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- [00:00]
A
Welcome back to the hurdle rate episode 57 for the week of May 4th, 2026. I'm Tim Kotsman. I'm here with Jeff Walton, Ben Workman and Matt Cole. Last week was the Bitcoin conference in Las Vegas, also known as the Digital Credit Conference. Arthur Hayes was on stage basically saying that if we had the Fed, the Treasury and money Printing all aligned, we're going to go to Valhalla. We had Matt Haugen, VA, the CIO of Bitwise recently saying that Bitcoin could go up 10x by 2030 and that it is dramatically undervalued versus the scalable market it's going after. We just finished listening and Jeff Walton participating as an analyst in the Q1 strategy earnings call. A few of my takeaways that I wrote down, things I think were interesting and notable. Vanguard is 2% the distribution for Stretch. I'm sure you guys may have some comments on that. Bitcoin is a two hour meeting at the board level. Stretch is a CFO level decision that may not even be mentioned to the CEO. Maybe it's a five minute conversation. Stretch is Bitcoin for corporations. Everybody can go to the credit tab on the strategy website. Put in your own assumptions into the model to be reminded of that. Strategy.com strive.com A shift in narrative to the business case for potentially selling high basis bitcoin. A focus on Bitcoin per share. They said we are like a bitcoin development company comparing MSTR to a land development company. They use an equity and risk model every minute of every day. This is investment grade credit with very conservative assumptions. Probably the biggest one for me and maybe we'll get into it. 1.22 MAV is where accretion begins. Negative sentiment is a pretty good business. They can fund dividends with Bitcoin and still grow the bitcoin holdings. And if they don't sell the MSTR common stock that may send the m nav to 2 or 3 or 4. The optionality in the business is expanding dramatically. Stretches a perpetual swap, not a loan. They covered the business result of the range and the rate of sofr. We see a world where we are debt free and sooner rather than later they get market feedback every minute. The daily liquidity of Bitcoin is $20 billion or greater. And finally, if a billionaire spends a million dollars to make a billion dollars, no one calls them poor. And of course you can summarize all of this with four magical words. Half cash, half stock. I'll throw it over to you Jeff, what were your takeaways from Vegas and from the earnings call?
- [03:04]
B
Man okay, I'm just going to start with the earnings call because we just got off of it. It was, I'm looking at the PDF now. It's 135 pages and it is just absolutely dense. If I were to summarize this in one word, I would say optionality. Optionality. Optionality. Optionality. And the instruments and the capital structure that they've created has created so much optionality. There's so many different things they could do with the different tools that they have. They've got, they've got the bitcoin, the bitcoin's liquid, they could sell the bitcoin, they could keep the bitcoin, they could issue derivatives on top of the bitcoin to generate cash to do things with it. They can issue strc, they could issue any of the other preferred instruments, they could issue common stock. Then they've got the operating business. There's, there's so much optionality within the capital structure to do different things at different points in time. I just, as, as the optionality was being explained through the entire presentation, I was just imagining like this is a chess master that's looking at the entire chess field and going like which chess do I want to do today? Like do I want to move the rook, do I want to move the knight, what am I going to do? And that's, they have that optionality every single day on their balance sheet. A couple other things that stood out, they are very focused on what, what seems like is retiring the convertible debt and getting to a debt free capital structure over, over the next three years, which, which I think is a prudent move. And I think a lot of people have been asking and wondering about the convertible debt that's sitting on the balance sheet, particularly the ones that are a couple years out. I think the has a, that there's a 2028 put date with a strike price around $600. And people I think are a little concerned about that just being on the horizon given the relative cash position and the equity in bitcoin position. So I mean it was fascinating to see the development. The other big takeaway was the openness to being, selling, to selling Bitcoin if needed to pay the dividend obligations with the idea that at certain points of time you may be interested in selling bitcoin to pay the dividends because it is more accretive to the capital structure to do that than the MSCR common stock just depending on different points of time and different valuation metrics. And all of this is math, like all of it is calculable. And you can have a single dashboard, especially with today's AI, I'm sure they've got just a single dashboard where they're looking at all of these metrics and as they change you've got different structures that you can pull with your bankers in managing the capital markets. So that was my biggest takeaways from the whole presentation and maybe I'll pass it over to Matt and Ben for some of their thoughts.
