The Hurdle Rate Podcast

Episode 45: Preferred Equity Demand
Date: January 28, 2026
Host: Tim Kotsman
Guests: Joe Burnett, Jeff Walton, Ben Workman

Episode Overview

This episode dives deep into the rise and mechanics of perpetual preferred equity in the Bitcoin treasury company sector. The hosts compare this new financing model with more traditional methods like convertible bonds and covered call ETFs, and discuss its implications for risk management, investor behavior, and systemic stability within the Bitcoin ecosystem and broader macroeconomic environment. The discussion further explores the current volatility in the commodities market (gold, silver) and the economic turmoil in Japan, connecting these trends to Bitcoin’s long-term positioning.

Key Discussion Points & Insights

1. Perpetual Preferred Equity Mechanics and Risk

• Jeff Walton opens the episode by addressing concerns about preferred equity causing systemic risk for Bitcoin treasury companies.
  • Clarifies that perpetual preferred equity is not debt, but equity with a dividend commitment, and does not manifest as a liability on the balance sheet.
  • Liquidity: If the price of preferred equity like STRC drops, it remains liquid and can be traded. “It is not a liability, it is equity on the balance sheet… if people are continuously willing to sell it at that price, [the company] could exchange Bitcoin capital to retire the instrument at a discount.” [03:08]
  • Companies can buy back the equity at discount, supporting price and enabling further capital raises.
  • Unlike bank debt, there is no cliff maturity; this makes it suitable for withstanding Bitcoin’s volatility.
• Ben Workman expands on risk factors and the concept of a "death spiral" in dividend rates:
  • The adjustment of dividend rates can be paused or managed without a rigid formula, especially during irrational or turbulent market periods.
  • The existence of a rolling two-and-a-half to three-year dividend reserve allows companies to weather downturns without forced sales of Bitcoin, something that failed companies like BlockFi and Celsius could not do.
  • Only extreme, prolonged negative outcomes for Bitcoin itself (e.g., 90% drop for 15 years) would present existential risks.
  • “Every issuer we’ve seen...is doing it with a risk forward approach...you don’t find yourself in a panic situation where you have to take rash measures.” [10:27]

2. Evolution of the Carry Trade on Bitcoin

• Joe Burnett recounts how Bitcoin’s monetization and search for amplified returns previously led to risky leverage through methods such as BitMEX or using Bitcoin as collateral with high liquidation risk.
  • The move to perpetual preferred equity (digital credit) is viewed as the most robust, antifragile approach to achieving amplified Bitcoin exposure.
  • “If those [previous leverage blowups] didn’t provide this existential risk to Bitcoin itself, I don’t think digital credit does. This is why we got to this point to begin with.” [12:48]

3. Investor Profiles and Incentive Alignment

• Buyers of preferred equity are typically yield/fixed-income oriented and less reactive to spot Bitcoin price changes than common equity or Bitcoin investors. This distinction creates different market dynamics.
  • “Turns out people do want lower volatility, high yield instruments…so far that thesis is playing out.” [16:24]
• Incentive alignment:
  • Convertible bondholders may be incentivized to see common stock drop (via hedging and seniority), while preferred holders want company health for continued dividends.
  • “The pref holder is long the credit quality, not the volatility…The incentive alignment between the two products is far better on the preferred side.” [30:30]

4. Recent Treasury Activity and Demand for Preferred Equity

• Strive’s (the company’s) preferred equity offerings have been met with significant demand, including upsized capital raises and rapid balance sheet cleanup post-M&A activities.
  • Aim: move towards an entirely perpetual preferred equity capital structure, removing debt maturities.
  • Contextual quote: “That old raise was also a testament to the demand that you see out there…investors and institutional investors are really starting to value these products.” [19:18]

