← Coin Stories with Natalie Brunell
Coin Stories with Natalie Brunell
Michael Saylor: Fixing Broken Credit Markets with Bitcoin
00:55:43
Michael Saylor, Executive Chairman of Strategy, joins Natalie Brunell for a masterclass on Bitcoin credit. Topics include: Why people feel bearish about Bitcoin Bitcoin credit 101: The problem with fixed income and the opportunity Bitcoin creates for...
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- [00:00]
A
The 10 years from 2025 to 2035, there's going to be a lot of different business models, a lot of different products created and a lot of different companies launched and a lot of money made. And there'll be a lot of mistakes made and there'll a lot of fortunes created. And this is the chaos of the marketplace.
- [00:24]
B
Hey, everyone. Welcome back to the show. Joining me this week is Michael, Michael Saylor. Michael, it's so great to see you. It feels like every week I see you in some other city giving a great presentation. How are you?
- [00:35]
A
Here we are in your beautiful studio.
- [00:38]
B
Well, I feel like we have a lot to talk about. You know, the sentiment that I'm feeling in bitcoin is bearishness, actually. So you're the perfect person to talk to because whenever I speak with you and do an interview, I feel more bullish than ever and need to buy more bitcoin. So, first of all, why do you think people are feeling generally more bearish and why do you think they should be bullish?
- [00:56]
A
I think there's a natural ebb and flow in the economy and in the community. And so bitcoin surges up and has periods of extraordinary excitement, generates a lot of adrenaline and enthusiasm. Then there's a celebration, and then people extrapolate. Straight line to the moon and then it retraces a bit and consolidates and. And then people think, well, it's gonna bounce back really fast. And if it chops sideways for a while, you know, there's always a natural human tendency to get frustrated. I don't think we have anything to be unhappy about. The truth is, if you zoom out and look at the one year chart, Bitcoin is like, up 99%. It's like, no way, double. So if you walked in, if anybody in the street and said, hey, I'm. I'm heavily invested in an asset that is growing up 100% a year, should I be happy or not? They would say, you should be happy. Right. It's just that the way that it gets there tends to be a bit volatile. You know, as for why, I think the, you know, the why bitcoin has been consolidating and, you know, building its support in the teens right now is because you've got $2.3 trillion of Bitcoin that is unbanked. And so you've got a lot of people that own a lot of bitcoin, but they can't get a loan against it. And because they can't get a loan against it, the Only you know, at the point that you all of a sudden find yourself bitcoin rich but fiat poor. You don't have a lot of dollars, but you have a lot of bitcoin and you can't borrow against it, then you think, I have to go sell it. So I think bitcoins. Right now it's like this Mag7 startup where all of a sudden all the employees got insanely rich on penny stock options, but they can't borrow against them, so they have to sell them. And so they're selling and then people are saying, well, why are those employees selling the stock? Is that a vote of not confidence, you know, in the company? And the answer is no. It's just they have kids to go to college, they want to buy a house, right? They want to live comfortably, they want to do something for their parents. Uh, and so right now I think that the selling is o crypto ogs that have had a lot of money for a long time, they're selling 5%, diversifying, they're doing something like that. And the market is absorbing all of that energy, building its support. The volatility is coming out of the asset. That's a really good sign. But because what you want for the asset to mature is for, for lots of long term capital holders, the big corporations, the big institutions to buy. You want the early OGs that bought Bitcoin for a dollar or five or ten dollars to sell some or as much as they need to so they feel comfortable. You want the volatility to decrease so the mega institutions feel comfortable entering the space and size. And the conundrum is, well, if the mega institution's gonna enter, if the volatility decreases, it's gonna be boring for a while. And because it's boring for a while, people's adrenaline rush is gonna drop and it's like they had this big high and now the adrenaline is wearing off and they're a little bit bearish. But this is just a growing stage or, you know, natural for the life cycle of an asset that's montane, that's monetizing.
- [04:32]
B
Like this coin stories is proudly brought to you by Gemini. Investing in bitcoin has never been easier with Gemini's bitcoin credit card ear. 4% back in bitcoin on everyday purchases like gas, dining, groceries and more with no annual fee, no foreign transaction fees, and no exchange fees on your rewards. And this summer, get 10% back in Bitcoin at golf courses. Plus sign up today and get a $200 Bitcoin bonus when you spend 3,000 in your first 90 days. Apply now@Gemini.com Natalie if you're like me and want to stay on top of Bitcoin without getting lost in all the noise, you've got to check out the weekly CIO memo from Bitwise Asset Management. Bitwise has been around since 2017 and manag more than $10 billion across 30 plus strategies. CIO Matt Hogan puts together a quick five minute memo that breaks down the biggest stories in digital assets each week. Just go to bitwise investments.com CIO Memo and check it out. And always of course, carefully consider the extreme risks associated with crypto. Coin Stories is also brought to you by Leden need cash but don't want to sell your Bitcoin? Leden is the global leader in Bitcoin backed loans, issuing over $9 billion in loans since 2018 and they were the first to offer proof of reserves. With ledn you get custody loans, no monthly payments and more. Visit Leden IO Natalie I've been to some events recently with tradfi folks and it's always the same reasons that they bring up of why they're not investing in bitcoin. It has no cash flow. Some of them actually who work in finance share that they are prohibited from purchasing bitcoin. Can you speak a little bit to that and how much progress you think we've made in terms of the tradfi world and what needs to change for. For more people to embrace Bitcoin?