- [05:46]
C
Yeah, as I was listening to this presentation, I couldn't help but rewind one week to the bitcoin conference when Jack Muellers was on stage and saying that strategy could not issue more converts at 0% and of course you would rather finance at 0 then issue digital credit. And what does Saylor do? He comes out and does, you know what, what Strive Wordy did. We retired 90% of our convert to issue more digital credit. Right. Like not because you couldn't issue the convert, but because you view the convert as expensive and non optimal financing for a bitcoin treasury company. Right. And to your point Jeff, this is all math, right? This is math when you actually look at the, the risk and the return potential in managing a bitcoin treasury company that it's clear that digital credit and simplicity makes for the strongest form of a balance sheet here. And strategy is laying out all sorts of different types of trades. But those trades to me had one clear foundational truth to increase bitcoin per share over time. That that's the foundational goal of every financing decision. And I think Saylor's talked about selling bitcoin before, but never so in depth and so openly. And I think it makes sense. I think he, I think rightfully sensed maybe some misunderstandings in the market. One of the misunderstandings is on when you can sell the common equity and have it be accretive. Right? So he really hammered home. Selling it at a, at a 1 times m nav when you have amplification like they do is not going to be in a creative transaction. It's actually going to be a drag on the yield. And so he walked through the math in depth math that we as managing a bitcoin treasury company stare at in the face every day. But you clearly see kind of a misconception of what should be done. And so I think it was a great masterclass that people that you know, maybe are confused by the mass should listen to multiple times. Because as he's walking through this I could just feel all of us like, yep, we look at those numbers, that makes sense. Yep. Retiring the converts, that makes sense. Yep. If you do, you know, if you issue at one times EPM now, you might want to, by the way, if you're making a balance sheet improvement transaction, Right. To improve the credit quality of your preferred equity. Right. To maximize value over time. But it is a yield drag. And I just felt like it answered all these questions that I feel like a lot of people answered and answered them explicitly. It showed the direction. It showed that they're not fans of having the converts and secretly wishing that they could have more converts out there. They want to get rid of them. And I think that they'll be able to if they're focused on that. We were able to do that, you know, fairly quickly. I mean, we have a much smaller size of balance sheet, but, you know, we were able to. To get, you know, most of ours done, you know, one week after the Semler transaction. And so I thought it was a. It was a great message from them. What do you think, Ben?
- [09:01]
D
What was really interesting to me was there, it seemed like there was a big focus on simplifying from here. Right. So in the past, they've been working really hard to get to the point where they are today. And that meant that there was a progression of products they had to issue into the market to inch them closer to getting, to stretch. They had to prove out the different markets. They had to find the capital. They had to give the market something that was already familiar to them. So when you think about the convert holders and you think about strike, there was a natural progression that they went through, and now it feels like they're shifting and they want to simplify here over the next several years. So the converts, they've been quite open about that, that they have no intentions of issuing any more converts. They want to get that off the cap table. They want to get the story cleaner. Because converts do give a focal point out in the future of a potential maturity in a cash obligation. And no matter how small that obligation is, if they had to retire those with cash relative to their trading volumes, the amount of capital they raise every week, it gives an anchor point in the market. It's the same thing we saw when they had the secured debt early on in the strategy where everyone was constantly focusing on that liquidation point. As absurdly far away as it was, it gave people something to focus on. And so by taking away any of those maturities, they're cleaning up the story. And these slide Decks, I think are going to start getting shorter than 135 slides when that happens, because now the story is very clean. There's no maturity. These don't come due. These are perpetual. The other theme that I saw stand out a lot and across several different areas was liquidity. They focused on the liquidity around MSTR and how highly liquid that equity is, which also plays into how much capital they can raise. They showed how liquid stretches relative to all the other preferreds out there in the market. The interesting thing to me was I was looking at our 30 day volumes on SEDA and we would have been second in that chart. We had 19 million in 30 day volume on average. So we would have been second on that chart, which I thought was really cool to see. But he also made the point about bitcoin and I think that was a big one, because when people think about selling for irrational reasons, they immediately think that what that means is a market sell of all 818,000 bitcoin. And the point that Saylor made today is no, we can strategically deploy this asset as we needed and that might mean we have to sell $100 million of it. And this asset trades 20 to 30 billion dollars a day. The market's going to be able to absorb that, no problem. And so he was laying the groundwork. While I don't think it's going to be an active focus of theirs, I don't think they really want to be selling any bitcoin. What he's proving is, is that we can and it's not an existential threat to the bitcoin network. Right. There's not a market dump coming of all 818,000 bitcoins. We have very small obligations relative to our balance sheet, and we can manage those and we can manage those with small increments. And then he showed that they could do it while continuing to increase the bitcoin exposure over time. So I thought it was a really interesting exercise to kind of walk the market through what their greatest fear is. And that has been the greatest fear is the unwinding of the treasury and the death spiral that people talk about. And he really highlighted that that's not there. Right. They've got the reserves that they need out there. If they needed to cover dividend obligations, which once all the debt and all of those chunkier maturities are gone, are relatively small, they can easily do it. And the market's plenty liquid enough to handle that. And I thought that was a really reassuring message for him to send out there because I Think that's something people overlook. They forget how liquid this market is. This is a global market and it's on 24 hours a day. And so they have the ability if they need it. But the hyper focus there on saying we're increasing our bitcoin exposure, we are absolutely looking to foster the common stock. I loved how he kept saying he wants to rip the face off the skeptics and smash the shorts. I loved how animated he got around that. It's clear that he's probably gotten a little annoyed with some of the narratives that have been happening here over the last several months. But. But they're hyper focused on doing the right thing. They're showing the market they're still scaling to be done. Right. There's a common framework out there that says, well, strategy is so big, how much more can they possibly do? And the answer from them was trillions. We could do trillions from here. Right. We're so early in this process and there's so much progress to be made that I just thought that was a really important point to drive home. So overall, I can't say I've ever seen a bad earnings call from them. Right. They use it as a massive education point and this one was no different. And you leave it feeling like, you know, any capital you've got invested is in good hands.
