin treasury company listed on the NYSE. American undertaker GNS Genius is building toward a 10,000 Bitcoin treasury and just launched the Genius Academy featuring courses from saifudinamous myself and more. Start learning for free today at Genius Academy. AI Genius Group. Genius isn't measured in iq, it's measured in bitcoin.
- [27:09]
Interviewer 1
Right?
- [27:09]
Adam Back
Yeah, no, I think the, there are a few ways to look at it. One way to look at it is the decision I went through in deciding if I wanted to. You know, so at some point later I sold half of the Meta planet when it went up to 10 again and then it limit down for three days in a row and reopened at five. I mean that was when the limit limit down stopped so you could trade it again. And then I bought back, you know, more than more shares, but had some money to one side and you know, then at some point later it, they'd increase the bitcoin per share a lot. So even at the same price, 400 yen, it became sort of cheaper in bitcoin per share sense. So you know, I felt okay, maybe I should buy some more. But I wanted to get some kind of something, you know, some way to value it, to try and understand the risk. And so that's where I came up with the months to cover. Because the thought process was, you know, you're buying at this at five times premium. I, I think it had fallen to like two and a half or three by the time I was thinking about buying more. But the price was still 400 yen, same as after it had fallen.
- [28:30]
Interviewer 1
Right.
- [28:31]
Adam Back
So the concept there is, well, if I, if I buy let's say three times multiple, how risky is that? And one way to look at how risky is that is how long will it take at the historic rate they've been accumulating bitcoin per share until that risk is paid for. And, and you know, the point that risk is paid for is when the bitcoin per share has increased by three times so that you have paid one bitcoin for the number of shares that holds one bitcoin collectively. And so I felt like if you could get yourself with a holding that you'd effectively paid one times MNET for because they'd continue to accumulate, of course your risk is that the MNAF decays. That is just the past is not necessarily a predictor of the future, but if you could get to that point, then it's a very interesting position to hold because it's like an actively managed bitcoin, right? If you got yourself back to the point that you paid one bitcoin for this bitcoin and they're continuing to add bitcoin, then they're working for you and you can just be a long term holder in it.
- [29:36]
Interviewer 1
Right.
- [29:36]
Adam Back
So then with that viewpoint and I found that at that time metaplanets months to cover how many months it would take for that to be the case was only five months. And the comparison for MicroStrategy was 18 months because the M net was lower. And so that made me a bit more comfortable with the risk perceptions I bought, I bought more at that price. So that is some of the context. And then when it comes to the prices correcting, I think the question is are they still able to increase bitcoin per share? Are the strategies they have access to, do they continue to work when MNAV is lower? And it depends what they're doing.
- [30:19]
Interviewer 1
Right, right.
- [30:21]
Adam Back
And then you can just wait.
- [30:27]
Interviewer 1
Right.
- [30:28]
Adam Back
I mean if you can get to that one times position then you don't really worry about it. You're more of a hold the bitcoin hoddle mentality and you've actively managed bitcoin. So I was kind of looking at it from that perspective and yeah. And I think another phenomena that started more recently is short hedge fund run by Jim Chanos. He's a relatively investor.
- [30:56]
Interviewer 2
He's been so negative.
- [30:58]
Adam Back
Yeah. Actually he did a podcast I think hosted by Preston Pish between Pierre Rochard and Jim Chenos and actually I think he was, he came across quite balanced and agreeable.
- [31:14]
Interviewer 1
Right.