- [06:14]
A
Yeah, I think there are a lot of assets. Property, the greatest property assets of Western civilization. Assets like diamonds, assets like gold, assets like old masters, paintings, assets like land, the Louisiana territory, California, Mexico, all of Alaska, none of them have cash flows. Right. All of the great things we've acquired in life. I mean truthfully, if we think about what we want in life, whether it's a spouse, a marriage, kids, they have no cash flows. A house, no cash flows. Right. So the world's full of things, right? A Nobel Prize, no cash flows. Fame, no cash flows. Yeah. Yachts and jets don't have cash flows either. So the world's full of things that are deemed valuable in the world. They have no cash flow flows. And of course, as we know, the perfect money has no cash flows though the whole, the whole definition of money, a liquid, you know, the most salable asset. But if you want something to be money, you want it to have no utility value. Gold is better than silver because it has less utility value. And when it had, when copper or when you find something like silicon, that has utility value of some sort, it becomes worse money. And so I think probably people say, they say, well, we don't really think this is good investment asset because there's no cash flows. That's an opinion that has developed in two generations, you know, since, you know, certainly since 1971 and the period, you know, from 1971 until today, I think the world developed a view and its view was, you know, long term capital is a 60, 40 mix of bonds and equities. And bonds had some dividend yield to them and then equity, sorry, bonds had some coupon and equities had some dividend yield or some earnings. And that's just the way they saw the world. And eventually, you know, the s and P500 became the monster. You know, if you look at index investors, 85% of indexes are invested in the S and P. So many people think long term capital, what they think of as money held for the long term is an equity index like the S and P index Vanguard, they commercialized this and they made famous the idea of the Vanguard 500 and the Vanguard index fund. So when organizations are hyper successful with an idea like 500 stocks in a fund and when the entire institution, right, the S and P or Vanguard or mutual funds, when they're built on that idea, when a disruptive new idea comes along, that's even better. It's not natural that they would embrace the disruptive new idea. They're kind of stuck in their ways. As a practical matter, in a world that's US Dollar, the US economy is growing and the dollar is the king of the world. It's the world reserve currency. And there was no world war after World War II, right? So we haven't had a massive disruptive world war. Then you're living in a very particular situation, a particular time. And you could fall into. In calculus, we call it a particular solution to a differential equation. If all of the boundary conditions, if this and if this and if this and if this and if this, then you can just plug in this number and you'll get out that answer. And that is true as long as you don't change any of the boundary conditions of the assumption. You know, if you've got the solution for aluminum and then I change the steel to change the metal to steel, then the formula doesn't work. So at that point you can't use a particular solution. You have to use the homogeneous solution. You have to be not the engineer, but you have to be the physicist. You can't be the trade craftsman with the simple lookup table of the answer, you actually have to derive it from first principles. So what you see is most people have never in their life had to derive anything from first principles. They've used the particular solutions given to them by someone that taught them the answer. And that breaks down when, for example, your entire currency collapses. For example, if, if you live in a, in a economy where the currency is collapsing like Lebanon and they freeze your bank account and the currency goes to zero or anywhere in Africa, or if you lived in Argentina when the currency collapsed, then if you actually owned anything with cash flows, they're all worthless. So, so the irony of course, is one of these good traditional safe assets that generates cash flows. Well, not in Nigerian currency, not in the Bolivar, not in the peso, not in the Lebanese currency, not in the Iraqi or the Afghani currency. I can give you a whole. Not in a Russian currency, you know, before the collapse of the ruble that took place at the turn of the century, 96 or something. So the people that have these ideas, they have a particular set of solutions that work in a very stable closed ecosystem that's never been challenged, either with external stress or never, never encountered a new idea. When the, you know, the people that will get Bitcoin will either come out of very chaotic environments, you know, collapsing currency environments, where they had to and had to think for themselves, or they'll be at their base kind of scientists, first principles, thinkers, people that, that question everything and rederive it. So I think, you know, the great irony is again, the CEO of Vanguard saying Bitcoin is not an investable asset because it doesn't have cash flows. And then the largest shareholder of my company being Vanguard.
