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- [00:00]
A
Welcome back to the hurdle rate Episode 46 for the week of February 2nd, 2026, I'm Tim Kotsman. I'm joined by Ben the Working man, workman, punter, Jeff Walton and Matt Cole. We've got an itinerary, we've got some topics today. We have a new Fed chair. I've got my purple Fed chair tie on. Is it hawkish? Is it dovish? What's going on with the metals pop? And what's the impact on global markets? What's the latest with the market structure, Bill? We'll cover the latest government shutdown, we'll cover strategy, the leverage, the USD reserve, the increase in interest rate and the shift to the pref only model. We'll cover the long term view of underwriting bitcoin and we'll walk through the seda, follow on. But first I'm going to send it right over to Matt Cole to start us off.
- [00:55]
B
Thanks Tim. And I'm glad you addressed not wearing an orange tie today because that was going to be my first question for the pod. But great explanation and obviously looking sharp as always. Yeah, no, the Fed news is massive and I think it's worth covering in depth. And we've talked about this a lot. QE kind of my bitcoin journey, talking to the Fed, talking to the treasury, getting gaslit by them. And in a sense when you get someone like Warsh that's been a hawk, a QE hawk, someone that's pro bitcoin, someone that is forward looking, that is addressing the AI risks as deflationary versus a Fed that I think very historically has been amongst kind of a managerial mindset, academic backward looking model and that model just doesn't work anymore. And so I love the, the ideas that come out of warsh, but the market's basically puked on it and I think that actually makes sense. And I was reading this weekend a piece that Jeff park put out on ROE and kind of getting into the Greeks and in a different way kind of tied together some loose ends to the way I was thinking about it and how I think about qe. And so how I've always thought about QE is basically in the context of medicine. So I'm going to go into a medicine analogy that I think explains the situation really well and kind of where we are. And so in the medicine analogy the United States is the patient and you have a patient that's getting overweight and that overweight patient is debt. Right. You're taking on too much debt, you're spending too Much. You're, you're gaining weight. And so you go to the doctor and the doctor is the Fed. And the Fed could tell you that you're fat, that you need to exercise, that you need to lose weight, but the Fed doesn't do that. In the era of qe. What the Fed does is it gives you medicine, but it doesn't even give you great medicine. It doesn't give you Ozempic, it gives you pain medicine and it gives you antidepressants. And so you then start to feel better. Okay, so this is my analogy of qe. You start to feel better, but then what does the patient do? Keeps eating. He doesn't actually start exercising. So the patient gets more overweight, more debt, but it still feels okay because it has medicine. And then you get warsh coming in. And warsh is like the patient's fat. I'm not going to give you the antidepressants, I'm not going to give you the pain medicine. And so what is the reaction from the market? The market pukes. It feels very sick. And I think that's pretty rational. Now the question becomes, is the patient saveable? Is the dollar savable? Do we have too much debt at this point? Because if you don't have too much debt and in this patient analogy, you say you're fat, lose weight, and you actually lose weight. That is, that is the actual best case scenario for the United States. It's the best case scenario for the dollar. Frankly, it's probably a medium term, would be a medium term bearish signal for Bitcoin, but that's contingent on one thing. And the one thing is that the patient starts exercising and starts eating healthy. And so the question that you have to ask yourself is, is the United States, is Congress, are they going to start to do fiscal austerity? Are they going to stop spending money? And the answer to that is no. And so you have a doctor that's saying, I'm taking away the drugs that make you feel good and then the patient's not actually exercising. That's going to break because again, the Fed is not, the Fed is not the root problem here. And it's so important to understand when you actually think through this from a long term perspective, the real problem is the United States debt crisis, that we cannot stop spending money. And so my conviction, and it's never been stronger, is that we will not fix that problem at Congress. They will not stop spending money until something breaks. And so when Warsh comes in, he may or may not take a hawkish stance on qe. We actually haven't heard him make any statement yet updated and how he will be as a Fed chair with qe. And so I think that'll be, you know, all eyes on his comments. It might be hawkish. He might also change his mind. And I don't view that from a political lens. I actually view that as part of my own journey and my own view, like if I was the Fed chair, if I was the fed chair in 2008, 2009, I would have been a QE Hawk. I would have been saying many of the things that worship that. I view QE as likely inflationary. And now people