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Sam.
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Foreign.
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Welcome back to the hurdle rate episode 62 for the week of June 22nd, 2026. I'm Tim Kotsman. I'm here with Ben Workman, Jeff Walton and Matt Cole. This morning, Strategy announced an additional purchase of 520 Bitcoin for 35 million. Strive announced an additional purchase of 759 Bitcoin at an average price of $65,850 per Bitcoin. Strategy also increased its USD reserve by 300 million in one week to top it off at a cool 1.4 billion. And 42 minutes ago, Fong Li posted. I bought $1 million of STRC today. Will hold it until it reaches par, likely longer. Topics on the table today include the Fed meeting, digital credit weakness, balance sheet moves by Strategy and Strive, and leverage and volatility. Jeff with more and more conversation around the USD reserves and credit ratings, I feel like maybe we're on the precipice of new slides with the TAMS per credit rating instrument, like per type, per credit rating by instrument type and industry. Maybe they're already floating around there. Maybe they're already floating around somewhere on the Internet. What do you think?
- [01:52]
D
Yeah, so we experienced some volatility in digital credit last week and it's been really interesting to analyze it and see, you know, what has happened and do a postmortem analysis of everything that occurred. And it's been really fascinating having some conversations with people and diving into some of the data. We saw SDRC drop down to low 80s. We saw Zeta drop down to low 90s and then since then they've recovered a decent amount. I think as of right now, as a recording strategy, STRC is is trading at $90 and SATA is around $98. So the these instruments have rebounded a decent amount. A couple takeaways and before we'll kick it over to Matt and Ben. In the conversations that I've had with some of the DEFI participants that are holding these instruments, I've been pleasantly surprised that there hasn't been much leverage liquidations that happened in the DEFI environment, which is the initial thing that most people had thought had happened on Thursday last week. But what it appears is that Saturn didn't have any trading liquidations. I think Apex had very small net outflows and what we saw was, I think, a liquidation event that occurred within the traditional financial markets, which is a bit of a surprise given that most everybody's making a bunch of noise about the leverage loops that are potentially sitting outside in the defi environment. So what it appears has happened is that there was a bit of a sell off on STRC in particular that resulted in weakness in the instrument and then ultimately, you know, margin calls and liquidations within the traditional financial market. So we saw a blip of the price go down, massive volume spike, and then volume trailed off and the price recovered into the upper 80s. We also saw some correlation with SEDA. So when those events happened, the effective yield, when the price of STRC comes down, the effective yield rises. This is bond math. And the effective yield actually became greater than SATA at a, at a brief moment of time. And what we've heard anecdotally within the market is people were selling SATA in order to buy stretch. So it's almost like the liquidity pool of SEDA had provided a little bit of a, you know, bottom support for STRC when the effective yields got a little bit out of whack. And so what did we see? We saw the price start to rebound. We saw some correlation in SATA as the, as the event was correlated. But this was largely a liquidity event and not a credit event. You go look at the credit profile of the, of the balance sheet and the credit profile, the balance sheet is unchanged, right? So, and you look at even this last week Strategy, raising another $300 million of USD reserve, buying some bitcoin, our balance sheet, we added some bitcoin to the balance sheet, added some cash to the balance sheet, and the credit profile is actually improving and improved last week over the week prior. And, and just some stats that drew out to me, the liquidity of these instruments was very fascinating. STRC on Thursday traded $950 million volume PFF. BlackRock's the largest preferred equity ETF on the planet. PFF, owned by BlackRock, traded $77 million of volume. So STRC, the instrument, which is a sole credit instrument, traded 12x the entire daily volume of PFF. And STRC makes up 3% of PFF. So it's really fascinating to look at the liquidity profile of these instruments if you're trying to scale in large into a credit instrument and get in and out without having that big of an impact on price. I'm thoroughly impressed with how digital credit stood up given the amount of volume and how much traded on these these two instruments. For another anecdote piece of information, SEDA traded $150 million of volume. It was the second largest trading volume day in SATA's history and it closed the day within 1% of our target trading range. Again, we traded two times SEDA, traded two times PFF, the largest preferred equity ETF in the world. That equity ETF, the preferred equity ETF, holds 450 instruments and it pays an annual yield of around 6%. And here we've got one instrument by a new issuer, $780 million outstanding and it traded $150 million in volume. That's a fascinating credit instrument. The world and the market is starting to understand how can I use these things, what is the liquidity pool, how do I scale in and out and how does it fit into a portfolio? So I'll kick it over to Matt because we've got a lot of thoughts and opinions on this.
