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- [00:32]
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Sa.
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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.
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Whoo.
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Welcome back. A lot going on. We have June 24, 2026. We are here live. We are talking about bitcoin today. This is True north, the investment grade bitcoin podcast. I'm the host, Jeff Walton. With me today, I've got Soleil. I believe Adrian Morris will be joining us a little bit later today and we're going to get after it. We're going to talk about everything going on in the market at the moment. So the price of bitcoin today, wicked down into the 50s. 50, I think 59 was about as low as it I saw. And then after the market, US markets closed, it snapped back up to about $61,000. So we're watching that MST. I think it's about a eight or nine hundred day low going back to February of 2024. We'll talk through it a little bit. We've seen some volatility in the digital credit instruments. The noise on X is palpable. You could cut it with a knife. And we'll dive into some of the data and some of the numbers like we do every single week. This is the investment grade bitcoin podcast. We want to focus on the numbers, we want to focus on the math. We want to think about what the balance sheet looks like and think about what this looks like into the future. So let's just jump right into it. Soleil man. We've experienced a lot of volatility, right. I think the price of MSTR got down to low 90s, 92 or 93 today. I couldn't help myself. I was scanning the options chain for MSTR and just, you know, trying to find the little areas of opportunity, which has been very interesting. And yeah, I mean let's, let's get your thoughts right off, right off the bat. Would love to, you know, just kick it over to you. What are you thinking about?
- [03:10]
A
Yeah, my favorite meme that I saw posted was like, volatility is a gift. And I was like, can I return this gift without a receipt? Like, I don't really need all this volume right here. But no, I mean, as an option seller, I'm a volume junkie. But even this is you know, pressing some of my limits because at the height of 2024, I kind of ballparked. I tried to be super conservative with my portfolio. When I decided to quit my job, right, I'm like, all right, I'm put my two weeks notice in. I'm just going to live off the market. And I figured, okay, worst case scenario is I have almost, well, I have every single penny of my money in bitcoin or bitcoin stocks. And I thought, okay, if it crashes by 75%, I can still generate enough premium to pay the bills. And we're probably down 80, at least 80% now. And so I'm like, holy crap. I'm like pushing the limits of even what I thought was the worst case scenario. And luckily the premiums are kind of like keeping me afloat. Like, even though the prices are down, the premiums are pretty lucrative. So as an option seller's perspective, this is kind of a mouth watering time to start selling entry positions like cash secured puts and things like that. So there's opportunity everywhere. But it would be hard to just totally just say, oh, there's just silver linings everywhere. And I'm blind to the blood in the streets. It's painful for everyone. So it's hard to ignore.
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Yeah, definitely painful. The price of the underlying security is down 50, 60%. The price of bitcoin is down pretty significantly. But I think in thinking about the math and thinking about the landscape of the instrument itself, I mean, thinking about us, our company, how we're managing a balance sheet, we're acutely aware to the price movement every single day. I mean, we were watching the markets every single day. I'm here in New York, I'm having meetings this entire week. I've had multiple media appearances earlier today and yesterday, talking through this volatile moment and the volatile time and additionally talking with institutional capital that's starting to look at these instruments and start to wrap their head around it. So we are acutely aware of what's going on here. But just a couple of things I wanted to point out about how I think about this ecosystem and my background, which I've talked about 100,000 times. But it's helpful to understand the way I view the world is through the lens of probability and thinking about where we're at today. The price of bitcoin is, I don't know, 2% below 200 week moving average. Historically, that's a very good entry point for the price of bitcoin. Historically, it's been a great moment and opportunity to Enter the asset at or under the 200 week moving average. There have been periods of time where Bitcoin has fallen below the 200 week moving average. And you could look at the data and start to calculate the data and see how the market has reacted. And within those, within that extension, below the 200 week moving average, you could look at the 99th percentile below the 200 week moving average of data points below the 200 week moving average around 2025 to 30%. And that was a result of the 2022 FTX collapse, Celsius block FI interest rates going from 0 to 5, a bad regulatory environment, no ETFs, et cetera. So I would like to think that the landscape today is significantly different than where we were when we've experienced historical drawdowns materially below the 200 week moving average. So the other thing just to point out here is thinking about again my background and how I view the risk is I've managed disasters on insurance balance sheets my entire career. I've managed a Cat 5 hurricane going over Miami and I've structured a volatility tranche to sell to the market to reduce the exposure from a Cat 5 hurricane hitting Miami and then rolling