- [12:45]
B
Ironic.
- [12:48]
A
The most ironic outcome is most likely according to Mr. Musk.
- [12:55]
B
Let's zoom in on bonds as an asset class and maybe give a little masterclass for the mainstream audience about how you're revolutionizing the credit markets. I want to first start with just what problem did you identify in the fixed income world that you thought could be solved with Bitcoin?
- [13:13]
A
Yeah, credit. If you look at the credit markets, you got mortgage backed credit. Mortgage backed securities are one and a half times collateralized and they yield like 2, 3, 4%. And then you have fiat credit. It's credit backed by the promise that the government will print more money and that sets the risk free rate. That credit, you know, In Japan generates 50 basis points and Switzerland generates minus 50 basis points. In Europe, 200 basis points a year and in the US about 400. It just got reduced by 25 basis points yesterday. Right. So you have that kind of credit, then you have corporate credit. And corporate credit is backed by the cash flows of companies, whether they're good companies like the Magnificent Seven, like Microsoft or Apple, or they're junk bonds, or they're struggling companies that you know are struggling to stay in business. Those credit spreads can range from 50 basis points all the way up to 500. But that means that when you're buying corporate bonds in Europe, you might be getting 250 basis points a year in yield, 2.5% interest. Well, the real monetary inflation rate is greater. So all of these countries, Japan, Switzerland, Europe, the US, they all suffering from a form of monetary repression where the natural risk free rates or the fiat yields are less than the monetary expansion rate and the rate at which scarce desirable assets are appreciating. So that's one challenge. The other challenge is those instruments are illiquid sometimes, like all preferred stocks, they're very hard to trade. Sometimes they don't trade at all and they're under collateralized. So what we observed is the credit markets are weak. They're unhealthy is how I would say them. If you live in Switzerland and someone is willing to give you zero or take 50 basis points of your money every year, you have it in the bank and that's the offer. One can't characterize that as anything other than weak. Yield starved is another way. And so, so a lot of markets are yield starved. And on the other hand, most people, like in the conference the other day, there are 500 people in the room and I asked them how many of you have a bank account? Everybody's got a bank account. You know how many of your bank accounts yield more than four and a half percent? None of them. How many of them, how many of you would like your bank account to pay you 8 or 9 or 10%? All of them. Who's offering that? Nobody. What we see is, is the opportunity in the market is unless you have Bitcoin, unless you have a long term store of value, what I'll call digital capital, and you're going to hold it for the next 30 or 40 years, no one's willing to give you a fair yield for the long term. Like tell me who's going to give you 10% interest for the rest of your life?
- [16:32]
B
No bank. Well, you are.
- [16:34]
A
Yeah, we are right. The bitcoin community is right. Your bank won't, A company won't, a government won't, no mortgage backed security issuer will.
- [16:47]
B
And I Think it's important to share. Why not? Why can't we get that kind of rate outside of what you're doing?
- [16:54]
A
Yeah. It's because no company has a good enough business that they can be confident that they can generate returns north of 10% a year AD infinitum. Running a company is hard, Right. Because no one with a home can afford to pay that. That's another reason. So at the end of the day, and because no government that has a strong position wants to. Right. The strong governments that run the world that are stable don't wish to. They wish to pay you much less. And the weak governments, they. They are forced to pay more. But their currencies are collapsing and their government is collapsing. So you can't find a national creditor that would pay that rate. You can't. And most corporations, most corporations, corporate finance strategy is not to issue credit and make it good. Their strategy is to avoid credit to buy back their stock. Right.
- [17:59]
B
That's the conventional method.
