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- [00:32]
Jeff
Sa.
- [00:58]
Dan
Ladies and gentlemen, what you are about to hear may be amazing, but it is not financial advice. It is for informational and educational purposes only. Nothing in this discussion should be considered investment advice or the offering of any security or other investment product. Please consult your own investment and tax advisors. And now I'll hand it over to the True north team for your regularly scheduled programming.
- [01:25]
Mason
Whoo. Welcome back, true north episode 65 and we are. We've got a jam packed episode for you today and we are going to get right after it. There's so much happening in the entire market and we are going to speed run through it. There was 135 slide presentation from strategy on the earnings call that happened yesterday. So much information that they threw at us and left the market to digest. Everybody is. There are several people that are losing their heads. There are several people that are incredibly bullish. It seems like there's a huge polarized view on the entire market, at least on X. We haven't been here in two weeks so we can catch up on the bitcoin conference. I literally just got off our airplane about an hour and a half ago from Risk World. We could talk about what happened at that conference which is just totally fascinating. People have their head in the sand and. But really the primary focus of today we are going to unpack the strategy earnings goal because there was so much information in there and we'll get right to it. A couple other things that happen in the market just to be aware of Bullish. Another treasury company, they're an exchange, a crypto exchange. They just purchased a transfer agent, a tradfi transfer agent. So think about securitization or the tokenization of stocks and equities. And they now have a distribution channel that's something to keep an eye out on. And then the Clarity act going through Congress. So we could, we could think about stablecoins and digital credit versus stable coins. I think that's going to be a continuous battle and digital credit seems like a better, more interesting product to potentially build on top of than than stablecoins. So just a couple things to stay on top of there but without further ado, let's just jump right into it. So strategies earnings call, first segment strategy for the first time on a public earnings call has talked about potentially selling bitcoin and people are losing their heads. This has always been an option. Bitcoin is incredibly liquid. It trades, you know, 20 to 60 billion dollars a day, a ton of volume in both directions. You're talking hundreds of thousands of bitcoin are exchanging hands within the market every single day. And so what, what do we think? Maybe I'll pass it over to you, Grain. You think this changes everything, right? This, the perspective that you could potentially sell bitcoin to pay off dividends into the future changes how somebody may view the credit quality, changes how somebody may view the underlying common equity, changes how somebody may view the entire structure itself. It's almost confirming what everybody already knew. But they're putting it on a slide and saying that we are not scared to do it. So maybe. Grain, I'll pass it over to you. You've got some thoughts.
- [04:10]
Jeff
Look, look, it changed everything. And it changed it from a narrative perspective. It changed it from a gap accounting perspective. It changed it from an IRS tax perspective. It changed everything. And I'll be very specific why it changed everything. Now the bitcoin is being actively managed. Before it was. We'll acquire Bitcoin and we'll never sell it. And in fact, they did sell some bitcoin back in, I believe in 20, late 2022. But what's going to. Why is this different? Why is everything different? In Strategy Zone Slide, they showed that they purchased 139,000 bitcoin over $100,000. What they're capable of doing now is, let's just say they sell 50,000 bitcoins at $80,000 each. Okay, that's $4 billion in cash, right? But now they're going to book a $1 billion loss on it. You're like, why would they want to do that? Well, now what happens, it gives them the optionality. Now they could buy back a billion dollars worth of converts. They can keep a billion dollars just in cash to pay dividends, which is basically almost a full year of dividends. And they've got $2 billion left over. This is when Saylor said, we're going to rip the wings off of the shorts. Why? Because now there's the. The biggest buyer for strategy stock is strategy. It's like a. It's a stock buyback. So now you're short the stock and there's a buyer that's got $2 billion in cash. Now you have to think twice about shorting the company because he. You don't know when he's going to buy back those shares, okay? And then you're like, oh, well, they sold 50,000 Bitcoin. That's not good on a bps level on a Bitcoin per share basis. Well, two weeks later, they just increase amplification by selling strc and they buy 10, 15,000 Bitcoin back. And they're like, why would they do that? It falls in different buckets, Right? They're selling bitcoin, they're selling mstr, they're selling strc. Go ahead. I think it changes everything.
- [06:15]
Dan
No, and I think you're right, Grain and they've reaffirmed their commitment to Bitcoin per share and, and bitcoin yield as the key KPIs for how they determine the success of the common equity. And buying bitcoin and never selling it is part, that has been part of their mandate. But theoretically, if they were to trade at a discount to nav really below 1.22 times mnav, which is what we've, you know, was determined in the slide deck yesterday, it's actually accretive to sell Bitcoin and buy back their stock. So this isn't selling bitcoin and changing the strategy. It's reaffirming a commitment to bitcoin per share as the metric which they target by any means possible. And then one more note on that is these, these converts are a real problem right on the balance sheet. They undermine the credit quality of all the senior instruments like STRC capital structure.
- [07:04]
Mason
They're lumpy.
- [07:04]
Dan
Exactly. And they trade terribly, they trade really poorly on these OTC markets. And you know, it's highly, highly accretive to buy them back at a discount on a bitcoin per share basis. So I'm really excited at the possibility of them being bought back from the convert holders. One last point, one last point on that is prior to I, I guess like yesterday really, there was never a statement from strategy's management team that they were, you know, never going to do another convert. Fong said verbatim that they will never do another convert on the earnings call yesterday. So they're no longer trying to appease the convert holders, the convert investors, and they're willing to just buy them back and wipe them off the balance sheet Simply because of STRC's success. Prior to STRC, they didn't have the confidence in the other preferred equities to retire the converts indefinitely.
- [07:56]
Jeff
Look, I totally agree. I got to chime real quickly. What Dan said is brilliant and spot on. The other thing is the delta hedging. We always knew this, that when the converts, when the converts are sold, what's going to happen is they're going to short the stock because the stock is not trading. And before somebody buys a billion dollars worth of converts, they're just not throwing a billion dollars, hoping and by the way there, let's say I believe one of the converts has a small coupon. Even though they borrow money at 0%, these converts convert anywhere between 35 and, I believe, 35 and 50% on upside. So it's not like they get these converts for free. But the delta hedging was the hard part. And people are like, well, they take out it. These delta hedges are not static. They're not done one time and then they stop. They're dynamically hedged based upon the price of the converts. So getting rid of the shorting of MSTR stock for a potential convert that's going to happen years in the future frees them up. And so from a debt basis, as you always say, Jeff, is what's their net leverage? You always talk about in the balance sheet that they have whatever, I believe it's about six and a half billion or $8 billion in converts.
- [09:07]
Mason
Yep, $8 billion converts.
- [09:09]
Jeff
So if they knock them off a billion at a time, like I just said, they get rid of the delta hedge. They get rid of their signaling directly that we're not doing this again, as Dan just said. And. And it really is more. It's really more beneficial to the common shareholder. So that was the whole piece. So they got $8.2 billion in notional amounts. I think they can clear this out. I don't think they clear all of this out in 2026, but I do think they get rid of 2 to 4 billion dollars of it by the end of this year.
- [09:41]
Mason
And I'll tell you, you can buy it back. We did, right? When we acquired similar, we inherited $100 million of convertible debt and we bought back $90 million of it. And we've stated publicly that we have intentions to buy back the last $10 million as well. So one of the, one of the unknown variables here that's really difficult to quantify that has a cost on the strategy balance sheet is what is the psychological overhang of the debt. What is that worth? That is unknown, but you know it's there, right? Like, what would the FUD look like if strategy didn't have any debt on the balance sheet? And you're like, we're actually debt free. We have 100% equity structure. We could pay our dividends for 30 years. What does that look like? How do you quantify that? What's the math look like? It starts to look a lot more attractive because you don't have this lumpy principal repayment on the horizon. So that's something that we strive for at strive is to have this clean capital structure. And we've had the advantage of being able to sit back and watch what strategy's done and been able to learn from the different components and understand the market. I mean, strategy is absolutely enormous. Way bigger than us, but it seems like we do have a little bit of advantage from the cleanliness perspective. But, Mason, I'll have you jump in here.
- [11:04]
Grain
Yeah, I think what we saw in response on Twitter were a lot of trolls, a lot of cynics were framing this as a negative thing for strategy and a negative thing for bitcoin itself. And I think the framing and the narrative actually really does matter. And if you understand it, these BTU sales, these, you know, potential sales are not a sign of, of weakness or distress. It's all about optionality and the ability to make accretive trades and, and really putting the, the shareholder and also the, the credit holder in, in mind as they are kind of operating the different levers. So I, I loved it. Shout out to Josh Mandel for, for calling this last summer. And I think it's a really positive narrative going forward.