- [31:15]
Adam Back
He wasn't saying I don't believe in this or that. He was just saying that he thought the market had mispriced, wasn't disagreeing with the principles of what's going on. He just thought it was too high. And he's not like shorting MicroStrategy alone. He's short in microstrategy and then he's long bitcoin. So he's trying to bet that the MNEF will fall. And so he's been doing that and probably I think some of that stuff is transparent on like market sites that they have to disclose after some number of months, some types of shorts and things say people are expert in that can like look at it and get picture and you can, you can typically look up the short interest like how much, what percentage of the shares are short and the borrowing cost because that's market set. So anyway, I think that will weighed on MicroStrategy for a while and I think MicroStrategy also is. They've said it explicitly, right. That they are in their history they transition from different fundraising methods as they Explore different market mechanism and try to find what worked better and evolved their approach over time. So initially the bonds I mentioned, then that Silvergate loan, which funnily enough, I mean, very unfortunate for Silvergate, but when Silvergate got into trouble, they were able to sell to buy back their own loan at 23% huge discount and make money on their own loan effectively. But after that they moved on to at the market sales and convertible notes, which are interesting I think, if people are not familiar with a convertible note, basically the person is, let's say MicroStrategy raises 150 million with a 50% conversion premium and we'll describe that. That means that until it converts, they have a debt that will eventually get paid back in like five years or something actually with zero percent interest.
- [33:19]
Interviewer 2
Zero, yeah, exactly.
- [33:20]
Adam Back
Which is very nice financial terms. And if the share price goes up by that 50%, they can convert them into shares and book a profit. So if you think about that, you could do that even if The MNF was one, because you're able to buy 150 million worth of Bitcoin today and experience $100 million worth of dilution. So immediately it's beneficial. Right. So they did quite a lot of those. But more recently they've, you know, work, they race through these more novel instruments. Perpetual preferreds. Yeah, you've got a whole palette of them, five of them. And really it seems like they're, you know, trying to get the market familiar with it, try to build the appetite for it. Fascinatingly, they've put ATMs on top of them. So the, and it's very interesting because, you know, initially what they would do is they work with a banker like Canto or so on to find institutional buyers for this debt instrument. I mean it's just paying a fixed interest rate or a variable interest rate rate, that kind of thing.
- [34:26]
Interviewer 1
Right.
- [34:27]
Adam Back
Higher than treasury rates, but sort of directly or indirectly depending on the instrument backed by, in, in an insolvency situation by the bitcoin and.
- [34:38]
Interviewer 2
Yeah, over collateralized.
- [34:40]
Adam Back
Yeah, yeah. And so there are different risk trade offs and one of them is convertible as well. So you're getting an interest rate and there's a kind of cool option. So if bitcoin get, sorry, if micro Strategy gets to $1,000 a share, you can convert it into shares to get the upside, but in the meantime you're getting some interest rate, I don't know, like 10, nine, whatever it is.
- [34:58]
Interviewer 2
Yeah, that's the strike product.
- [34:59]
Adam Back
Yeah, yeah, exactly. And then you know, most recently stretch, which is Also interesting, that one is, it's more like a money market fund because you cash it in, you can sell it in the market and in theory you should get the capital back. Whereas if you bought a 10 year treasury bond and the interest rates change and you sell it early, you could suffer a significant loss or a significant gain depending on which direction the rates moved. So they wanted something that could pay an attractive interest rate that didn't have that phenomena, which is more like a money market fund.
- [35:32]
Interviewer 1
Right.
- [35:33]
Adam Back
You can put your notice period in and get your cash back and you've got some defined interest rate. Now they constructed it in a novel way.
- [35:40]
Interviewer 1
Right.
- [35:40]
Adam Back
They're varying the rates to try and keep the price stable.
- [35:43]
Interviewer 2
Yeah. Monthly dividends.
- [35:45]
Adam Back
Yeah, yeah, exactly. So it's interesting. But then on top of these things, apart from the institutional selling they've looked for at the market, so I think the beauty of that is that, you know, if there's demand in the market like the, the price on it is creeping up, they just sell some more directly into the market via an authorized intermediary. Right, yeah. Which could become a very scalable way to access capital. And you know, unlike the, at the market delusion or the convert or the convertible preferreds, sorry, all the convertibles rather, and the convertible preferred, there's no dilution implied, they're just paying an interest rate. And so on the face of it, 10% interest, you think, well, that's a high interest rate. But I think their perspective is they're buying Bitcoin $100,000 and they're paying 10%. And if Bitcoin got to a million, which is hard to predict or put a timeline on or anything, then their interest rate would be effectively 1%. So they're not too worried about the interest cost.
