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- [00:00]
A
Welcome back to the HURDLE RATE, Episode 55 for the week of April 13th, 2026, I'm Tim Kotsman. I'm here with Ben Workman, Jeff Walton and Matt Cole. This past Sunday, Michael Saylor posted Think Bigger and today, Monday, he announced approximately a billion dollar bitcoin buy, all acquired from STRC. 13,927 Bitcoin. So over 13,000 Bitcoin is in one week through the STRC ATM program. Will the trend continue? Well, today it's estimated that the estimates are all over the board. The trading volume is 1.154 billion. According to Sayworth's tweet I posted this morning, strategy could average a billion dollars per day in bitcoin buys. The reply guys were very fired up. The replies included higher. If they were smart, and they are, they will buy all the bitcoin as much as they can. While bitcoin's on sale, Michael is unstoppable. All your models are destroyed. I'm ready for this. Yes. And it's off the scale. Epic. So what do you think, Jeff? Are we heading for a billion dollars a day in corporate bitcoin buys?
- [01:18]
B
Yeah, I mean this thing is absolutely monstrous. It's the most exciting two penny chart to watch on the planet. From 99 up to 101 and one penny. And we're seeing massive volume that's coming in the door and I mean just today, $1.1 billion in volume. So you think there's a significant amount of capital that's raised in selling equity over and above $100 now the biggest thing in my mind right now at the moment is that the market is fundamentally changed. These instruments are attractive to different capital pools. These STRC is attractive to the credit market, whereas MSTR and Bitcoin and all the other equities is attractive to the equity market. So Saylor tweeted this a week ago. Global consensus is that BTC is digital capital. The four year cycle is dead. Price is now driven by capital flows. And to me, this is Saylor calling his shot. Right. You know, this is checkmate. I just checkmated the entire market. We've got a new instrument out in the market that is actually capturing new capital flows that are happening from different pools of capital that historically never would have purchased bitcoin. So it's really turned on the spigot of new capital that's coming into the market that was never previously there. So I've got some graphics and images to walk through, but I'm going to kick it over to the guys first and let them provide their perspective.
- [02:46]
C
Yeah, we're in the phase now where the product's maturing and it's starting to break down all the narratives that were out there around it. I remember there were several times where we would talk about there was billions of dollars of demands for these perpetual preferreds. And the common response was, well, that was only in the ipo. Well, now they did a billion dollars in a day at par.
- [03:09]
B
Right.
- [03:10]
C
So that narrative's out the window. There is demand and of course there's demand. It's a great product. And I think that's the point. The people who have really focused on these and focused on the risk reward and the value proposition of these instruments. And Jeff, I know you've spent a significant amount of time on this. They were so incredibly appealing on a risk adjusted basis that you couldn't see how there wasn't going to be demand. And when you introduce something new into the market, you can't expect it to ramp up to full capacity within a couple of months. There is a digestion period when you launch something new. People need to understand the structure, they need to understand the broader balance sheet, they need to understand the type of product and why it works. And, and I think we're just finally now getting to the point where people have become very comfortable with that. They see the momentum behind it. They know the asset that's backing it, that's making it work. They see really attractive yields. So it's a great value proposition for someone who's looking for cash flow in their portfolio. And because of that, you're now starting to see the demand ramp up. Right. This is a highly liquid instrument and everything else that plays in a similar category doesn't have that same profile. And so it's reaching that maturing point. And today is probably not even the biggest volume day. That's probably going to be Tuesday because that's the last day for people to buy before they get the dividend. So you often see the volumes ramping up leading into the ex dividend date. And so I think that this has been a very important month because it had a very shallow drawdown. It rebounded back to par very quickly and then it pegged and it stayed there, even to the point now where they're controlling it to within a 1 penny spread up or down, which was the ultimate goal for these products. And so this has been just an absolutely incredible month in digital credit. This has kind of been the proof of concept moment here where you're starting to see the market demand show up no matter what the price is on it. It's not just people buying these at a discount for an arbitrage anymore. If you're buying it at par, you're buying it because you want that future cash flow, those future yields. So I think this was a pivotal month in digital credit.
