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Sam. Foreign
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welcome back to the hurdle rate Episode 64 for the week of July 6th, 2026, I'm Tim Kotsman. I'm here with Jeff Walton, Ben Workman and Matt Cole. This morning, Strategy announced it sold 3,588 bitcoin for $216 million to fund dividends on their digital credit securities. These were for the Q2 quarterly dividends on STRF, STR, E, STRK and STRD and the full monthly dividend for June on STRC. As of July 5, they hold 843,775 Bitcoin and $2.55 billion in their USD reserve. Strive purchased 17.76 Bitcoin last week and now holds 19,882 Bitcoin. During the second quarter of 2026, Strive acquired 6,236 Bitcoin, achieved 24.0% BTC yield, generated 3,264 BTC gain, and ended the quarter with an amplification ratio of 67.2%. Interested to see if Matt Cole has anything to say about that amplification ratio? Orange BTC acquired 8 additional Bitcoin during the last week. And this morning Sam Callahan posted just a reminder, Strategy acquired 89599 Bitcoin in Q1 alone. Today the White House said, quote, to deliver on the President's vision, the Trump administration continues to evaluate the best structure for a strategic bitcoin reserve. And now within the last hour of us recording here, there is a statement from the U.S. justice Department office of Legal Counsel that it is working closely with both the treasury and Commerce Departments to determine legally available options to accomplish the President's policy of establishing a strategic bitcoin reserve. Jeff, I'll hand it over to you. What's going on in the market. Is the market going to come to understand this new capital machine or is it going to take a new all time high to go from FUD to fomo? What do you think?
- [03:01]
C
Yeah, there's a lot moving and we've officially closed quarter two and we are off to the races here in quarter three. Happy 250th anniversary to the United States. To everybody that celebrates that and everybody listening. It was a wonderful weekend. A lot of celebrations there. But yeah, we've seen some activity in the capital markets where we're rolling into July, which is historically one of the lowest trading volume capital markets activities months. Traditionally most of the folks that work in capital markets like in the East Coast, New York, everybody's out at the beach, in their vacation homes, and generally away from their computers. And this is a. Actually a really good time for building in the space and continuing to build behind the scenes, getting ready for the end of Q3 and Q4 as activity in the capital markets continues to ramp up. But what did we see over the last week? Strategy sold, yeah, 3588 Bitcoin. I think this is good for a couple different things. It's good for one, the confidence for the STRC shareholders. So STRC understanding they've got multiple ways that they could pay this dividend, not only do they have $2.5 billion of cash now sitting on their balance sheet, they're also willing to monetize a bit of bitcoin that's sitting on their balance sheet. Bitcoin is incredibly liquid. We saw that they sold 3,500 bitcoin at a price around 59,000 or 60,000. And the price as of recording this today is about 64,000. So they sold this amount of bitcoin and the price of bitcoin moved higher. When you're thinking about the MSTR shareholder, I think that this should be viewed very positively from the MSTR shareholder perspective as well, because the common stock is not being used as monetization in order to pay the dividends. So I think that's a signal that many of the MSDR shareholders have been talking about in the future. And this is continuation of building this new capital vehicle into what it can become and how it can operate in both directions, both accumulating Bitcoin and selling Bitcoin as it's needed to pay the dividend obligation. And I really encourage everybody to just zoom out a little bit over Q2. Strategy accumulated something that was like 77,000 Bitcoin, and yet they sold 3,500 Bitcoin. And people that were complaining last week about the capital markets activities and are now complaining about strategy selling Bitcoin, but the fact is they, they accumulated 77,000. They sold 3,000. That should theoretically provide more conceptual support for STRC and its ability to grow into the future, which increases their ability to purchase bitcoin, Bitcoin moving forward, and their ability to continue to accumulate Bitcoin and keep the machine rolling. So, and then on top of that, our. Our capital markets activities have been very strong as well. We, we had a very good, very positive Q2 and then closed it off with the purchase of 17.76 Bitcoin in honor of America last week. And, and we are continuing to roll our capital markets Activity into the future. I'll kick it over to Matt.