- [36:46]
Interviewer 1
Right.
- [36:48]
Adam Back
Because they've got this kind of long. They're basically trying to match people with low, with short time horizons that want an interest rate with something that is volatile in the short term, like Bitcoin, but has performed well over like a five year time horizon and sell products that line up with that, basically. So that's, that's the theory. So, you know, yeah, those, those preferreds are quite interesting. And it's perpetual or not, depending on whether there's a, you know, redemption date.
- [37:25]
Interviewer 2
Yeah, well that, that brings me to kind of zooming in on what you're going to be offering through the Bitcoin standard Treasury company. You launched this via SPAC a couple months ago. A SPAC being a special purpose acquisition company. I know some people aren't as familiar with those. But can you talk a little bit about it? Because based on your deck, you're some convertible notes, a convertible preferred, and then there's also pipe investors. Right, so talk to me a little bit about your company specifically.
- [37:52]
Adam Back
Yeah, so all of those fundings you mentioned are closed. So there was the initial 36 day period where we did the institutional selling basically and some like family office, high net worth and actually bitcoiners as well. And then there were two shoes and a shoe is sort of 15 or 30 day option to upsize it. One of the some of those things for investors that you know, decide after a bit of thought they want to do more. So that 30 days, also 15 or 30 day periods also pass. So it's all kind of wrapped up at this point. And so it's past tense. And then we did couple of novel things that hadn't really been done before at this stage in a company that's going using the SPAC process. So we had equity pipe, which is the normal, most straightforward way to invest in these things. Of course there's a SPAC itself which is just a shell company with a bucket of money in it, 200 million in this case. And then we raised an equity pipe and following. And then we also raised the convertible notes you mentioned. And we did a second pipe which was novel in being bitcoin denominated. So people with bitcoin could invest into the pipe with bitcoin. And this was done using a tax advantage structure where you don't get an immediate deemed sale on a bitcoin by investing in a company. If you just do it in a straightforward way, that would be the case. Right. And with this way you basically have people have to take their own tax advice. But I'm not a US resident or taxpayer anything. So you know, you, you have to, so you can defer the, you know, your cost basis on the bitcoin. You don't realize the gain. If at a later date you sell BSTR shares, presumably you would wait, try to wait for a higher price. You'd have to pay that capital gains implied by the bitcoin price plus whatever capital gains, if any above that applied by the BSTR price. So that's actually quite beneficial in tax terms because if you run the numbers, I know what the capital gains tax rate is in the US long term, let's say it's 20% or something. If you have to pay a 20% tax on some low basis cost Bitcoin, firstly you got the 20% and secondly, going to have to sell some more bitcoin to come up with the money to pay for it. And then you're going to have to find more bitcoins, come up with the money to pay for it. It's kind of recursive, right. So the percentage of the bitcoin you have to sell to pay 20% tax rate is not 20%, it's probably 25 or something.
- [40:51]
Interviewer 1
Right.
- [40:51]
Adam Back
So that's one here. And then you're doing it once and then presumably you're going to do it again when you sell the BSTR shares. And then you've got the same problem again. And so you've got this kind of double compounding, compounded tax problem. And it's super expensive. So if you can consolidate it all into one, you don't get any reset in your cost basis. That, that doesn't go away, but you don't get the compounding effects because there's only one tax event. So we, you know, we engaged tax professionals. People took their own advice and you know, you could, you could use it or not. We were thinking it was attractive for bitcoiners. And there's about 5,5021 bitcoin came into the bitcoin pipe at the time, I think we were using a $120,000 price. It's a bit more like 110 now. So at the time that was around 600 million, around 550 million now and the standard equity pipe was 400 million. So we got more money in bitcoin form. And the other interesting thing was some of the investors that used this in kind type of investment were actually us domiciled funds, hedge funds and things. Didn't expect that, but evidently that, that worked for them and they had some bitcoin with cost basis inside the fund. So they found it interesting too. And then the last thing they did that was novel is we did out of the gate a convertible preferred.