- [06:54]
A
A lot of thoughts, a lot of opinions, a lot of data. And I think one of the things that was fun to do and I say fun, it's like obviously liquidity stress event. You wouldn't necessarily call it a fun day, but this is such a novel space and we're all learning in real time. And so one of the things that I saw back in my TRADFI experience is that whenever you would see the markets drop, you would see every media outlet come up with just like the most silly reason that you would see something drop or something rise. And we would always just joke if something dropped, that there was more sellers than buyers, because it was always. Even though there's always the exact. Actually from a fundamental perspective, there's always the same amount of sellers and buyers because to sell something there has to be a buyer. But it was just kind of laughable. But here I think we actually had one. When you combine the data, the combination of empirical evidence of a lot of different people putting on different types of leveraged trades around digital credit, and to Jeff's point, a lot of these trades were traditional finance based. They were not on the DEFI ecosystem. You have a couple examples of anecdotal evidence of people facing liquidations. And then when you just look at the data around strc, you, you see basically kind of even in the initial weakness of STRC, call it from par down to 90 or 89, kind of like just small volume. And then you just see a massive spike of volume as it goes down to 82 and you combine it with the previous things I said and you say, okay, well why was there this massive spike of volume that out of kind of previously just like very little volume that caused when STRC dropped to 82 and then immediately rebounded basically on Friday, almost to unchanged on the day, and you say, why did that happen? Why did so much volume happen there? And the only thing I could possibly point to is a liquidation event. Like who is the person that's just dumping a ton of STRC right at that level. And what you find in liquidation events is that it's because people don't want to sell at that level. And so you find a lot of selling pressure and then you also find a lot of buying pressure at that time. And one of the other I think interesting observations around this, thinking back to traditional finance is that one of the most common places of these sorts of events in credit markets is actually US Treasuries. And that is a. It's almost a. Something that you would say is non intuitive. You would think that the most common place of these liquidation spiking events would be in like high yield markets. But they're actually Treasuries. Why are they in Treasuries? Because investors find Treasuries to be highly liquid, have minimal volatility and have yield. And so you find investors wanting to juice the combination of those things. And so this kind of gets into. Maybe one of the reasons why I wanted to put this out there is just one, to help educate people. But two, because I actually think that this might be something that repeats periodically in digital credit because as its volatility profile minimizes and you have this double digit yield deep liquidity instrument with a super strong credit that the people that are investing this I think actually understand really deeply that it will encourage risk taking behavior. And so is that a feature? Is that a bug? I would actually say it's a feature of the strong credit. That is people are treating them similar to how hedge funds treat US Treasuries. And I think the markets will evolve, people will get smarter. People aren't going to get their hands chopped off multiple different times, but you're going to see new people enter the ecosystem and take risk. This is just part of the educational journey, the evolution of these new instruments. And to me they're not broken. I think this actually proves the thesis of the confidence that people have in these securities. And one of the last things I'll say is that when you have weakness, and I do think that there was some weakness in stretch lower prices over the last month or so into a liquidation event. You know, sometimes that can snap back really quickly, sometimes it takes a little bit of time. We don't know, right. As kind of these, the hangover of this event wears off. But the reality is that it's not broken and it gets into the last thought. I'LL have before I pass it over to Workman is Samson Mao posted something over the weekend that just said strategy could literally do nothing. And this would likely snap back to par because of the credit worthiness, the yield profile and the principal potential gain. And that was similar to what Fong had said in an interview. And I think that people underestimate this. They think it's broken. It's not broken, it's working. And I just view this as a little bout of volatility on the journey.
- [11:57]
B
Yeah, it is a knee jerk reaction that you see out there on the Internet. And you got to remember that the Internet is not the place to go for stable takes on things. Right. There's a lot more emotional takes out there, you know, than there are ones based on the fundamentals. And I think we saw a lot of that. Right. Anytime you see weakness, particularly right now, while you've got kind of a divided bitcoin community. And so it amplifies what's going on out there in the market as people jump into the conversation here. But it is important to know that they don't have to do anything. Right? They've got an incredibly robust balance sheet. The structure of the product is not broken, the credit is not broken, and so they can just wait. Periods of volatility just exist in markets. They always have. It doesn't matter what the market is. To your Point, Matt, the U.S. treasuries is one that'll have bouts of volatility in it and that's supposed to be the risk free rate out there. So to expect that it would never come for digital credit, particularly this early in the journey, I think would be a little shortsighted. Now. You never know when it's going to come. But one of the things I found really interesting is when we normally talk about liquidation events around anything bitcoin or anything in the crypto ecosystem is we're often focused on defi, where leverage can be anywhere from 1.1 times to 100 times leverage. And what that creates is inconsistency in where the liquidation points are. But in traditional markets, if you think about your brokerage account, if you've got a ton of people that are applying leverage while these instruments are trading at 100 and they're levering these things up, you have chunky capital that effectively all has the same margin requirement on it. Those points where the stress is going to show up is consistent across all of those investors, whereas in the DEFI ecosystem it can vary widely. Someone who took on five times leverage is going to have a much different trigger point than