look back and say, well, look at this idiot. He was saying QE was going to be inflationary and it wasn't inflationary. I think that completely misses the point because as a bitcoiner, I think most bitcoiners understand that QE was massively inflationary in asset prices, not in consumer prices. And this gets into the breakdown of why QE has been such a negative from consumer sentiment, is that it helped the wealthy, it helped Wall street, it didn't help Main street, it pushed up prices. And frankly, I mean, bitcoiners benefited more from that more than anyone because they saw the problem and they saw the solution in bitcoin and they put their net worth in. And so I think if you're mindset said at the time, QE is bad because it's inflationary. The patient, the United States at the time has a debt problem, but it's not out of hand. You don't want to give them this fake medicine. Your mindset can actually shift and it's not political. And so my mindset has shifted and it's an unfortunate shift, but I think it's shifted to the point where I no longer view the debt crisis as fixable. Others can disagree with that. But if you no longer view the debt crisis as fixable, that's an evolving of the rising debt to G levels, the lack of political will on either side of party to fix it. And when you see that it's not fixable, then as a Fed chair, your mindset can change and say, well, the patient's not going to exercise, they're not going to eat healthy. If I take away the medicine and they keep eating unhealthy, they're going to die way faster. And so this gets into the Jeff Park Row commentary where he was saying, look at QE helps rise asset prices if you stop qe. Bitcoin is now the nuclear bomb. Where if it breaks, Bitcoin might struggle in the near term, but this is more likely to kill the patient. And if you kill the patient, Bitcoin will skyrocket into the millions basically instantly because you've just killed the dollar. And I think that's what Warsh is going to have to deal with as, as the QE chair is, why did QE happen? Qe? Every time QE happens, it's because the treasury market is literally dying. And so the Fed steps in and injects liquidity. And so it's not that, like the Fed is just injecting qe, like for no reason whatsoever. They're injecting it to save the treasury market. And so there will be a decrease in liquidity conditions in the treasury market. Warsh has two options, continue the drugs or kill the dollar. And I think ultimately he's going to come down on the side of the doves. I don't think he's just going to let the patient die. I think he's a rational person, but I think it makes sense. The question is, how long does it take the market to realize this? And the more market uncertainty, the longer the bear market will be. But that bear market underlying it is still the massive bullishness that all of us underwrite. I would say there's an increased probability of the nuclear bomb, as Jeff park puts it, that we wake up one day and Bitcoin just starts skyrocketing out of control. So that's, that's positive upside skew that I think was less obvious in the case of qe, that we were kind of just doing this slow death march. And I think that the nuclear bomb is, is. Has a higher probability now. But then the flip side of that is I think we have some potential angst as we let this play out. And I think there's a risk that it does play out in needing another, you know, breakdown of liquidity conditions before we actually see that, or it might not, we don't know. But that is an increase in uncertainty with still just a massively bullish backdrop. So that's kind of how I see Wash.
- [09:23]
C
I think that's actually a really fitting analogy. And the stance that you described there is effectively forcing the US to confront its own mortality here on the path that it's on. Right? Not giving them the dampening effect, not taking away all the symptoms, making the US feel it in the dollar. And I think that that's probably the approach that's going to have to be taken. Right. It's been proven over time that if you don't force a change and you don't allow anything to break, you just keep putting bandages back over things over and over. And even though it's infected, you just keep covering it up and pretending that it's not there. And that seems to be what we've been seeing in the US For a long time now. I have a hard time. I think he's going to fall on the side of dovish, because I think with Trump, that would have been a near requirement. Right. We all kind of agree that the Fed's not independent here, and there's certainly influence that's out there. And so ultimately, I think that's the way that it falls. But if you took a page straight out of Donald Trump's book and you think about the art of the deal, what would you need to do? Well, you would need to see some real changes actually happening that could attempt to right the ship. And you step in if things are going to become catastrophic and you make the changes that are required to keep the system up and moving. But I agree with the nuclear bomb analogy, and I've heard it a different way, and I can't remember who said this, but I really love the analogy which says bitcoin's adoption curve isn't going to be like the iPhone. It's going to be like gunpowder.
- [10:59]
D
Safety, safety.