- [42:32]
Interviewer 1
Right.
- [42:32]
Adam Back
So, you know, as we were talking about microstrategy that took, you know, that was their very latest, that's the strike kind of structure. Right. So they'd gone through bonds, ATMs, convertible notes and then the preferreds, we jumped straight to the preferred. So effectively we were benefiting from the, their experience. Right. And of course, you know, there's another question is will investors invest in a new company? Because MicroStrategy has been around for decades, right. With this same structure, it turned out, yes, they will. So we have a big, I think it's about 300 of that too. The total raise between all those different instruments is around 1.3 billion. And there is 200 million in the SPAC. Whether you get the SPAC money or not depends on the redemptions. People in the SPAC have to write to cash out, to take the money back without. They can decide later. Because when they invest the money in a spac, they do not know what the target is. And so to encourage them to put money in it, you generally have to. There's just some market stuff that's evolved.
- [43:44]
Interviewer 1
Right.
- [43:45]
Adam Back
But they generally offer them the right to redeem if they don't like.
- [43:52]
Interviewer 1
The.
- [43:52]
Adam Back
Strategy or if they need the money back for some other reason.
- [43:54]
Interviewer 1
Right.
- [43:55]
Adam Back
So you'll get more money in if you offer these flexible terms. So that was also a first. There's two firsts in there. One is, as far as I know, the bitcoin equity pipe. And the second is the convertible preferred out of the gate in a new company. So the company shares of the SPAC are trading, which is CIPO Counter Equity Partners 0. And that ticker would change to BSTR on regulator approval, which is probably going to be sometime next quarter, fourth quarter this year. And at that point we get the ticker change and people pay. So one other part of this is to start this company, we made a new company, BSTR, and put Bitcoin in it. So that has 25,000 Bitcoin in it as well.
- [44:57]
Interviewer 2
Yeah, I wanted to ask you about that because you've already climbed the ranks when it comes to bitcoin treasuries, which you guys can all track@bitcointreasuries.net and so you're number four with more than 30,000 Bitcoin. That's massive. You seeded this with 25,000 Bitcoin. Where did that come from? Was that from you?
- [45:16]
Adam Back
I'm one of the investors. There are other early bitcoin investors as well.
- [45:20]
Interviewer 2
Oh, yeah. I saw in your deck, like you've got access to early OGs. So you guys put bitcoin in this. That's a lot. I mean, what does that allow you to do? Because the scale really matters.
- [45:32]
Adam Back
Yeah, I mean, I think scale can matter for which counterparties you can face and things like that. I think the other point was it's kind of skin in the game. I think if you look at the roster of other treasury companies that have gone a SPAC or RTO route, including some that I personally invested in, they are basically coming to Wall street, you know, partnering with a SPAC or finding an RTO target, raising an Equity pipe and then, you know, running from there. So there's no or very little founder equity in it.
- [46:08]
Interviewer 1
Right.
- [46:08]
Adam Back
I mean they will have sweat equity, some compensation plan, but they basically come into Wall street to assemble money to do a bitcoin play. Whereas we were rather, you know, bringing the bitcoin, you know, bringing bitcoin from the founders of the BSTR Nuco and inviting bitcoiners to use the in kind equity pipe or to use the equity pipe via an in kind mechanism or via just a straightforward, you know, provide the, provide bitcoin. Because some of the investors are international, right. So that particular type structure won't, will be different in their country. So. So between it all, yeah, it puts us at 4, possibly 3. It just depends on what the price of bitcoin is. When we get, you know, the 1.3 to 1.5 billion, minus fees. If bitcoin is a little lower, we could, we could move up. But you know, everybody is moving target too, right? People are trying to accumulate.
- [47:12]
Interviewer 2
Yeah, absolutely.