- [13:46]
B
Yeah, I completely agree, Ben. I've got several more points I've been writing down as you guys were talking, because it's all coming back to me here just to emphasize on what you said, Ben, the liquidity. So strategy was out of the market last week. They didn't purchase any bitcoin. We bought, I don't know, something 50, 50 plus million. I don't recall the exact number off top of my head. The market cap of Bitcoin increased $200 billion in the last week. Strategies out of the market. There's people that are buying bitcoin regardless of strategy. Being in the market like that market is incredibly liquid in that emphasis on being able to and willing to sell the bitcoin to pay a tiny relative obligation relative to their balance sheet. I think that would be a fascinating signal the bears are going to take it. The energy would, would, would be very electric on both sides. There would be people that are long, there'd be people that are short. A couple other things that came to my mind. $200 million call option was printed on MSTR today. There's the largest single call option trade in the entire market. And that's, that's interesting, right People are, people are hedging, people are going along, people are going both direction. I think that's a really interesting signal. And then another example that was brought up thinking about the variable perpetual preferred equity, that because it's a variable rate, you're not locked into that financing forever. And that financing can come down over time. And you gave the analogy of Amazon. But one analogy that I like to use is, that was directly applicable to me is the insurance industry over the last decade. So there used to be thousands of insurance companies, there still are thousands of insurance companies, but there's been a lot of consolidation to large national insurance carriers. And so these companies like Progressive and Nationwide and Liberty, they've been really hungry for business. So what do they do? They undercut the prices below the actual risk rate for homeowners insurance and car insurance. And they've been doing that for the last decade because what they knew is the small regional carriers would be unable to keep up because they don't have the large geographical exposure. So those big insurance companies cut the costs of homeowners insurance and car insurance just to get that business in the door. So it was super sticky. And then when the market was opportune, they would slam the price back up knowing that a lot of the business would be retained as the market starts to move and change in that direction. You've seen a lot of noise in the insurance industry. People complaining about homeowners prices and car insurance. It's inflation. But it's also this large market dynamic that happened by carriers accepting the fact that they had to pay to get the business in the door and that they were able to change that cost curve over time. So it's just fascinating thinking about long term capital, right? This is like, this is a 10 year, 20 year horizon thinking about capital management and Bitcoin being a long term store of value on the horizon. So that was, that was a very large, you know, point that I wanted to make there. And then the, the last piece is layer two, layer three. Digital credit is layer two, Bitcoin is layer one, Digital credit is layer two. And this layer three ecosystem, which he's talking about, digital money, digital yield, I've called it amplified digital credit and investment grade digital credit, which I think I like a little bit more. But that is where this market is going and the ecosystem is exploding and it's moving very quickly. It seems like defi is moving much faster than what traditional finance can do. But the traditional financial market will plug into some of the largest pools of capital that we've Ever seen. Right. If you're able to get a credit rating on any of these instruments and plug it into investment grade credit, that's a big idea. That's a big idea that can pull in significant pools of capital. The last interesting piece is if you're able to get this investment grade tranche potentially rated, unlike Boeing or Microsoft, that's limited in how much investment grade paper they can issue to the market based on the future cash flows of the underlying business strategy could theoretically issue infinite amounts of investment grade digital credit. They could issue $50 million a day. They could bring it in the door. Bring it in the door because they've got the bitcoin. The underlying bitcoin on the balance sheet has the ability to store that energy into perpetuity. So, yeah, I mean, super exciting. There's so much here and so many things moving.
- [18:12]
C
Another thing that came to my mind from the call was Fong saying something that we talked to about internally, a lot of how high would you take amplification ratio? And he talked about how if the debts retired, he's like, I could see us. And he was comparing strategy to banks on a leverage ratio. Right. And showing how levered banks are versus strategy as a balance sheet company which has almost no leverage. And as they retire their debts, you know, has a goal to be debt free. Right. Just like, just like us. And, and, and he mentioned 50 to 60% amplification ratios. Wouldn't scare him. And Jeff, I know you've done just so much work on this and when you don't have debt and you're not staring at a maturity wall, I still think even the 50 to 60% could be conservative. But I think what his point is, it could go higher and we're not afraid to take it higher as our capital structure improves over time. And I think that makes sense. I don't know that I'd ever heard them say 60% before. I remember Saylor in the past saying 30 to 50%. And so that was another, I think, signal to me that these guys are obviously great stewards of capital, but they get it that as you retire the debt higher amplification is still equivalently a similar level of risk. You can support more amplification when you're pref only. And that's something that we've been hammering for a long time. And I think part of the reason why we think the risk on SATA is mispriced even within the digital credit ecosystem, that it's not just amplification, it's the, the type and it was really promising to hear them talk about that.
- [19:58]
B
Yeah, it smooths out the liability profile without debt in a chunky potential. Put where you've got to come up with 2, 3 billion dollars of cash. That liability profile is incredibly smooth. So you think about volatility, which he brought up in the questions. The big debate right now is what's the forward volatility curve of Bitcoin, which is the influencing factor of, you know, what, what that true credit spread should be. I think the market is pricing in effectively Bitcoin of 5% ARR and 40% volume. That's the effective price based on the calculable risk model. But we disagree with that. Right. We think that the long term ARR, at least the next 8 to 10 years for Bitcoin is going to be 30%. The volatility still may be high, but there's a big disagreement on that relative, I guess, the credit frontier into the future.