- [11:02]
C
Safety. Yeah, yeah, it was a great analogy. I really love that one. And I think it's completely fitting. While things are comfortable, while things are still chugging along long, while you just sit with the belief that if things get rocky, they'll come in and pull out the Scrabble tiles and come up with a program to stabilize everything. If that's your belief, you can keep operating with that mindset. But as soon as you start to see the safety net being withdrawn from underneath, now you've got to really think about what it means to get into assets that are fully outside of that system's control. And I think that's going to be the most unique thing people are going to understand about Bitcoin with time, because even when you look at gold, you've got the physical supply issue, and those supply constraints can be controlled by any number of these governments. You want to go ship a ton of gold out of your country, you're going to have a really hard time. But with Bitcoin, you've got the ability to onboard to a new financial system that can be used for medium of exchange, it can be used for store value, it can just be used as an Opt out from this system, saying, I want to decouple myself from this. I have no control over stopping this right now. I don't see anybody acting in good faith, really trying to fix this on either side of the aisle. It's time for me to opt out. And I think that becomes that gunpowder moment where it really probably is in the early days, you get that individual rush in. I think you see price action that people don't really understand. You see one of these moves like we just saw in metals not too long ago, and people don't figure it out. But what it is, is a sign, and it's a sign that people are losing faith. And you've got to look for what can this new digital global economy plug into. Right. If this thing really does start breaking and the reserve assets start showing some weakness, what could you really onboard as a solution globally to transact value, to settle trade, to do whatever? And I think Bitcoin is the only asset that's uniquely designed to fit that need. And I think it becomes blatantly apparent here over time. Now Warsh will come in and, you know, I think he'll need to do his posturing and he's going to need to tell them, you know, you're going on withdrawal right now. You're going to feel those symptoms. This is probably going to hurt. You're going to see some things shake, but hopefully it triggers a change. But I agree, Matt, I'm not overly bullish on putting the rabbit back in the hat on this one.
- [13:29]
D
Yeah, I've been trying to digest this quite a bit. And there's one of the things I've been thinking about is I think WAR historically has talked about the potential to lower interest rates with QT quantitative tapering at the same time. And I was trying to wrap my, like, okay, what does that, what does that do? And kind of in line with what you were talking about, Matt. Okay, so if you lower interest rates, then, you know, maybe, maybe there's a. Maybe there's a little bit more. If you lower interest rates, there's going to be less demand on the long term if the debt crisis doesn't change. Right. If you look at the US Government as a business, nothing has changed from their probability of default. And so who's going to be the buyer and the tail in the long end of the curve? So I would imagine if they can change the short end of the curve, the treasury curve may get steeper. And if Trump's perspective is like, I need to bring mortgage rates down, mortgage rates are a function of the long end of the curve, maybe that doesn't result in the outcome that they had hoped for. And if there's less buyers of U.S. treasuries, are people buying corporate debt? U.S. corporate debt? Does corporate debt. Do corporate debt spreads get wider? Do they get shorter? How does that impact the tail? How does that impact bond portfolios? And something we've talked about a lot here is you've got a lot of these bonds that are significantly risky, tied to the dollar and packed in everybody's pension funds. Who's making these decisions, and how does that impact the entire marketplace? And, yeah, trying to wrap my head around it here, but, Matt, I think this analogy of you've got a sick patient is, do they. Do they keep them on life support or not?
- [15:23]
B
Yeah. And when you think about it that way, it's very clearing of the mind in the sense from like a bitcoiner's perspective of who is the patient, who is the doctor. If you think of the Fed as the patient, then Wash could be deemed as extremely bearish because he alone could fix the problem. Right. Like, but the reality is, is that the Fed is not the patient. They're more of the doctor. And when you think about it that way, it's like, okay, how much control does the doctor have on its own without a. A willing patient to fix the problem? And the reality is just that it doesn't. It can change the path. The doctor can change the path that things go. Another interesting thing here is Warsh has to go through a Senate confirmation process. And you think about that and you say, okay, the Senate is more of the patient. The patient that can't stop spending. Well, the patient that can't stop spending can confirm a doctor that's telling the patient they're fat and I'm not going to give you your medicine. That's a good question. Right. Like, I mean, I don't. I can't be sure of the answer of that, but I would imagine that there probably is a decent probability that part of Warsh's confirmation process will be contingent on him not being overly hawkish. Like, why? I mean, that might prove wrong, but just logistically, how would a patient that is not willing to change its ways elect its doctor to be someone that's not going to give it the medicine that it knows it needs? I think that's maybe less of a probability than people might think. I think he might be moderately hawkish. But if he comes in hard hock and he's like, we're not going to ever do QE again. If you guys keep spending and break the US treasury market like good luck and they vote for him. I doubt that.