- [18:01]
A
They're very conventional. So what we discovered is Bitcoin is digital capital. Bitcoin is going up faster than the S and P forever. Right. Once you actually acknowledge that bitcoin is appreciating more than the S and P forever. And my forecast is it appreciates about 29% a year for the next 21 years. And I've shared that with the community. But you could have any forecast. But if bitcoin is an asset and it's appreciating, then you can create credit collateralized by that appreciating assets. So Bitcoin's digital capital appreciating faster than the cost of capital. The cost of capital is the s and P500 return. And then credit written against it or issued against it is digital credit. And the digital credit can have longer duration or it can have short duration. It can have higher yields. It can be in any currency. Because bitcoin is a stronger currency. Right. One of the keys in the credit market is if you're going to issue credit instrument in a currency, you want it to be weaker than the collateral you hold. So if you issue the credit in a currency which is stronger than the currency you hold, you'll be upside down and you'll go bankrupt. Right. And this happens, for example, when they borrow in dollars and they live in a country where the currency collapses, they're bankrupted, Right? So what you want to do is you want to issue the credit in these other currencies. And so we can issue credit in yen or francs or Swiss francs. Or in euros or in dollars, because all of those currencies are weaker than the bitcoin currency, right? And so we discovered that we could take on any kind of currency risk we can then issue. We can offer higher yields. We can offer yields like a distressed debt, like a company going out of business, but we can then over collateralize them so that they look better than an investment grade. Investment grade. Companies in the United states aren't, aren't 2x or 3x over collateralized. We can create 5, 6, 7, 8, 10x over collateralized credit. So we can create, create credit which is less risky. We can create durations which are longer. We can create yields that are higher. And because we can create those in perpetual instruments, we can take them public. And if we take them public, then they'll have more liquidity. And so the idea is give me something which is smarter, faster, stronger than everything else, right? Make it more liquid, make it longer duration, make it, you know, more, more collateralized, make it less risky, make it higher yielding, better performing. And the opportunity of any kind of bitcoin treasury company is you have the world's best collateral. You have bitcoin digital capital. If you issue digital credit, you'll have the world's best credit. And that credit will then create amplification for the equity because whatever volatility and whatever performance you strip off of the credit will accrue to the common stock shareholders. And so you create amplified bitcoin in your equity. You create domesticated, low risk, low volatility bitcoin with yield. You, you know, that thing that doesn't have cash flows, we give it cash flows. Right? I mean, the irony of course, is, you know, a lot of these traditional credit investors, right, the people that want to invest in cash flows, they'll invest in the bonds. You know, they'll invest in the bonds or the equity of a company which is losing money or, or that has cash flows that don't even meet the cash flows that they're collecting, but at least it's cash flows. So, so what we're doing is we're, we're giving bitcoin cash flow, we're making it credit that way. It goes into credit indexes, and then we're creating equity which outperforms and that goes into equity indexes. And both of those two things raise capital. They're both gateways for capital. The capital flows into the bitcoin ecosystem and then we buy bitcoin in that, that finances empowers the bitcoin network.
- [22:33]
B
So you've identified that capital is grossly mispriced. And the collateral in the traditional world is really overvalued, whereas bitcoin is undervalued. And so you saw this opportunity. You've released these credit instruments, you've got strife, strike stride, and now stretch. Let's break it down a little bit further. Can you just share? For a lot of people, they don't really understand what is a preferred stock. It says stock or share, but it really acts more like a credit, like a bond. You're getting a yield. So can you talk about what a preferred is? And these are specifically perpetual preferreds and how unique that is in the market?
- [23:10]
A
Okay. A preferred stock is a second class of stock other than common. Common stock is you're just the final owner of the company and you don't really have any particular preferences. You don't get any particular guarantees from the company. But if you create a preferred stock, that stock can be given a dividend yield. We can say that stock's gonna play pay this dividend monthly or quarterly, or it's gonna pay a dividend that floats with sofr, it could pay a fixed dividend, it could pay a variable monthly dividend. It could. So you can give it certain cash flows and certain yielding rights. The stock can also have conversion rates. So you can say, hey, this converts to 110 of a share of my common stock or 1/5 of a share, or it's fully convertible. So you can give it any amount of equity upside, you can give it any amount of yield, you can give it liquidation preferences, you can make it senior, and you can, you can give it guarantees like, like it's a cumulative preferred dividend. So if we miss our dividend, we'll accumulate it. Or you can give it penalty. You can say, if we miss it, we'll pay you a penalty. You can pretty much write anything into the share that you like. So there are many different types of preferred stocks. It's a generalized container.
- [24:38]
B
And it's not debt where you have to pay it back. Right. It's not like a convertible where you have to pay the principal back, you raise the money and you don't pay it back.
- [24:46]
A
Yeah, generally it's different than a debt instrument because a debt has to be. The principal has to be repaid at some point. Certainly you could make it more debt. Like if you said, hey, the holder has a put right to put it back for cash, and you should, you could make it look more like a debt instrument if you wanted. Or if you basically give the holder the right to get all their cash in principle or to redeem it. If you gave it a redemption right at some point that would look a lot more like debt. Or you can make it look a lot more like equity. If you said it's non cumulative, like stride is non cumulative, so the principal never comes due and the dividend could be suspended without a penalty or without an accumulating liability over time. So you have extremes from very very debt like preferreds to very very equity like preferreds, everything in the middle. And that just makes it a very flexible security for a public company to issue. Now if you happen to be a public company and if you have a lot of bitcoin, then you could create this security and then you could take it public. So the first innovation is to create a Preferred, the second innovation is to take it public and then you IPO it on like a four letter ticker like strc. And the third innovation would be if you do take it public, you might put a shelf registration against it. And in that case that means you might sell $1 billion of it up front, but then you might sell 50 million a week or some amount of it continuously. Almost like an ETF gets bigger, like I bet got bigger because every single day capital flows into it and they increase the number of shares of of an etf. So when you create a preferred that's got a shelf registration that's public, you've almost created a kind of proprietary etf, Right? You've created a new financial creature. It's got all the benefits of an etf, but it's got also the benefits of a proprietary asset because you're creating the credit instrument in real time as opposed to I collect someone's money and then I'm running a junk bond ETF and I have to go and I have to buy a bunch of junk bonds. So an ETF provider has got a wrapper on someone else's assets. But when you create a digital credit instrument as a preferred, you're actually creating a native instrument back integrated all the way to the bitcoin over collateralized. Yeah. And then in that particular case you could create a preferred that is 10x over collateralized, that pays 10% dividend and it pays that forever. Right? That would be an instrument and just say that's what I'm going to sell and I can sell a certain amount of that.