back and through and hitting Louisiana. My entire career has been around disaster management. And looking at this probabilistic scenario, our balance sheet strategies balance sheet is designed to withstand this scenario and this scenario is well within the bounds of probabilistic outcomes. So while the entire market is yelling at the top of their lungs about Saylor's going to go bankrupt and MSTR needs to be sacrificed and all of this stuff, it just couldn't be more wrong. The design of the capital structure, the architecture of the capital and how it sits within the corporation is literally designed to withstand this. This is why the company pivoted to perpetual preferred equity, was to avoid any situation where there were bad terms where they would be forced to sell Bitcoin at a period of time where there was a significant drawdown. Thinking about our balance sheet, we don't have any debt on our balance sheet. That is by design. That architecture is by design because we don't want to be a forced seller at a point in time of volatility. That is why we designed our balance sheet to have long term Bitcoin assets, liquid cash assets and then moderate term STRC on our portfolio because we are looking at managing that into the future. So I think that's something that largely the entire hatred on the Internet is coming from a misunderstanding of the capital structure it's been rather ironic to see a plethora of NFT profile picture accounts that are coming out of the woodworks to talk about how this strategy and strive are. You're not going to survive or they're going to go bankrupt. They just couldn't, they can't wrap their head around that. The capital structure is literally designed to withstand this. So I just want to use that as the, as the lay of the land.
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Yeah. I will say that I think some of the anger is coming from everyone that's new to Bitcoin feels a little bit behind. So there's always this pressure to catch up.
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Right.
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And so there's some kind of statistic where I think it's something along the lines of you have to take half of bitcoin's lifetime and that's the time it should take to 10 extra money. Like you used to be able to do it in one cycle or like half a cycle or something. Right. And so people that got in and it's like, oh, we're still early, but you do have to admit that we're not as early as the OGs. Right. And so there's a little bit of a frustration there. And so when you're behind, you're like, okay, I have to play catch up with a leveraged bitcoin play. Okay, so let me get some strategy. And then you buy some strategy, maybe you FOMO on the way up. And now all of a sudden you're looking at it and you're like, well, I haven't outperformed bitcoin. I was looking at the five year chart side by side and it was like a couple percent underperforming bitcoin. And so there's naturally going to be frustration and disappointment about that because you're trying to play the catch up game and you're like falling farther behind. So it's like a double whammy. But I think the thesis is exactly the same because like what you mentioned, you're calculating the risk. And for me, the thesis was extremely simple. You know when people say it's either going to zero or a million or to infinity, like that's still true. And if you own bitcoin, your floor is whatever your bitcoin stack is. And so that thesis hasn't broken until bitcoin is completely broken. And so in that sense, if you can summon some strength from the depths of your bitcoin diamond hands Hodling foundation or whatever, then this too shall pass, I suppose.
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Right, right, let's. Oh, hold on, hold on. One second here.
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You got doordash, man.
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I've got the room service person at my door. Hold on.
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Yeah, I could keep this going. So, yeah, I mean I think that the, well, and I'll probably have to repeat myself when Jeff comes back. But the real test is like, yeah, you can Cherry Pick the 5 year chart between today and 5 years ago and be disappointed. But there's also what we've been talking about with the institutions needing to season. And so if you're looking at, okay, I have to compare my bitcoin to my strategy position. After four or five years, it almost kind of takes a little bit of a reset because they pivoted from the convertible bond deals to the press. So now it's kind of like you have to wait four to five years after the prefs in order to get a new baseline to see if this, you know, if this strategy actually works or not. And so if, if you're not in it for, you know, an inv. An investor time frame of that long, not from five years ago today, but like a good five years from when the prefs were, were turned out into the market. So you kind of have to reset and reset your calibrations a little bit.
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Expectations, right? Like if you're, if you have low expectations and the final result comes in high, you have this expectation gap, right? That's that. We call that the satisfaction gap. And if your expectations are high and then the result comes in low, your satisfaction gap is, is tiny. That reset of expectations I think is definitely helpful. But let's, let's talk about the math because I think the math is really interesting and the math can't be ignored and the balance sheet can be ignored and I've got a lot of math. So let's, let's jump through it. Let's do what we normally do. Let's talk about the strength of the balance sheet. We'll jump into the Excel.
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All right, let's up.