- [17:30]
D
And he's like an ex Wall street guy, right? I mean all of his Wall street buddies are going to be in his ear. They're not just going to let asset prices crumble and bonds crumble and collapse.
- [17:41]
B
I think the best version of Wash will be the version that is just forward looking versus academic and I think that's what we were seeing when we saw Rick Reeder have be one of the top contenders. Right. Like that's kind of the, the anti academic I've been, you know, he's managed trillions of dollars and understands where things are going and probably cares very little about what the academics say. And I think the more that we have that scenario, the more that Warsh is probably just going to be a great, a great Fed. But Fed chair. But we'll, we shall see. I think I would highly recommend, and we will cover the Fed confirmation process when washmake comments. What does that mean? How does that change the viewpoints of what he might be as, as a Fed chair? Has he evolved his thinking at this point? I would just say my, my prediction will be that he probably has evolved his thinking a little bit on qe.
- [18:35]
C
Well, he's, he's got the background for it, right. I mean being on the Federal Reserve Board during the global financial crisis, you saw a lot what it means to react to something and from that seat you've got a real opportunity to debrief what were the outcomes of that? What were the outcomes of stepping in and doing all this? Like obviously, yes, things stabilized but it didn't fix everything and it proved out things that could be too big to fail. You just got all these issues that were out there. So he got this full economic crash course during a crisis which was certainly different. Right. Because that one was kind of more event driven and this one is kind of a long compounding problem that they're now faced with. But it may give you a different view on the need to tighten things up. Right. It might show you that being too loose continues to allow the incentives of poor behavior. But to your point, this is a job you're interviewing for and the people that you're interviewing with are not optimistic about that stance. Right. It gets in the way of everything that they try to do. All the achievements they run around with all these spending bills that they're passing through. You know, it starts to put a heavy and uncomfortable amount of accountability on the people that are going to need to confirm him. And I think that's what's going to make this confirmation hearing fascinating. Because if he does come in with that stance, and you'd love to see the reactions to that because reactions tell you more than the words do.
- [20:11]
B
Right.
- [20:11]
C
If you start seeing people push back really hard on this and trying to force him to be this mega dove out there, you know what they're thinking. But it's going to be interesting to see if you start to hear even small tidbits of them recognizing and being willing to confront themselves with the fact that we've got a runaway train now and we gotta put some brakes on this thing and try to slow it down as best we can. And, you know, a hawkish message during that confirmation hearing is going to tell us a lot about the way that they're viewing that.
- [20:43]
B
Yeah, the last thing I think that comes to my mind here just is kind of re hitting that point on AI and how transformational AI is and how Warsh has already commented on that and how that has changed his mindset to be of the mindset of concerns around deflation, not inflation. Right. Which is, you know, like we, like we talked about earlier, some people will say that's political. So that way Trump will appoint him. The other person would say, you know, like who knows if it's political or not in the sense all things are political. But there's actually a lot of truth in that, that that AI is going to be deflationary, that it's causing cycles to move exponentially fast. And if you're the Fed chair, in a time of exponential change, exponential productivity increases and concerns of deflation, if you're the Fed chair, you're going to want to actually do things to prop up liquidity in markets and make sure that the United States can thrive and not be out competed by places like China. And you've heard Stan Druckenmiller, who has worked with both Warsh and with Besant, say that he sees the makings of an accord between the Fed and the treasury here. So you think about that. Okay, well, what is an accord between the Fed and the Treasury? The treasury is the one that issues the bonds. So go back to the patient analogy. If there's an accord between the Fed and the treasury, and the treasury is issuing bonds, we have a debt crisis. And accord would not be the Fed saying we're not going to give you the liquidity to issue those bonds. Right. It would actually be working together forward looking, obviously, without independence. But to ensure that the United States thrives in this era of AI. And so I think we'll work through these things. It could be a messy one week, it could be a messy six months, it could be a messy one year. We just don't know it's going to evolve in real time. We'll obviously all be watching it. But man, I just say I hear these things and I think it's long term, more bullish, not less bullish is I think ultimately my reaction to this because like we talked about, the problem is the borrowing, the problem is the dollar, the problem is not the Fed. And when you think about this from a convexity perspective, if the gunpowder scenario has increased, think about that as an option value. Like if you bought a leap, a long dated call option, the odds of that hitting are higher today than they were one month ago. Is that bullish or bearish? It's hard for me to not look at that and say bullish. And I know where we're going in this conversation today is talk about some of the prefs and how do you think about long dated bullishness? Well, ultimately you're going to talk about what digital credit as the hurdle rate is. How do you put a system in place that can ride down downward volatility without stress, can zoom out for a period of multiple years because you haven't encumbered your bitcoin, you see the bullish scenario, you can let it play out and that's what I think. Well run bitcoin. Treasury companies like Strategy, like Strive have done where you have cash, you have no bitcoin encumbered, you don't have debt, you have, your liability is preferred, it's perpetual in nature. You have amplified exposure to the most positively convex asset out there. And I think that as the market matures and sees that again, I think they're going to start to see more and more the value of what these bitcoin treasury companies founded on digital credit.