- [47:14]
Adam Back
And I think one factor that's different here is the other. Treasury companies by and large were priced at the start, whereas we are priced at close. So people deliver the bitcoin at close. At the time we would get regulator approval. And so at that time people deliver their dollars, they get shares at $10 per share, or if they deliver bitcoin, they get the price of bitcoin divided by $10 number of shares. So the point there is so roughly two thirds of the money is bitcoin anyway. So we optimized it for the bitcoin optimist viewpoint because that's our kind of mindset, right? We, we want to keep all our savings in bitcoin. So we want to, you know, if we're doing a corporate vehicle, we want that to be bitcoin based too. So that's, so that's, you know, that's, that's the inputs.
- [48:19]
Interviewer 2
Yeah. And just a reminder, guys, all these documents are public. You can look them up. It's fascinating to see some of the disclosures from these companies. Adam, before we start to wrap up, I would just love to get your take because there are some in the community that don't like the idea of the corporatization or the, you know, the, the Wall street era of bitcoin. They're skeptical. They think it doesn't align with the original ethos of bitcoin. And who would know that ethos better than you? You're one of the original cypherpunks who actually worked on what would ultimately become Bitcoin? So what do you say, what do you say to those people that look at the treasury companies and they hate what's happening and they feel like it's somehow anti Bitcoin.
- [48:58]
Interviewer 1
Right?
- [48:59]
Adam Back
Yeah. I mean, I think there's a few factors there. One is it's a novel new strategy for, for a public or private company, right. To, to use the capital raising advantages of a company structure over what an individual can do easily.
- [49:19]
Interviewer 1
Right.
- [49:19]
Adam Back
I mean, if you think about, in one way to think about, I think about whether you want to invest in a Treasury company, some people's reaction will be, well, I can do that myself. And I used an example on a panel with Michael Saylor and Eric Liser in Prague that, let's say you have a friend who has a dental practice. Maybe it's worth a million dollars because of its annual turnover. It's a stable business. People always want dental work. And he tells you he's gone to the bank and he's got a million dollar loan. Would you like to buy 10% of his company? And then he says, well, I don't want 100,000, 10%, I want 110,000. And you're like, oh, that's greedy. But then you do the analysis and you realize he's got much better credit terms because he's got an operating business and he's got a lower interest rate. Maybe you don't have the collateral to even get the loan. Or if you don't, or you have, the loan is expensive because it's under collateralized. And so you do the sums and you realize that it's win, win. You know, he gets a premium and you get a premium. So I think with that, you've, you've basically proved initially for yourself that treasury company should come on a premium because you just, you know, did a reasoned exercise of why it could make sense to invest in a private company rather than trying to do it yourself. Of course, if you've got things you can borrow against, like unmortgaged real estate or something, maybe you could do it yourself too, right? So it just depends. But I think that's, that's the starting logic. The, the other point is that there's something novel about them, right? It's a novel use for a company. And so people from a traditional private company or public company financing perspective are still getting to grips with how that works. You've got, you get skeptics from the, you know, professional and interest from professional and sole traders that they find it confusing or still getting to grips with it. And then bitcoiners too, right? A lot of bitcoiners are not necessarily traders or investors. They bought bitcoin the asset class and they want a dollar cost average or buy and hold. And that proved to be an extremely successful and low risk way to participate in bitcoin given the volatility. So they are skeptical about anything that has a risk reward trade off. Because there have been a lot of things that have gone wrong with bitcoin related investment schemes which we saw in the last bear market where half a dozen companies suffered hedge funds and things on lending programs, exchanges and so forth, suffered contagion and bankruptcies. And so people are rightly concerned about any risk reward trade offs that they want to understand it. And if the professional investors have trouble understanding it, then somebody who's not a trader is going to have even more trouble understanding it. Because there's a bunch of novel concepts in how public companies work, different share classes, ATMs, the whole thing, right. It's complicated. So you get, you get people that skeptical. And then I think the other thing is, you know, some people have a kind of, they don't like the banks or something, right. And, and so they, they suspicious of people that wear suits to work and people that are operating companies, big companies, things like that. Whereas for me, you know, with the cipher punks list, I was actually, you know, a lot of people in that discussion are like Austrian economic outlooks, they are anarcho capitalists, right. So they, you know, they want a very free market, they want minimized or no government. But they believe in, you know, capitalism and at least to my perspective, you know, capital formation, public and private companies are a huge part of what, you know, got humanity to the current state of standard living product and services because you can't build advanced things. Think about building, you know, an Airbus A380 or something that costs billions to build, right? You can't do it without a company. And ultimately my view is there's nothing that suspicious about a company. It's just a group of people with a shared enterprise. Right. And I was, and the last thing is I was, you know, an active day trader in the mid-90s. So I was already a trader. So people like Adam, you're a bitcoiner, why are you trading? I was like, well, I was always a trader. I just kind of paused that when I focused on my kind of cryptography and Internet security career at startups and big companies. But when I saw bitcoin, I got back into it.