- [05:23]
D
I agree. I think we, we went from the IPO of Stretch last July, where it was quickly seen as the iPhone moment, to strategy, to this being the first couple months of actually seeing the product behave as it was intended to happen. And that's kind of to be expected. And I think sometimes people don't get this on the first initial months post IPO of anything, where you go out and you raise a substantial amount of capital. Some of that capital is not long term capital. And so you have a lot of supply just from the IPO process kind of coming onto market. And then for Stretch and for digital credit in general, that happened. The IPO also right before the start of a bitcoin bear market. And so people didn't understand these products, they didn't understand how they were going to behave in a bear market. And now we're still sitting at $73,000 in Bitcoin and you have Stretch pegging at par, having billion dollar days of liquidity. And to me what that just means is even though we were already talking about this being the iPhone moment for strategy and for digital credit, it's probably even bigger than all of us were still even thinking. And I'll just tell you part of my, my own expectations. And so Strive, you know, has an asset management subsidiary. And so we've done so much work on growth curves of new financial products and kind of we've talked about this like three year track record building process and kind of, you know, the initial kind of breakthrough IPO moment kind of shows you initially how big that idea could be. And then you see linear growth for the first three years and then exponential growth afterwards. Strategy is already starting to see exponential growth. We're in month six right now. Right. And they IPO'd $2.5 billion and now stretches up to six and a half billion. And maybe it had a billion dollar day today. And so we're talking about in a period of less than a year still, it's already tripled in size from its ipo. And so you really have to just start thinking bigger and bigger and you then start to look at the size of the credit markets and then you think about the flywheel, which I still think people don't fully get in the sense that strategy's equity or strives equity that's amplified bitcoin. And so you never know the exact correlation, but there's some correlation of people that are bitcoin holders that want more amplification. And so a dollar into the common may or may not be a full fresh dollar into bitcoin. A dollar into digital credit, that's a fresh dollar into bitcoin demand and what that means. And Jeff's done a lot of super interesting work that I know he's going to go through a little bit of that, but I still think that's not priced in as well. Right. And so you see Saylor talking about, well, I can buy more bitcoin than anyone can sell. Yes. And it's fresh demand into bitcoin. And so starting to get into some of these scenarios of strategy itself igniting the next bull market. And it's just really fun to watch. I mean, it's kind of like watching Jordan or LeBron in their prime. I mean, it's just incredible.
- [08:40]
B
Yeah, absolutely incredible. The capital flow, the global capital flow is going to impact the future of this marketplace. And maybe it makes sense to pull up some of my screens here that I worked on over the weekend, because that comment really resonated. Right. This is. We're in a completely new regime for strategy and bitcoin and all of these instruments, right. You know, five years ago, they were a small 500 billion or $500 million, $1 billion equity. And there was a ton of interest in the equity. People bought the equity. There was euphoria. Then there's kind of a blow off top. They're buying or they were selling convertible bonds. They took on a new type of leverage. And. And we've seen this capital structure kind of evolve over time. Now we're talking about a $50 billion entity, right. Strategy is now a $50 billion market cap company. They're, you know, top 250 publicly traded companies in the United States and frequently top 20 publicly traded equities by volume. Now, something really interesting happened last week, and a lot of people brought this up. So last week, big monumental week for strc, right? Huge amount of capital came in the door. But something really interesting happened on Friday where the price of bitcoin went higher and the price of MSTR went down. Very few days happen like this in the entire market. A very, very small number of days where this happens, where there's alternative forces moving the other direction. Now, I wanted to try to dissect it and draw A little color as to what happened. So what you can see on your screen here, this is a screenshot of S&P 500. So SPY QQQ VTI, which is total stock market index, IWM which is the Russell 2000 and then IGV which is the software ETF. The highlighted bars in each one of these images shows the daily traded volume for every single day last week compared to the prior 30 days. Now one of the most fascinating things that I noticed here, if you look at all four of these graphs here at the top, the traded volume for the SPY, NASDAQ Total Stock Market and the Russell 2000 was significantly low last week. It was significantly lower than the prior 30 days in general. So just very little volume happening in the broader US equity environment with the exception of IGV being the software etf. And if you look at the last three days of trading last week in the software etf, the volume relative to the entire month prior was significantly higher. So Friday was actually the largest day in the last 30 days on a volume perspective. And IGV, the software ETF was down 7% last week. Now who's included in the IGV software ETF strategies included in there? They represent 2% of the IGV software ETF index. Now it's fascinating, right? You think about capital flows and how they're impacting the entire market. Well, there was a big sell off in software on Wednesday, Thursday, Friday, last week, which resulted in agnostic selling of strategy. Even if you're along the stock and you just held the software etf, you would have, you would be selling the entire basket of goods. If you're like I'm