- [11:55]
Mason
So I think there's a couple of things that have also happened in the last year that have probably given them a little bit of comfortability to do this. I mean, prior to this, our company didn't exist. Another digital credit issuer that's got another instrument where we're trying to put a continuous bid on bitcoin. And you've got the advancement of all these other banks that are establishing ETFs now. You've got Charles Schwab, you got Morgan Stanley. Like previously, you just had ibit. And so the infrastructure is becoming a lot more robust. And I put out a little bit of math here earlier today, which you cannot ignore. Right. Strategy. Prior to the earnings call, they were out of the market for 11 days. Yet the price of bitcoin, the market cap of bitcoin went up $66 billion. And in that time horizon, bit there was. What is this? How much was traded? $349 billion of Bitcoin volume was traded. That's 4.4 million Bitcoin. And we're talking about the possibility of strategy selling 1,530 bitcoin to pay a monthly dividend. Yeah, that's not going to move the needle. Right. You've got miners that are out there selling bitcoin. There are several people out in the market selling bitcoin. And there are several people out in the market buying bitcoin. And you can see it because strategy was out of the market for the last 11 days and look at how much it moved. Everybody thinks that strategy is the only buyer. They are not the only buyer in the market. This market is so liquid, so freaking liquid. It's always moving in all directions. So, Mason, you hit on the really good word there. Optionality. So much optionality. You think of this like I'm just imagining I said this in the hurdle, right too. It's like just a chess master. It's like, like, what is financial markets? What is modern financial markets? How can I make sure that I don't get screwed? It's like game theory cubed, right? You're like, okay, these guys want to do this, so let me protect myself against this. So these guys want to do this, let me protect myself against this. So it's all about creating this impenetrable capital vehicle with the best capital infrastructure and you've got the perpetual preferred equity, which is like the best capital structure. So it's. Yeah, I mean it's, it's crazy seeing it all together.
- [14:15]
Grain
And I think specifically, like, I, I think this helps address the, the question of short sellers. And, and also, like, what was really fascinating to me was the fact that he mentioned that they could sell, stretch and buy back the own common. Right. If you're a short seller, that that makes you think twice before, like shorting it indefinitely or, or without consequence.
- [14:42]
Dan
So that's an important point, Mason, because we talked about this when Stride was released. We talked a little bit about Stride being this potential defense mechanism against shorts. You could sell Stride without undermining the credit quality of the other instruments to buy back mstr if it were to fall below 1 times m nav obviously this is more advantageous with strc and, and that breeds the next kind of point. And Saylor harped on this a few times. He talked about, he used the term the stochastic cost of capital. And talking about this idea stretch, like Jeff just mentioned, gives them the ultimate optionality to the issuer, to strategy, simply because the cost of that capital will fluctuate over time. It's not fixed in terms of principal and coupon. It's more of a function of market demand, credit quality. And so for, and so they right now are paying 11.5%, you know, cost of capital, which Saylor made very clear, that over, you know, a 10 year timeframe, it's highly, highly, highly unlikely that that cost of capital will remain at 11.5%. Unlike, you know, if they were selling STRF at 11.5%. So it's the perfect optionality vehicle for raising capital.
- [15:53]
Jeff
Hey, can I. Can I show a quick slide here? It'll just take a second. Yeah, so let me. Let me do this. Chrome tab. Oh, oh, hold on one second here. Got it. Okay, let's see. You guys can see it. Yeah. So while they've been saying this before, if the BTC average rate of return. Right. Is more than greater than 2.3%, BTC sales can fund dividends forever. While they've been saying this, I don't know, for the past three months or so, what they didn't say was that they would sell the bitcoin. And that's where they said as long as bitcoin grows more than 2%, we can always pay. We can always pay the dividends on strc. But what now what they're saying is we are willing to sell bitcoin in order to do that through the capital appreciation. That's the fundamental shift. And to be honest with you, I don't. You know, I rarely ever see a slide that has the infinity symbol in it. I've been doing corporate presentations for 26 years. I. I could tell you that I. It. I would have to look up how do I write the infinity symbol and, you know, in. You know, in the, you know, shift, all F3, whatever it is, in order to get it. And when you see a slide like this, it's like, like, why did they acquire so much bitcoin? It's to do. To say this. And then they're like, well, where are you going to get. How are you going to fund the dividends? Well, we could sell our bitcoin to do it. And we. And as you cue what you just said, Jeff, whatever, three minutes ago, they have to sell, whatever, a small amount of that bitcoin to do it monthly. It's a very small number for them, given the 818,000 Bitcoin.
- [17:35]
Mason
Two slides after that, selling BTC to pay dividends while remaining a net buyer, if their STRC sales are 2.3% of the Bitcoin reserve, aka $1.5 billion, they could pay their dividends forever.
- [17:48]
Jeff
Yeah. And then the other crazy part is this. They could sell bitcoin to pay dividends while remaining a net buyer, btc. And people are like, why would they sell the bitcoin and then buy back the bitcoin? Because they're.
- [18:00]
Mason
I think I. I think I could explain that a little bit and. And give a little bit of perspective on. On how it works behind the scenes. So right so strategy's got 818,000 Bitcoin and let's just say it's spread across three custodians. It's not three wallets. They have thousands of wallets, thousands of wallets. Every single wallet has a different cost basis, right? So they've got some bitcoin that's got a cost basis at 19,000 and 50,000 and 75,000 and 120,000 they can select. They're like, oh, look at this wallet over here. It's got a cost basis of 126,000. Boom. Bought the top. Let's go sell. You know, 1500 of these Bitcoin, lock in a loss. There's no wash shell rules in bitcoin. So you can immediately go buy, go back and buy additional bitcoin if they've got capital coming in the door from strc. So by locking in a loss, that also solidifies return of capital dividends into the future.
- [18:56]
Jeff
Right, so, so I, so, so I posted this. You're exactly right. So here they gave us the breakdown. They've got 129,000 bitcoins, over a hundred thousand dollars each. I believe that strategy will sell some amount of bitcoin very quickly. This benefit only exists while bitcoin is low. If bitcoin rips to an all time high, they cannot book a loss. So this is where I said let's say they sell 50,000 bitcoins, they have 129,000 above 100 grand. They sell 50,000 bitcoins at 80,000 bucks. Let's say there's a little bit of slippage in it. That's $4 billion in cash. But they'll also get about a billion dollar tax loss. That's what they can, that, that is a realized loss. Now what they do is in Q4, let's say Bitcoin's at 130,000 or 140,000. They report an unrealized gain in GAAP accounting. And guess what? Now they could sell more bitcoin, have a realized gain in GAAP accounting, but they pay no taxes on it. Like wait a second, you just said they, they're selling bitcoin with a realized gain. Yeah, but they have a billion dollar loss from Q2, then they make a billion dollar gain in Q4. The billion dollar loss and the billion dollar gain offset each other. From a gap perspective, that'll be a monster Q4 again, provided Bitcoin goes up and then, so what do they do with this? This, you know, when they sell the bitcoin, they in the fourth quarter, then they do the same thing. They buy back the shares to crush the shorts. They buy back more converts. Right. And they're more accretive on a bitcoin per share basis. Go ahead.
- [20:32]
Mason
Yeah, no, you absolutely nail it. But there's, they're always going to have high basis bitcoin. Why? Because they're always strong when the market is strong. So they're always going to be buying when the market is going up. Like they will always have high basis bitcoin. So I think they're going to continuously be able to carry some high basis bitcoin that will leave them this optionality into the future. And that's a critical component here. And the Saylor also said the capital gains fund, STRC dividends. But what that means is the capital gain from the bitcoin that they gained is like the bitcoin gain from the instruments that they sell accrues to the underlying balance sheet. So that makes the common stock worth more. So it's, it's all accretive. Like everybody thinks that when they talk about this they're like dilutive, Dilutive. No, this stuff isn't dilutive, it's accretive.
- [21:28]
Grain
Right. They only do accretive transactions.
- [21:31]
Mason
Yeah, these are, these are accretive transactions. And you could see it because you look at the one XM Navs going up and to the right, they're like, oh my God, MSTR should trade at 1xm nav. Well, 1xm nav is going up to the right forever. It's going up forever.
- [21:46]
Jeff
You know, you know what I got, Jeff? Let me chime in. The crazy part about this is in this slide, they already told us what the dollar amounts are in the unrealized gains. They have just about 11, $11.2 billion in unrealized gains. So, so when bitcoin's at a high price, they buy the high priced bitcoins, then they will offset it by booking the profit on the unrealized gain of a 7.5 billion. And so what they'll do is over the next, it's always, it's always going to be like this. They're always going to have low cost bitcoin and high price bitcoin. So They've got here 11, $11.2 billion in gains. Now these gains go up as the price goes up. But what they're going to do is they'll pick which lot they want to sell. And they could do this. Now I want to explain something to people because this will take less than a minute in America. I'm not giving any financial advice. But in your brokerage account because it's T 1 trade date plus 1. If you sell any equity today, right? And in your account, whatever the default setting is, it might be lifo, fifo, last in, first out, first and first out, highest cost basis. Or it could be, you know, longest term held. Let's say you sell stock today, on Wednesday, you sold it Wednesday, today. Tomorrow you're like, you know what, I want to change my cost basis. As long as you go in before it settles, you already sold it, you can go in before it settles and you can change what lot was sold. What strategy can do is the same thing we've been able to do in our, in our accounts, right. For I don't know, 25 years, 30 years. You can change your which lot, like you said, which wallet you have your bitcoins in and you could pick which bitcoins you want to sell first. They could keep the bitcoins that were purchased sub $20,000 or they could sell the ones between 40 and $60,000. They can engineer exactly how they want to be accretive from a tax basis. And that's different than gap accounting. And people are like, why doesn't gap accounting match irs? And I'm like, I, let me then let me grab this.
- [23:58]
Mason
Yeah, go get a Diet Coke or a Coke Zero. Now if you're a convert the unrealized loss and people, yeah, if you have high basis bitcoin, the unrealized loss has value. Right. People want that. We've had people reach out to us wanting our unrealized loss. They're like, let's get a deal done.