- [20:56]
D
Yeah, I think it shows that there's a heavy cost to maturity risk out there. And once you free yourself from any of those future maturity risks and you get into a model that allows you flexibility and you're managing much smaller obligations on a monthly basis, you can feel more comfortable moving out that curve a little bit. We've talked a lot. 60% to us doesn't seem all that high. And you kind of use it because you're modeling where would you want your amplification to get in a drawdown? Because the amplification varies greatly depending on what bitcoin does. And you see significant drawdowns in bitcoin, and it's a part of how you manage your balance sheet throughout those cycles. When you're in a bull market and the price of bitcoin is going up, you're getting de amplified. But what you're constantly looking at is what would my amplification look like if we went down and had another 45% drawdown from here, 50% drawdown from here? Would my investors still be comfortable with the ratio that I'm at? And it's a little bit flawed because there is no chunky repayment, there's no future principal repayment out there in the future. So that's what you're measuring it against. But that's not an outcome in a perpetual equity. Right. This isn't debt, this isn't a loan. So there is no maturity. What you're really looking at is how much value is there. That's excess into the common equity. And that's where you're trying to focus on you want to make sure that your investors continue to see the value in whatever instrument it is that they're holding. So I thought that that was really interesting. And it does highlight why they want to be freed from all these maturity risks with the bonds. Right. Those just need to go. They're noisy. They give people something to focus on, and it inhibits your ability to operate at the level that you want to. I think with that debt, that amplification ratio would be looked at much more closely. And I think that for them, that just causes noise that they're not going to need. The other thing that I thought was really interesting was he went after the cost of capital discussion. There's been a huge amount of discussion out there about the current cost of capital around the perpetual preferreds. And he put out the new model around the stochastic cost of capital and showing what happens with SOFR as it moves around, Talking about the history of SOFR and how we had 0% rates at 1 point in time. And because these are variables, you've got the ability to bring that cost of capital down here over time. And you would expect that over time, if those rates were to go down, if SOFR was to go down significantly and the spread started to widen, these are going to become incredibly attractive products in the market. Right. The wider that spread gets, the better these are going to look to investors. The more demand is going to come in, the more pressure that these are going to feel. Pushing up against par and above par, and that brings in that ability to lower that cost of capital over time as needed. And I thought it was really good that they walked through that, because I think that's misunderstood. I think that everyone assumes that the cost of capital is struck in time based on whatever the interest rate is at that moment in time. With a variable rate, that's just not the case. These are going to float over time. We don't know if it's one year, two years, three years, five years. We've talked a lot on this podcast about needing to show a track record before a lot of that new demand comes in. And how does that coincide with the rate environment that we see out there at the time. Right. We don't know exactly when that moment in time is going to be where you feel comfortable that you have sustained demand. These are attractive enough products. You can start to lower that cost of capital over time. But right now, we're out here building a new market. This is something they haven't seen. They've been in the market. The variable rate Ones for far less than a year still. We're still very much maturing. And the demand on these has been incredible. I mean, we're almost half a billion dollars on SEDA. They're at, what, eight and a half or 10 billion on stretch? I can't remember the exact number that they had in there, but there are billions and billions of dollars of these being bought. You're seeing these hit par throughout their monthly cycles over and over again. Right. The demand is there. Right. That's undeniable. Those are market metrics. You can watch, you can monitor. And as awareness grows, you know, Jeff, you're learning this right now because you've been at Risk World. There's a significant lack of awareness still.
- [25:08]
C
Right.
- [25:08]
D
We see it in our everyday interactions because this is the bubble we live in. And now it's time to go outside of that bubble and start to help other people see that there is a better option out there from the traditional investments that they've been holding.
- [25:22]
B
Yeah. I went to a bitcoin meetup here in Philadelphia as well, and I was chatting with a few of the folks here, and one guy came up to me. He's like, yeah, I really like Stretch. I'm holding Stretch. But I don't like seda, but struggled to articulate it. I asked him why. It's like, what is it? What is it that you don't like? Explain it to me. Let's unpack it. Let's think about it. And it really struggled to articulate it. And several of the conversations I've had here at RiskWorld as well, are, this sounds scammy. That's too good to be true. But struggled to articulate or poke holes in it. And it's that consistent track record building, Matt. Something you talk about all the time. I'm sure we'll probably come back to this event here in Philadelphia at Risk World next year, and we're going to have another conversation. And by then, hopefully, we've 5xed our balance sheet and 5x the perpetual preferred outstanding. And then you do it the next year, and you've 10x'd it, and you start having those conversations, and you're like, wow, I've actually paid out X amount in dividends, and I've continued to do it. Here's my risk profile. Let's talk about our balance sheet. And I think that that's the effect of infiltrating the trust networks and getting the people that are trustworthy in communities to understand that you are trustworthy. You have a good credit Quality, you are paying out the dividends and you're doing it into the future.