- [27:44]
B
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- [29:22]
A
What we did was we created four different instruments so far. The first one we created was Strike and the idea with Strike was let's give people a dividend, 8% at par, let's make it par value $100, pay an 8% dividend stream and then give people a conversion, right, to a tenth of a share of MSTR so that you know, if the strategy stock is trading at 350 bucks, you have $35 worth of equity inside that instrument, right? So that was like have some equity upside, have downside protection via the liquidation, and then have continuing income via the dividend. So that was a very simple, well, not a simple instrument but an idea which is I want the upside with very little downside and I want yield while I'm waiting. The second instrument we created was Stryfe STRF and that was a 10% dividend yield at par. So we're going to pay 10% interest in a way or 10% yield on $100 instrument forever. Okay. 100 year bond that pays 10% yield. Right. You just don't see that very often. And we made that senior in the capital structure. So we, we basically put as part of the security, one of, one of the covenants in the security is we won't sell any other preferred stock senior to Strife. So Strife will always be first in preference. Senior, senior, long duration credit. And that's very comforting to credit investors who are very risk averse because they would say, well, I'm going to get paid before everybody else. So that makes my principal much better protected. And that, that gives me, in theory, that's credit positive. It gives it a better credit rating in their eyes. So we sold that and that traded above par. So that traded way up. So it was yield. And the idea was as the credit improves of our company and as people get more comfortable with bitcoin, as the price of bitcoin goes up, that could go from 85 to 100 to 110 to 120 to 150. It could go to 200. So it could trade way up above par because it's totally perpetual. And that sets the cost of capital for our company. That is the investment grade.
- [31:52]
B
Yeah.
- [31:52]
A
If you're saying what would be the long term, the 30 year bond rate for an investment grade bitcoin company, that's setting that rate by the market right now. So then the third thing we did was we created Stride strd. And the idea of Stride is what if we just sold Strife? But let's just take away the penalty clause and the cumulative effect. We literally took out like two clauses and it's the same thing. It's still 10% at par. But you would say, well, this is junior long term credit, not senior. So the senior one looks more bond like and you're, you've got not a bond. But it looks, it looks less risky.
- [32:34]
B
Less risky. Higher in the capital stack.
- [32:36]
A
Yeah, higher in the capital. And this looks more risky. Lower junk. It's just right above the equity.
- [32:42]
B
Right.
- [32:44]
A
So we sold that and that trades with an effective yield of 12.7% whereas strife trades with an effective yield of 9. So a 370 basis point credit spread appeared between the least risky and the most risky. And ironically, the Stride deal was twice as successful as Strife. It was twice as big. And people would say, well, why would someone want to buy that when it doesn't have a cumulative right. And doesn't have penalties? And it's junior. And the answer is because they believe in bitcoin. And they trust the company and they want the yield. Right? You would rather have 12.7% in your bank account than 9%. And so the issue is, do you trust your bank? You know, at some point, if you trust your bank and they offer you 12 instead of nine, you know, then you're going to do that. So now, who else trusts the company? The equity holders. Right. Just like who trust Bitcoin, the bitcoin holders, at some point, you decide what you're going to trust. And this is an instrument that provided two benefits. Well, many benefits. One benefit is it gives people that believe in the company and believe in bitcoin the ability to get paid 12.7% dividends. That's great for them. The second is it gives the company the ability to build collateral that's junior to the senior instrument. So it's credit positive, it's good for Strife, it's good for Strike, it's good for everything else. And then it also gives the company a very scalable way to generate leverage to buy bitcoin, which doesn't have credit risk. So in theory, if there's a market to buy $100 billion of Stride, we could sell $100 billion of Stride and we could lever the 90% leverage and we would buy bitcoin with it. And that would be good for bitcoin, that would be good for the equity. If that was good for the equity, that would be good for the equity component of Strike, you see. And of course, because we bought all this bitcoin, that means that strife would be 50x over collateralized. So it's actually good for the credit, good for the converts, good for the equity, good for bitcoin, and then good for the stride holders. Right? So it's kind of the fly wheel. And that's why we did the third. And then the last thing we did