- [24:17]
Dan
That's interesting actually, Jeff. That's super interesting. Yeah.
- [24:20]
Jeff
Hey Jeff. You know Jeff, I heard this guy today, did a post that there's some dude willing to buy strategies high cost basis bitcoin.
- [24:29]
Mason
Yeah. So, so think about it, right? There's again, that's what I was talking about, the infrastructure, right? We, we have the infrastructure here. And there's countercyclicality between the credit and the equity. So sometimes when the equity's hot, the, the credit's less interesting, right. People are literally saw today. Josh Mandel is like, I'm selling strc. And then he's like, I have 80,000 shares of MSCR. He literally did the trade, he did the trade that we forecasted for months now. When, when the equity is hot, people will sell the STRC and they long mstr. We've seen it. That's Countercyclicality, they're moving the opposite.
- [25:11]
Jeff
I just got to call this out. The fact that you're using the word countercyclicality, this is investment grade freaking. That's a great work. Could you.
- [25:20]
Grain
He was just at risk world.
- [25:23]
Dan
He's been practicing his terminology, his fancy speak.
- [25:26]
Jeff
Okay, but.
- [25:27]
Mason
All right, so just, just like strategy's got countercyclicality. There's also counter cyclicality between the rest of like the, the instruments in the market too. Like, like think about stretch versus SATA. They're offset, right? They're offset. Okay, that's. Now you've got different points in time where different companies could be in the market at different points of time. That's interesting. Same with the equities are going to move a little bit differently. There's this arbitrage surface everywhere and it's so lucrative. The arbitrage surface is so lucrative. There's never been anything like this where you've got an arbitrage surface where your downside is if you're stuck in any of the credit instruments that you're getting paid 11 and a half to 13% on an annualized basis while you're in the ecosystem trading around these different instruments. So it's just so fascinating. The volumes are going sky high on the perpetual preferred instruments and they're not slowing down. Okay, I've got to shift gears because we'll be stuck on this forever. I'm going to talk about mnev. I've got a tiny little bone to pick with msdr. I'm going to throw it up on the screen and maybe we could talk about MNAV for a few seconds here.
- [26:36]
Dan
That was a good slide.
- [26:37]
Mason
Bitcoin per share accretion is primary goal with m nav as one input. Now they bring up 1.22x m nav here, but then they show the M NAV as assumed diluted shares outstanding times MSTR price. This is the first time they've showed this this way on their website. They show enterprise value and they don't show this Adso market cap. I'm sure just knowing behind the scenes how this goes. They've got tons of dashboards and analytics that they're constantly looking at. I think it's very apparent by how many slides they've got on the screen here. But yeah, the interesting thing is one, this metric is not on their dashboard. And you think about this being the metric that they're looking at for break even. That kind of changes your framework. Right. Instead of it being 1xm nav they're looking at 1.22xm navigation this is the crux of the decision making of like do I sell the basis bitcoin? Do I sell strc? How do I manage the capital structure and how dividends are paid out at different points in time. But curious your guys thoughts.
- [27:45]
Jeff
I've got insight to this. So for strategy and you could pull up their page on their shares. So their, their basic shares outstanding is 350, just about 351 million and their ADSO is 383 million. So it's, it's off, it's off by about 10%. And so when Rohan made his site Bitcoin Quant he had contacted me, he's like, you know there in some other bitcoin treasury companies there's a big difference between basic shares outstanding and Adso. For strategy it's kind of only off by about 10% but if this number was off by a lot that makes a big difference. And then here you can very clearly see the converts. And by the way the one interesting thing about the converts is that there's only one pref that's on this page which is strk because STRK can convert into shares. So that's that row right there. But if you look at this just from the convert perspective is that this is important to them for them to eliminate 10 of the shares. Right. That is important for them and that's because they want to be BPS accretive. So that right there. So I think that what they're saying is everybody, not everybody, many people assume that the crux, their m nav is 1.0. They told us it's 1.22. And looking at ADSL I'm not going to recalculate everything that I did because as they get rid of the convert it's you know, your basic shares outstanding and your ADSL will get much closer.
- [29:22]
Mason
Right. Because they'll be, they'll be so similar. Yeah, you have no very convertible. Yeah. So that 1x target might be, it should, it should collapse, it'll compress a little bit.
- [29:32]
Jeff
But, but, but this is, you know what's amazing also in the deck is that they also gave us all the scenarios and can you go to slide 61 not just to jump ahead, you know this is where, this is where they start talking about they can increase their amplification. And I'm going to say this, this is okay in a public setting. I was there, Rohan was there and Adrian was there and I said to Saylor I said, and this is public, this is in the hallway. And then there was a group of people around us and I said, you know, what's the right amplification? And he goes, that varies over time. Like it's different. And he said, right now where we are is pretty comfortable. And so where we are today is they are more comfortable. If they get rid of the converts, their debt to that they can have higher amplification. So the information that he told us, that he told me and other people that were there publicly was, was, was true. But now that we have new information, if they get rid of the debt, which is the converts, then they can have higher amplification. And the important part, everybody at the preps have to realize the amplification comes from because when they issued strc it doesn't increase Adso. I know that we get it, but that's why the prefs are amplification, because it doesn't increase, it doesn't increase Adso. Whereas the converts.
- [30:49]
Mason
And there's, there's no debt, there's no
- [30:50]
Jeff
covenants, there's no right because he never pays it back.
- [30:53]
Mason
There's no, there's no principal repayment. There are covenants, but there's no principal repayment. And this is, this is something that, you know, we've, we at strive have considered quite a bit, right? We're a little bit ahead of them in our capital structure given that we have 1% debt on our balance sheet relative to their 9. And so thinking about amplification is a really interesting question. You're like, what is the credit quality? It comes down to what is your ability to pay this out in perpetuity. And that math is so fascinating. This is like the coolest frontier math I've ever worked on in my entire life. And I've worked on some cool math. This is the coolest. But you start to think about like a four forward looking view of volatility. You start to think about underwriting the entire landscape of the market. What's your forward looking view of ARR? And if you don't have a lumpy principal repayment, it's really easy to go and back test all of the historical bear markets. It's like, okay, well what if we dropped 80% from an all time high? What do we survive? You're like, okay, well I've got cash on my balance sheet, I've got medium term STRC on my balance sheet and I could always sell bitcoin. And thinking about okay, well let's back test it, let's Go through historical bear markets. And so you could go take that perspective. Do you think that's applicable into the future potentially? Maybe, maybe not. Let's go look on a forward looking basis. Let's take all the past data and apply it on a probabilistic standpoint given Monte Carlo risk simulations. And go look at, okay, what's the probability that I don't have enough capital to pay the dividend? What's the probability that my capital falls below one times the notional value of the notional pref outstanding? And again, you start to think about this capital structure relative to other things in the market. Banks, insurance companies, leverage ratios. Thinking about all of those companies are very highly levered. You think a bank is 90% levered, an insurance company could be 100, 200, 300 levered. And you're looking at an amplification ratio of maybe, I don't know, 40, 50 or 60. And you kind of rationalize based on some of the math that you look at, you know, potentially a 60% amplification ratio or higher. All it is very dependent on your assumptions that go into the models that you pick. And I was standing across from Saylor and him and I were chatting at Strategy World and we had a really good conversation about this. And the critical component is managing both your credit investors and your equity investors. And just because you could pull the G's on the airplane doesn't mean your passengers won't be dead by the time you land the plane. Because you pull a couple of G's and your passengers are all puking on each other and starting to kill each other and you land, you had a great ride. You're like, wow, that was super fun. But all your passengers are dead. And the analogy was don't kill your, don't kill your credit investors. Your credit investors are the ones that are sitting in first class with their glass of wine and they're going to sue you if you spill a, spill a drop of wine on them. So it's like, it's a very delicate balance of managing that amplification into the future. The math, fascinating.
- [34:19]
Grain
I think this was the first time that was explicitly stated. And I, I think, I think the, the words they use was the capital management principles or, or maybe I came up with that. But there's three stakeholders and three questions for, for every decision. Is it good for MSTR common holders? Is it good for stretch? Slash the credit investors? Slash preferred investors? And is it good for Bitcoin? And when they're, when they're driving this vehicle. Those, you know, those are the three questions they, they are considering before they do anything. And what, what this earnings call to me was about was them acknowledging that they're in that seat, acknowledging the passengers and, and giving themselves maximum optionality again to, to, to do the right thing when they need to do the right thing. And, and that's going to look like a, a broad spectrum of, of, you know, possible trades or, or possible capital rotations that they could do. But now I, I think they've explicitly given themselves the optionality and the language to, to do that.