bearish software because of AI and how everything AI is taking over, you'd be selling strategy and you're not not even knowing it. And so what we saw was the entire equity market, very low volumes, software sold off. Now what else happened? So this is a capital flow summary. This is kind of looking at the entire world of assets. I've got Several different index ETFs representing different types or different portions of capital within the market. And STRC was the only instrument out of this entire analysis. It's got several of these instruments here that had above average volume for the week compared to the 30 day average. STRC had 118% more volume than the 30 day average volume. Meanwhile, every other instrument in the entire market had less than, less than average 30 day volume. This was one of the lowest volume weeks in the US equity market since August of 2020. So why do I point this out? I point this out because the capital was coming from a new pool that was more active than the equity market. This was coming from credit capital that was interested in the SDRC product. Meanwhile, the equity market was relatively damped down. So what I think has happened last week is STRC bolstered, right? Clearly they bought $1 billion worth of Bitcoin. STRC is bolstering and holding the price of Bitcoin higher. Meanwhile, the rest of the equity market was relatively quiet and software sold off. So why do I point this out? I point this out because there, now we're entering a new regime where there's going to be different, larger, very, very large pools of capital that are impacting the moves to a, a broader, larger degree. So you kind of have to think about the scale and how this, all of this capital moves from a, from the top down globally in different ways. It's, it has a much larger impact than, you know, very small individual investors buying things. We have to think about broad capital movements now just for, to further the data. So everybody could see here, this is the Mag 7. You could look at this Week on the Mag 7 significantly lower than all of the other weeks. Here's the bitcoin equities. So you can see IBIT relative to MSTR relative to STRK and strd, a very low volume week relative to history. And then this is the price volume trend. So it's a matrix outlining all of the different instruments. So over on the left hand side you could see IGV was in a point of distribution. Price was down and volume was up. Meanwhile STRC was price flat and volume was significantly higher. So yeah, I, I think this is a, we're in an entirely new regime and thinking about capital flows is what is going to impact the price of bitcoin moving forward. We've got new ETFs that are hitting the market. Morgan Stanley is now getting in front of new, new types of people. These digital credit credit instruments are, you know, working their way through the market.
- [14:59]
C
If we think about what capital traditionally finds its way into fixed income. Right. You're typically talking about risk off capital.
- [15:08]
B
Right.
- [15:08]
C
A lot of that capital would rotate into fixed income instruments. This is really the first time that we've had a fixed income instrument in the market where those dollars are shifting into what's historically been a risk on asset. So watching these flows during a time where clearly the market's going risk off, you're seeing capital flows slow way down in the market. Obviously in the software sector, that's been a bloodbath with many names down 30, 40% in the quarter. That one's just been getting hammered. But what you see is this massive increase in stretch and that capital rolling over into bitcoin, which also has been surprising people by how it's been behaving given all the whipsawing that we've had with everything going on in the Middle East. It seemed like last week it was an every other day we'd have good news, we'd have bad news, we'd have good news, we'd have bad news and the market would whipsaw along with it. But bitcoin hasn't been behaving that way. Bitcoin has really stabilized here over the last call it two weeks and it's actually been moving up. And so what's interesting is what you might be seeing here, and this is just a hypothesis, but as people are going risk off and they're seeking the higher paying instruments, that capital that they're investing into those instruments, because it's going through microstrategy, is rotating into bitcoin and putting that bit underneath it. So I think that's an entirely new dynamic that we might be looking at here. If people do start to view these instruments as less risky, right, There's a huge amount of collateral on these balance sheets that are backing them. They're holding massive cash reserves that keep those dividends feeling very secure over long periods of time. So if they have periods in the market where they want to pull their capital out, they don't want to be sitting in equities that have been incredibly volatile. They don't want to be in the alternative assets that have been incredibly volatile. And they start to look at these instruments, that new capital comes in and it changes the entire trading dynamic of bitcoin. It stops being just fully aligned to being risk on and it changes the patterns here, which will be fascinating to see when the markets come ripping back. Right. If you've got all this capital that's now moving into it during periods of time where everyone's going risk off and they're rolling into these fixed income instruments, what happens when it goes the other way? Does it still retain the upside of being a risk on asset? And I think it will. Which means you start to get the shallower drawdowns and you start to get the explosive expansions to the upside when people now want the equity exposure. But you've still got huge demand for yields that are 11.5% plus. I think we're Entering kind of a new era here. And I think, Jeff, to your point about Saylor's post that he swapped out for his pin tweet, I think that's what he's alluding to. We are now in a very new environment for bitcoin that we haven't seen in the past. And so the behavior here over the next six months is going to be just fascinating to observe.