was stretch. And the idea was stretch was people said, yeah, I'd like to get 5, I'd like to get 10% bank account instead of 5%. But I don't want the volatility. I don't want to think that maybe the principal would trade up 10, 10 or trade down $10 a share. Like, if I buy it and it's trading at 110 and then the interest rates change and it trades to 105, I'll have lost one year worth of interest or one year worth of dividends. So we wanted to find some way to get to $100 and keep this price right around par, right around 100, lowest volatility. Imaginable and extract the yield. Okay. And so the idea of stretches, well, we don't, we don't want the duration risk. What strife has is long duration. That means effectively 120 months of interest duration. That will cause the principal to move up and down, but below or above par a lot. In fact, 1% move in interest might cause a 20% change in principal. If you have a long duration, a 20 year asset. Right. So what we want to do is strip all the duration off. So not 120 months. We go to one month and we wanted to. And when you strip the duration off, you strip the volatility off because you know, the 30 year bond trades much more volatile than the one month treasury bill. So we wanted to strip the volatility off when we stripped the duration off. And to do that we had to create a monthly instrument, not quarterly. So we basically took the dividend to a monthly cash pay and then we had to create a variable dividend rate. So this is the first time in modern capital markets that a company created a preferred stock that has a variable monthly dividend. Right. And so we call that a Treasury preferred. We invented the treasury preferred stock with AI. I used AI to do it. Nobody else would have thought to do it because they never had an asset that would justify doing this. And in essence stretch becomes like, it's not quite a high yield bank account because you don't have perfect zero volatility. And you can take, you know, if you had a $1,082.32, you would get exactly $1,082.32 tomorrow if you asked for it. It's not that, but it's, you would be pretty close and you could put money in it that you needed to hold for a year. So, you know, with very low volatility you could collect the 10% dividend and then if you needed the capital back, you could redeem it into the market and get your capital back. So the idea is a bitcoin backed money market type instrument. Not again, not quite as good as a money market, they're less volatile. But we wanted to compete with that, you know, with bitcoin backing it.
- [38:22]
B
So you're building out a whole yield curve backed by bitcoin. These are perpetual. Here's where I feel like people get confused. You promise not to sell your bitcoin, right? So if you aren't selling the bitcoin, where does that yield come from from these instruments? That's the question I hear from the average person who's considering like what are these instruments actually? So how does that work exactly?
- [38:49]
A
So we've got about $6 billion of these preferreds. We, we pay out about $600 million a year in dividends. The company enterprise values about 120 billion and we sell about $20 billion worth of equity a year. So you think about this. We basically sell the first 600 million of the equity, we use it to fund the dividends. The rest of the $20 billion we just buy more bitcoin with. So we're raising capital at a ferocious rate in the equity capital markets. And maybe 5% of the equity capital we've raised, we've earmarked for dividends. The rest we just buy more bitcoin. In the event that we couldn't sell equity for some reason, we actually have the bitcoin itself and we can sell either credit instruments against it or we can sell derivatives. So for example, we could sell bitcoin derivatives, we can sell futures against bitcoin, or we could sell out of the money call options. And you know, they call. There's something called the basis trade where you can actually sell the future against the spot and you can capture a yield if you have bitcoin as collateral to post against that trade. So the company's primary method of paying the dividends as we just sell equity, our secondary methods would be to sell derivatives on the bitcoin itself. And then the credit markets are open to us. So we could also tap various credit markets from time to time.
- [40:25]
B
And is the goal to have these instruments rated by the big credit agencies? And what would that mean?
- [40:30]
A
Yeah, the company's campaign right now is to become the first investment grade bitcoin, treasury company and crypto company in general. And, and to get all of the instruments rated by credit rating agencies. And, and that's an elaborate process of lots and lots of meetings and lots and lots of education.
- [40:51]
B
Oh really?
- [40:51]
A
But over time, I'm confident we'll get there.
- [40:54]
B
Well, this makes me think of, you know, a lot of people were wondering why, why you didn't make it into the S P500 yet. But it seems like you weren't that surprised at least, at least for now. Why weren't you included yet?