- [35:35]
Dan
Yeah, well, Mason, that's a good point. And I mean they explicitly reference now more than they used to. I think the bitcoin market as a whole. We, you know, Saylor on the earnings call talked specifically about the decentralization of bitcoin network only growing and you know, the security of the bitcoin network growing. But something they need to consider. I think it's really, really relevant when it comes to amplification. There's kind of two points here. One, the volatility of Bitcoin, as Jeff's been saying, is a massively important input into the risk framework of the preferred equities. So as the volatility of bitcoin comes down and it will over time, this is not the S&P 500. This is not the NASDAQ. You know, this is a, an asset that is growing from, from $0.01 and it's being monetized into a multi trillion, $100 trillion asset. The volatility will diminish over time. That defines a new sort of form of risk. Slash credit. Yeah, risk involved in these instruments. So then where do you take the amplification in that scenario? You know, the, especially if SOFR comes down and the credit, credit rate, credit spreads on the preferreds come down as well, you know, you could potentially have very, very high amplification ratios. That leads to the next point, that slide Jeff just had up. You need to be at a 1.2, 2 times M nav break even for common equity issuance. That's at the current, you know, it's roughly 30 or it's like 25amplification directly from preferreds. If the amplification from preferreds goes up to 40, 50, 60% that break even M Nav for comma share dilution to be accretive will be even higher. So that will be 1.5, 1.6 times M nav. So there's a world in which they could have, you know, a traditional bank sort of M Nav rating 1.5 to 2. That's kind of the historical JP Morgan M Nav valuation. Yeah.
- [37:28]
Mason
Price to book.
- [37:29]
Dan
Price to book. Excuse me. And with a 40 to 50 to 60% amplification on its way to a hunt like I think there's a world in like a hyper Bitcoin world where you know, short term credit backed by Bitcoin is a hundred percent amplification type of market. But in the near term I do believe that it's going to be really interesting how the common equity issuance interacts with higher and higher amplifications. And based on this kind of break even M Nav chart that we now have.
- [38:01]
Jeff
Let me chime in and I'll make this super simple why I like this. So I believe that strategy right now is the largest buyer of Bitcoin in the world. And if somebody is a bigger buyer for them, I'd like them to announce that publicly. But they don't.
- [38:16]
Mason
I don't think there's a bigger buyer.
- [38:17]
Jeff
Okay, so we, so strategy. What we didn't have was strategy was buying Bitcoin. So therefore the price of bitcoin theory should go up. And that's great. What we didn't have was a buy. So there's a buyer of, of the first resort when bitcoin is high, that strategy, because in theory there's. Their stock could be at a high mnab. Therefore the, they're the biggest buyer when bitcoin is high. When Bitcoin is low, which we saw in Q1 of 2026, that was their second best quarter ever of acquiring Bitcoin. So now we, what we did not have was a buyer of last resort for MSTR shares. So now if bitcoin is higher is this is your countercyclical statement, Jeff, if bitcoin is high but MSTR shares drop below 1.22 or it drops to 1.1, who's going to buy MSTR shares? It's going to be strategy. And you're like wait a second, why would they do that? It's called the stock buyback. The Mag 7 all does this. There's a trillion dollars in buybacks that are sitting in cash on their balance sheet that is accretive to reduce the shares in the denominator. So therefore the stock price can go up cause you're reducing the float. So they're not doing anything different than they did before. And people are like well where do they get the cash to buy back the shares? Well they could sell high cost bitcoin to book A tax loss and then they could offset it by selling Bitcoin. That was low. People like, wait a second. And they could do this forever. And so for me, everything shifted. I know about tax loss harvesting. I've had to do this in years where I made a bunch of money. I had some loser investments. I sell those, it reduces my taxable amount of money. I've been doing this for 30 years. And now the fact that strategy will do this, it changed everything.
- [40:07]
Mason
It's a tool in their toolkit. Yeah. Going back to amplification for a moment and thinking about the 60% number because I think this is a fascinating number. One way that I've liked to think about risk is downside. It's all downside. What's the downside look like? What's the balance sheet look like in the worst case scenario? And starting to wrap your head around, what do you want to be true in a downside scenario? And one thing that's fascinating, I've done a lot of math on this 200 week moving average of Bitcoin right now. So 4 year average price of Bitcoin right now is about 58,000. Okay. There are a few times in history where the price of Bitcoin has fallen below the 200 week moving average. And it's like 90%, 95% of those data points were FTX collapse Celsius. Like the whole incredible blow up that we saw back in 2020. Two of those data points, 9, 98% of those data points fall within 20% below the 200 week moving average. Okay, so now that's interesting. Like, okay, if I, if I think that that is a, a good low mark to, to benchmark against 20% below the 200 week moving average, what do I want to be true at 20% below the 200 week moving average, what do I want my balance sheet to look like? And so in taking that perspective, if you're like, okay, I want my balance sheet to be 100% amplified at 20% below the 200 week moving average. If I have cash on my balance sheet to pay out the dividends into perpetuity, and I just assume that we're going to work our way out of it. And in that framework, that amplification ratio today is around 60, 65%. So that math of thinking going up to 40 to 60%, I think you can rationalize it. And the question is, would the market let you get there? Would the market let you get there? Maybe, maybe not. Because it's very clear that the market doesn't understand the risk profile of these instruments. Saylor said it yesterday. It was a little bit of a softball question. It's like the market doesn't agree with the risk that you come up with on the strategy website. The true risk that the market is giving to the credit instruments is something like assuming a 10% increase in Bitcoin and like a 40% volatility. It's just crazy assumptions to get to the actual credit spread that the, that the market is paying. So yes, the market doesn't agree with that, but what happens when the market does start to agree with that? How high does amplification go? What does the forward looking volatility look like? What does your view of downside risk look like? And you could start to map all of this framework out. This is all doable. We've already got infrastructure built around this concept of downside risk and just the probabilistic scenarios. But then the question becomes if you get to a point where you're approaching, I don't know, 50, 60% amplification, what's the equity look like? If bitcoin's moving, what's the equity look like and is the equity ripping, what's the MNAV framework look like there? And Dan, I'd be curious to get your perspective. There's multiple times that Saylor talked about everything's undervalued. Equity's undervalued, the credit's undervalued. He's like even talked about I want to rip the wings off the bears. This could go to 4, 5, 6 M nav. I mean he threw it out there. Like that's a data point. How do you feel as an equity investor thinking about that?
- [43:40]
Dan
I mean I still just think like talk of 5, 6 times M nav is a little bit ridiculous in my opinion. We've talked about that before and I think the real metric is like if they're looking to double, let's say they're looking to double bitcoin per share every 10 years. Let's say your expectations are a little bit more generous. Let's say they're going to double every five years, then how forward looking would, on a bitcoin per share basis would you purchase the equity? 10 years. I mean it's Bitcoin, you could go out 20 years potentially. So you could argue if they're doubling every five years, then on a ten year time horizon you could justify maybe. So in that case three or four times mnav.
- [44:22]
Mason
Right.
- [44:23]
Dan
That could be an assumption you make. So I just think you should do it on a bitcoin per share basis. Yeah, I just think it's how forward looking you're going to get back the bitcoin per share that you're paying a premium for it. So that's an expectation of bitcoin performance, of their execution, yada yada.
- [44:42]
Mason
So the current equity market is looking 30 years ahead. That's not MSTR. Then the other question becomes what does the rest of the equity market look like? Which it's been my long term thesis here. I don't know. I think there will be a reckoning at some point with the rest of the equity market where all of these companies are going to get really challenged with cash flow. The marginal cost of everything is going to go to zero. People's jobs are going to get wiped out left and right. And what does the equity market look like in that scenario? And it might be a couple years out, but do people shift? What's the purpose of holding any equities? You're storing value over time. Yeah.
- [45:27]
Dan
It's accrue value per share, more or less. Right. Whether it be earnings per share or bitcoin per share.
- [45:32]
Mason
Right, right.
- [45:33]
Jeff
So look, Saylor said this before. He rebuilt the company 10 times. He wanted to compete against Microsoft and he was, he was ineffective to do. He was unable to do that. He rebuilt the company and to grow it and so he could have sold off but he didn't. And he had this thing that he could have retired and done that. And I had never heard of Michael Saylor or MicroStrategy. I know it's now strategy. Prior to them buying Bitcoin In August of 2020, I'd never heard of the company, never heard of him. And I've asked a lot of other people and they had never heard of him before either. And so what happened is that if software companies are being displaced by AI companies, right. Think about now in the lens of AI, the fact that they pivoted to Bitcoin in 2020, how early they were to that. Like he talked about the mobile wave who would short Apple because they're going to have a billion devices out there. And so from their perspective is the fact that they have 818,000 bitcoin at all different cost bases and the fact that they could financially engineer this the way they're doing it. They just need bitcoin to go up and they don't have to do anything to make bitcoin go up. Then besides Sailor and Fong going out and talking and sell the credit and attack the bond Market with the preps and the other, the other amazing I'll wrap up here with this, is that I like, you know, they asked him a question about what do you need regulatory to happen? And he's like, I don't really. He goes, I would like the Basel 1250 to be changed. But the prefs are a 100 year old concept.
- [47:08]
Mason
The press release, the word Safe harbor.
- [47:10]
Jeff
Safe harbor.
- [47:11]
Mason
Safe harbor. Equity Safe harbor Prep. Safe harbor. Safe harbor.
- [47:16]
Jeff
And so, and so, so for the press, they were used to build out the railroads and steel factories and whatever 100 years ago. So he's not inventing. What he did was, is the prefs are built on top of bitcoin and built obviously on top of an operating company that buys bitcoin for the Treasury. That was the true innovation. And then obviously with STRC paying out monthly and supposedly semi monthly and then being able to change that rate each month based upon the vwap. So I can't be any more bullish.