- [06:05]
A
Yeah. On strategy, sell it. And I think this, I agree with you that this is a good thing. I always encourage people, we talk about this so much on this show to just zoom out and look at the bigger picture. And what is the bigger picture for strategy? To me, it's pretty simple. If our bull thesis around bitcoin plays out, they're likely to be the largest company in the world. What do you need to operate at that scale? You would want investment grade ratings. And so you're directly taking on some of the direct criticism in the B minus rating that they got by starting to monetize bitcoin to actually pay a dividend. So it wasn't just sell it on a random date you sold. They sold it when not only did they have the STRC dividends due, but also the quarterly dividend payments for the other preferred equities and directly used bitcoin as the funding vehicle for those dividend payments. And I think to me that is almost the most important thing. And we don't know how many times that would need to be true to start to alleviate S&P's concerns. But my guess would be it's not one time. And it doesn't necessarily mean that it needs to be every time either. But there probably needs to be. Just like we're building a track record of every single day we pay a dividend. Right. That that track record building process. It also is true for them that they're building a track record process of actually using bitcoin as money. Right. And that is to me a very positive sign. In addition to all the different financial metrics or valuation metrics that might support this type of decision, that I think they're thinking long term. And you contrast that. Obviously we think long term too. We are a growth company. Right. We are a quickly growing but still a relatively small company. I think Jackson Fairbanks puts out every day. How many times Strive needs to grow to be one of the 500 largest companies in the world. Not because that's ultimately the goal, but I think we think that that's going to happen at some point. And I think right now it's somewhere in the realm of like a 15x and so we're a 15x to even become one of the largest 500 companies, let alone get the S and P comfortable for us to be in the s and P500.
- [08:23]
C
Right.
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A
We got, we got a ways to go. We can just think about amplification ratio, paying the dividends, strategies Playing a little bit different of a game here, right? How do I get in the s and P500? And so that type of attract track record building process for them I think makes sense. I think it was a good long term decision. And to me, I think the market reacted pretty positively to it. Where when they first announced it, you saw bitcoin sell off, their common equity sell off. And then quickly throughout the day that reversed itself and the common closed on the day, flat stretch was up on the day. And so I think the market is getting more comfortable with this. I, I don't know about what you guys felt that you saw on X, but I felt like there was less freak out over this as what versus when they sold 32 bitcoin. And so I think the market is starting to get inoculated to this messaging. That strategy's been pretty consistent on for a long term, long time. And I think that is a, that is a good thing. And to your point Jeff, I mean they still bought a ton of bitcoin for the quarter. I think that story will still be true for many, many quarters to come.
- [09:31]
D
I think one of the things that the market's gotta be really optimistic about was when they sold this many bitcoin, if you had rewound back to when they first sold 32, they effectively got blamed for the market sell off. It was the loss of confidence. It was over, there was a death spiral. They were forced to sell 32 bitcoin. That was the narrative running around. And now they sell more than 3,500. The price of bitcoin was up. Here's the day where they announced that they bought the 3500 Bitcoin has now moved back above the 200 week moving average. Bounced off power law floor like all the metrics moved in the right direction. And meanwhile you would expect this to be a much larger sale. But to your point, Matt, like this is what's been getting telegraphed to the market for a very long time. These discussions about selling bitcoin didn't just start up in the last couple of weeks. These have been going for several months now. And it really was on the back of those ratings where you do have to prove like, okay, you're hoarding this asset is what a lot of people were viewing this as, right? You're taking an asset, you're putting it in custody, it's never going to move again was the narrative. And in that situation, if you stood firm on that and you said, I will never touch this asset, I will never monetize this asset. There's a reason why the rating agencies would be incredibly hesitant to assign a value to that asset. Because you're telling them there's no scenario where you will utilize the value. To the contrary, now you're seeing that asset utilized at a rather large scale to the tunes of hundreds of millions of dollars. They're monetizing it. They're showing how liquid the market is. And I think that's very important, right, that during this period where strategy was selling that many bitcoin, you know Bitcoin was up, right? It started moving higher. And that lends itself to fortifying the narrative that bitcoin is one of the most liquid assets out there. It's 30 billion dol every single day and sometimes much greater than that. And so for a company like strategy to be able to need to monetize a couple of hundred million dollars to be able to pay dividends is a non issue in this market. This market can very easily absorb that. And for the people that were concerned that this bitcoin that was being held by these companies was simply going into custody and it would never hit circulation again, it would never transact again. This should also be a good sign because it shows that this bitcoin is not just static in storage, it is a capital asset. And it is a capital asset that can be used as a part of an active capital management strategy. And that's what we're starting to see here. And I think that that's going to be much more of the narrative focus moving forward. Right. Bitcoin is capital and that's how it's being used on corporate balance sheets. And it needs to be normalized that when you have capital needs, you can tap the capital assets you're holding on your balance sheet. And that's exactly what strateg strategies proving out here. They're showing you can do it in size, they're showing you can do it in a liquid market. Rewind back to when Elon had all the bitcoin and then he sold a whole bunch. And what did he say he needed to test the liquidity of the market?