- [18:08]
D
I completely agree. You think about capital flows here and you have two sources of massive capital flows that even a year ago would have been difficult to foresee. The Morgan Stanley Bitcoin etf, I think is a massive, massive change in how bitcoin ETF flows might happen over the next couple of years. And I get that the Morgan Stanley advisors could already allocate to bitcoin, but you have to remember that they work underneath the Morgan Stanley umbrella. And so to have the full endorsement of a Morgan Stanley bitcoin etf, that's the lowest priced etf. What that's telling people is that there's no conflicts go full bore into bitcoin, that this is important from us, from a corporation at the top level to the largest advisor group in America. And I think that's massive. That's a new pool of capital to flow into bitcoin in a major way. And then on the digital credit side, as much success as Stretch has had, it's $6.5 billion as of our recording right now, that's actually tiny in the capital credit markets. And so the amount of dollars that could flow, flow into this as people start to become aware of this, because people, most people still haven't heard of digital credit that would be interested in this is near infinite. I mean, the bid for double digit yields with almost no volatility is going to be effectively an infinite bid. And so the amount of capital flows that could go in here, this is adding fuel to the bitcoin fire that we've already talked about. Like we, we started this podcast, you know, a year ago about basically at this point and we talked about bitcoin being the hurdle rate and we've talked about all these different bull cases for bitcoin over the, you know, the incoming over the course of the next 10 years. And we've also now just expanded the capital pool drastically. And so I think, you know, I kind of come back to some of the, a couple different conversations. I had one over the last couple of weeks, you know, with some hardcore bitcoiners that it's like it should just be bitcoin only, you should not build anything on top of bitcoin. They completely missed the capital flow argument and opening up new pools of capital that would never be able to buy bitcoin. I can't tell you the amount of investors that buy both the common equity and digital credit that literally could not buy bitcoin. I mean, I was talking with Jeff about this earlier where it's like I could literally put these exact bitcoiners in those jobs and just say, hey, you now work at X Asset Manager. Here's your mandate, here's your investment policy statement. Go invest. They couldn't buy bitcoin, but they could buy Stretch or SATA or MSTR asst, depending on what their mandate was. And it doesn't matter. Should they be able to do that or should we just sit on our feet and do nothing? I mean, I think the answer is clear. You expand capital access to new pools of capital and you drive demand and you actually make the thing happen. And I think that's what we're seeing here. And I think the only conclusion is whatever your bull assumption was, I think it probably should be moving higher with these new developments.
- [21:31]
B
Very bullish. Everything's very bullish. The structure that we've been talking about, it is now, it is now bearing out and we are seeing it happen real time and we're able to quantify, see the data and understand the, the value of these instruments real time, think about capital flows, manage the balance sheet and view the balance sheet. And I'm going to go back to sharing my screen here for a moment because I think this is a fascinating perspective as well. The, you know, folks have been asking about. Well, I'm going to point out a couple things. The credit tab on Strategy's website. So one STRC now $6.3 billion outstanding, that is now larger than all of the other preferred equity instruments that they had combined. So this is definitely their iPhone moment. They're leaning into it and it is growing incredibly quickly. Now another thing that's interesting is looking at the BTC rating. So how much, how much capital coverage do you have relative to the notional outstanding on your balance sheet? And this is something that I think many people aren't wrapping their heads around. The, the math around this is last week the BTC rating with the bitcoin price at, I don't know, 69, 000. The BTC rating was 4.3. So selling a billion dollars of the STRC instrument, they've now got a BTC rating of 4.2. And that's with zero common equity that has been issued. Okay, so BTC rating of 4.3 to 4.2, you'd say, all right, maybe it's a slightly, slightly riskier. But I would direct your attention to this final column over here. The BTC credit. This is the credit spread necessary to offset BTC risk for a given security. This is a, a function of your underlying assumptions of BTC volatility, which we've got in here at 40% and the BTC ARR of 30%. This is kind of strategy or sailors projections for the next until 2032, something like this. You could argue either way that the volatility should be higher or lower or the ARR should be higher or low. And that's the underwriting of these particular instruments. Now the fascinating thing here is if you have those assumptions, the BTC credit spread is three basis points. Last week I think it was around two basis points. And, and I've got this visual here. And we will show this here. That shows. So this blue line is the credit curve. So you can see this credit curve here. And it's a function of BTC rating. You got BTC rating on the x axis, basis points of credit spread on the Y axis. And you could see how if you change points along this curve, this is the credit curve, right? You've got this exponential relationship. And you can see as you go along the curve, it's actually a very small delta in the mathematical credit spread. So they could issue significant amounts of this stuff without the underlying price of Bitcoin moving at all, without issuing any additional mstr and the relative mathematical credit spread based on your assumptions of 45% BTC volume and 30% BTC ARR, there's significant capacity to issue. So thinking about almost like what is the speed limit here of strategy being able to issue STRC into the market? And I think they're not even close. And in thinking about again capital flows, the scale of the market as strategy is buying more Bitcoin with strc, they are moving the floor plot, floor price of Bitcoin higher. Assuming there's no other buyers of Bitcoin, there's no other ETFs that are buying, there's no other treasury companies that are buying. There's nobody else in the market. They're moving the, the floor price of Bitcoin higher. And that capital is now sitting on the other side of the balance sheet on MSD or MSTR side of the balance sheet. And the as the, the size of the underlying balance sheet, MSTR's balance sheet grows, the amount of volume that they get in the door on the underlying common stock will continue to grow along with it because the underlying price of the Bitcoin is moving. And so that scale on MSTR should increase the total amount of volume in the market for the common stock as well. So you've got just so many moving pieces that I mean they've built this engine that is anti fragile, very clear, easy to calculate, easy to understand risk profile and they've got two instruments tapping two different capital pools that are subject to different large scale capital transactions. So yeah, what a time to be alive. I, I mean this is incredible stuff. And my, I am spending so much time with AI, I am burning the silicone as much as humanly possible and it has been so fun. These, these things are getting so incredibly good and stuff that would have historically taken me a year focusing 100% of my time on I can now do in, you know, two hours while going on a walk with my dogs or something, I just type into my AI and it's working while I'm thinking about it and I can just keep pushing it. And this stuff's incredible.