- [54:17]
Interviewer 1
Right.
- [54:17]
Adam Back
So it's not that, you know, why did you suddenly do it? I was always doing it. It's always the same. And that's, that's my philosophy. I mean, people are welcome to their own view. I think if you do, if you do like, you know, do see societal value in companies and you have a stake in a company or you want to, you know, see a company succeed because you like the products they're building, then logically you should want them to protect their cash reserves like MicroStrategy did. Right. So, you know, you see like different public companies have bought a bitcoin. Not many, but some big operating companies bought Bitcoin. I think, you know, coming back to bstr, one differentiate for BSTR is that its stated objective, and people can see this in slides, is to be actively managed to try to achieve a yield on Bitcoin, to do hedged alpha strategies that are diversified to manage the bitcoin and create a net return separately from the capital markets. Strategies that MicroStrategy and others have worked through with the view that those things in combination are more accretive. So that's what we've described in the deck and to the investors in the process. The other fun anecdote is that when we did the raise for bstr, we chose to do it in Cantopitz Gerald's office. They have all the video, you know, the video conferencing set up Sean Bill, who's the cio, quite well known macro trader, hedge fund manager and for a couple decades and most recently he managed as a kind of new adventure, a pension fund which became the first US pension fund to put bitcoin on the balance sheet. So he and I were there and you know, it, it got extended and it got upsized and they asked us to stay, you know, more days and over a weekend. And then I think the most hectic day was we had 21 meetings in one day, that half an hour each. So there was like, you know, you'd have to sort of take turns to, you know, fetch a bottle of water or eat off camera. And it was just back to back to back to back to back. So it was quite intense but fun. And what I described as the capital result, which we're obviously quite pleased with because I believe it's about two times bigger in terms of capital raised than the nearest runner up in the bitcoin treasury space.
- [56:48]
Interviewer 2
Yeah, it's been really impressive what you've done. Were you wearing a suit for those meetings? Yeah, I can't really picture it. But hey, thank you so much, Adam, for sharing so much. I really encourage people to look up more information on bstr. And if people want to find more on your work, I, I really encourage them to also watch our original interview where you shared your whole origin story backstory, the work you've done on cryptography. Adam, any final thoughts before we wrap up and we go to a part two recording for all those who are active in a certain debate going on in bitcoin? But where do you want to send people?
- [57:26]
Adam Back
Yeah, I mean, just you can go to at Adam3s and, you know, just keep stacking and holding. I think, you know, people should do what's safe and not take risks that they don't have long term confidence in.
- [57:43]
Interviewer 2
Yeah, to each their own. You don't have to invest in one of these treasury companies. You can always just hold bitcoin. All right, thank you, Adam.
- [57:50]
Adam Back
Thank you.
- [57:51]
Interviewer 2
Thank you so much for checking out this episode of Coin Stories. Make sure you're subscribed to the show so you don't miss any new episodes. And if you can, turn on those notifications and leave us a positive review, they really help the show grow organically with new listeners. We have a free weekly newsletter. You can sign up@thenewsblock.substack.com this show is for educational and entertainment purposes only. Nothing should constitute as official investment advice, and you should always do your own research. I'm always open to feedback and guest suggestions, so please feel free to reach out@infoalkingbitcoin.com I'll see you next time.