- [47:48]
Mason
Yeah, it's, it's, it's a really good segue into the next topic. And I want to talk about L2L3 because this is, this is evolving incredibly quickly as well. And I think just to summarize a little bit of the kind of market sentiment, some of this stuff is so simple, right? It's so simple. Like it's, it's actually not very complicated and a lot of people are trying really hard to make it really complicated. It's not that complicated.
- [48:15]
Dan
So true.
- [48:15]
Mason
There's just, there's like, there's a lot of data. It's not that complicated and they just have multiple levers and people are really just, they're breaking their brains trying to wrap like. And they're, they're struggling to articulate why it won't work. And instead of like thinking about the possibility of this actually working, they're like stuck on a black swan.
- [48:40]
Grain
Too good.
- [48:41]
Mason
Yeah, it's like too good to be true. I mean at Risk World, we had people walk by and 13% was on the screen and they're like, too good to be true. Scam. You guys are scammers. Why are you here? It's like, like if we would have an 8% on the screen, maybe we'd had double the amount of people that would stop by because it's like, oh yeah, maybe that's reasonable. But it's just like, no, this is really good. We're able to do this because we're taking risk on our balance sheet. But. And that's again, not a Novel concept. Insurance company has been around since the 1700s doing the same exact thing. They've pro, They've been hated for 200 years doing the same exact thing. And they've been accruing value for 200 years, taking risk on a balance sheet. This is not a complicated concept. It's just with one asset it's very simple. The liquidity profile is the key to the whole thing. Okay, layer two, layer three, because this is, and this ties in the Bitcoin conference a little bit as well. The bitcoin conference or maybe the STRC conference, the digital credit conference, because it was one of the largest topics aside from Quantum, was everything that's happening on the digital credit ecosystem. I'm going to share my screen because the earnings call did a good job at this is showing everything that's going on. So digital credit is designed for every investor class. And I think there was another slide that might have been better. But there are so many different layer threes that are being built on top of digital credit and that's also hurting some of people's brains. They're like, what happens when this layer 3 gets super hyper leveraged and ends up not working because they're promising 25% return on top of the digital credit instrument? You're like, well that's probably going to happen. There is probably going to be companies that take, you know, too much leverage in a layer three type system on top of the digital credit equity. But what happens in that scenario? In that scenario, and let's just say they have to liquidate all of the STRC boom. That hits the price of the underlying strc, the price of STRC or SATA, the digital credit instrument would come down. But guess what, it's equity. It has no impact on the underlying Bitcoin that's held in strategy's balance sheet. In fact, that provides opportunity for anybody that wasn't involved in that layer three tragedy, whatever that may be, into the future, that provides anybody that's not involved in that an opportunity to come in and buy the instrument when the credit's mispriced. And there's several buyers we're seeing it right now, this thing trades hundreds of millions of dollars a day. And there are companies that are buying it, there are crypto native stable coins that are being built on top of it. And I think just announced today, Pendle, which is another one of these crypto native ecosystems, is building a structured instrument just like we've been talking about the last couple of weeks with a senior tranche and A junior tranche, it's going to pay out two different yields because they've tranched the digital credit one more time into two separate pieces. And they did it in defi ecosystem and didn't have to deal with all of the crazy US regulations and they did it in defi. There's going to be interest in that, there's going to be hundreds of millions of dollars of interest in that structure and that will grow incredibly rapidly. The traditional market will do the same thing, it will just take longer. The defi ecosystem is so incredibly fast to build on. Dan, maybe you could provide some perspective after working at Buck for a while what was going on there.
- [52:22]
Dan
Yeah, so super interesting with Pendle and Strada is the other one. So Pendle is a yield segregation market where you can buy a fixed rate for a fixed duration on the underlying asset and then someone else can buy the future expectation of the yield at some point in the future. So it creates kind of a futures curve, futures expectation of the yield. So if the yield over a set period of time is higher than anticipated or the market was pricing it cheap at the beginning, you get a levered exposure to the yield. Strata is this method by which you can tranche the risk. So same thing Jeff has laid out before is you have a senior and a junior tranche. The junior is first loss capital but is exposed to more of the returns whereas the senior is protected by the junior and you have lower volatility, lower returns over for strata it's a specific duration of time. But yeah, I mean Defi is great for all these, creating all these sorts of mechanisms. Definitely something to wrestle with when it comes to the risk you're taking on. Because the amount of risk inherent in these smart contract protocols is like insane. During my tenure at Buck we had probably, I mean there were smart contract hacks every weekend with some of these defi protocols. Aaven there was an AAVE hack, there was hacks between bridging chains, there was a hack at a big lending protocol. It was insane. So you got to be super careful with this stuff. And I think there's going to be kind of a. There's definitely going to be one winner and I don't know who the winner is yet.
- [53:54]
Mason
Yeah, and liquidity profiles change, Right. So if you're, if you're on the layer two, right. As you go further down the layers, liquidity changes and that depends. Liquidity is a risk and Matt Cole talks about this a lot and like the liquidity premium and often investors just conflate liquidity premium in their head. They don't even think about it. And sometimes they'll think about illiquidity as a benefit, but it's actually definitely not. It is a risk profile that has a mathematical risk that should be taken into consideration. So liquidity is important. But one thing that's fascinating here is how quickly does this come about? And Saylor even mentioned it on the call. It's like sometimes I don't even find out about this stuff until you guys do. It's like, oh, another guy, another thing popped up and pops up on your screen. And he's been on a retweet frenzy, which I love. He's just retweeting all of these things that are happening in this ecosystem. It's fascinating. It's moving so fast now. I think that makes some of the OG bitcoiners a bit uncomfortable because they've been spending all of their time and energy working on layer threes, layer two, layer three, like lightning for example. And now a lot of energy is kind of shifted away from that potentially. Right. So these instruments provide another new avenue for people to build on digital credit. You can build on top of digital credit and it's incredible, incredibly sturdy and it's getting even sturdier every single day because the liquidity profile is growing. It's interfacing with traditional finance. The total addressable market that's interested in this type of instrument is enormous. It's probably the largest TAM on the planet. I think it is the largest TAM on the planet. And so what you could do on top of it becomes fascinating because the yield differential between traditional corporate credit and these digital credit instruments is so large you can insert businesses in between it.
- [55:56]
Grain
Hey Dan, in your video yesterday you talked about digital credit is hyper bitcoinization. Can you repeat that? I thought that was a really good segment.
- [56:09]
Dan
Thanks, Mace. Yeah, and I think curious to hear your guys thoughts on that. But the majority of, I mean what is the M2 money supply in the United States for US dollars or the global M2 money supply? It's like 20 trillion.
- [56:22]
Jeff
Right.
- [56:23]
Dan
And there are 400 trillion worth of total assets in the world. You're not going to take 900. 900. Excuse me, excuse me. 900 double. And so you're not going to take over the total asset. You're not going to start denominating assets in bitcoin by just taking over, attacking the $20 trillion M2 like paying for coffee is the.
- [56:48]
Mason
Exactly.
- [56:48]
Dan
Paying for coffee. Exactly. So what you have to do is attack the Entire debt markets, the debt markets being some of the biggest markets in the world, which ultimately support the real estate market, you know, another one of the biggest markets in the world. And how do you do that? You need debt denominated or not, excuse me, not denominated, denominated for the time being in USD, but backed by the collateral asset that's ultimately providing the value is the encoded monetary policy backing the interest rate of the debt. And so what we're creating now is a bitcoin backed yield curve that is creating the risk free rate or the cost of capital for debt markets around the world. And that's ultimately a much bigger market than just the M2 money supply.
- [57:31]
Grain
This is what bitcoiners need to understand. And you think they'd be good at this because they're usually able to put things in perspective like bitcoin, right? Bitcoin's. Bitcoin's small. Everybody thinks, oh, bitcoin's at, you know, 100k, it's over. No, bitcoin's only a trillion and there's, you know, a quadrillion dollars out there, right? There's plenty of room to move M2 or, or medium of exchange is, is a really small segment. And that's why Saylor often says bitcoin is capital, right? It's, it's, that's what it's going to infiltrate first. And digital credit is the innovation, it is the entryway, it is the platform on which all the capital in the world is slowly going to come into bitcoin over time.
- [58:21]
Dan
It's not stable coins. This is way a bit more important than stable coins.
- [58:24]
Mason
Correct? This fundamentally changes how people interface with money. It's going to get better. These things are nine months old, right? They are going to get better. They are going to get better than this. And Mason, you brought up a big point here. The bitcoiners are struggling because they have disruption. This is the first time there's been massive disruption in the bitcoin market. Everybody was working on one thing and they're like, oh, this is the way that the world's going to be earth shattering, right? Digital credit gets issued. Earth shattering. You have to, you have to rethink everything you thought about bitcoin. That's hard for people that have committed their lives to this asset and shifted their whole perspective. And this is the way it's going to be. And now you're like, okay, suit coiners come in the door, suit coiners. And they're issuing credit against it and they don't like it because they've seen bad things that have happened before. But what if it works? What if it works? You have, you have to consider that.
- [59:25]
Grain
And what if it makes the world a better place? You know, using bitcoin, right. I think, I think ultimately that's what's important here is that we are, we are bringing bitcoin to people in a way that is approachable and accessible to them.
- [59:41]
Mason
You are reducing the education curve dramatically.
- [59:46]
Jeff
Right?