- [26:40]
C
I just have to laugh because over the weekend when my phone starts buzzing, my wife's first response is, what did Jeff build now? Because Jeff's just been ripping tools all throughout the weekend with the receiving end of some of those. But the other thing, when you look at the most recent strategy, bitcoin buy, I think it starts to shift the narrative a little bit. We talked a lot in the early days of this about how important it is to build a foundation that you can scale on top of. And that's what you started to see. And your risk model there, Jeff, also shows that, right, they've got huge scale on their balance sheet which gives them massive issuing capacity. And a lot of that was made possible by what they were raising with mstr. Even during the periods where people were screaming about it, there was a lot of weeks where people were not happy that they had the ATM on and they continued going down that path. And that capacity that they built for themselves allows them to shift over into this model where they say we don't have to touch the common ATM at all. We can issue all credit products and by the way, look at how much coverage we have on these. And when you look at the math behind those risk spreads, it just shows how important that foundation building is. It can't be ignored because it's what allows you to scale so effectively. And the timing is probably actually Great. When you look at what happened during the bear market, right, you build that foundation they were issuing on the common stock. And now as you're turning a corner and you're starting to see Bitcoin behave differently, right, it had its major drawdown, it came down 46%. It started moving back. We started seeing this new bid come in for the credit products. That capital is flowing into Bitcoin. It's putting a bit underneath Bitcoin. You're now positioned where they could effectively pile on Bitcoin yield during a bull market. They could be off the common and allowing themselves to raise through the credit products still and have that flow in through significant BTC yield. In the event that they don't have to issue any common or they just slow way down on the common that they are issuing. My hunch is they'll still want to issue to keep the capacity expand because of the TAM for these products. But it gives people a glimpse into what's possible now because the yield that they generated from this last one, I don't remember what the exact number was, 2% or something like that. I mean, it was a significant yield relative to the size of their balance sheet. And so it's starting to show what's possible that you do have to build that foundation, but it's going to give you those moments where you can shift over and you could say all the demand is in the credit production. We think our common is depressed. We don't want to be raising on that right now. And so now we're going to go full bore on the credit side while there's massive demand there. I think that's a monumental shift for both a company like strategy, but as well as for people to be able to digest those changes. It felt for a while like that wasn't going to be the case. But we're talking about products that have been in the market for less than a year. There's no product that's in the market for less than a year that you can declare success or failure on. It takes time for these things to play out and we're finally seeing that come to fruition here. Even the treasury strategy. Just think about that. What's the timeframe you need if you're thinking about Bitcoin? Well, the baseline is always four years. You need to give it at least four years. That's one full cycle. But really with the way that the conditions have been happening out there in the macro environment, you could argue for even much, much longer than that. You go the amount of time you might need to put on this, you look at it in timeframes and you time bound it. If you're thinking about it as a trade and it's different if you're seeing a structural shift happen out there. And I think that's what we are seeing, right? We are seeing a structural shift out there with the way that they're managing the balance sheet of the countries, we're seeing that all come to fruition. And now it's about who's best positioned. How do you capitalize on that structural shift and what time frame are you willing to give that? Are you willing to give it a decade, two decades? Do you think it's better or worse 20 years from now? I mean, we all know where our bets are, we've positioned our careers, our personal balance sheets, all according to that. But for a lot of people, they're still answering that question. But when they do, you've now got two different models because even the credit model is different. These are different products than they look at. They're typically, if you're looking at a bond fund and you're getting 4.4, 4.3% out of those right now, and you've got the opportunity for a 3.5, you might not be ready to take the ride of Bitcoin or even want to, but you might be ready to boost your cash flow using something that pays over 11% in yields. That might be very attractive to you. And the question becomes, with all the disruption that's happening out there, with everything we've seen in the technology sector, right, the software sector, but several other areas as well. When you see that level of disruption, how good is that bond paper now? How good do you feel about that? And even in your equities portfolio, what p. ES are you willing to put on these companies? How comfortable are you in those future earnings now as you're seeing this much disruption? I don't know if you guys saw that post that I reposted. That was showing the software sector and the drawdowns over the last quarter, but it's like 50 companies that are down 40% plus.