someone who took on 100 times leverage. Now, the 100 times leverage liquidation might cascade into the five times if it catches on and causes that contagion. But in the traditional markets, it's much more consistently applied across all of them. So if you have these instruments that were trading around 100 and you had a lot of investors trying to lever up on it to boost that yield, you have large chunks of capital that are going to have the same margin call points. And I think that's important to notice. And it might be why you started seeing that liquidation cascade happen down in kind of the upper 80s, going down to the 82 range was that you just had this chunky piece of capital that needed to move, it was forced to move and then it recovers right after that. Right? You see that V bottom that you'll often see in those liquidation events. So, you know, I think the weakness we saw over the week before where it's kind of started slowly grinding down to the low 90s, you know, that starts to create some uncertainty. It starts pushing that price to the ranges where people start getting nervous about it. You start getting people that capitulate and start selling out. And ultimately that can lead to these liquidation cascade events. But that's what they are, right? They're events. They're those point in time where they went into these liquidations. I think just seeing the way that they're already trading, you know, today you saw some recovery in those. They both recovered pretty strong into the close last week, you know, tells me that a lot of that has been washed out now. So I think there's far less leverage in the system here and the credit quality hasn't changed. So it's likely that you start to see these things return. But it's important to know that these are trading in the open markets and these events can happen. Right. That's part of the risk profile. It's part of the reason why I think on this show a lot we've talked about the dangers of using leverage on things. And this is one of those examples where it shows that you can have a thesis, you can have the right long term direction, but if you put too much risk in your own strategies, you're, you can find yourself taken out of the trade. So I think this is one of those moments that people will reflect on where you just have to know that these are always possibilities when leverage is at play and nobody can control who puts on leverage and when they put it on, that's part of trading in markets. So overall I think it was an event that shook a little confidence in the short term. But with the bounce back, I think that you're seeing, people still see that the strength is there in the balance sheet. You saw purchases from our company, you saw purchases from strategy, you saw them boosting their reserve. Right. Nothing stopped. Right. It was business as usual. It was a very exciting day. You got to watch all the takes out there. So it certainly created a lot of excitement. But the model didn't break, it continued on and we're still as strong as we've ever been. So I think this is going to be a good one to reflect back on.
- [16:35]
D
Yeah, completely agree. I think there will be a lot of reflection on this event. These products are just so new and novel. And I, I was interviewed by Coindesk this morning and they're asking about, you know, oh, this was created with AI. Does that, you know, cause some concerns for you? It's like. Well, no, like all of the elements of this instrument were, they've already existed before. It's just really the putting all of these elements together into a novel way, creating a novel instrument that's never been seen before. So it's, it makes sense that one, we're seeing a little bit of volatility. That makes sense. It also makes sense that there's a bunch of people that hate the instrument, are confused how it works, don't understand it, are seeing something they've never seen before. The first initial reaction is, is to, you know, not like it because you don't understand it. But there's a lot of people that are starting to wrap their head around this, identify ways to put it into different portfolios, identify construction on top of it. And this is a, these are so fascinating to watch and understanding a credit instrument relative to other credit instruments in the market. And I was thinking about this quite a bit over the weekend. This isn't bitcoin, right? Like digital credit is not bitcoin. A lot of people think this isn't like, or that we are saying this is an alternative to bitcoin. It's not what we're saying at all. We've created an instrument that's tapping a new capital pool that may be interested in a high fixed income, high yield instrument. The alternative, and this is something that made a lot of noise in Q1 is let's say private credit. And we heard throughout Q1 there were significant capital that was looking to exit private opaque credit. What is private credit? Private credit is effectively opaque credit where you have no Liquidity, you trust a company, you give, you give capital to a company that's managing a portfolio of private bonds and you have no understanding of what those bonds look like. You, you're just understanding that there is risk associated with it and you're going to get income associated with it. So what do we see with, with the development and advancement of AI, there's significant uncertainty in private credit. So what did that cause that caused significant amount of capital that wanted to leave private credit? Well, guess what, all of the funds, they limited how much capital you could pull out to 5% of net assets. Well, STRC traded 10% of net assets effectively in last week on Thursday. So there was, there was $950 million of liquidity, which is roughly 10% of the notional outstanding on STRC. And there's no, there's no rules, like it's an open liquid market and, and I think that's largely underappreciated. Right. You've got, the alternative is an opaque private credit market that's maybe paying equivalent yield, but you have absolutely zero liquidity. If you want to go get your capital out, you are literally limited. They limited how much capital you could pull out to 5% of the net assets because they understood that this would break the underlying instruments and the relationships, how they're structured, the capital, the whole thing. There's no liquidity or a buyer on the other side. So I think again, thinking about the liquidity profile is just so incredibly fascinating here relative to any other preferred stock, any other high yield instrument, private credit. I've spent thousands of hours looking for a better credit instrument than this and I'm really struggling to find one. I would encourage anybody else that is remotely interested in this to go try to find a better credit instrument with a better risk return profile than these. And, and I, I would be impressed. I would love to have a conversation.