- [26:50]
C
Yeah. One of the things that Saylor talked about on the call too, was in that direction of new technological breakthroughs and how people just always question them in the beginning. And it's something that we've been talking through a lot this last couple weeks where you're starting to see these people, obviously from TradFi, that don't understand the risk, but then also people from the Bitcoin community that don't understand this or are skeptical or just really want people to buy Bitcoin and can't understand why you would buy anything other than just straight bitcoin. And, and it just strikes me of whenever you have a breakthrough technological re. Revolution of anything, that the, the people that are being disrupted are likely to kick and scream and fight and, and, and, and, you know, and not understand it and not, you know, kind of do the, the analysis. And I think that's, that's what we're seeing here paired with exponential growth, right? And so it's not just, you know, people kicking and screaming and then no demand. Like, like the demand is going exponential. And then the people that are being disrupted or that, that, you know, that, that would disrupt things that they're used to are kind of kicking and screaming. And I think what happens is that you keep showing up, you keep showing the success, right? And it is exponential growth. So, you know, you show, you know, whatever it, two X's, four X's, ten X's, whatever it is. When you go back to Risk World next year, oh, and you say, oh, and by the way, we paid every dividend for the last year, no problem. Right? Like, and then you do it again the next year. And you know, at a certain point they're like, okay, like, like this, this is, this is working. All of the criticisms that I had are, are not, you know, actually playing out. And it's just like any, you have the early adopters and then you have the, you know, the innovators. I can remember what the four steps of a new technological, you know, and then you have the late adopters at the end, right? And I think that's what we're seeing here. And it's not surprising to me that we're seeing it pick up on the retail side first. And I think the reason is retail was the first to adopt Bitcoin. The institutions lagged substantially, and now the institutions are just starting to get access to Bitcoin through ETFs and kind of that working through all the different channels. Right. Every single institution, even just a couple of years ago, was, bitcoin's a scam. It's for money launderers. It's rat poison. And now it's within the system, in the wrappers and in things that they're used to. And now it's, you know, we recommend, you know, allocation to all of our clients up to 5% of the portfolio. Right. Like. Like that. That change took a long time, but bitcoin didn't wait. It's not like bitcoin just like, flatlined. No. Like, bitcoin grew exponentially the whole time because it was such a breakthrough innovation. And I think digital credit is going to be the same thing. And it makes sense because it's on bitcoin rails. But I do think it'll move faster than bitcoin itself did. I think we as a. As a society are kind of just moving at exponential pace here with AI adoption. But I do think that that's how it will ultimately go. And I think you look at how big bitcoin got with no institutional adoption, I think that could be a kind of a barometer of what could happen to digital credit here as it kind of works through all the different retail channels.
- [30:34]
D
Yeah, it's that thought of keep showing up until you become undeniable. Right. It happened with bitcoin. The bitcoiners continued to show up, continued to push, continued to educate. And now bitcoin's hitting that point where it's starting to become undeniable. You know, to me, I think that the kind of the finish line for becoming undeniable would be the change of the Basel framework. Right. I think that's going to be the biggest event that we could see happen that shows that bitcoin is now undeniable.
- [31:03]
C
Right.
- [31:03]
D
That's probably the very big achievement that we've got looking out there. But the same thing's going to happen here with digital credit. It's the reason why right now we can't get the ratings. It's still part of bitcoin not being undeniable yet is because it's getting no credit in any of the ratings. And there's a lot of education that has to happen there. And there's a lot of misnomers about volatility versus risk, and people have a very difficult time separating the two. And so I think that it is going to be a function of having all of these companies, all of these individuals, all of these institutional investors that are the early adopters showing up. That's ultimately going to force both of these things, bitcoin itself and digital credit, to become undeniable out there in the market. The nice thing with digital credit is you don't have the same dynamic that you have with bitcoin where people look at the price now and they go, oh, I missed it. I wasn't buying it when it was $100, so it's not worth buying now because now it's worth $81,000 and I missed it. You don't have the same thing with the digital credit products.
- [32:08]
C
Right.
- [32:09]
D
There's no bad time to find a product that offers you higher yields.
- [32:14]
C
Right?
- [32:14]
D
That is a problem people have in their everyday life all the time. Perhaps none more than today. I was out looking premium gas around here, $6 and something a gallon right now. Prices in the supermarket are really high. Cash flow is always important. It's what you need to live your life. It's why in the early days, I was very dogmatic about it needed to be bitcoin only. And I never would have thought that I'd become this fixed income proponent out here. That was never part of my journey. I was way out the risk curve. But I see the power of it and I see the need for it. It's a huge gap that everybody's facing out there. And companies are facing it too. If you face the issue in your individual life, companies are facing it too. They have products that they need to buy, they've got people that they need to pay, they have expenses. Everybody needs cash flow. So having the instruments out there to optimize that cash flow is going to be critically important. And that's why we're so bullish on this, is because the addressable market there is so huge. And it's one of those things that you're almost in shock that these products aren't undeniable already less than a year in, because they're just that much better than everything that's out there in existence. But to your point, Jeff, where you run into people and they can't articulate it, it just sounds too good to be true. That's the education side of this. That's what these companies and people like us are responsible for when we have those conversations, is helping people understand what that risk really looks like. And when you really break it down to them and you show them the difference between these products and all the ones they've been comfortable with for years, not even knowing why, haven't even looked into them, when you realize that these are businesses that are holding in our case, 20 years worth of asset coverage today against our fixed income instrument and every one of these other products that's out there is based on the hope of future cash flows coming. That's a very different thing. I don't think the market appreciates that yet, but I think it's going to continue to get highlighted here. As more innovation hits the market, more companies start to struggle and more of these products start to highlight that that's a real risk. Yeah.