- [32:11]
B
Oh yeah, absolutely.
- [32:13]
C
If you're holding the bond paper of those companies in your portfolio, how comfortable do you feel right now? Did they build a war chest on their balance sheet? Are they able to survive this? Those are questions that start to pop up now. It shows you how important balance sheets are and that hasn't historically been the model because money and capital was always flowing so freely. We were kind of in that expansion and innovation. Now we're seeing what happens when innovation really shows up at the door. We didn't even know what it meant. This is a new level of innovation that we're seeing and we're showing that it can be incredibly disruptive. So when you think about how entrenched that 60:40 style of a portfolio has been in people's minds, it's just the default you go to as you get to a certain age, you go to 60, 40, that's what you do. But now you're starting to see the risk, the disruption risk that's in those portfolios. And I think that we're probably not done seeing just how high that risk is. But now there's alternatives because now you've got credit products that are backed by an asset that has a fixed supply. And that's a completely different equation. So if you believe an asset like Bitcoin is there to absorb the recklessness that you've seen from the money printers and the way that they've had to prop up the economy and you don't think that's going to slow down, not going to get the debt under control and you're not confident in commercial credit paper anymore because you're seeing those get disrupted overnight. These might be very comfortable products for a lot of people. They might just not know it yet, but they're going to become aware quicker and quicker.
- [33:48]
D
This gets into why it's really hard to estimate how big digital credit could be, because I'm a firm believer that the 6040 portfolio is dead. My mentor at Calpers, he retired probably right around 2020. And basically I had a 40, like little over a 40 year career. And so if you look at the 10 year treasury chart, his career was basically the 40 year bull run in Treasuries. And someone from a very large asset manager shop gave him a roast. And basically the roast was congratulations on perfectly timing your career with the 40 year bull run in fixed income. And this was before we've even seen now, but it was really well written from the perspective of when that 40 year bull run is done, what comes next. And what comes next is a period where effectively all the models. And so I love the saying your models are broken because they really are. When I was at Calpers, you would look at the data because I was like, well, what's the data that's underlying these models? Almost all data underlying the financial model complex does not go back beyond 1980. And so you basically start at the high in treasury yield and you ride it all the way down and so these asset allocation models overallocate to fixed income. It's the basis for the 60:40 portfolio. Or if you actually were to look at data for the last couple hundred years as an example, you would not want a 6040 portfolio that would be an overallocation to fixed income. But yet we have a whole economy and a whole financial ecosystem that's built around this idea of a 60:40 type portfolio. And so you have this heavy, heavy bias in people's minds that even more so than they need, that they want income. And where does that income come from? In the midst of an expanding debt crisis, companies that would be income producers, software companies, basically going under, getting one shotted by AI. And so you, you have this breakdown of this model and where are people going to go?
- [36:01]
B
Yeah, rethinking credit is, it's so important, right? A lot of people have, have, they're, they're, they come out and say well it's equity, it's not credit. It's like, well no, it's actually a hybrid instrument. It's more like credit than it is equity. And you have to analyze the credit risk of the company and whether or not they're credit worthy to pay the dividend that they claim that they're going to pay. So it really is a credit instrument in that regard in that you are underwriting credit risk as opposed to equity risk. So you've got this like blended hybrid component which makes it very, very fascinating. And it gets to the point that Ben was talking about, right? Like in a world where everything is changing very quickly, like what is. You have to rethink your entire, you have to shatter your reality of what credit historically was because that was built on an entire system that we think might be, is showing some cracks and is moving very quickly into a new technology, AI denominated future. You have to rethink like what can credit look like. And guess what? We get to build it from the ground up. We have this really unique opportunity. We have this new asset that's never existed before. Asset without an issuer that's tradable in digital markets. Very high volume. One of the largest assets on the planet now up there with like mag7 $1.4 $1.5 trillion asset now as of today. I mean this, this is a new opportunity to rethink things and create something new, right? This, so many people like get caught up on it. Just like you can also just think a little bit differently and think maybe this could work. Just like when people thought about Bitcoin for the very first Time you see it and your first response is, no way. It's too good. It's too good to be true. What do you mean? What do you mean there's only one 21 million? What do you mean nobody can make any more of them? It's like some of those realizations are they're easy to write off when you see Bitcoin for the first time. But once you start digging in a little bit more, you're like, oh, wait, no, this is actually, this is just pretty simple. It's very elegant and this can work. And these digital credit instruments are very, very similar. It's very elegant, but it can work. The math looks good. The underwriting of the credit risk looks good. The underwriting of the math of the underlying instrument looks good. The volume profile of these things, the relative risk profile compared to everything else in the market. This is, this is a new instrument that's exploding in popularity. I wouldn't be surprised if 10 years from now there's a couple trillion dollars of this stuff. Outstanding.