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Well, let's, let's math it up. I've got a lot here. And so we usually go through this every single week. And I just want to continue to hammer on it because here we are today, June 24, 2026, Bitcoin held 847,000 strategy. They purchased about 500 Bitcoin within the last week. They also added $300 million to the USD reserve. The Bitcoin price as of recording this is $61,000 bounced off of 59,000 MSDR. Price is down around $95. Bitcoin assets held on the balance sheet. They have $51 billion of assets held on the balance sheet. Again, this is a staggering number. $51 billion is a huge number. Lloyds of London, I bring this up a lot. Lloyds of London has been at Capital Management for 300 years and I think they've got about $50 billion of total capital. So they've been doing that for 300 years. Strategy's been at this strategy for now 5 or 6 ish years and have $51 billion of capital. What does the next 5 years look like? What does the next 10 years look like? On top of that $1.4 billion USD reserve that's been growing over the last couple of weeks, there's been a little bit of shareholder revolt at least on X talking about the USD reserve. So they have been expanding that. I think that was a good move. As a result of the movement in the volatility in the underlying STRC instrument. Debt held on balance sheet 6.7 billion. Preferred stock 15.4 billion. The net capital. So if you were to take assets minus the debt, you've got $46 billion of net capital. The annual preferred dividend payment obligation is $1.7 billion. They have 28 years of net capital already on your balance sheet. This is, this is very, this is like getting a mortgage on a 30 year mortgage on a house. But you already have all the money already. You know what I mean? It's, they have 28 years of that coverage already on their balance sheet. With the Bitcoin and the USD reserve, Bitcoin's incredibly liquid. The USD is incredibly liquid. The USD is kind of that first line of defense. And despite the price of bitcoin being down 50%, 55% from all time highs, the capital markets have still been incredibly open to MSTR and allowing them to continue to accumulate capital. So there the health of the balance sheet. And I think this is super important to compare, right? Everybody is trying to compare this to what was going on in 2022 with strategy in November of 2022. In November, strategy held. November of 2022, strategy held 130,000 Bitcoin. Their debt to asset ratio. They had 30% more debt than they had assets on the balance sheet. Now Today they have 10%. They have $6.7 billion of debt relative to $51 billion of capital. This is an incredibly strong balance sheet. The price in order for the Bitcoin assets to be worth less than the debt in 2022 was $21,000. That price today is $7,900. Now, again, the price of bitcoin could go down to $7,900. They're still not going to get liquidated. The convertible bonds are like the bitcoin is unencumbered. They can hold, they could hold onto the bitcoin before they have to make a decision into the future. So the percentage drawdown needed for the assets to be worth less than the liabilities was as of today, is about 87%. So, okay, there are a lot of bears prices. Yes.
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Oh, nice. Yeah.
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Yes.
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That would be. That would be blood in the streets.
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That would be a lot of blood in the streets. Correct. So what I like to do is look at a stress test scenario. Let's look at another 50% drawdown from here. So the price of bitcoin going down to 30,000. What does the balance sheet look like? Well, the balance sheet, at that point in time, you'd have $25 billion of assets. Still is a lot of money. $25 billion is still a lot of money. They have $6.7 billion of debt. The net capital on the balance sheet, they'd have $20 billion of net capital. And so at that point in time, they would have 13 years of dividend coverage held on their balance sheet if bitcoin were to drop another 50% from here. So this is something we continue to look at, that we can continue to monitor. And this is, I think, a helpful framework in understanding the strength, the financial strength of the balance sheet. And again, we saw strategy or Michael Saylor posted his interview at the Atlas Gala in 2022. And then that was right before bitcoin fell a little bit further. And they had the FTX scenario outlined here in column E. And I think one of the reasons he posted that was because they've been through much worse where they're at right now on a relative basis, they've gone through significantly worse times with significantly less capital than where they're at right now. And so let's. I'm gonna stop sharing this and I'm gonna jump into a few other things because I think it's helpful perspective. Okay, so what you can see right here, this is, I've got, I've got a couple pieces of data here. And this is MSTR historical price history relative to Bitcoin, historical price history and the 200 week moving averages associated. So blue line is Bitcoin 200 week moving average. And the faint blue line behind it, you can see is the actual bitcoin price. And the orange line is MSTR's 200 week moving average and the faint orange line behind it is the MSTR price. So a couple of things to point out here. Bitcoin is right at the 200 week moving average. It closed today at $61,000. 