5. Comparison to Covered Call ETFs and Volatility Products

• Discussion of newly launched covered call ETFs tied to Bitcoin (e.g., IBIT covered call ETF):
  • Covered call ETFs trade upside for yield by capping appreciation, whereas perpetual preferred equity keeps optionality on upside through overcollateralized reserves.
  • These products are fundamentally different in risk and return profile.
  • Risks: Covered call ETFs may appear attractive in sideways markets but underperform in strong upside moves—a lesson from gold/silver’s recent volatility.
  • “You can do it for a little while and you’re earning a certain yield…until something just melts your face off and you lose half of your position in a short period of time. Because hard assets, especially bitcoin, with a perfectly inelastic supply…things can start moving very quickly.” [39:02]

6. Macro Outlook: Gold, Silver, Fiat Stress, and Japan

• Commodities: Recent rapid increases in gold and silver prices could suggest a rotation of capital searching for monetary assets outside fiat.
  • Bitcoin currently sits well below these assets in total market cap but may benefit from similar rotation as “digital gold” in the future.
• Japan’s economic instability (40-year bond yields spiking, 250% debt-to-GDP):
  • The hosts consider the prospects for US intervention, possible dual-currency regimes, or even adoption of digital stablecoins.
  • “You’re seeing the bond yield spiking…what do you think this path looks like?” [47:31]
  • Bitcoin treasury companies in Japan (e.g., Metaplanet) could benefit from capital flight if investors move funds from yen-based assets to bitcoin-based assets.

Memorable Quotes & Segments

• On perpetual preferred equity risk:
  "Perpetual preferred equity is equity. It is not debt... you can weather volatility for an extended period of time without having a cliff maturity." — Jeff Walton [01:21]
• On incentive alignment:
  “What’s the best-case scenario for a convertible bondholder? The stock goes to zero... for a preferred holder, you want the company to perform, and dividends paid. So, everybody kinda wins.” — Tim Kotsman [29:35]
• On risk reserve:
  “You’ve got three years of capital frozen in time…to pay off those dividends without ever having to touch the base asset.” — Ben Workman [09:48]
• On covered call risk:
  “You can do it for a little while and you’re earning a certain yield…until something just melts your face off and you lose half your position.” — Joe Burnett [39:14]
• On macro uncertainty and capital rotation:
  “It’s clear you have capital moving out of the existing systems and looking for a home where it can be protected. Right now, the first place to go is metals, and I fall in the camp that bitcoin will be the follow on.” — Ben Workman [43:37]

Timestamps for Key Segments

• [01:00–05:25] — Introduction to perpetual preferred equity; clarification of risk and liquidity
• [05:25–10:57] — Dividend reserve, resilience against flash crashes, risk mitigation
• [10:57–13:18] — History of Bitcoin carry trade, evolution to preferred equity model
• [13:19–16:27] — Investor base for preferred equity, alignment vs convertible models
• [16:27–19:06] — Dividend policy mechanics, capital raising success stories
• [21:43–24:38] — M&A transaction experience and operational pace at Strive
• [29:14–32:44] — Incentive alignment between bondholders and preferred holders
• [32:44–37:47] — Comparison to covered call ETFs, risk of yield strategies in hard assets
• [37:47–41:52] — Market cap comparisons: gold, silver, and Bitcoin
• [47:31–55:00] — Japan’s fiscal crisis, possible scenarios, implications for Bitcoin
• [58:06–63:49] — Capital flight potential, utility of Bitcoin as global store and transfer of value
• [63:49–66:00] — Closing thoughts: market context, store of value rotation, optimism for Bitcoin’s role

Conclusion

The episode offers a comprehensive, nuanced look at the current boom in perpetual preferred equity among Bitcoin treasury companies—a response to lessons learned from leverage blowups and the needs of institutional and yield-focused investors. The roundtable highlights how the yield and risk mechanics differ fundamentally from both debt and from new equity-linked covered call products. In the context of a rapidly shifting macro environment—with gold, silver, and fiat currencies in flux—Bitcoin’s unique monetary qualities and financing innovations position it as a pivotal asset for both corporate treasury and private wealth preservation moving into the volatile years ahead.