- [41:04]
A
Well, you know, the S and P has a certain set of criteria, and we didn't qualify for the criteria until just this quarter. So for five years we didn't qualify. You have to be, you know, profitable. You have to check a certain set of boxes. And I think we weren't able to qualify until we had implemented fair Value accounting. And so in the second quarter of 2025, that was our first quarter of eligibility. We didn't expect that we would be accepted into the S&P 500 in the first quarter of eligibility. Tesla wasn't accepted in its first quarter of eligibility. We're kind of a revolutionary new company and this is a revolutionary new asset class. It would be very reasonable for a risk adverse traditional committee of decision makers that are making a decision that's going to determine the flow of billions or hundreds of billions or trillions of dollars capital. It would be reasonable for them to wait a few quarters. They might very well say, let's see what happens with the second. And if this business turns out to have staying power after 2, 3, 4, 5 quarters. Look, if someone adopted a new idea after 4 quarters of performance, they would be deemed to be quite innovative and progressive. Right. Sometimes people wait three, four, five years before they acknowledge something. So I wouldn't expect it in the first quarter. I would think over some number of quarters. At some point after you've got a track record in the industry seasons, then I think we will be accepted. I think the S and P's already, they've accepted Coinbase and they've accepted Robinhood. So I don't think that they're averse to the crypto asset class or to bitcoin or digital assets in general. I just think that exchanges have been around a long time, 100 years. Right. And so those businesses have a much longer track record and so they understand them better. Treasury companies are really exploding new category of company and they're very revolutionary. And I date the entire treasury company industry to November 5th to 2024. I feel like we're three quarters into it when it's very clear that this is a legitimate new class of companies. And you can see the markets treating it the same way. We've gone from 60 companies to 185 companies in 12 months. The industry is in hypergrowth mode.
- [43:42]
B
Yeah. We have gone to almost 200 companies, but some of them, you know that we're seeing the M Navs compress. We're seeing this consolidation happen. Can you speak to maybe just the market reaction out outside of the Bitcoin space? Are they looking at Bitcoin treasury companies as something that will be kind of the institutional investment grade in the future? How do they value these companies? Are you still seeing that adoption? Really slow. And maybe something will be a catalyst to turn that around.
- [44:08]
A
I think the market's in getting educated mode. I mean, I just had 25 investors. And, and I asked them, you know, how familiar are you with this, this, this, and like, tell us about Bitcoin and is bitcoin going to get banned, you know, or not? And, and we literally have to go back to no, Bitcoin was actually not going to get banned in 2023.
- [44:29]
B
Right.
- [44:30]
A
And then you have to lay out the crypto industry in general. And then you, then you explain the various credit instruments, then you explain the equity. And so most of the market's still getting educated. I, you know, if you wanted a metaphor, imagine that the year was 1870, and people are starting to refine crude oil. And there's a bunch of companies being launched to do crude oil things. And then someone comes up with an idea for plexiglass or Lexan, and there's polyester and there's Lycra and there's nylon, and there's all these possible petrochemical applications products. And there's, you know, and someone's talking about kerosene and some guy saying, well, I think we could use diesel or gasoline. And some guy talks about asphalt fault. And, you know, and, and all the investors are sitting around saying, is this a good idea? How big is, how big could this industry be? You know, and they're still struggling with how big could the, you know, the kerosene business be in 180 countries? And by the way, the, the first application of kerosene was lamps to light your home. It was light, and then it became engines, and then it became heaters, and then it became jet fuel, and it's rocket fuel today. And so I think the industry is just so embryonic that, you know, the, the companies are learning how to, how to explain what they're doing. They're deciding what they're going to do. The companies are deciding what their business model will be. The investors are trying to understand the business models and, and the industry, the regulators, you know, are evolving the regulations, and this is all happening in real time. So this is the digital gold rush and the 10 years from 2025 to 2035. There's going to be a, there's going to be a lot of different business models, a lot of different products created, you know, and a lot of different companies launched and a lot of money made, and there'll be a lot of mistakes made and a lot of fortunes created. And, and this is what the chaos of the market.
- [46:40]
B
We only have a few minutes left, so I want to end this on a more personal note. A lot of people just in the last week They've been feeling really heavy. The nation feels more divided than ever before. People are pulling apart, and they're fighting online. Do you have a message? Because you have clearly found so much hope in bitcoin, and you always talk about how it empowers the individual. There's nothing out there that serves the rich and the poor more than something like bitcoin. And I think we need a message of hope right now when our country's been so divided, even, you know, especially in the wake of the. The Charlie Kirk assassination.