- [34:27]
C
Earlier today I did a podcast with a financial advisor that has been in Strive's ecosystem just buying our equity and fixed income ETFs for a long time. And you want to talk about that. He also want to talk about Bitcoin and Theta and just like explain this stuff to me. Explain this to all my clients. And so I started by talking about the debt crisis and I started with a reframe. And I think this is like, people just get this, forget starting with digital credit, it's the debt crisis. And So I framed U.S. treasuries as the risk guaranteed rate. And so it's like, because U.S. treasuries earn less than the rate of debasement of fiat currencies for the last hundred years and just said like, do you agree with me that if you invest in Treasuries, your purchasing power goes down? And there's been a history of a hundred years of that being true. And so you're not actually earning a return, your purchasing power is being diluted actively if you're in Treasuries. And he's like, I've never questioned. I've always just thought of Treasuries as the risk free rate. But like, you're right. Like it loses 100% of the time. And so U.S. treasuries are putting your money in a mattress. You literally have a 100% chance of loss. And so how do you make a return? Like there is no risk free return that does not exist. There's only a loss guaranteed return if you're in cash or in your U.S. treasuries. And so you want to earn above the pace of debasement, you got to take risk. I know you hammer this all the time, right? Like, like life is lived by taking risk. And so when you look at that things that could earn above 7%, then you enter digital credit and you've already discredited the fact that in a debt crisis that you should be buying as an investment debt from a government that's in a debt crisis like that. It just does not make sense. Right. And so what is the best form of debt? I truly believe, or not even debt because obviously digital credit is not debt. But what is the best form of income that you can find from a risk return adjusted basis? It's digital credit. And I think when you actually go through the math of this, I mean these guys were like pulled up like these like, you know, and I should probably put like 10% of my clients money in digital credit. Like, like and you know, I'm never going to be doing much of math and it's like, is like, but it's like, it makes so much sense. And, and so to me to see like, I mean to me like the most, the most flab like thing that I was like bewildered by this week was to see bitcoiners recommend buying U.S. treasuries. Like, like what, like, like where, where do we get that, that we're going to recommend an allocation to buying the debt of, of a country that's in a, in a debt crisis? It just, it just doesn't make sense. And, and I think that, that education is actually easy. People see that problem. The 6040 is dead. Everybody talks about the 6040 is dead. What do you replace the 40 with? That's actually the hard part of the question where there's not a consensus. And I think that's just going to continue to build the digital credit. I think it's why last week at the bitcoin conference Fong and Saylor were talking about over the next 10 years or so, digital credit being 1 to $3 trillion. And you know, on the upper end, that's bigger than the market cap of bitcoin today. And then you think about what does that mean for the price of bitcoin? It doesn't mean if Bitcoin's 1.5 trillion and you have 1.5 trillion of digital credit, that doesn't mean bitcoin doubles, right? Not every bitcoin is being sold. It means an exponential increase in the price of bitcoin for that capital to come in, which also reinforces the balance sheet strength of these companies. And it's why I just don't see how you could be bearish here. I see how you could, whatever. Maybe we go down a little bit in the short term, but how could you be bearish with this? Picking up steam? It's just, I think we're going much higher and trillions of dollars digital credit.
- [38:46]
D
I mean you just have to think about the mental gymnastics people have gone through or the narratives that have been pushed into their Head for so long where people are so comfortable locking in a return that loses them value. And they know it. When you see this debasement, it's what, 6.7% on average. Anything you're taking below that, you're just locking in effectively a guaranteed loss. And people are completely comfortable with that outcome. They don't even question it because it's, I guess it's slightly better than not buying the instrument that locks in a loss. Right? You're locking in a smaller loss, and that's good enough for a lot of people. When you have that realization and you understand that that's what's been happening to you for so long, and you start to wonder, why doesn't it feel like I can afford anything more now after I've been investing for all these years? Why hasn't that caught up? Well, that's why you're eroding value. You're taking a big portion of your portfolio and you're dedicating it to losing you value every year. I mean, it's a really fascinating thing. Once you finally break through on that paradigm shift to go reevaluate. And you look at everything in your portfolio and you don't even ask yourself, am I beating the bitcoin hurdle rate? That's not where most people are at. Just ask what portion of my portfolio is beating debasement? Just start there. Are you intentionally putting yourself backwards? Whether it's through laziness, not wanting to look into the investments, you just buy whatever. Tickers have the most capital in them because they've been easy for people to go and invest in. I think that there's a serious lack of awareness out there about what it is that they're holding. And when you have that awakening moment, it completely changes what you're even willing to consider for your portfolio. I know it has. For mine. My portfolio has become more concentrated than it's ever been because you start to see that structural damage you're doing to yourself for no reason. Now, the reason before was you didn't have options, right? There weren't good options out there. And people weren't comfortable with the volatility of, you know, going 100% into the tech sector or whatever it may be, whatever was providing the returns at the time that were beating debasement. But with digital credit coming out, this is a new option. It gives people a new place to look for those returns without the volatility of needing to lean into the equity side of the portfolio any heavier than they already were. So you can still Work within your traditional framework if you want to, but you can move that yield up, that blended yield across your portfolio higher. And I think that's incredibly powerful. And it's why I think the demand for this is probably going to hit that hockey stick curve well before the three year mark. I think with a little awareness, word of mouth starts to take care of the rest. When you're working with financial advisors and you're educating financial advisors and they're starting to see the options that are out there, particularly unique options like these instruments that have the tax advantages, right, the stepped up cost basis when you're passing it down to your heirs, that becomes incredibly powerful. And it's not going to take long for that message to get out there. Once you start getting the RIA community comfortable with what the risk profile is on these and why they work. So I think it's a matter of time, but it's mostly a matter of education here.