- [38:42]
C
Yeah. Rewiring the way people think about finances is very difficult. And it's not going to happen in a really compressed timeframe unless it's forced to. Some of these concepts. We talked about the 60, 40 and Matt thinks it's dead. I think it's dead as well. That's been such commonplace out there. But also the way people are managing just their day to day finances, you park it in a bank, people buy CDs, they do all the things that they've done for decades and decades. And being able to rewire that behavior is going to be difficult because it comes with a lot of education. Anything that makes somebody feel uncertainty slows down their speed of adoption. And so I think it's really important to just continue to push on what those risk profiles are around these products and around these companies because I think it's so misunderstood. But I think we're coming to the point where it becomes necessary. There was a study that came out from the University of Michigan that was talking about whether people felt like they were in a better or worse financial situation than they were a few years ago. And the chart was going completely vertical. Everyone felt like they were in a worse financial position than they were before. Those are the things that cause you to think different. Right. If you can't necessarily change the amount that's coming in every month, you might be able to change the allocation of what you're holding to increase the amount of cash. Right. There are solutions and that becomes very powerful once people see that, but they have to be looking for it first. It's easy to go into autopilot on your own finances and just let it be done how it's always done, and you put it in all the vehicles you've always heard about and that's the end of it. And you don't have to put a whole lot of thought into it. And you just think time's going to do all the work for me. But I think that those times are changing. I think people do need to take more of an active stance in understanding what it is that they're holding in their portfolios and how they're allocating their money. Because the compounding impact of this is critical over time to the quality of what your life's going to look like later on. So it's possible we are turning that corner. You're starting to see the signals out there that there's some stress that causes people to look for other solutions that look for better ways. And I think there's also way more avenues out there to help educate around bitcoin, around digital credit, and getting that message out there in a way that people can understand. You know, I just think that the next six to 12 months on that is going to be so important in informing people that there's new options that weren't there. So you didn't hear them from other people. You didn't hear them from your traditional financial advisors. Maybe until recently, the Morgan Stanley move, I think that gets very underplayed relative to how big it is. I mean, They've got about 16,000 advisors at Morgan Stanley. And when Morgan Stanley themself puts out a product around Bitcoin, it changes the way that those advisors are going to be willing to talk about it, because you're effectively putting your own reputation in the game now. Morgan Stanley is putting their stamp on it going. We were comfortable enough with Bitcoin that we're putting out a product under our flagship here and now that gives their advisors the air cover to start discussing that. And there's a lot of education that probably has to happen first at that level, at the advisor level, before it can even get to their clients. Because they have to know how to talk about it and they have to know what products are out there. But once you're in the bitcoin ecosystem and you're looking into it, it's going to be almost impossible not to see digital credit in that same thread. Right. The two are getting so intertwined now that once you go down the rabbit hole on one, you're going to see the other as well, and that education is going to speed up quickly.
- [42:40]
D
One of the hardest intellectual conversations that I've seen happen over the last five years is you see a lot of people actually say 60, 40 is broken. And then the next part of the question is, well, what do you replace it with? And the answers are literally all over the place, like the amount of smart people that have come up with some idea. But the problem is every idea lacks income. And so the most common solution is you're replacing the income component with some sort of a hard asset that has volatility. I mean, bitcoin is a very common one and obviously one that, that I like. But so many people are going to be looking and begging for income and you have these advisors that are now going to be understanding Bitcoin. Well, digital credit is a safer version of bitcoin. It's less volatile, still tied to the underlying asset of bitcoin at a time. And why I think it can become so big and catch on, and it's catching on so quickly is so many people already understand the problem, and those same people sometimes will hesitate. You have 40% of your portfolio. You don't want the volatility of Bitcoin for 40% of your portfolio. For most people, that's just not a workable solution. So the idea that you can get some income that's tied to an asset that fits this new world is just going to be such a compelling answer relative to everything else that's being discussed out there. Because what you replace that with is just. It's the hardest question that I see institutional quants try to wrestle with is they're like, okay, yeah, yeah, yeah, yeah. The income's not fun. You know, like when I was at Prismat, we want to allocate away from income, but we just don't know what to allocate to. You know, you're, you know, 50 basis points of alpha on something that earns 3%. It's, you know, you're, you're crushing it on alpha. But the beta sucks.