- [59:46]
Mason
Like in order to educate somebody about like putting bitcoin in gold surge, which I believe, like we all have bitcoin and cold storage. And I fundamentally believe that people should hold bitcoin and cold storage. But the reality is not everybody is going to do it because the education curve is too high. Nobody has enough time and they're not interested in doing it. They're not going to hold a bearer asset. That's just a reality. But these other instruments reduces the education curve of getting people in the door. It becomes a lot more familiar. It's in a familiar wrapper. I could buy it in brokerage account. I could buy it from my trustworthy source. This like it. Bitcoin is a trustless asset, but the trust networks are going to get built on top of it. Society is a trust network. Like you're not going to eradicate trust networks from the entire world. It's just not going to happen. Like there has to be trust networks within the like if commerce, if you want commerce to happen, there has to be trust networks around the world. And this is a new trust network that's being built on top of this. And there are many bitcoiners that are frustrated because they don't like that. One trust network has a lot of power and is accumulating power very quickly.
- [61:00]
Grain
I think that's how I, Jeff, if we go back to that slide, we don't have to pull it up. But it's important to note right now that the main volume or the main bid on stretch is retail. And when you think about what the retail movement really is, and this is something I, I often think about, it's our, our money is broken. And so people inherently know that they need to take their fiat and they need to put it in assets. And it used to be that, you know, you would have a professional money manager, you'd have a broker. But in the, in the 21st century now with the Internet, now with you know, online brokerage, with, with Robin Hood with self directed mechanisms, there's people and many of the, honestly probably everybody watching our stream are are in this category of people who are taking, you know, the, their financial future into their hands because they need to. Right. This is mandatory if you want to, if you want to be wealthy in this world, you don't hold fiat. You know, people who store their value in fiat, we call them poor. If you don't want to be poor, you, you need to invest, you need to look after yourself. And that's the main bid on Stretch right now. It's people who are looking into the future or taking some risk or deeply understanding it, taking the time with us to really understand it and kind of bootstrapping the liquidity for this product and letting it grow before the institutions get in. This is the same thing we saw with, with bitcoin as well. Bitcoin took, you know, 15, 15 years before anybody wanted, you know, on the, on the traditional side to touch it. And that's what's going to happen with, with Stretch. And we're seeing it with retail, with the crypto cowboys, with, with innovative tradfi. And it's just going to take some time. But I, I do think the, the amount of capital in the retail realm or in the crypto realm is plenty for the next, you know, for the foreseeable future.
- [63:11]
Mason
That's why I don't understand the perspective of the bear, like the people that are bearish this stuff. The downside risk of you being wrong about being a bear is you miss the greatest opportunity of all time of getting exposure to what is going to be the largest company on the planet. Like, that's your downside risk. And yet people are going to complain about them not being able to pay a dividend that's just so infinitesimally small on the relative size of the balance sheet. It's just like. It's a strange argument. It's a strange argument. The upside risk risk has got two sides, right? You've got downside risk, fat tail. You got upside risk also fat tail. And the upside risk, just like with bitcoin, the fat tail on the upside is, is much larger than the downside. And mathematically, if. And somebody had a good post about this and Soleil even retweeted it, Bitcoin will always have value. It'll never go to zero. It will never go to zero because there will always be somebody that is going to hold it as value and exchange it for other things always. Unless the Internet breaks or something which different problems. If you mathematically remove the probability of 0, your, your mean of the distribution of the probabilistic distribution Explodes because the tail, the right side upside tail is so large, the mean of the distribution explodes. And like that is what that, that's why I'm here, that I, I mathematically like see that when I close my eyes. But the same thing applies to strategy and this, the digital credit and digital equity and the vehicle that's being created here. If you're wrong, if you're wrong to the upside, you miss the greatest equity. You potentially missed the greatest equity opportunity of all time. That's a, that's an interesting stance to take.
- [65:08]
Grain
So Jeff, I, I have three numbers and this kind of relates back to what we were talking about before with the break even ARR. But stretch is 11 and a half percent. The break even ARR for Bitcoin for them in order to pay the dividends forever is 2.27. And on the, on the Peter McCormick interview, that sailor, did you know he hammered the point M2 money supply has been compounding at 7% a year, right?
- [65:40]
Mason
Yep. So the last 50 years in a
- [65:43]
Grain
row, the denominator is it's expanded at 7%. And we have a hundred years of, of history to back this up. And bitcoin only needs to go up 2.27%. And the yield that you're getting is beating the debasement. So it's like most people, whatever they have in their bond side is not beating to basement. They're getting crushed.
- [66:16]
Mason
I saw it my entire career in the insurance industry. I'm looking at the balance sheet of these companies. So this is one of the reasons I left reinsurance. Right. So in Covid, I was watching insurance company balance sheets go down into the right. Meanwhile, I look at this company that adopted Bitcoin and it's going up into the right. And I'm like, I need to get out of here. There is a problem and it was very apparent I need to get out of here and I need to go chase the things that's going up into the right. But great point, Mason. And I can't believe the data is public. Like you could go look at the Fed website and they tell you that we're debasing the money at 6.7% annually for the last 50 years in a row. It's insane. I can't believe that's a thing. And the curve looks exponential. And in the future, if you just take that same assumption, the curve is going to even look more exponential. It's just going to look wider. But I want to shift gears before we hit on the last topic, which is the Stochastic cost of capital for STRC is not fixed at 11.5%. People are thinking that you've got to pay this cost of capital at 11.5% into perpetuity. Going to share the screen here. Super important point. And Saylor brought up the idea of Amazon, right? They gave everybody free shipping for $10 and they did it for a few years and then all of a sudden they, they jacked the price up and nobody got rid of it because they had all of this business. It was just fundamentally there. It was so sticky. You had no other option. Like, what are you going to do? Go somewhere else? What are you going to do? Not pay your $100 annual Amazon prime membership that you are now just so ingrained on, you know, how it works and how it fits into your world? No, it's not going to happen. Something very similar. Go ahead, go ahead.
- [67:57]
Jeff
Yeah, let me, let me analogy, let me bring this up because. So back in the olden days, during the Internet bubble, right? And prior to 2000, I just, look, all these businesses popped up. You know, pets.com, you're going to buy a $50 bag of, of dog food, sorry, a 50 pound bag of dog food. They're going to give you free shipping. It's going to be less expensive than you buying at the store. And people are like, okay, I'll take the deal. And so the joke was, wait a second, how did these come? How does pets.com make money? Well, if you sell something out of a loss, you just sell more of it and eventually you'll make a profit. What happened was when the Internet bubble burst, those companies that were hemorrhaging funds, they bailed out. So now what happens with Amazon? You have Amazon prime, right? I don't pay for shipping because I have a subscription. They give me a bunch of free services with it, Amazon prime for. I get Amazon videos and so forth. You're like, hey, where's this going green? You're not making any sense. Well, there was another company during the Internet bubble that still exists to this day, which I really don't use anymore. And that company is ebay. Why don't I like ebay? I'll look something up on ebay. I'll look it up on Amazon. I'm like, hey, I can buy it on Amazon. I could buy it brand new. If it's a piece of junk, I could return it real easily. And there's no shipping. And so now I don't buy something from ebay because of the shipping and oh my God, There's a company trying to buy ebay. I don't want to derail and talk about that. But it's not that the business model wasn't. I was a real big fan of ebay when I sold some stuff on it, it was kind of cool. I'm not saying ebay is a bad business, but it's like, you know what, it's just easier for me to buy on Amazon because the ecosystem that it created. And so Sailor is correct about this. Once you bought, once it be in marketing or product management terms, we call this sticky features.
- [69:50]
Mason
Sticky.
- [69:51]
Jeff
It's sticky because if I want to go buy something from ebay now I'm like, screw it, I want to pay. I'm buying a $30 item and I got to pay $10 in shipping. No, I'll just look it up on Amazon and It's the same 30 bucks. And because they have to, they have to have. I'm dealing with companies that have economies of scale is, does this kind of suck for the small player? Sure. But you know, hate the game, not the player. And so, so for me, what he's saying here, and he's shown this, I love how the sofa is a dotted line and it's like a wave. And I've seen people online saying, well, strategy is going to reduce the amount of their, their dividend on strc. And I'm like, right, yeah, yeah.
- [70:37]
Mason
Because it's mispriced, right?
- [70:39]
Jeff
It's mispriced. Right now you get a benefit if you're early with it and when it. And he's gonna keep that, he's going to keep that difference. Which he's saying is what, about 6% correct?