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A
Right.
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D
Well, this is really the second very public testing of the liquidity in the market at a larger scale by a public corporation where you're monitoring every single move that they make. So if there were going to be headlines, if there was going to be panic, if the market was going to reject this and say this was a danger, you would see that reaction in the market. And quite frankly, we're seeing exactly the opposite.
- [13:07]
C
Right?
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D
Bitcoin started the day moving down. It was what, 61,500, something like that at the Open today. And then it bounced back and it's up at 64,300. And the market shrugged it off. This was a non event. And I think that's the response it should show. There's always the shock in the very first sale, right? No matter how many times you hear it, sometimes you condition yourself not to believe it's an actual possibility. And so the first time it happens, it's kind of a shock. The second time, less so. And as they move forward, I think this allows them to make the most prudent decision at the time. And if you look back to what happened last week when bitcoin was showing a lot of weakness, their premium was very razor thin to below one. And so it wasn't the optimal conditions for them to use equity to go and pay these dividends. And so they did what they were telling the market that they would do, which was they monetized some of the bitcoin and they paid the dividends that way. So for my eyes, this was a really good move. And I like that they did it in full scale for the full monthly dividend amount. They didn't dip their toe in. They didn't hesitate. They proved to the market this asset has value. It has a liquid market. You can access it, you can use it in the normal operations of your business.
- [14:20]
C
It's pretty crazy actually to think about it, right? Monetizing $215 million in just a couple of days. If you needed to go sell a $215 million piece of real estate, how long would take. It would take a very long time to, to get that piece of property liquid. And it's pretty insane that you're able to take this digital security, this digital commodity and get it liquid and have it so you could pay dividends very quickly. Just for perspective, four days of trading last week, June 30 to July 3, IBIT alone traded $7 billion of volume. The estimate global all exchange trading volume across all exchanges for bitcoin over the last week is around $220 billion. So that's. I haven't pressure tested to this. This is from the AIs on doing some back testing here. But if that's true, the $215 million that strategy raised in just a few days represents 9.7 basis points of the trading volume for the week. So not 1%, not 0.1%, 0.097% of the trading volume was how much capital strategy tapped or pulled on over the last week when they were selling bitcoin in the market. So just to emphasize how deeply liquid this market is, that it's, it's a crazy statistic that they're able to, you know, go grab this much capital out of the market and be able to use it in a different way. And that stuff is what the rating agencies, what credit investors need to see and understand in order to start to wrap their head around these credit instruments as they continue to start building that track record, moving towards semi monthly dividend payments here, getting past the quarterly dividend payment and utilizing their Bitcoin to pay that moving forward. One other thing that I think about quite a bit, especially as we're now starting to see this play out, and this is an analysis I've run, maybe I'll refresh it. I ran it six, eight months ago, was looking at what this business model would look like if you had zero access to the capital markets and you just issued credit against the bitcoin and you sold the bitcoin in order to pay the dividend payments. That business model is actually very interesting. Like mathematically, if you run back tests historically on all bitcoin, historical bitcoin drawdowns, that's still a very interesting business model. If you had a big pile of bitcoin and you started selling credit against it, utilizing historical backtesting, that is a very interestingly profitable business model. Looking back into history, and I think the statistic is something like if you have 11 years of Bitcoin coverage at the peak of bitcoin, any historical bitcoin price path, you would be able to weather a bear market and come back the other end better off than you would have been if you hadn't issued credit. So it's now we're starting to see it actually occur where the bitcoin is being sold to pay the dividends while they also have access to the capital markets. And we'll continue to see that accelerate. So it's just another feather in the cap that this business model is very interesting. Even if you had zero access to the capital markets and you had to sell bitcoin to pay 100% of the dividends.