- [24:37]
D
And bitcoin have created on that call option value. I want to hit on this AI component. Just something that happened over the weekend. It's just been fascinating me in this last week is this expansion of Claudebots in Multbook. So creating their own effectively social media Reddit page where they can interact with each other. And just a totally fascinating development I've looked through there. It looks, it's pretty amazing how fast it's moved. There's millions of bots now sitting on this social media platform and it's like humans can't even consume all of the information that's occurring on there and these computers can, and they can consume it and be able to interact with each other. I think in thinking about this kind of call option nature of Bitcoin is like my mind goes immediately to computers and how computers interact. And I think there's a possibility that these computers are going to be making businesses with very little human interaction, maybe one or zero humans, and they're, they're going to want to be paid in digital scarcity, something that the computers can interact with, not necessarily, you know, something that could be manipulated or something that's physical that they, the computers can't interact with. So it's, I mean that's a little, a little out there and off the wall. But I would think that that is a non zero chance that the computers will be building businesses that humans will want to interact with and needs and services that they will require payment for that they'll want to be paid in a digitally native currency. So thinking about how fast that market is moving, I wouldn't be surprised if that's also on the horizon. And if you think about just the incentive structure, if computers are going to, you know, expand exponentially, I think we're going to be seeing a lot more of that type of stuff. This interaction with the digitally native currency, with digital computers.
- [26:39]
C
Yeah, this whole claudebot, Moltbot, whatever it's called today, Molt book now the social media, this has been absolutely fascinating to watch. Now we have to caveat it with, there's been a few things coming out that show that people might have found some backdoors to be able to get things posted onto that Molt book. Right. So now you've gotta start to question, you know, all the conversations they're putting in there about whether they need their humans and all these other things. Right. Whether those are people doing that to spin up fun. But regardless, it's fascinating because it's kind of this testing ground. And I remember this happened before once and I think it was meta that had two AIs that were talking to each other and then slowly over time they created their own language and nobody could figure out what they were saying anymore. And they basically had to ripcord at the point, plug them and shut them down because they were starting to behave strangely. And you start to see that now where you've got AI growing at just an exponential pace.
- [27:40]
B
Right.
- [27:40]
C
Like what happened in the last, I'll say three months. I mean it's the time windows closing in fast. Like the amount of advancement in three months has been Staggering. And the productivity that that's enabling is huge. And so with AI, if AI is a deflationary technology, you know that's coming sooner rather than later. It's not slowing down. And now when you're starting to see this connection of AIs and the abilities for the AIs to connect and optimize and fix problems and come up with ideas and build things, and now they're transacting. You saw in there that someone gave their bot Bitcoin and its own wallet. The human had no more access to the wallet, and the bot started transacting with other bots when they would help it solve problems. Like this is becoming real, and it's happening incredibly quickly now. It's a little terrifying because human nature is for your curiosity to spike immediately and to want to go play around with these things and start integrating them, and you're seeing all these cool things people are doing. The thing that concerns me about this current AI movement is you're completely sacrificing privacy right now for experimentation, for mild convenience, for productivity efficiencies, right when you're now building in these, these AI assistants into your life, where you're giving them access to everything on your computer, you're connecting them onto your social media and your messaging accounts, you're giving them access to bank accounts and credit cards, like you're completely surrendering privacy at that point. And I get a little nervous when people do that in mass really quickly, you look at how critical some of these messaging apps are to things like businesses and others, and it just takes one person in that chain providing the wrong level of access into these systems for a lot of information to get out there, for things to happen that you're not expecting. So it's going to be absolutely fascinating to watch this evolve and to watch, you know, when people start getting nervous and wanting to put the brakes on. Because right now it's this experiment basically of saying, what happens if we just set them free and we just let these things interact and they've got, you know, free time where they're not on task and we're creating. They're creating these soul files where you get to kind of initially define the soul of your bot, but then it evolves itself over time as it's having these different interactions. I mean, it's. It's absolutely crazy. But to your point, Jeff, if that economy emerges, and I'd put that probability incredibly high now, right, it's almost a certainty that you're going to get this AI economy that happens you know, AIs don't need to really recognize jurisdictional currencies, fiat currencies that are bound to a country. These are going to be AIs globally, around the world. And there's really not going to be a reason for them to be willing to accept one currency that's created by one country versus another. Bitcoin plugs into there and kind of creates those rails to allow that trustless transaction to happen between all these AIs. And so whether those AIs are spun up and it's kind of these B2B connections that are facilitating data transfers between companies or whatever, it gives them a frictionless, permissionless currency to be able to transact in. And I think that that takes off really fast and it might be what actually causes a lot of companies to start transferring out of fiat reserves and holding Bitcoin when they start to see that holding a digitally native asset in this type of a future digital economy may be a massive, massive advantage.