- [70:48]
Mason
Well, yeah, yeah, yeah. As the market starts to understand the risk profile. Right. Like we understand the risk profile. We've done more math than anybody else on the planet. But you go talk to Joe, Blow on the corner, they're like, what? I have no idea what you're talking about. I don't know what credit is. Right. It's just going to take a while. It's going to take a long time for that to kind of infiltrate and go through the market. And they've got this here on like a 20 year horizon, which I think is an interesting perspective. But the, the market will understand the risk profile over time. It. But the interesting component, the data is there. You have all of the data. So the people think it's too good to be true. It's like, well, no, you can actually go calculate the risk profile like right now and you go compare it, I've done it. Go compare it to everything else in the market. Do the math, do the work. If you do the work, you can understand and look at that discrepancy between everything else in the market and these instruments and you start to understand what's going on here. And grain the stickiness. Such, such a good, such a good point. I also saw this in the insurance world and this like boiling frog thing is happening, right? And it happens over a long horizon. And, and people, people have a hard time of, of under seeing exponentials. They also have a hard time at seeing stuff over time like a, like a, like a horizon and seeing a shift of society. So over the last decade, the 2010s, there was a huge advancement in big data for big insurance companies. And so these large insurance companies exploded. You saw GEICO Progressive nationwide and they started putting like things in your car and like started to underwrite based on how you drive and stuff like that. And the amount of data that became available just like exploded. So what that did is it allowed the companies that were large enough to consume the data to price risk cheaper. So what they did, they knew that they could price risk better than all of the other small little local mom and pop insurance companies on the planet. So what they did is they undercut all of the other tiny like regional insurance companies and they won a ton of business because you know, the people are like, oh yeah, I could go save, save a thousand dollars on your car insurance by coming to geico. I go save a thousand dollars on my car insurance and I have Geico for a decade. And then slowly Geico starts ratcheting up the prices because all of the competitors are gone. And that's been a boiling frog scenario. And I've even seen it over the last year, people complaining about the cost of their home insurance going up and all these other things. It's like, well the 2010s were, everybody lucked out because the price of insurance was so incredibly cheap because all of these new entrants or big capital were going to go acquire huge swaths of the population as consumers, understanding that they like the long term trajectory, that they were going to bring the prices back to the true risk rate. So everybody underpriced the business, they took a loss and they knew that they're going to get it back into the future. Future. That's where we're at right now. And there's a reckoning, right? And at the same time you saw inflation, so you got this double whammy. People are seeing like 40, 50% price increases and it's, it's the perfect moment for insurance companies to jack the prices back up because inflation is the word they use. It has nothing to do. It's, it is inflation, but it's under the veil of inflation.
- [74:24]
Grain
Jeff. We just need an insurance company with digital credit and bitcoin on their balance sheets. Everybody and, but somebody listening.
- [74:35]
Mason
We need, we need an insurance. We need, we need somebody to tranch out in the traditional ecosystem an investment grade. Sailors called it digital money and digital yield. I'm calling it investment grade digital credit and amplified digital credit. And if somebody builds that in the traditional market, you can make an insurance company built on this stuff. Because insurance companies, you can get 85% capital credit for debt that sits on your balance sheet. So if you put the digital credit into a debt wrapper and you slap a term on it, you can now have the highest the capital quality and capital credit that an insurance company get for holding debt. And you're going to have the best performing investment grade debt in the entire market. And you could also hold digital credit as equity capital and you get 45% credit for it. And maybe you hold just a tiny bit of bitcoin because you don't get any capital credit for it right now. Maybe you will in the future. But yes, a business model can be created like that. And we're so close. I think we're probably, I don't know, six to 12 months out from having scenarios like this. We're close.
- [75:52]
Grain
Yeah.
- [75:53]
Jeff
Okay.
- [75:54]
Mason
It's cool. I'm bullish. I'm incredibly bullish. I left, I left the insurance market and I left Risk World. Okay, brief moment on Risk World. 50 of the businesses that were there, how many people were there? There were about 12, 000 people there. Very similar to the bitcoin conference in terms of feel like there was a ton of energy. I walked around, there are probably about 15 to 20 balance sheet companies there being insurance companies. And then the rest of the companies were like small, small MGAs or tiny businesses that were trying to leech on top of the insurance companies. Half of those businesses are going to get obliterated by AI and they have no idea. They have no idea. I walked around to several of the booths and I just started talking to them like, hey, what are you guys doing? And I'm just like, oh my God, the business model is broke. Several of the companies just had like little vibe coded dashboards on a TV and they got like 15 employees that are there at the Little tiny booth. One or two of them know what's going on. The other ones have no idea what's going on. And yeah, man, it's a little bit bleak knowing what we know to go to a conference like that and communicating with people that are going to struggle. A large portion of those people, I think, are going to struggle big time because the business models don't make any sense.
- [77:21]
Grain
Yeah, it's tricky.
- [77:23]
Mason
So maybe a couple minutes on the bitcoin conference, and then we'll wrap it. Get out of here. Anything else to add from the bitcoin conference? We were the four people that were there.
- [77:38]
Jeff
Yeah.
- [77:38]
Dan
Grant Grain was working the room, so let's hear what he's got.
- [77:42]
Jeff
So. So I went there for a particular reason and. And obviously for the. The event at Gatsby's, which I showed up quite late for. But. But with that said, look, the conference, it exceeded my expectations. I thought there would be a lot less people there. I was completely wrong strategy. Had a booth in the exhibit hall, which is the first time they've ever had a booth at a bitcoin conference. So I walked up to. While I was there, Fong was there, and there's a whole group of people. And. And this is a quick anecdote. I walk right up to Fong, and there's a line of people. So I start waiting in line like everybody else just to say hi to him. And again, public setting. And I. And. And he looks up, man, he goes, hey, Grain, good to see you. And people turn around and look at me like, why is his name Grain? And so anyway, so. And so he's like, how are you doing? I'm like, I'm doing great. You know, your booth looks great. And he goes, I said, can I ask you a quick question? And he's like, sure. I said, the number one question that I get from people is, how do you manage your cash? Like, how do you, you know, how do you acquire? What's. What's your strategy for cash? He goes, oh, do you mean, what's our strategy for cash? I go, yeah. And I said. I said, do you try and do it lump sum, or do you want to space it out over time into multiple transactions? And he looks at me, he goes, we're long bitcoin and we're short cash. And I'm like, really? He goes, yeah, we acquire cash when we need it. And I was like, thank you. And people are looking at me, and I'm like, I'm shaking his hand. I'm like, I'll See you later at the event and so forth. And he's like, great. And then that was so what I'm trying to tell people, if you can go to Strategy World or if you can go to the bitcoin conference, when they're there and you walk around, there was a whole line of people to meet. Fong, I did not talk to Sailor this time. He was whatever, just wasn't around by him. But I talked to so many people at Strategy. We had the investor relations team at Gatsby's. And so we spent time talking to them. And they asked me what my opinion was. And I think that is the huge value is that they're like, as a shareholder, what do you think of what's going on? And I told them and they listen. And so I just want to tell everybody the event exceeded my expectations. Our party was killer. It was great to see you guys there. I got to meet two of my heroes. I won't say who they were. There are two bitcoin OG bitcoin guys that bought bitcoin sub $5. And I sat next to them at dinner and it was pretty awesome. And so from that perspective, I would just tell everybody, if you put yourself out there, get a blue check mark, tweet a bunch of things, go talk to people. I met Michael Sullivan in person. I mean, there's so many people that I got to meet. Fred Krueger dragged us to a party, right? You guys were there?
- [80:23]
Mason
Yeah.
- [80:24]
Jeff
And I said to him, I said, hey, there's Tim Draper. Like, have you ever met him? He's like grain. He's invested. He. He's invested in my. My third startup. I'm like, oh, I guess you know him. I don't know. I've never. So anyway, I thought it was a great event. I was happy to see you guys.
- [80:40]
Mason
Yeah, absolutely. Yeah. The True north event was fantastic. It was a packed house. We sold out on all the tickets. It was. It was great having people there. A couple of things stood out to me. At the bitcoin conference, Shell Gasoline had a booth that was interesting. I was like, oh, wow. And I walked up. Shell is creating some sort of cooling liquid for the mining machines, and they're getting integrated into the mining infrastructure. It's evolving. It was so cool. The mining infrastructure. There was a lot of. Yeah, a lot of mining infrastructure boosts. There are a couple of news desks. It's definitely shifting more towards energy, more towards this institutional perspective. Like all of the bigger companies there. Strike was there, Gemini was there. Mara had stuff There all of the bigger companies were involved. So it was interesting to see, and it's definitely shifting. But I do want to add here that we've got an event coming up here. Here in Oregon, Bitcoin for Business. There are. So if you missed the event, there's this event that we're holding in just a couple of weeks. So this is. What is this? May 21st? I think it's Thursday. May 21st. Might be a Wednesday, Wednesday or Thursday. And it is on the back of. Or on the front of Bitcoin is for Everyone conference in Portland, Oregon. May 22. May 23. So if you're interested in coming to this and chatting with us, I will be the host and a few folks. I think Ben Workman will be there, Joe Burnett will be there. Maybe a couple of these guys will be there. But we are looking to talk about how to incorporate bitcoin into these businesses. Start to think about digital credit and building a community ecosystem on top of this. Because ultimately, if it's good for you, it's good for your business, it's good for your family, and starting to think about how can we reframe our relationship with capital and our relationship with money? And we want to start that conversation and do it in different locales across the US So I hope to see a couple people there, and there's plenty of tickets left. So if you're interested, it could be a lot of FaceTime. And that's all I've got. Maybe we'll pass around for final thoughts.
- [83:02]
Grain
Can I just hop in here about the. The bitcoin conference?
- [83:05]
Mason
Yeah.
- [83:07]
Grain
Yeah. Our event was great. And thank you to everyone who, you know, bought a ticket and came out to see us. And, you know, we really appreciate that. That's. That's. It's amazing. And. And everybody was just so complimentary of.
- [83:25]
Mason
Of us, so fantastic stories, and it was great speaking with people where you feel like you could speak the same language. You're not a. Yeah. You're not a weirdo anymore. Like, if I go walk down the street, I'm a weirdo. But if I. At the True north event, you're like, wow, oh, my gosh, I'm with my people. You know, it's cool. It's really cool. Special. Like, super special.