- [17:55]
A
There's a lot of different ways to look at this. But I think the bottom line is the model works if you assume no access to the capital markets on the common equity, even no access on the digital credit. If the bitcoin thesis plays out and bitcoin goes up, you don't need it. You could just Sell Bitcoin and you could actually structurally outperform bitcoin over time. Now the reality is that oftentimes you can even do better than that because of the full access to the capital markets, and especially US capital markets as the deepest capital markets in the globe. And that's what strategy's been able to do. That's what we've been able to do. But I think that showing this and now inoculating the market to not freak out about it makes that option that much more valuable. And I think that's one of the things that I think is maybe still underappreciated here, that if strategy can just make the best financing decisions with no impact to the capital markets based on what they do, as long as they're making sound decisions, their company's worth more today than it was worth a month ago. And I think that's what one of the they say bear markets are for building. And I think this is part of that building process that now this starts to become normalized and they can make the best decisions for them on a financing basis. And I think that'll pay reap rewards for years to come.
- [19:26]
D
Yeah, I'm even looking back at, at some of the bitcoin metrics here because part of the going in thesis around this is that it would need to work on the assets alone. Right? That is the thesis is that the performance of the assets that you're holding in your treasury could support this model out into the future. And we always talk about underwriting 20 to 30% compound annual growth rate on Bitcoin. And when I look back right now on a rolling four year basis, the four year compound annual growth rate's 33.5%, the eight compound annual growth rates 33%, 12 years, 46.7%. And so even here when we're at these lows in the market, that thesis is still very much staying intact. And so I think one of the biggest misconceptions out there around these companies is that you have to constantly be in the capital markets all the time for this to work. And it couldn't be further from the truth. Right. That's part of the way that these companies are structured is so that they can be resilient, where if it's not the optimal timing to be out into the markets, you don't have to be. It's the reason why you've got reserves. It's the reason why several of these companies are holding cash on the balance sheet. To be able to draw from that, you can use Your Bitcoin, if that's the better option during that time period, you have several options. And you're not just reliant on capital markets activity. It's an enhancer and it can help propel you forward faster when those markets are very favorable. But it's not a requirement.
- [20:57]
C
Right?
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D
You're building this model around the long term assumption of the performance of the asset that we're building and the carry trade that we're effectively putting on. And I think that when the narratives start getting hot and people start seeing softness or weakness in the market, and you go into the summer months where it's historically much lower volumes, people are off on vacations, enjoying life while the sun's out, the narratives start to spin up around, well, can they access the capital markets? And we made this point several times leading up to today. From the time that we IPO'd SEDA to now, we've just been in a consistent bear market the entire way down, and we've yet to have one single month where the capital markets weren't open to us. And it just shows you that there's reality of what happens out there and how these things work and what access is available to you and how the capital markets are seeing these equities and the value of them at the time. And then there's the narrative that's out there. And the narrative is always the full extreme, right? It's absolutely no access, not a single dollar is going to be put into these equities ever again. Right? It goes to the far extremes and that's just not the case. And you've got evidence of that over this entire bear market period. You've got evidence of that over the entire existence of this strategy with strategy, right? They've been proving consistent access to the capital markets for years now. And so while it's not a requirement, it's been available. And so now as these models are evolving, you're tweaking yourself operationally to figure out what is the optimal mix. Right? How do I use the asset? When is the right time to use the asset? When do I use common equity? When do I use preferred equity? What are the market conditions that I should be paying attention for and changing my model? These are all things that evolve over the time that's part of operating these types of businesses. And for companies like ours, we're focused on how do we maximize that long term exposure to Bitcoin in our common equity. Right? How do you create that rocket ship where when Bitcoin does move, you've Got an equity that's highly sensitive to that movement in bitcoin where you can outperform. Right. That's what we're structurally building to be able to do. And that's the fun part of all this, is this is evolving. Right. It's a living operating model. We're constantly adjusting. You're taking in new data. We just took in more new data this week when strategy made this move. Move.