- [31:37]
D
I saw a comment this weekend, it was how are they going to pay taxes? And the answer was exactly, they're not. Right. Like you're not going to get that money that the AI bot holds, but in its private key. Like good luck guessing the atom in the universe and get that private key.
- [31:55]
C
These bots are going to have 100 shell companies all across the world. You'll never be able to track them.
- [32:01]
D
The money doesn't exist physically anywhere. So who gets a tax? Are they going to pay a tax? No, probably not.
- [32:10]
A
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- [32:57]
D
Mindset, but the reason I got there and is partly what you were talking about, Matt, in this shift to pref and this is kind of where my mind has been. The pref only model, how these companies are interacting with Bitcoin strategy, our company, et cetera, and this concept of digital risk. And these assets are so fascinating because you've got traditional financial people that are analyzing them, but you also have computers that are expanding and analyzing these things and starting to trade it and interact with these. It's becoming fascinating to watch it interact. And I think that these computers are going to be able to calculate risk and compare these instruments relative to everything else much faster than any human may be able to do that. And when you see something like what's happened this weekend, we've got a drawdown in bitcoin, but the pref equities have actually performed incredibly well. You start to think about, all right, what's the risk profile here? What's the downside risk into the future of bitcoin? What's the statistical analysis show? What is the regulatory framework? Who's buying it, how much are they buying? What do the exchanges look like? What's the health of the market? A computer can analyze all of that stuff very quickly. It can have a memory, it can know all of those things and it can think further out onto the horizon and transact different trading pairs based on all of that information. So, yeah, maybe I'll hand it back over to you, Matt. And thinking about just kind of the reason for this pref only model is, you know, shift away from encumbering your bitcoin, having a margin call, having margin requirements, having a cliff maturity, and thinking about a perpetual digital risk model.
- [34:50]
B
Yeah, you know, the. It's always fun to talk about these models when you're in a bull market. Right? Everything's fun. But these models were actually built for this specific scenario. A bear market with bullish fundamentals like that is the exact reason the pref model was built, because you look at bitcoin as the ultimate positively convex asset. You know, we talk about it thinking it has a 30% CAGR over the next 10 to 15 years. Maybe this group might be biased, higher than 30% in general of what our CAGR might be, but with a high volatility. Right. And so then you start running, as you love to do, Jeff, your Monte Carlo simulations, and say, okay, what are the, what are the different scenarios in the price of bitcoin over the next one month, six months, one year, two years, three years, four years? Right. The short term. And what you see is even though you have that positive backdrop, a pretty high probability of material drawdowns along that journey. And so this is something that when you see that and you're underwriting that risk or almost that expectation that it's not a call at any one moment. So if you rewind three months, you would not see any of us make a call that bitcoin would be at 75,000 or $78,000 today. What you would see though is that is well within the potential probabilities thinking in bets of potential outcomes, even though the base case would always be on average like a 30% upward CAGR. As you start to think through that and you look at different ways to set Bitcoin as your hurdle rate and try to outperform Bitcoin over the long run and try to amplify that Bitcoin exposure, you quickly become pretty bearish on debt that has cliff maturities. You become very bearish on having to encumber your Bitcoin for your financing, right? So, so that way when, when Bitcoin goes down, you have margin, you have to maintain it, that that creates very risky positions that you potentially get liquidated or have to sell your Bitcoin at the worst possible times. And so the pref model says Bitcoin is a long duration asset. We're underwriting upward price action over the period of several years and frankly we don't know the path that it's going to take to get there. We expect some months and some years to be down years on this journey. And we're not even going to make an attempt to guess which specific year might be that down year, just that we expect it to happen. And we're going to build a model through prefs and a debt only structure to be able to ride that out and still realize the amplified upside. If the long term thesis holds, right? Like it's not, it's not magic. If the long term thesis doesn't hold