- [83:45]
Grain
Yeah. And then. And then the. The other thing, I had a cool experience. You know, Mel Use is part of bitcoin for corporations. So I got to go to the dinner and sailors spoke there. And really his main message, if I had to distill it for the Businesses in the coalition is if you can't issue digital credit, which many businesses can't, it's a very unique position to have the balance sheet, have enough bitcoin, have the regulatory infrastructure in your country, so on and so forth. He, he said as business, you should be thinking about how to build on top of digital credit. And every business is going to have a different avenue, a different regulatory environment, a different idea. But that's what he really hammered home is that's what you should be thinking about. Because if you are able to successfully introduce it in some kind of product, you have a license to print money, right? You have a, you have a license to print money. And especially if it's successful in, in whatever you're trying to achieve. And you know, I, I, I would say the same thing to our audience, right? If you work in banking, like if you're a banking executive and you are stumbling across true north and you have any power in your institution, this is how you make like your whole career. This is how you become infamous in whatever sector in finance or even beyond potentially is by integrating digital credit into whatever it is you're doing, your company will be more successful than any other company. Like for example, if you take a Neobank and Saylor spoke about this and I'm sure they're having conversations, I'm sure he's going up and saying, hey, you guys should do this. You're going to draw so many deposits, you're going to crush every single other bank. And what's going to force them to do is every other bank is going to have to adopt it, which is going to make digital credit stronger, which is going to make Bitcoin stronger. And this goes back to the idea that this is a harmonious system that is all powered by Bitcoin itself. Bitcoin is a closed loop. And Dan, I think you said this in, in your, your video yesterday. The only reason this works is because of 21 million is, is because of bitcoin. And it creates this, these amazing. And Sailor spoke about it, these concentric fly wheels. And that's why I am feeling so bullish right now. Like, I, I go to bed and I think about, okay, you know, bitcoin goes up. What does that do for digital credit? We're going into an easing environment. You know, the fiscal situation of the US is here. And, and Dan, like I'm, I might be on Sailor's side. Like, I think we could see a 4xm nav and, and also I was gonna say this earlier, I think I think, I think we need a, we might need to retire M Nav. I think it might just be priced to book just, just so we can speak, speak the traditional finance language.
- [87:10]
Mason
Well, there's multiple ways to look at it, but yeah, I agree. Yeah, it's just price the book.
- [87:17]
Dan
Well, I mean like I kind of ate my words earlier. These are my final thoughts. I kind of ate my words earlier. I mean if Jeff is saying that the traditional equities markets generally look out 30 years, you're looking at a, you know, doubling the bitcoin per share every seven, then logically, you know, you could, you could bet on a 4M nav. But by nature like bitcoin per share or bitcoin yield is diminishing over time because of scale, arguably. So there's a lot of factors. But yeah, what about a gamma squeeze
- [87:48]
Grain
or, or you know, when, when you, when you have derivatives complex, it can get really wacky.
- [87:53]
Dan
Totally. And I mean, I mean long term sustainable mnab. I don't talk, I don't mean like squeezes up, I just mean like fair value valuations.
- [88:00]
Mason
It's going to oscillate like whatever the number is, it's going to oscillate. Just like the underlying volatility of the underlying instrument. It will oscillate, it'll go high, it'll go low, there will be periods of time. Just because the whole world is dependent on capital flows and capital flows happen. They're not constant. Capital flows aren't constant. They vary depending on different things happening in the market. Just like we saw in, in the last six, eight 12 months. Right?
- [88:30]
Dan
We, we, that moves the needle.
- [88:34]
Mason
Yeah. I mean 80,000 shares a lot. Yeah. Thanks.
- [88:40]
Grain
One, one, one final thing. Like I, you know, we get, we get so in the weeds. We just forget about the, the main KPI which is Bitcoin yield. Right. And Q1, what was it, 9.4 already? That, that was what they were supposed to do this year, right? Or was it?
- [89:01]
Mason
Yeah, I think it's year to date. Yeah. Right.
- [89:05]
Grain
Okay. Year to date. Year to date. So just, you know, regardless of the, the fiat price of the equity denominated in bitcoin were at all time highs, all time bitcoin per share. And, and that's, that's really what you want to be paying attention to. And, and I'm so glad that they are focusing on that even more intentionally than they, they, they might have been. Even though it's, it's always been the goal.
- [89:33]
Mason
Okay, so it comes back to the accretion point. Right? And I, I had an argument with the guy on the news desk when I was at the bitcoin conference about accretion versus dilution. And we're, we, we were talking about it, right? And I brought up the concept of like, bitcoin per share. And I said, like a glass of whiskey. If I had a glass of whiskey and I poured water into it, what am I doing?
- [90:00]
Grain
Diluting.
- [90:01]
Mason
I'm diluting. And it's less potent. Okay? Right. So you're thinking about, like, the potency of that specific instrument now with this scenario of putting more. Right. Like, I'm not pouring water into my whiskey. I'm pouring Everclear into my whiskey. Just a little bit of Ever. It's like, it's making it more potent. Every share is more potent. That is accretion.
- [90:30]
Jeff
Let me just correct this in a different way. Really, what's happened? So you have whiskey and you put water into it. So that dilutes it, but if you allow the water to evaporate right now, all of a sudden it becomes. It's more distilled, it's more potent. Right. So you took the water out. Folks, look, the ratio is price over earnings per share as you let the water evaporate out. Right? Right. What's going to happen is you're going to have a bigger multiple because you have less shares. There, there. That's, that's the whole goal. Either you're gonna have a higher multiple or a higher price. And, and, and, and by the way, they sell alcohol, you know, this vodka, 80 and 100 proof, right. It's like, well, which one do you buy? It's like, well, we're just gonna mix it with orange juice. So I think we all natively understand this, but I, I don't know why. When we explain this to people, PE is price over earnings per share. And so we're going to reduce the number of shares by buying them back. And they're like, well, does the price
- [91:33]
Mason
automatically adding more bitcoin? It's like, either way, you do it.
- [91:37]
Jeff
And that's why the 80, everything, this all ties together, right? Adso assumed diluted shares outstanding. And what's going to happen is, you know, this is my closing thought. Look, the bitcoin conference turned out to exceed my expectations. I got to hang out with you guys. We had a great party. I went to a great dinner, met a bunch of people there that, that surprised me who was there. And I think that, I think that we're going to look back, that this was one of those major inflections points and we'll say, oh, this changed everything by the Do I think the strategy necessarily now is gung ho and getting to a million bitcoin? Not really. Do I think it's a good metric to chat to, to track?
- [92:17]
Mason
Sure.
- [92:17]
Jeff
But BTC yield, people are like I'm not really sure, you know, in terms of explaining it. Whereas getting a million Bitcoin was a better number. It was just easier to understand. So my view is I'm bullish for the stock. As a shareholder, I think that this is awesome and that's my final thoughts.
- [92:36]
Mason
Yeah, absolutely. Completely agree. I mean I am, I'm incredibly bullish about increasing bitcoin per share, the potency of every, every single share. Final thoughts? Just a couple of things that, that I'm thinking about on the horizon here. So strive. We have our earnings coming up, our Q1 earnings coming up in the next couple of weeks. Something to keep a lookout for. I will be at the Money show next week down in Dallas. We're, we're just going out and we're talking to people about the digital credit instrument. So this will be our second Money show. Matt and I will be there, I believe it's on Thursday or out in 5pm down in Dallas. So if you're in Texas, keep a lookout for that and you can go, you can come check it out and go see what it looks like to interact with some of these other people, some of these other investors interested in credit instruments. I'm also keeping an eye on Clarity, act and look at what's happening in that market. And then I'm also trying to understand what's happening in the tokenized ecosystem and how that's moving and where it's shifting, thinking about tokenized securities and in that horizon. So a couple things to keep an eye out there for. Additionally, the True north stream, we'll be moving to a different time. Starting next week we're going to move to 6pm Eastern, 3pm Pacific. We're going to shift it to two hours after the market closes. The goal being to continue to bring high value content, get a little bit more availability of a higher, higher availability of audience and potentially bring on additional guests. Our goal is to keep four people on, on the stream, start to bring in a little bit more rotation of some guests and bring in new perspectives and new views from people that are just at the forefront of what's happening in Builders.
- [94:25]
Jeff
We want builders, we want people that
- [94:27]
Mason
are building in the ecosystem. So if you're, if you're out there putting out high value content on Twitter. We want to talk to you. So we want to create the incentive structure to bring you on the show at a reasonable time. It's not midnight Eastern. And. And we could talk about the biggest story in all of finance.
- [94:45]
Dan
Or non Twitter people.
- [94:46]
Mason
Or non Twitter. Exactly. Exactly.
- [94:50]
Dan
LinkedIn people.
- [94:51]
Mason
Maybe. I don't know about LinkedIn. I'm trying to penetrate LinkedIn, and it is, it is just bleak out there.
- [94:59]
Grain
LinkedIn's gonna hear about digital credit in 20 years.
- [95:02]
Mason
I'm trying. I'm trying my damnedest. I get a couple hundred likes occasionally. All right, well, that's it for True north, episode 65. Thanks for joining. We will catch you next week. Godspeed. It's a good time to be bullish. See ya.
- [95:18]
Dan
See you guys. Peace.