- [20:28]
B
I think what Matt said earlier is actually really important.
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A
Right.
- [20:32]
B
You know, and it was kind of the joke, but the one to one, you've got a buyer on the other side. People forget that when you see these flash liquidation events. There was a huge amount of buy side demand that brought it back up to being almost flat on the day there. Right. Somebody stepped in and that's what we've talked about a lot of times with these products where you see the price drawing down, but that makes the effective yield start to go up. And there's a point where that starts to become really attractive to an investor. The other thing that you had is for people that are watching These who see the credit quality, they see the strength of the balance sheet, they still have trust and the management team, they believe that product's going back to par. It also created a capital appreciation opportunity for them to. And I think that's partially why you started to see CEDA trade in tandem with Stretch at a certain point in that day when it got close to that liquidation event was because now you've got an effective yield that was effectively matching what Seita was. It was actually a little higher there for a while, plus you had a higher capital appreciation component there. So for investors that were looking to rotate capital through that, seeing an opportunity, I think that's what you started to see happen. Because SEDA didn't see the same volume profile Matt talked about earlier during that liquidation event where you saw a massive spike. It was pretty stable all throughout the day and you could watch it effectively trade in tandem with the price action of Stretch. So I think it's just important to recognize that when it got down to those levels, buyers stepped in in size because there was a huge amount of volume that traded hands during that event. And if there weren't buyers there, you would have seen much deeper price action than what we actually saw.
- [22:09]
A
You want to know how easy it is for me to say this is not broken and this is still going to be a multi trillion dollar opportunity. We say, like, if you go to strive.com, you'll literally see what say it says. The first thing that says is not a money market fund designed to be better than one. And on a day where we've had a week, we've had the worst volatility in the history of these instruments. I just want to point out how true that those statements are when you look across the income world. And it gets back to this point of the 6040 portfolio being broken, income being broken. And so I want to start we can get to money markets in a second. But TLT, the biggest US Treasury ETF in the world since 2020. So we're talking a period, it's the beginning of 2020. A period of six and a half years has a negative total return, including all income of minus 24%, minus 4% a year on average. U.S. treasuries, that is the backbone. If you look at income in people's portfolios, it's the biggest sleeve of income in the average portfolio. It's the biggest hunk of debt that is out there. U.S. treasuries, negative return for six and a half years. You look at digital credit right now you have obviously bitcoin right around the 200 week moving average. If you think about a credit instrument that's tied to bitcoin risk, it's obviously likely to have the widest credit spread, the worst performance that it will have in the depths of a bear market. And if you look at stretch right now, you know, if you assume, you know it was it IPO'd last July and it obviously IPO'd less than 100, but let's just assume you bought it at 100 last July, it's at 90 right now, but it's also been shooting off income. The total return would be around flat, very slightly negative, but right around flat for a year of holding in a 50% drawdown in the price of bitcoin, you have a total return right around flat. That is an insanely positive outcome. If you bought SATA the first time it hit par, it's at 97.50 right now. It'd have a positive total return in the midst of a bitcoin bear market. These instruments are designed to have high income around bitcoin risk, deep liquidity, and an issuer trying to minimize volatility. There is nothing that's comparable out there. There just simply isn't. And so these are not stable coins. This is obviously proven that they're not stable coins. They don't have a peg around 100. But you have, and I think this is still misunderstood and not appreciated enough an issuer that is taking steps to minimize volatility around $100 and that just does not exist in other instruments. Typically the issuer does not care to the degree that strategy or a strive cares. And so when you see Saylor tweet out today on Monday that they raised several hundred million dollars of cash and that they will take further steps to increase the credit quality, the confidence in the credit around stretch that is unique. These securities not only have a strong balance sheet that you've, if you listen to this podcast, you've heard Jeff Walton stress test every different way and why it's mispriced, why the dividends are going to continue to get paid, but there just does not exist another instrument out there. You take a money market fund, it pays once a month, it pays around nothing. That is an instrument that is getting debased every single month versus the rate of fiat currency debasement. Here you have digital credit. It's actually playing offense on income and, and still providing a great total return profile around bitcoin risk in the depths of a bear market. There just does not exist a comparable product out there. This is why, to your point, Jeff, this does not compete versus bitcoin. You want bitcoin returns, you want bitcoin volatility, buy bitcoin, buy amplified bitcoin. Obviously we are deep fans of that. We are deeply convicted in that. Bitcoin's around the 200 week moving average. Great time to take risk around bitcoin right now. But the reality is that most people are in a different place. And so when you then look at these instruments, even after the worst week they ever had, nothing compares. And so this is why it's so easy to say this is not broken. I mean, you want to see something that's broken. U.S. treasury ETF has a negative return for six and a half years. I mean, that is broken. This is not broken.