- [42:15]
B
100%. 100%. I want to hit on the FDIC for a moment because this is like the risk free, right? If you got cash in the bank, people are like, oh, it's FDIC insured. It's risk free. Like the, let's talk about the FDIC Federal Deposit Insurance Corporation. So this is a backing. If you need to go to the bank, the bank is assuring that you get, you can have $250,000, effectively $250,000 of coverage from the bank no matter what. Even if there's a bank run, you'll get up to $250,000. Now let's talk about how crazy this is. The FDIC has a current reserve of $153 billion. The insured deposits are 10.8 trillion. So the FDIC is 71x levered on the actual insured deposits in the banking system. So people don't realize like you're actually paying risk premium to the FDIC in via inflation. The fact that money can be printed because there's not enough reserves to protect against everybody going to get their money at the same time. So it's, you know, not risky, but it is risky because you're, you're paying the risk premium via inflation. Society just accepts it. They have no idea, they have no idea it exists. So I think that framing, a lot of education to build around that framing. I think people are starting to catch on about it. But we had a conversation at lunch about this exact concept, so I think that's fascinating. Another fascinating piece here is drawing back to the Bitcoin conference that we had last week and some of the back and forth that we've seen in the, in the bitcoin ecosystem on X and to your point, Matt, on disruption, the bitcoin ecosystem is experiencing disruption from digital credit and it's uncomfortable to a lot of people that have been working in the industry for a long time and they don't know what to do with it. And it's very clear, like the folks that have been working on, I don't know, lightning or custody solutions, that some of that growth has stagnated because people aren't necessarily going to buy bitcoin and put it in cold storage. They're looking at these other kind of layer two and layer three options to interface with the bitcoin ecosystem because it's a little bit more familiar, it's less volatility, a little bit more safe. And that's changing a little bit of the bitcoin ethos and that is making people uncomfortable. It's threatening business models of companies that were reliant on the old bitcoin system that is quickly evolving. And these, as the institutions start to come into the marketplace here, they're bringing hundreds of billions of dollars of capital. They're not going to go self custody. They don't want to interface on the lightning network. They want to do business the way they've done business for a very long time. And I think Eric Balchunas hit the question really well. There's a little bit of an ethos change here to the underlying bitcoin ecosystem and it's a bit uncomfortable for people. But the market is still growing and the opportunity for growth is still very vast. It's just different than the ideological mindset of what people thought bitcoin would be or should be into the future.
- [46:01]
C
I think that the killer app was not what some of the hardcore bit hunters thought it would be. And I think, but importantly, everybody's right to still self custody. Bitcoin still exists and will always exist. That is fundamental to the bitcoin network. And I think that's great. You think about the dollar. Today you can still use cash. Today you can hold cash, you can be off grid. That's kind of like in a sense, the bitcoin equivalent would be a better version of that. Right? Like holding bitcoin in self storage is substantially better than holding cash, you know, in a safe, in, in many different ways for all the different properties that bitcoin brings. Right, that, that the traditional bitcoiners would talk about. But the reality is, is that that will, that is not what the average person wants. And I don't think it's what the average person will ever want. Do I recommend everybody have some bitcoin and self storage? I do. And you want to know what? Most people don't want it? Right? Like, and I think that's just, that, that's just the reality. And you have to live in the world. That is the reality. Right. And the reality is a lot of people are risk adverse. That's why they invest in US Treasuries and give money away. They're risk adverse. Right. So digital credit offers a solution that is within the rails of the ecosystems that they're talking about. It's comfortable, it pays a better yield and it's looking more and more like it's the killer app to build onto Bitcoin that a lot more will be built on top of. And so, you know, kind of this uncomfortableness, I don't think it's a change in ethos of Bitcoin itself. I think it's bitcoin finding its biggest product market fit in the ecosystem that will exist. And I don't think that's uncomfortable. I think that's just, that's just reality. One other point I have on your FDIC stuff that you were talking about, why does FDIC insurance even exist? Why do you need it? You need it because banks run fractional reserves, right? They take in your money and then they only hold 5, 10% of it in house and then they've gone out and lent it, you know, 20 times over. And so a bank run exists because your money isn't that you put in there is not at the bank. Right. And I think that, that is something that I think the new digital credit rails, like when strategy was talking about their balance sheet differential versus banks that you think about FDIC insurance and it's like, well, if there was actually a structural run on the banks, FDIC insurance can't cover it. Right. They're underinsured. Now what will happen if that actually happened? What happens? The Fed prints all the money in the world, everybody gets their dollars back and they're worth nothing. Yeah, right. Like, I mean it's, it's a. Because, because you're kind of stuck either way. If you don't do that, then it also fails because you have a bank run and all the banks got a business. And so I think you ultimately get that escape lever. But, but that's the ultimate, you know, kind of pain patch there where you look at digital credit and the substantial less leverage that they have.