- [47:18]
A
I think my message would be that we actually all have a lot more in common, and we agree on a lot more things than the mainstream media would lead you to believe. So, for example, if we take just the bitcoin community, oftentimes we have very divisive debates in the bitcoin community between one set of bitcoiners and another set of bitcoiners. And when I go online, you know, it could be very toxic and very colorful, very passionate, and people get so worked up. They get. Sometimes they get massively angry at me. They get, you know, one set of developers get massively angry at another set of developers. And I think the irony is that we agree on 99.9% of everything. And when you dig a bit deeper, what you find is that the inflammatory messages tend to run harder. Lies run harder than truth. Extreme positions run harder in cyberspace on X and. And through the ecosystem. And, you know, even I notice in times of success, like just of late with our company, our company's never been more successful. And yet the amount of hate and toxicity like that gets posted online has never been greater. And then I'll drill down on some of these, on the people posting, you know, all the negativity and the hate and the criticism. And here's what I see. Oftentimes I see it's a person that's never interacted with anybody before, and they have 328 followers, and they share none with me. And I look a little bit, and I'm like, this is not even a person. This is a bot. And it turns out, I think that a lot of the toxic, inflammatory behavior online is actually cyber marketing or guerrilla marketing. A short seller in my stock has actually paid a digital marketing organization to spin up a bunch of bots, to post a bunch of nasty, awful, skeptical cynicism because they think it might work. And it's very transparent to me that someone paid some money to create the appearance of a protest. Wow. And I think if you take this in the political Realm, same thing. A lot of times the political inflammation is someone paid a digital bot to create the appearance of.
- [49:57]
B
Unhappiness, to manipulate us.
- [50:00]
A
A lot of times, I think in our country, a lot of protests are paid protest. Someone actually spent money to hire someone to go and protest, and it's a hired, paid for protester. And then what happens is the mainstream media will put the camera on the paid protester, or they'll put the camera on the fake bot, and they'll say, people are up in arms in cyberspace, or they're up in arms in such and such. And they'll put that in front of millions of people and create the appearance of societal dysfunction, unhappiness. And unfortunately, right. If you actually take a fake protest and you amplify it enough, you may convince 1 out of 10 million people to violence, and then it becomes real, and it becomes a tragedy, and it's awful. But my message to everybody is, I think this might be the tragedy, the Kirk affair might be the tragedy that causes people to realize that there are actually some dysfunctional systems in our society that are in the business of creating inflammation. They're. They're actually creating the. They're divisive systems of amplification. And in fact, the people can be brought back together with a little bit of surgery. Find, find the amplified sources of divisiveness and turn them off, right? Turn off the, you know, the amplifiers of toxicity. And then the other part is just the recognition. It's like if you read 37 negative comments, you think everybody hates you. It's like, online, I read things. I think everybody hates everything that I'm doing. And I go out in the real world. I've never met anyone that was unhappy. You're like, how come the people in the real world seem so happy and the people online seem so unhappy? And what you're seeing is the cameras. There's a phrase. If it bleeds, it leads.
- [52:02]
B
Yep, I knew it in news, right?
- [52:05]
A
So the cameras are looking for the civil unrest, but my message is the civil unrest is being paid for. Right. I think that there are, there are actors that create the civil unrest in cyberspace. They create it in the real world. Then there's unhealthy media that amplify, that magnifies and amplifies it. And I think the general population is kind of sick and tired and, and they're getting more and more aware. Right. Like the, the. The growing distrust of all of these systems, you know, is an immune mechanism kicking in place? I think generally this is Going to catalyze a lot of positive behavior and a lot of constructive humanitarian engagement. I'm very confident I'm opt. Over time, we'll find our way to a healthier world and a healthier body politic. But it starts with not believing everything you're told, not believing everything you read, thinking for yourself. Right. And then I think there is a place for you to, you know, to recognize when you've got 187 bots in your stream that are amplifying toxicity, don't engage with them. Don't feed the trolls, you know, because just like when there's 52 paid protesters on your street corner and they were paid to be there, don't go out and fight with them, you know, because they're literally mercenaries paid to do this. Don't spend your time trying to convince them otherwise. They were paid to have a certain opinion. Right. That's their job, to have that opinion. And we've saw. We saw that, you know, in a number of crypto wars, you know.
- [53:56]
B
Yeah.
- [53:57]
A
You know, when. When Greenpeace and the Sierra Club were paid to decide that bitcoin was not environmentally friendly, you're not going to convince them otherwise. It's not an honest transaction or an honest reaction. It doesn't come from any, you know, from. From any place of honesty. It was literally paid protest. And so I'm hopeful the society will look at the consequences of paid protest and they'll take a step back.
- [54:25]
B
Well, and there are a lot of connections ultimately to something like bitcoin being a peaceful revolution and maybe defunding some of these power structures that have really taken advantage of us and trafficked in attention and move it to a system that is peaceful and creates more value for people. Right. That's kind of what I always get from your message, too, of hope in bitcoin.
- [54:45]
A
That's what we always say. Bitcoin is a peaceful, fair, and equitable way for us to settle our differences as everyone embraces it. Peace will spread. Equity will spread. Fairness will spread. Truth will spread. Toxicity should decay.
- [55:03]
B
That's a great note to end this on. Michael, as always, thank you so much. I appreciate the conversation.
- [55:08]
A
My pleasure.
- [55:09]
B
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.