- [26:39]
B
Yeah, it's a great point. I mean, it's all relative to what you're looking at. And people get lulled into complacency. It's the same way that portfolio construction has been for decades now. People were constructing the 6040 portfolio just because that was what they most commonly heard you had to do. And there just really hasn't been a whole lot of innovation in that space until recently where people actually had different options. You know, part of what I was exploring when we were talking in Prague was just how slow innovation has been in the financial markets. If you think about things that people would point to as being revolutionary, one of them has been settlement timelines, which seems like the most boring way to point out innovation that I've ever seen. But you know, prior to 95, it took five days to settle a trade. Right. It wasn't until just a couple of years ago we even got to one day. We still don't have same day settlement on trades, which you would think, think technologically would have to be possible by now. Right. And so the financial markets are just so slow to move and people get very complacent as long as it feels like it's working. And over the last several decades, it's felt like it's working. Right. If you were allocated into the equities and you were in the s and P500, you were effectively getting, call it a 3% real return on your money. If you were trying to look at am I beating monetary debasement or not? And so the introduction of products like these and now the introduction of things that are novel like daily dividends, I think people overlook just how big that is. You know, that is an innovation in markets. Quarterly dividends showed up back in, I think it was 1885 when Con Edison put the first quarterly dividend into place. And then when was, when was monthly, Jeff? I'm blanket on the day.
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D
1961, 1961, 1961.
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B
And even now, if you look at it today, only 2% of companies paying dividends even pay monthly. So the vast majority of dividend paying corporations are still on quarterly, which was set back in the 1800s. Innovation has not been in the traditional financial market. So having these new instruments that have come out, having new ways that these instruments are paying investors, it's going to take some time for markets to adjust to these, for markets to realize what it is that's sitting in front of them. Because it's a completely new concept and it's something that people have to get comfortable with. And that's why you've heard Matt over and over talking about that track record and how it's probably three years before you see a lot of institutional demand show up. That's why they need to see these track records. These are the types of stress events that they want to see. How do these products behave during a liquidation event? Is there a buyer that steps in and bids these back up or not? And the fact that we've got to do this and push these out to the market during one of the bigger drawdowns in Bitcoin here, going more than 50% down basically through the life of these instruments is going to be just an immaculate stress test for these institutions to look at as soon as these things mature in the market. And I think that over time it's going to fundamentally change the way they look at portfolio construction, particularly when they have their own target to meet. And these instruments help them do that. You know, over time, as more capital comes in, as you see more price stability in these products, these are going to become very attractive repeating benchmarks for a lot of these institutions.
- [30:08]
D
Yeah. And the fact that strategy's got semi monthly dividend payments, we've got daily dividend payments. The fact that the frequency has increased should help these instruments go back to par. Because the, the concept of, you know, how, how much risk am I taking on for the dividend? Thinking about anybody that's arbitraging the dividend, which, which we've seen several times is volume come in and then volume, volume kind of trails off as you increase the frequency. That should result in less volatility and more continued interest in the, in the instrument. And Ben, you brought up three year track record. I look forward to the day when we've paid 700 dividends, 700 total dividends. And then finally institutions will take us seriously because we've paid 700 dividends dividends in a row. And yeah, I look forward to that moment.
- [30:57]
B
That's why I like that post that comes out every morning. You know, now with the dividend being paid, you know, we're going to pay dividends until morale improves out there. So they're going to keep showing up seeing that number out there. We're going to be waiting a long time. If you've got a bear thesis right now,
- [31:12]
A
Jeff, I I'd love just if you have any reaction to Sailor's post this weekend of his perspective when he posted that that talk he gave at the ATLAS conference in the last bitcoin be market and kind of just obviously his mind kind of going there and talking about how he gave that talk and it was already pretty depths of bear market. Then right after that, bitcoin dropped further to 16,000 strategies. Debt was substantially more than their bitcoin and their cash. So in current terms the amplification ratio was well above 100. But they didn't have prefs.
- [31:49]
B
They actually had debt.
- [31:52]
A
What did they do? They chilled. They kept executing on the strategy. You read that and you think about that and it resonated with me because I don't even feel like these are truly tough times right now. I feel like our balance sheet is so strong. We just announced a 700 bitcoin buy. We also increased our cash strategy, increased their cash by 300 million this week that that people are freaking out on X. But the reality is that these structures are super resilient and I would say even on the strategy side and strive too. But they prove antifragile. You see something happen. Strategy uses a bunch of cash to pay off the convertible debt. Bitcoin floor falls out right afterwards and they're increasing their cash back up. Listening to the markets, not taking every bit of advice. But what does this do? It proves antifragile. People think it's broken but they've been here before. They've been here in a way worse situation. It just feels like the market's concerned relative to the reality. The balance sheet strength. I don't know if I've ever seen such a divergence in that viewpoint. And it feels to me like say there's it's chill guys.