- [23:24]
C
Right.
- [23:24]
D
You're evaluating what's happening in the markets and you're finding what is the best way to position your investors for the long term. To capture the value of the thesis that we hold very tightly here.
- [23:37]
C
It also gives us a little bit of a comparison too. If we were to do this on our balance sheet, if we were to sell bitcoin to pay the dividend obligations, I just ran through the calculus. To pay our daily dividend obligation, it's selling 6.3 Bitcoin to pay the dividend for the week. It would be selling 32ish Bitcoin. This is with the price of Bitcoin about $64,000. If we were to sell Bitcoin for the entire month, that'd be 127. Bitcoin strategies just sold 3,500. Right. This business model now from at least our lens looks incredibly attractive too. Right. If we had to sell bitcoin, it would be just a fraction of the daily liquidity in bitcoin and how that would possibly work. So I think it's good to conceptualize. And I found this. I'm going to share my screen here as well. I had Jackson run a back test on digital credit amplification. I think we ran this, this was beginning of 2026, and this is an assumption of 50% amplification, 15% dividends, and assuming 100% of the dividends were paid through the sale of bitcoin. And what this is going to show is what if you ran this on every single, every single month going back in history, what would the value of the net asset value, what would the value of the balance sheet effectively look like? And would there be a point in time where as of today, where the value of the balance sheet would be less than the dividend obligations, even if you sold the bitcoin to sold the bitcoin to pay the dividends? And here's what this looks like. I think this is a cool image. So this is kind of back testing historical drawdowns. Assuming you sold bitcoin to pay the dividends. And what this is effectively showing is over Nearly every single horizon here. You're better off. You're better off running this model. Even if you sold Bitcoin to pay the dividends. With 50% amplification and 15% dividends, the balance sheet scaled significantly larger than if you were to have not run this business model. So I think it's just a fascinating visualization to see the effect of compounding on the underlying balance sheet and the relativity of the interest rate relative to the balance sheet size and scale.
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D
Yeah, I mean, that just visualizes exactly what we've been saying. Right? Like that is the foundational thesis of this model, is that that is a possibility and you can operate this model if that was your baseline for how you were going to operate. So seeing strategy make this move, they put out the new framework last week or two weeks ago with the holiday in there, I can never quite remember, but they put out the framework that was basically solidifying that this was something that they were going to be consider considering. They've been messaging this for months and now they've executed on it and the market knows it's a possibility. I would expect that you'll see this several times here leading into the future. If the market conditions turn and it's more favorable for them to sell the bitcoin, then I think that that's what they'll do. They did it on a big one to begin with. Right. Because this is the quarterly dividend payments and so it's covering the dividend payments for all of the preferreds that they have out there. So this is one of the biggest single monthly capital requirements that they have from a dividend perspective. And so they chose to do this on one of those month and they covered it entirely from that sale of Bitcoin. I think it's just a really good solid message to show the market. It also shows that they're going to execute despite the noise that you're going to hear out there. There's going to be a lot of narratives. You saw more of these mainstream media pieces start popping up now, which you always expect here. When we get down in the lows around Bitcoin, you know those are coming at some point, you just don't quite know when. So those started popp up and they continued to say, we messaged, we told you how we're thinking about this business and now you're watching us operate it in that manner. And it's something that you'll adjust to because now you've seen it. Nothing will be a surprise here as they continue moving forward. So I think it was a really great message to send.