- [49:13]
B
Right.
- [49:13]
C
Where strategy is actually over covered with the bitcoin that they have relative to the digital credit that exist. Not that you can even do a run on the bank as in strategy. Right. Because you can't cash out your principal. You can only sell the security on the open market. And you see a system where FDIC insurance actually is just not even needed because it's a structurally different and better solution.
- [49:36]
B
Market structure. The architecture is being built on this huge bitcoin foundation. And it's elegant. It is really elegant. A new financial civilization can be built on top of a novel structure. That's a big idea. It's a really, really, really big idea.
- [49:59]
C
Yeah.
- [50:00]
D
I just think it's underserving in the bitcoin community to take the approach that every dollar that goes into something like a digital credit is a dollar that didn't go into bitcoin. Quite frankly, it is a dollar that went into bitcoin comes into these companies. But there's a fundamental misunderstanding there. While people are grasping to this idea of you think everybody is just going to go to self custody bitcoin, which all of us agree is a great thing to do.
- [50:30]
C
Right.
- [50:30]
D
It's one of the main benefits of bitcoin. You should participate in that benefit. And we've even often said it should be your foundation. Foundation of our entire company. Right. Like we are all great believers in bitcoin, but there's a realization that not everyone needs the same thing and not everyone can tolerate the same thing. And that's where digital credit comes in. You know, these types of instruments are not for the people. And I'm getting absolutely bullied by my dog here. You know, these types of investors are not the ones that would natively be out buying bitcoin. These are people seeking cash flow, something that bitcoin natively on its own does not provide. And so digital credit is giving them a way to participate in this ecosystem without having to ride the volatility that we're used to. Right. We're comfortable with. We've underwritten that risk. A lot of people aren't. So we're expanding new markets and we're finding ways where we can bring all of the benefits and all of the features that bitcoin has to offer and turn that into products that everyday people can work into their lives. And I think that that is just a massive application. And don't kid yourself, this isn't going to be the last iteration of it. There's going to be other people out there that are innovating. I think Every day we're all shocked that there aren't more. Yet. There are so many ways to build bitcoin into people's lives that this is not the last evolution of this. We just happen to think right now it's the biggest one. This is where the immediately addressable opportunity is. And it's what we want to double and triple down on, because we do believe that this is what people need right now. And I think that that is the beauty of bitcoin. It's always going to evolve. Its use cases are always going to evolve. We're going to find more ways to integrate this into people's lives, and hopefully we find ways to make those lives better. I think that's the important outcome at the end of all of this is. Is what we did, did it make people's lives better? And if we can go out there and structurally change portfolios and give people better retirements and help companies have longer runways, I think that's a successful outcome and it's one that's worth pushing forward on, even if it agitates the purists.
- [52:41]
C
Right.
- [52:41]
D
This is a big idea, and big ideas always come with resistance. And it's always hard for people to see something change. But bitcoin, this is a feature of bitcoin. I don't get to decide how it's used. You don't get to decide how it's used. The OGs don't get to decide how it's used. It's open to the world, and now the world's going to decide what is the highest and best use that we can use this for. And I think that's the beautiful thing
- [53:05]
C
about it sounds decentralized.
- [53:08]
D
It's very decentralized.
- [53:10]
B
It's a worthy mission, too. Make the world a better place. I mean, that's critical. I can't tell you how many people came up to us at bitcoin conference and the True north event that we're just thankful to be here and to be able to communicate and follow along and, you know, telling stories about how their lives have been changed and how they think about the world differently. And there's. There's no going back. So it's. Yeah, it's been so fascinating to watch it evolve.
- [53:37]
C
Yeah, it really is a purposeful mission. And it kind of ties back to me for, like, the fundamentals of even, like, why strive? You know, I think for a lot of us, why are we in finance? To fix the retirement crisis? To provide people an opportunity for a better life. Right. That's. It started with the ETFs with those. And digital credit is, I think, the biggest version of that that I've ever been involved with. And it's, and it's really fun, and it's really motivating. To your point, when you go to some of these events and people tell you how it's changed their lives for the better, and, and they're, they're seeing it, it is changing lives. And, and I think it's going to continue to change a lot more lives. And because of how great bitcoin is, that you can build great things with bitcoin as the base life frees you.
- [54:29]
B
Yeah.
- [54:30]
A
Well, that's a wrap for the hurdle rate. Episode 57 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.