- [33:10]
D
Yeah, I think a bit surprised on the market perception. Everybody's got Amazon brain, right? Like they're used to having something move and get a package delivered in 24 hours and that's just the way they expect the world to work. I mean the strategy is sitting on about $50 billion of net capital across the bitcoin held on balance sheet and the USD held on balance sheet. When you take you know, total, total capital reserved less the debt which is $6.7 billion at this point. So I think a bit, a bit surprised that the takes that we're seeing on X because the financial strength, the capital structure again is incredibly strong and incredibly healthy. I look back to you know, where we were in November FTX Celsius Blockfi collapse and the market was you know, treating MSTR as dead. They were 130% leverage at the time or 130% amplification. They had more debt than they did assets on the balance sheet by 30% and it was true debt. It wasn't, you know, preferred equity. And at that moment in time I was identifying opportunity because I saw that the, the market had mispriced it in my opinion because the, the debt had a long term on it and I, I had a long bullish bitcoin thesis. So I, I suspected that they'd be able to come, come back out of that. And now they're sitting in a completely different position. Incredibly strong 10 leverage ratio. They've got, you know, very successful preferred equities sitting in the market. They've got the ability to buy Bitcoin in a bear market around the 200 week moving average which again you go back to 2022. I think throughout the entirety of 2022 strategy bought 10,000 bitcoin now in 2026 I think there are somewhat near 300,000 bitcoin purchased in 2026. And we're thinking this is, this is, this is the bear market and now you've got additional entrants in the market. You can underwrite Bitcoin because you've got more companies that you can transparently see that are continuously buying bitcoin. You can now see how the ETF flows are moving. Yeah, I think there's a bit of reflection in that, how far they've come and a bit frustration with the EX marketplace and their understanding of the financial structure and the capital structure of these balance sheets. Again I talk about insurance all the time because that was my prior life. But like I saw the insurance industry, their balance sheets are going down into the right and the equities report performing relatively flat. And then I saw this industry adopting digital capital and the balance sheets going up into the right and the, the opportunity with the equities. And I encourage everybody to go look at the rest of the world and identify the financial strength of the rest of the world and start to compare these assets to the rest of the world. Because that's what they're trading against. That's the capital flows that the market is up against is everything else in the rest of the world and how it fits into the rest of the world.
- [36:33]
B
I think Michael's point when he reposted that was quite clear. It's we've survived worse. Like this has been such a short term event that if you're in his seat, with the history that they have with this company, right, and go all the way back, you know, don't just look at, you know, what happened a couple of years ago. Go all the way back. This is a resilient company and it's a guy that does not quit, right? If you haven't picked up on that by now, I don't know what to tell you. But he's gone through the wringer here in his seat that he's been in and he's seen everything that you can possibly throw at him. This hardly registers, right? This is a bad market week or two. And I don't think that's something that creates, you know, any existential, you know, know, risk in his mind at this moment. But one of the things that he said that I thought was really insightful was it's not hard to see the future. It's hard to survive long enough to see it materialize. And I thought that that was a pretty powerful statement. Because that is the harder part, right? Like when you're building these structures and we see a world that starts migrating towards a bitcoin standard, you know, whether you believe that's 10 years, 20 years, 30 years, when you're putting these structures in place, you're hyper focusing on the ability to stay in place and in position long enough to watch that materialize. Because you're going to have years that don't go your way. You're going to have years that shake your conviction in the overall thesis. You're going to have years where the market's screaming at you that you're wrong. That's part of any major change, right? That is part of the journey. And so as a company, you do everything you can to create the stability, to be able to ride through those turbulent moments. And when I think about the things like the reserves, right, it became abundantly clear that the market values the reserves. They want to see that cash in place because that Provides you with a level of security around those dividends payments. And that makes sense. And that's been our thesis. I think the market underappreciates how long those reserves actually last, right? So think about ours for example, right? If you put an 18 month reserve in place, which is what we have currently, when people are looking at that, they look at it as 18 consecutive months in a row. So look at the bear markets. The reason why there's a reserve around 18 months, because that was effectively the longest bitcoin bear market that there was. But that would mean you picked month one of that bear market and you ran it all the way to the end of that bear market. In reality, how these bear markets work is they chop, right? You have periods of release relief in there, you have periods of drawdowns in there. And what we've seen so far, because we've been in a bear market now, you know, for a fair amount of time, right? Call it seven or eight months. What you've seen with these companies is the continued ability to raise capital. And that's important because if you haven't had to dip into the reserves this far into a bear market, it tells you that the length of time that those reserves put in place for you is likely longer than what you see on face value, right? You're assuming that you're completely shut out of markets, no ability to generate any excess income, which is also something we could talk about at some point. But just assuming you're completely sidelined for 18 months consecutively in a row, no ability to replenish, and you just have to draw on the reserve, these reserves make you more resilient than I think people give them credit for. And I think that's important. When you're thinking about the structure and what is the right tenure for a dividend reserve or how much stability do you need to signal to the market? These are credit enhancing things you're putting in place to make sure that the market can feel that stability even during the times where it doesn't feel good. If you were proxying these directly to Bitcoin right now, and I've seen a lot of posts going around highlighting this now about the performance of the digital credit assets during this period of time relative to Bitcoin, if the market was viewing these as just proxies for Bitcoin, which we all don't agree with, you would see a lot more stress having happened through this period of time in these products than what you've seen. And so it's clear that they're valuing the balance sheets and their totality, they're looking at that overall coverage. How much coverage does the Bitcoin provide you? How much coverage does the US Dollar reserve provide you? And they're seeing that it builds resiliency into this model. And so I just, I just wanted to highlight that because I thought it was a really insightful statement that I think goes underappreciated. You know, it isn't hard necessarily to see what the future is going to look like. It's hard to put the structure in place to survive to see that. And that's the job of these companies. That's what we're doing right now. It's why we hyper focus on credit quality. It's why we stress test the drawdowns. It's why we're constantly looking at what are the worst case scenarios. You want to focus on the bull case scenarios, those are the more fun ones. But to run a business like this, it has to be constantly battle testing what happens to your balance sheet and all these drawdowns. And it's why you see Jeff talking about it so frequently. It's because that is the primary focus. You're planning for the rainy days. You're hoping for the sunny days.