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C
Matt, shall we talk controlled burns?
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A
Let's do it. Yeah. I'm pumped to hear. I actually didn't realize the extent that you had personal, deep, personal experience with controlled burns when I tweeted out the analogy of strive doing our own controlled burn with seda. Maybe I'll start with just kind of what I see and what we're seeing with seda, and then we'll kind of get into this analogy and even some of the stuff that you were seeing in your past life here. And so I think there's. To me, I love capital markets. I don't hate shorts. I think it's fun to talk about burning the shorts because, you know, when you bet against us, you know, gloves are off. But to me it's, you know, it's part of a healthy functioning capital markets that, that there are shorts out there. But, but I think a, an important question as an issuer is, is, is the market functioning normally or is there something that maybe appears abnormal happening in your security and you know, know, can't get probably too much into the weeds because one, we don't know, but two is just not appropriate of like why the shorts are happening. But there is a very, very large short positioning happening in SATA. So there's a couple different metrics you could look at. One of them is short interest. Other is borrow rates. And then now you can do all sorts of other analysis. And what's interesting is so short interest is delayed on a couple week basis. And so you see on SEDA, short interest spiked to 1.2 million shares. And that's very large for the size of SEDA. SEDA has about 7 1/2 million shares outstanding. And for a security that pays 13% dividends every single day, that is an expensive short position. So, you know, that is, that is, that is tough to finance. What was interesting was that, you know, into that 1.2 million short interest positions, and because the reporting of that's actually delayed, the borrow rates weren't even really spiking while that position was built. The borrow positions and we started seeing this so last week, I think the highest I saw was in the neighborhood of like 70% annualized rate to borrow. It's down substantially from that. But that is after that. And so we don't fully know what that means. But it would be an intelligent guess to say that if the borrow rate spiked after the 1.2 million short interest was taken, that there's more than 1.2 million shares short how many? We don't know. It could actually be wrong. We'll see what the actual short interest was as of 630 in a week and a half or so. But it's very large relative to the size of SATA. And so it gets into the question of how do you build the most strong antifragile structure? Because ultimately we want SATA to trade at 100, the maximum amount of time that we possibly can have it, trade at a hundred with the highest degree of confidence. And it gets into the question, well, if you know that it's capped at a hundred, does that make the job of a short position more difficult? Right. And so because we had this large short position build up, the question is, well, how do we deal with this? How do we decrease the short position, which obviously is going to be a large amount of buy pressure into seda? How do we make that normalize as quickly as possible and ultimately discourage what I would say is excessive short positioning in the future? And this got into the concept of a controlled burn. So I think typically you would say like, I would say in poker there's called like level one, level two, level three, level four, level five thinking. And you would say, oh, like, well, if the price of the security is down, buy back the stock, which is obviously an option. I would say that's. That's level one thinking. You think about even like as an example, which I think is a kind of an interesting example here is, you know, the Strait of Hormuze, what did the United States do when the strait was blocked? They put a blockade on the blockade. And that was the strategy. The strategy wasn't to force them to open it is, no, we're gonna. It's kind of like the trump card, right? And so for me, when I'm thinking through this large short position and the economics of the short position, if you're short and you believe the securities pegged at a hundred or won't go above 100, your losses, your potential losses are capped. Well, that doesn't have to be true. And in my view, it could be in the best interest of our shareholders of SATA to remove that hundred dollar limit to make the jobs of short interest people taking shorts a little bit more difficult. Right? Make their jobs tough, maybe they end up making some money, but we're not going to make it easy on you. Right? And so that was the concept here. And then to make it more of a controlled burn, saying that I would prefer to never have to do this. I would prefer to never have to do A controlled burn to just let this thing trade at 100 and not have to take any additional steps, but that maybe when there are extraordinary things happening in the security, we might take a controlled burn. So the concept is, how do you fight fire? Well, the best reason, the best way to fight fire is to fight fire with fire. Actually, oftentimes if you're trying to fight forest fires and reduce the risk of forest fires, that. That was a similar concept to what we were taking here, a controlled burn. And we're not going to go through all methodologies. There's a lot there of how we might think about controlling burns, but I think that would, again, make the job of the shorts too easy. But ultimately, what are we trying to do? We are trying to have SATA trade at a hundred dollars as much as we humanly possibly can. And this tool in the toolkit, we think makes that more likely over the long run. But when I put that out there in the control burn, and Jeff had some interesting stories on controlled burns that I thought were both interesting and relevant
- [34:27]
D
here, I knew the minute you called it a controlled burn that Jeff got as excited as he could possibly get.