200 week moving average is 62,449. But MSTR closed the day at $99 and the 200 week moving average is $157. And a couple things that you could see visually here. Like you can see correlation, right? You could visually see the correlation of the two securities. You could see the amplification, you can see the beta, if you will, of the two instruments. As the price of Bitcoin goes up, MSTR goes up more than it. As the price of Bitcoin goes down, MSTR goes down more than it. You could see it on the rolling averages with the price of Bitcoin being, or the price of MSTR what, 20, 37% below the 200 week moving average. Historically, if a security is below the 200 week moving average, that's been a historically good time to buy the security. Now another thing I wanted to point out, this is sensitivity. So 30 day rolling beta of MSTR to Bitcoin and QQQ. Why is this important? This is important because traders look at this view and people, people are trading MSTR and it's not, it's not just the plebs. There are institutions that are trading MSTR that are very sophisticated, that are using the depth and liquidity of the entire market to hedge Bitcoin in multiple different directions. Market makers are utilizing the instrument in the derivatives market of MSTR to hedge the underlying price of Bitcoin and the moves in Bitcoin. And you can see that through the sensitivity of the underlying MSTR relative to Bitcoin. So this blue line here is the rolling beta to Bitcoin and as you can see, it's above 1 for effectively 95% of the return periods over the history. So what does that show you? That shows you that MSTR is very sensitive to the underlying price of Bitcoin and it's being greater than one, meaning the beta. There's going to be amplified movement, there's going to be amplified movement in the underlying security. I've also included the purple line here, which is a rolling beta to qqq. Because people have said that Bitcoin is an expression of the tech trade and MSTR is an amplified expression of the tech trade. And you can see that here with even exacerbated rolling beta to QQQ. So the latest beta to Bitcoin is 1.64, 1.64. Meaning for every 1% increase in the underlying price of Bitcoin, MSTR is going up 1.6%. And same on the downside, for every 1% down Bitcoin moves, MSTR moves down 1.6%. So it's amplified in both directions and you can expect that. And we're also seeing this in the trading volumes. This is something that we're looking at quite a bit, the trading volumes and the liquidity. Something that's been really interesting in looking at our underlying common stock and strategy mstr. The liquidity profile of those instruments is significantly greater per Bitcoin, per Bitcoin held than the underlying ibit. Okay, so let me say that again. Strive and Strategy are trading more dollar volume per Bitcoin held than ibit. And then most of the other treasury companies are trading a fraction of what the dollar volume traded per Bitcoin held of the underlying ibit. That's, that shows you the depth and liquidity of the instrument and how it can be utilized as a trading tool. All of this sounds really complex, but the goal of this entire podcast is to try to tell you what institutional people are doing and what institutional capital is using these tools, like how they're using these tools. And if it's too sophisticated to you, you can dumb this down and say MSTR is sensitive to Bitcoin. If it goes up, MSTR goes up more. If it goes down, MSTR goes down more. Right. Like you can, you can boil all this down. People have been yelling at me for saying that I'm making this too complicated. I'm telling you what I'm hearing. This is what I'm hearing in the market. This is how computers are trading these instruments. Market makers are hedging using these instruments. And this is a, this is a sophisticated trade. You can choose to be sophisticated and trade this in a sophisticated way, or you could choose to be a, be a passive investor. Okay, so I'm going to start. That's, that's point number one. I've got a bunch here. Let's, let's see, what else do we go into? Okay, Point number two. Point number two is rolling four year compound annual growth rate dashboard. So we've got this on our T North website. This is the Bitcoin compound annual growth rate dashboard. This is something we come back to pretty frequently, just internally and thinking about underwriting Bitcoin to a long term view. When you underwrite Bitcoin to a long term view, it's helpful to take a four year compound annual growth rate perspective. Why? Because bitcoin supply is cut in half every four years. Historically, business cycles have been on four year cycles, election cycles are on four year cycles. And we see historically capital has flowed every four years. Now that's changed and each one's a little bit different. And there are nuances with the macro capital environment. But it's helpful to come back to this data. So what you can see on the screen here, this is the rolling compound annual growth rate with a bitcoin price overlay. So bitcoin price is up here at the top and this other yellow line, I'm sorry they're both yellow, but this other yellow line is showing the four year compound annual growth rate and how this has changed over time. So as of today, and this is showing June 14th, but it's, it's more recent than that. As of today, the rolling four year compound annual growth rate, rolling compound annual growth rate is, is around 25 to 30%. And what that's doing is that's taking today's price, today's price of bitcoin relative to the Bitcoin price four years ago. So we're talking about
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what are we.