- [41:48]
D
We're going to clip that, Ben, I hope you're ready for that. That was a great response. It's easy to see what the future looks like. It's hard to last.
- [42:00]
A
I think that's going to age really well. Maybe shifting gears a little bit talking Fed, if that works for you guys. I thought the Fed conference last week was really illuminating in a way that was very refreshing for me as a outspoken critic of the Fed for several years. And so I liked that Warsh was a man of few words and a very intentional man of few words. And basically to me the TLDR was I'm not going to sit up here and tell you a bunch of things that I think are meaningless that I don't have deep conviction on. When I speak and I tell you something, it'll be because it's important and if I don't have anything important to tell you, I'm not going to tell you anything. And we've been conditioned to have a Fed that over delivers in communication that ages really poorly and becomes meaningless. And I think one of the easiest things to point in is the dot plot. The dot plot and projections around what the Fed is going to do is wrong all of the time. And the reason that it's wrong is that it's really hard to Predict the future. And so why have a bunch of people try to predict the future when the future is unknown versus underwrite a thesis, have a framework and then react to that. And I think that's to me that is very similar to how we've thought about strive we, we have a framework like when you see us have a presentation and put out there, it's often 10 or 15 slides and it's like hey, here's how we think about the world. And then we react based on how the world evolves. And to have the Fed do that with someone that is a bitcoiner is making statements around wanting to get better data and talking about some of the flaws and some of the data that they're discussing. I found it to be very positive. I think it will be interesting to see how the market digests that because one take would be if you have less frequent communications you should expect more volatility in the markets because the market doesn't know what the Fed is going to do. That could be accurate, could be inaccurate. Another take would be well the Fed's communications has been wrong so often that the market is then left to wonder when the Fed speaks of are they going to do it or are they not going to do it because it ages poorly. And so maybe less frequent communications will actually allow the Fed to actually listen to the market in real time and then actually deliver statements that are going to be more consistent with what the market would want, which would actually be volatility reducing. So we'll see where it ultimately goes. I thought that the fact that he's having five different task force pop up to actually evaluate the actions of the Fed shows very explicitly that he understands it's not working the way it's currently being done. We need a fresh perspective. And so I take all those actions to say very positive on Warsh. But again just to kind of go back to the fundamental issue, the core problem is not the Fed's communications. The core problem is the debt crisis that is not being fixed. It's not going to get better. So does not change the path of where we ultimately go with bitcoin. But I think it's nice to have a, a fresh perspective that I think would be more aligned with how people that would likely be bitcoiners would view the world. So thought he, I thought he knocked it out of the park but curious your guys perspective.
- [45:44]
B
I was just going to say I like that, you know he really trimmed it down and one of the core messages I heard from him effectively is we need better data. And I think that's a pretty powerful message to send to the market because what it also tells me is buckle up, we're going to rework this metric again.
- [46:02]
D
Right.