- [34:36]
C
Well, I think it's such a good comparison. You think about fighting a forest fire right now, the primary firefighting method is go drop water on fires everywhere or cut down trees in the line of fire, like, move brush and move all this stuff. And, and to me, that, that concept is almost like watching what we're seeing right now, where you see the price of the security drop, and it's like, okay, well, fighting a fire in one direction, like there's a proactive way to manage a fire, and then there's a retroactive way to manage a fire. And, and we kind of see this playing out in the state of California. I feel very strongly about this. I. I worked primarily on wildfire reinsurance and the west coast, so I, I placed some of the hairiest, weirdest wildfire reinsurance placements, and I helped with the advancement of wildfire insurance, Insurance and reinsurance in the state of California Post the 2015 fires and the 2018 fires. 2018 being the paradise wildfire that wiped out, you know, 13 to 15,000 homes in just a couple of weeks. And there's. There's so many different nuances here of, of how to conceptualize and analyze and understand what a wildfire is. I won't bore you guys to death with them, but what, what we were seeing is there's a. There's this externality problem of, like, who is responsible for Controlling the fire or who is responsible for bearing the cost of preventing a future wildfire? And how do you, how does the state try to manage some of that stuff, like should that fall on the insurance industry, should that fall on the state? Should it fall on the taxpayer? Should it fall on the utility provider? And the reality is nobody was really covering it and it started rearing its ugly head in the insurance market. So the utility companies have like hundred year old aging infrastructure. So if there's high winds, their infrastructure would fall and spark and cause a wildfire. That's what happened in the Paradise Fire. And then it exploded super fast because the forest hadn't been managed. There were no, there was no trimming of any brush. There was trees that were falling on top of these power lines. There was nothing, nothing was being done because nobody had the incentive to control it. And Matt, I called Matt immediately. Once he put up the control burn, I was like, hey, look, I've actually worked on this problem here. The funny and interesting thing about the controlled burns in California is almost everybody is universally in agreement that a controlled burn should happen, that we should clean our forest to prevent future wildfires, like most of the people that are managing money and how that, how that works. One of the biggest challenges though, for the controlled burn, at least in the state of California, is who carries the liability should something go wrong? Wrong. So there were these controlled burned companies that had all of like the infrastructure, they had all of the tools to go run a controlled burn. But who holds the business liability if, you know, 25 mile an hour wind picks up out of nowhere and it wipes out the town of Malibu. That's a very difficult business model where you've got this just massive tail risk of running something that's good for everybody, who, who pays for that? And what does that look like? And that ended up causing all of these people that wanted to do good in California to be completely frozen. And so what they've resorted to in certain areas in California is using goats to clear forest and sending people out to go cut down trees and manage things. And another development within this industry is the utility companies. They were deemed liable for these wildfires that happened in 2018. And there's this concept of inverse condemnation. I'm going deep here, so sorry to bore you. I'm just going to bore you guys. There's this concept of, it's called inverse condemnation in California, which basically means if, if you're, if you're like, if you're a farmer and you're in your backyard, and you're using a hammer, and if you throw the hammer and it hits a utility pole and the utility pole sparks and causes a wildfire, it's not the farmer's fault for throwing his hammer. It's the utility company's fault for having the infrastructure in the farmer's backyard. So that pretty much makes the utility companies liable for everything, everything under the sun. And after this big event happened in 2018, the utility companies were deemed liable for this event. It was like a 10, 15, $20 billion event. Huge, huge loss that happened in a year. Their liability insurance for the next year was not getting renewed because they had this enormous loss, and the insurance companies had to pay out. So the rating agencies came in and they said, well, if your liability insurance is not going to get renewed, we're