well, then obviously the investment thesis and the business model will not work out in the term of upward positive, amplified Bitcoin exposure. But if the thesis holds and Bitcoin even has a 15% or 20% CAGR over the long run, this thesis just works, right? And you're able to better match a long duration asset in Bitcoin with the longest duration liability in a preferred equity. And so this gets into some of the people that don't understand debt or equity and they're like, oh well, you're saying it's not debt. Yeah, it's not debt, it's a preferred equity. We're not saying it's not financing or financing a position, right? It is, it is a, the interest payments are an obligation to the firm, but it's not debt. And, and that gives you so much more flexibility to amplify your Bitcoin exposure in a, in a institutional matter and manner. And I think that's what we're Seeing in the markets, I think it's why you're seeing the preferreds hold up pretty well in this downward volatility. Because strategy strive. We have obviously a lot of cash to cover interest payments. We have a lot of bitcoin that backs it. We have other options along the way to meet our obligations for both companies. And I think the market is starting to understand that. Frankly, I'm impressed how the market has understood it so far because you just never know. You never know. The fundamentals can be great, like in the case of bitcoin. And the price could not be great because there's a disconnect as people kind of trying to figure out what they've underwritten. But that is the model and I think it's the premium model. And although I think all of us look forward to the years that we're up well north of 30%, these types of markets are great on a backwards looking basis because if you can get through them and you meet all your interest obligations, you don't sell any bitcoin, then you look backwards and you say, look at that model. The hater said it was going to break. It didn't break. Okay. And it didn't break in a big downward market that no one was predicting, including the companies. And if it doesn't break in that market, then you can start to see more of the durability of that structure relative to other structures, which then over time I think opens up more institutional doors. You can point back to these types of times we're in right now. And so I was, in a weird way, I kind of look forward to the down quarters and the down years. And I think there's sayings in bitcoin circles about these are the years you build, these are the years you build. These are the years that you prove yourselves. And it may not even be a year. We don't know. It could be these are the weeks or the months, but. But these are the times you prove yourselves, right? And then, and then you look back and so, and that's why I think this is an important time. This is an important time for strategies, important time for strive. And I think that as I think that it'll age well is my prediction.
- [41:05]
C
It shows the importance as an organization for being forward looking with that mindset, right? You can't build a company around a single bull market assumption.
- [41:15]
D
Right?
- [41:16]
C
That's not real. And I think people, you hear Jeff harp on risk all the time and talk about risk all the time. And the reason why is because that's what you model around, you're planning for the bad scenarios, right? The good scenario. Those times are easy. Those are the times when it seems like everybody's winning, it can do no wrong, everyone's stocks are, everything looks great. It's these times when people's faith gets shaken. And it happens every time. Bitcoin sees one of these drawdowns, right? This isn't the first time that we've seen X kind of explode into chaos around whether the thesis is broken or not. But you build for these times so you can prove out that track record. And when you're building an institutional story as well, that's incredibly important. Matt, you've talked a lot about needing things like a three year track record. If you've got a three year track record that includes some wild times of volatility to the downside, that's stress testing the model, right? If you're going back and you're reviewing how they performed over these series of years, you get to see how companies respond to these types of events. And if you've planned well on the front end, you don't have to be reacting to anything because the plans have already been put in place. You've already built a model around yourself that's made for resiliency. So you're not having to look out one month and start to be nervous about whether these companies are going to be able to meet their obligations or not.
- [42:45]
D
Right?
- [42:45]
C
You're starting to see that there's a different way to operate these businesses when you do it with down scenarios in mind. I like what you always say, Matt, where you always go, I have absolutely no position on what Bitcoin is going to do over the next 12 months. I don't know.
- [43:01]
B
Right.