- [46:03]
B
And we've kind of been waiting for that because AI has come in and now you're starting to see how are they going to work the impact and the deflationary nature of that technology into the CPI figures. And I think there's a ton of ways that they can do it. But the fact that they're now specifically setting up these task force and I like that it kind of became a meme like the Ryan Cohen, you know, half cash, half stock know now the meme is we have a task force for that. And so. But the fact that they're reviewing that because the data has been getting highlighted as flawed and it's always backward looking and I think that the fact that they're focusing on that now tells you that there's some changes that are going to come. It also probably tells me that they're going to stay where they are for the moment. Right. Get into a position. And it's what anyone does when they get into a new position here is you take the time to really get the lay of the land and get your hands around what's actually happening out there. And if there are data concerns out there and there are things that they need to clean up and get better line of sight to, I typically think that that's the best course of action. Right. Spend the time to do the work, to pick the right course. And that was kind of the message that I heard from him. He was very slow to commit to anything, you know, when, when everyone was asking him questions. In the end you would always defer them to the fact that they had task force for all these different components. But over the long term, I do think he's going to ultimately end up being dovish. I'm not sure that he has a whole lot of choice there. I think in the near term holding steady is about as hawkish as he can be. I know that we're pricing in, I think one hike here this year so far. We'll see. I'm not sold that that's going to happen yet, but I was very pleased to hear someone come out and finally admit that we've got blind spots and we need to rethink how we're approaching this metric because it's so critical. Right. This drives so much in the markets. It is important to get it right. It is important to consider the fact that the world around us has changed. And that was the message that I heard from them was that that was going to be one of their highest priorities, was getting that right.
- [48:02]
D
I think you hit the nail on the head, Ben, thinking about the focus on task force and data and how we see cpi, how we see the information that is coming into how the Fed makes decisions. Matt, you hit the nail on the head as well. The this has historically been backward looking. Now we're looking at forward looking metrics and just, just some examples, just, I mean we see this every single day of how AI is disrupting like everything. Last week we saw Mid Journey comes out with a full body ultrasound that it's able to deploy and you can do it in 20 minutes. You go into a healthcare office and you can go do that. Well, that will impact healthcare costs, that will impact how people interact with health care and health, you know, prospective health or even ailments that they already have. You think about transportation, robots, you've got cyber cabs now being deployed in multiple different cities, you've got waymos in some of the larger cities. You're able to go from place to place and that becomes a little bit cheaper. Legal advice or therapy. People are using AI for legal right and something that would have cost $10,000 for legal now costs 100 or therapy that would cost thousands, thousands of dollars a month and now costs practically nothing with AI. And these will, in my opinion, ultimately impact what the CPI data is showing. The Fed, which helps them make the decisions, which controls, you know, their view on inflation is a function of how good the data is that's coming in the door. I don't think the data is necessarily the best. And now that you've got advanced analytics, advanced computers and there's no, they're not shying away from using all of the data that's available to them in the marketplace. So it is, it does feel like a breath of fresh air of somebody that's a little bit more modern and has an understanding of the economy today and what it may become is I look forward to seeing how this plays out in the next couple months.
- [50:06]
A
All right, I'm going to share a deeply held conviction that I'm going to hold very loosely because it could be proven wrong. But I think that's the best way to operate in markets. And if I think about a Fed that is admitting that they were looking at things backwards and if you think about any institution, if they had bad tools, then things are going to break. Things break. They have to come in and fix it inject a ton of liquidity and that's marked the the last several years. Basically Bitcoin's history is that liquidity gets injected in deeply. All markets rip. Bitcoin rips and then eventually it gets drawn back out and everything crashes and then it rips again kind of this cycle. If the Fed actually can orient itself around better data, then I actually agree with war that they're not necessarily left with this prisoner's dilemma of am I trying to optimize around inflation or implies deployment and with AI advancements I think the economy is pushing in that direction as well. That I am still of the belief that a super cycle is really possible here and that this current bitcoin drawdown, although we've gone to the 200 week moving average, is still very mild in historical terms. And that the combination of productivity enhancements through AI, a Fed that's actually looking at better data and can be more reactive in real terms and not have a let it crash and burn then fix it cycle can actually engineer a longer bull market than we've seen in probably most of our careers. These, these things have happened throughout history. It's not like I'm predicting something that's never happened before, but that we can actually have a super cycle. A super cycle in which the debt crisis will not be fixed but will be the best outcome in my view, for nations like the United States to engineer around a bad debt situation. And that will be one that will be very positive for Bitcoin. So I mean like I said, I've called this bear market a bear market for ants. We'll see if that continues. And if we don't, the good news is that we're prepared to be shut out of capital markets for a long time. We're prepared to be wrong, but also thinking opportunistically into the future. And to the point you mentioned earlier, Ben, it's really easy to see where it goes. It's really hard to survive, which is why we do things like have this 18 month reserve. But man, it's hard for me to be more bullish than I am right now. And I think WARSH just made me. It reduces the chance of the Fed just unintentionally breaking something because they can't see it. When you have someone like him in which creates that more likely. It's not the only reason that a flash crash could happen in markets, but it is a major driver of one and I think that risk has been reduced. Feeling good on super cycling long the super cycle.
- [53:22]
C
I'm just over here taking notes. You know, this is a bear market for ants. Matt Cole on the Hurdle Rate pod. Thanks, everybody, for listening and watching the hurdle rate. Episode 62 Digital Credit Weakness. For Ben Workman, Matt Cole and Jeff Walton, I'm Tim Kotsman. We'll see you back here next week for another edition of the Hurdle Rate.