going to downgrade you and all of the debt that you issue is going to get downgraded. And then the state comes in and says, whoa, whoa, whoa, whoa. If the debt gets downgraded, then they're going to pass on this cost to all of the people that live in California. And the state's like, well, that can't happen. So the state stepped in and put in a $21 billion wildfire fund to back up the utility companies in the event of a utility caused wildfire. And then they put all this, like, crap in place saying the utility companies had to go do all of this XYZ in order to prevent future fires from happening. So now, effectively, what has happened is they put a little bit of the onus on the utility companies to prevent a wildfire, and they're deploying weather systems everywhere. But it's still like this massive problem still controlled by the state. There's a insurance commissioner in the state of California, a big problem there. Insurance commissioners are voted positions. So the insurance commissioner, like, wants to get rehired. Right? So he's going to do everything to protect the consumer. So the incentives are totally skewed. You've got these, like, quasi, you know, public private companies running, you know, aged infrastructure, and nobody is, like, responsible for this event. And the. There's. There's no free market, really, in California. But, like, I think if some of that were lifted, that would result in some of these, like, controlled burns actually working in California. And you know, how that. How that market plays out.
- [41:39]
A
Bad incentives causing more massive wildfires. When everybody sees the problem and a better solution through controlled burns.
- [41:51]
C
Pretty crazy.
- [41:52]
B
The.
- [41:52]
C
The market is almost universally in agreement, meant that there should be thinning of forest and controlled burns. But, yeah, there's just like bad incentive after bad incentive that's stacked on top of each other and it's just like nobody. Everybody's frozen. Yeah, it's crazy.
- [42:11]
A
Pretty. Pretty wild. Maybe just quickly going back to our controlled burn. The last thought just. Is that I have, is that this controlled burn could take a while. And we have as a company, the ability to be patient. We obviously are active in capital markets all the time. And I think that in these types of scenarios, one of the worst things you could do is try to rush something. This is a very large position. My assumption is it's larger than 1.2 million. We'll see. And so to do it in a controlled manner, but also not be afraid to unapologetically do what we think's in the best interest of shareholders. Just like how strategy unapologetically just ripped a large Bitcoin cell to fund all the dividends. We'll rip this like this. And it does give in the free markets perspective, because obviously we love free markets. SATA shareholders, if SEDA were to start trading above 100, can decide, do I want to monetize it if it's trading somewhere above 100, and buy back if it's at 100 in the future. Because I know the company wants to put it at 100. That'll ultimately be your decision and something that we support, whatever, obviously our shareholders do. But I hope the result of this is that it makes large shorting positions that potentially could increase volatility less likely to happen in the future. And that could be true even if SEDA doesn't ever trade above 100. Right. Like the goal in and of itself in this, in this exercise is not to push SEDA really high. It's to ultimately let the market have some free market activity in it to make that risk calculus more difficult.
- [44:14]
D
It's all about positioning, monitoring, and taking the right actions at the right time, even if it takes a while. I think it's a lesson we've all certainly learned being in markets for as long as we have, where while there's always a desire out there for something to be done immediately, for a result to be seen immediately, the one thing Bitcoin has taught us is you can be patient, right? It's all about positioning. It's about having the right tools in the right place, and you've got the benefit of time on your hands. And if you use that time wisely, you're going to end up on a much stronger foundation to continue to build from. So I think it's the right approach. It's obviously one we've talked about at great detail at this point, and we'll see how it goes.
- [45:00]
C
It's the great part about doing this podcast, too. We're working through it. I think that's all we got. That's all she wrote.
- [45:07]
B
That's all she wrote. All right, thanks, everyone, for listening to episode 64 of the hurdle Rate. Building the track record for Jeff Walton, Ben Workman, and Matt Cole. I'm Tim Kotsman. We'll see you back here next week for another edition of the Hurdle Rate.