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June 2022, the price of Bitcoin was around $21,000. 26, 22 20ish. 20ish thousand dollars. So that's our reference point. And as we go throughout time, that reference point will actually go a little bit lower because we know that In November of 22, price of Bitcoin fell down into the 16,000 range. So that relative historical underwriting period, we're still seeing the four year compound annual growth rate math play out. Okay, so I'm a math nerd. What does this look like on a math perspective? Here's the four year compound annual growth rate percentile distribution. So these are the percentiles of historical rolling compound annual growth rate outcomes. The 99th.6 percentile on the upside is 861%. And the 99.6 percentile on the downside is 9.1%. So every single four year return period of holding bitcoin is positive. Every single one. And as of today, let's just say it's around 25 to 35% four year compound annual growth rate period, we're within a 10 to 25th percentile of the distribution. And this is including all data points going back to like 2014. So even if you remove some of the earlier days, we're probably around 50th percentile of four year outcomes. And I think this, this what we're experiencing today is well within a probabilistic framework looking at it in multiple different ways, whether it's four year compound annual growth rate period, looking at price relative to 200 week moving average. The balance sheets were designed to withstand this. Let's look at historical drawdowns. So I've got a perspective of historical drawdowns going from peak to matching. Jump in there.
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A
Can you, well, can you check the chats real quick? I'm getting a message saying refresh the tab. Needed to refresh before going live and refresh my screen. You would know what that means.
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B
No Windows screen. Everything's good. There we go.
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A
All right. Yeah, there's some other charts that I really liked and they fit kind of in that model with the SMA that you mentioned. There's one that Smithson with likes to use and it's like a quantile regression, I think of the power law and I think the band that we're in right now is like, it's very, it indicates that it's a pretty good buy signal but also we don't spend very much time here. He actually calculates how much time do you historically spend in each band. So that's a pretty good one.
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B
Time is important. Time is super important when you're thinking about managing a balance sheet or managing your life. I'm managing a balance sheet with our company. I'm also managing my personal balance sheet. You are managing your personal balance sheet. You're generating yield off your assets held. Right. You got to think about time and duration and your risk profile over those periods of time.
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A
I think the other one is the cost of production power law and I think we're getting close to the bottom of that one. I think a lot of the estimates are around 50k which would really be pushing it on deep value territory. I, I, I hate to say it, but I think there's a, a reasonable chance we could get there in the next couple of months. But there's a lot of macro, there's a lot of factors that could go into that. There's not just uncertainty in the market, there's uncertainty with, there's like another 60 days left on the memorandum of understanding for peace in the Middle east, stuff like that. So I think there's more uncertainty in the market than just our options expiration contracts. You know what I mean? There's more going on in the world than what we are hanging our hats
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B
on for the, there's so much, I mean the Largest capital markets events in history have happened this year. The largest IPO in history, SpaceX, just happened this year. $80 billion of capital. That means $80 billion of liquidity needs to come into the market from somewhere. Where does $80 billion come from? It's not held in cash, I'll tell you that. It comes from everywhere else. It's coming from everywhere. And then you're thinking about people that are holding capital for anthropic ipo OpenAI ipo. People are throwing capital left and right at memory stocks. You see, Nvidia just did a $25 billion bond. Google raised something like $80 billion. This moment in time in capital markets history is so unique. Prior to 2026, all of these companies that are raising a ton of capital right now, all of them have bought back stock now. They're doing the complete opposite. They're doing the complete opposite and they're raising money to go build the future. They could have been hoarding capital in the past to go build the future, but no, they're going to go raise capital to go build the future. They're doing that via debt, they're doing that via equity, they're doing it via several different ways. And that rings through the entire capital markets because that capital has to come from different places. The capital is coming from somewhere. A couple other things that I do find interesting. Gold seems to have turned over pretty significantly. The price of bitcoin relative to gold has been going up since February. Seemed like, seems like it, yeah. So maybe we'll jump into that. I've got so much, so much data, so many things we're looking at here. Let's do, let's do this. This is that, this is bitcoin priced in gold relative to the last year. So let's bring that up. So yeah, here's, here's bitcoin relative to gold. And the price of gold as of today, I think it broke down into the 3,000 territory. So the price of gold is down or the valuation of the entire gold market is down $9 trillion since February. Say that again. It's down $9 trillion since February. That's seven and a half entire bitcoins, all of them. Seven and a half of them since February. That is an enormous capital outflow. But capital was being generated on the way up. There were people that were generating capital as the price of gold was going up. That capital is getting, is exiting and going to other places. This is like capital rotation. We see this over time. So you look at the price of bitcoin relative to gold, there have actually been a couple green candles. It seems like we have bottomed here in February and it seems to be turning up. So while Peter Schiff is making a bunch of noise about strategy not working, the price of gold has lost $9 trillion in four months. So just an interesting data point to keep out there.