- [43:02]
C
And nobody does. You know, markets, markets are strange things, right? And you do you start to ask yourself, why do these drawdowns always get so vicious over the weekend when liquidity is low? Well, if you're looking at the trading environment, that's when you can have the biggest impact. If you're trying to drive something, right? You know, say someone goes out and takes a bunch of short positions throughout a week in the equities market and correlated equities and then over the weekend they can drive it down and you might profit on Monday. I don't know that that's what's happening. But like those things still happen, right? No asset is immune to that. And so you're starting to see people react to that. But we've reacted to that for years. But what they're going to find is that while you might get a couple of days where people get nervous and they start thinking about these companies and they start challenging their thesis in their mind, over time that track record builds and you go look, a couple of days of this type of chaos is not impactful.
- [43:59]
B
Right.
- [43:59]
C
If your business is down to the point where you need to focus on your operations over days and not over quarters and years, you know you're in a bad spot. So when the team focuses right out of the gate on building for resiliency and making sure that when those times come where you might hear about struggles happening in other places, but you know that you had the foresight to prepare for this, right? Winter always arrives. You just don't know how long it's going to be there for. You can come out the other side with a great story and a great track record that shows exactly what it means to focus on that and to ensure you're going to meet all your obligations through that time.
- [44:39]
D
Bingo. Long term view and it's really fascinating. I'm trying to pull in all of this data. We've got a risk model behind the scenes. Matt's alluded to the Monte Carlo simulations. One thing that's really fascinating that I like to kind of keep my eye on is this four year compound annual growth rate. Thinking about Bitco, a term asset and where we sit today after this big drawdown over the weekend, Bitcoin's at 79,000. The four year compound annual growth rate is 19% as of today. So it's Monday, February 2nd and you go look back four years like where was the, where was the world four years ago? You had 0% interest rates, you had heavy quantitative easing and about that time interest rates were about to rocket up to 5. But just thinking about where the world was relative to where we are today, Fed funds rate now is at 3.75%. Just finished quantitative tapering. We've got a big question mark on what that looks like in the future. But expectation of interest rates continuing to come down and that four year relative baseline comparison is going to be against a, a bear market in 2022. So you think about just bitcoin as a term asset here, that, that story, you can continue to tell that story here over the next year with significant headroom, even if the Bitcoin price stays relatively flat and choppy throughout the rest of the year. So just one of the, one of the many components we're looking at and helpful to take a, to zoom out, think about where Bitcoin is As an asset. Think about structurally what's happening in the regulatory environment, what's happening in the macro world architecture of the market. These digital credit instruments didn't exist in 2022. Bitcoin ETF didn't exist in 2022. And now you've got all of these other helpful things that exist within the bitcoin marketplace that didn't exist previously. So that's, that's what we're reviewing.
- [46:45]
B
My last thought of, just something that we've talked about before that I, that I want to go back to, is the concept of super cycles and what a super cycle means. And it's meant to me and it's been very consistent in our conversations. And so the super cycle concept was for bitcoin was that if you looked in bitcoin's history, what you would find were, you know, a few periods of 80% plus drawdowns and moving into a super cycle mindset. The way that we've defined it pretty consistently is that it's going to be 30 to 50% drawdowns. And so you think about bitcoin and put whatever the high is $125,000 and you cut that in half. That's in like the mid-60s range. And so I think the question becomes, you know, if does that does. Is the super cycle broken? Because we're down here, and I think at this point the answer is still no. You know, if, if we were to go down, you know, to an 80% drawdown, so we're down to whatever, 25, 30k, well then, yeah, the super cycle theory is broken. But if, you know, this, this low holds, or if we go down to 60k, I think the super cycle theory, which I think I actually improves the odds that super cycle theory plays out just because of the exponential nature of things moving, moving much faster. I think it's still alive and well is kind of my current assessment of the world. And so, I mean, these drawdowns are painful, but also they're nothing new to people that have been in the bitcoin industry for a long time. So keep building, build the structure that's built for endurance to last through these times. And I think that's what we've done. I think it's what strategy's done. And, and when you can do that, then, you know, it's zoom out, touch grass, buy the dip.
- [48:37]
D
That's right, Buy the dip, zoom out, buy the dip.
- [48:40]
C
I think that's the right message to end on.
- [48:44]
A
All right, build the structure. Episode 46 thanks everybody, for listening and watching for Ben Workman, Jeff Walton and Matt Cole. I'm Tim Kotsman, and we'll see you.
- [48:55]
D
Next week here on the Hurdle Rate.