- [44:40]
B
Yeah. Bewilderment will intensify for quite a while because just there's so much capital out there, right? Like, we. It's hard to comprehend, you know, a couple hundred trillion. You know, it's easy to say, like, the number of zeros. Right. Is like so massive.
- [44:56]
D
It gets into. You said, you know, I think digital credit could be 1 to 2 trillion. And that sounds like such a crazy number when you think about Bitcoin's market cap. Itself today. But it actually is an insanely small number when you look at the size of capital markets. And so like, if this thing, digital credit actually becomes the best source of income in an income starved world and in a debt, you know, a world with a massive debt crisis, it could go much larger than that. And I think that's where you start to, you know, does it get there? We'll, we'll have to see, right? Like there's so many conversations and so much growth that needs to happen. But the ultimate size of this, there is no model that you can just sit there and look at and say, well, it pencils in to be X because of the growth rate. Like everything's broken. People don't have enough money, they don't feel good about themselves. The money's broken, the debt is broken and you have a solution here. And so it's just impossible to forecast other than to say this thing's going to be massive.
- [46:04]
B
There's never been anything like it before, ever. There's no great comparison.
- [46:11]
C
There isn't. I mean, we are completely on a new frontier here. I think that's completely obvious at this point. But I think that instruments like digital credit are going to make it more comfortable for people to explore bitcoin going the other direction. We've talked about it before where if the first place they found it was in the equity markets, that was a wild ride for a while. That might be too much volatility for most people if they're not even willing to allocate to bitcoin in there. But as they start exploring, they'll realize what it is that makes bitcoin volatile. And I think that's the theme that Jeff's starting to really put a lot of work into, which is the capital flows. Capital flows on an asset where the supply doesn't expand because there's more demand. That creates volatility. And it's those dynamics that are so often overlooked. And people are busy equating volatility to risk and thinking these assets are too risky. But really what you're watching is capital flows on an inelastic supply. That's what it is, that's creating volatility. It's probably why bitcoin's always going to have higher volatility than you see in the equity markets. And as soon as you understand that, that it's a function of the moving capital, right, it's an ecosystem, it's expanding and contracting. But as that supply is shrinking, right, and less of it's being put into the market. With every cycle, you start to see those dynamics at play. But when you realize that more capital's coming in all the time, you're seeing the capital flows into the digital credit products, you're seeing the demand that's coming from individuals that are starting to understand it. You're seeing people take allocations and ETFs and they're starting to talk about it. And as you see that capital start moving the price up, you start to understand we've been in these very consistent cycles for a long time now where people have gotten conditioned that that's the way this is always going to behave. But we're seeing structural shifts in the bitcoin ecosystem now that's changing, it's opening more capital flows. It can come from more places now than it could have in the past. And ultimately I think that's what's going to result in those supply dynamics resulting in a higher price eventually. It just has to, it's got to move. Yeah, it's got to move.
- [48:24]
B
I think that's why I'm so freaking excited about everything that we've got going on right now at Strive as well. I believe, I truly believe we are a systemically important component of those capital flows coming into the market as well. I mean, strategy has graduated, right, very clearly has graduated from a small cap stock to middle cap stock to, you know, medium large cap stock, 50, 50 billion dollar equity market cap. We're completely different, right? We are accessing capital flows that are interested in small cap stocks like a common stock's worth 800, 900 million. We're a part of the Russell 2000. We have a digital credit instrument that is different than strc, very similar in construction, but a different risk profile and that attracts different pools of capital. So now you've got multiple pools of capital coming in and just accessing all, all ends of the market with efficient vehicles. And man, I am, I am super pumped. I am super excited to be here. I'm super excited that we've got this instrument out. And yeah, the future is bright.
- [49:30]
D
It's been the most exciting bear market ever.
- [49:33]
B
Yeah, yeah, absolutely.
- [49:36]
D
I think at this point it's like peg these things to par and we'll sit down here in price as long as people want us to and just keep buying more bitcoin.
- [49:47]
B
Yeah, it's got to move. It's got to move. It's moving as we're talking. So yeah, as we're talking here, what, 74,500 and it's still going higher.
- [49:57]
C
Does anybody wonder who the buyer is in the market right now.
- [50:02]
B
Who's in the market with a billion dollars?
- [50:04]
C
Speculate on that.
- [50:07]
B
Yeah. My gosh. Crazy times.
- [50:10]
A
Thanks for joining us for episode 55, a structural shift. A New Frontier. All your models are destroyed. For Jeff Walton, Matt Cole and Ben Workman, I'm Tim Kotsman. We'll see you back here next week for another edition of the Hurdle Rate.