- [34:37]
A
Yeah, the only thing that ticks me off when I'm listening to my libertarian podcast is when I have to hear the ad reads for yield on metals. I'm like, I don't want to hear about your shiny rocks, dude. Get with the digital gold.
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B
You got to get with the digital gold. You know, I think he's a, he's a closet bitcoiner. I think his wife owns bitcoin.
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A
Yeah, guarantee.
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B
But so I, I do want to hop back soleil into you brought up time. I think time and duration is important. Let's think about that and what you can see on the screen here. This is looking at historical drawdowns. Assuming the top the peak was we'll assume that's a 100%. And what is the duration of the drawdown for it to get back to the peak? So what you'll see here on the red line, that's 2014. The purple line is 2018 and the blue line is 2022. A couple visual things that pop out right away is the duration of bear markets looks to be shrinking. The red one in 2014 was over a thousand days. The purple one in 2018 was slightly over a thousand days. The blue one in 2022 was slightly over 800 days. And each one appears to be getting shorter. So why is that important? If you're thinking about managing a balance sheet with duration liabilities, you need to think about what is time horizon, what is my perspective on time horizon? What is my probabilistic distribution of time horizon? And that's why our company holds cash portion on our balance sheet. That's why strategy holds cash on their balance sheet. Because there may be a period of time where you need to draw on cash in order to pay the dividends into the future while you're buying yourself time to wait out the capital markets. Couple unique things here and just interesting data points for people to think about. Many of the ways that we are analyzing a balance sheet and our downside risk scenarios, we think about what is this downside scenario if we had zero access to the capital markets. So we assume and strategy assumes this as well. What if I had zero access to the capital markets and what can my balance sheet withstand if I had zero access to capital markets.
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A
Well,
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B
that's good in theory. I think it's really good in practice. But what have we seen in reality? In reality, our company strive. We have raised roughly in the last 45 days. We have raised roughly $350 million of capital in the last 45 days. That's with the price of bitcoin being down around 50%. That concept of managing your balance sheet with an assumption of having no access to capital markets is a conservative view. You can think of it as a conservative view to managing that portfolio into the future. Again, thinking about how long do you want to manage that Strategy? They've got $1.4 billion of cash on their balance sheet now, which I think is around. What is that around a year? Is that around a year of dividend coverage? Maybe 10, 11 months, something like that. Our balance sheet, we've got about 18 months of coverage.
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A
Didn't you all.
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B
Okay.
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A
Buy more bitcoin than them one week?
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B
We did last week. Last week it was good. But they also did raise $300 million on top of the trustee reserve. So their capital markets activities were, were significantly greater than ours.
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A
You can't puff up too much because then they'd be like, well, we could
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B
have, well, yeah, we could have bought another $300 million of Bitcoin. Okay. But before we get into digital credit volatility, one more thing that I wanted to put out here is this graph of just what's going on in the market. And I'm here in New York, I'm having several conversations with people. People are watching this same stuff and it's interesting to share.
- [39:08]
A
Boom. Okay.
- [39:11]
B
Can you see that? So Galaxy Research posted this, which I think is a really unique perspective. One thing that we've talked about here recently over the last 12ish months has been this concept of the IPO moment for Bitcoin and the IPO moment. What happens in an IPO? IPO is the first time that initial investors get access to public liquid markets where they can sell shares into the public and actually get that capital back. They get to capitalize and solidify, crystallize gains that they've got since holding this instrument for a very long time. I truly do buy into this concept. And why do I buy into this concept? If you've been a Bitcoin OG and you've been holding this instrument for a decade, 12 years since the bitcoin's been in the hundreds of dollars, this is the first time that there's been large scale institutional liquidity and Architecture to scale out of $100 million, $500 million billion dollar position prior to this, when Bitcoin was at all time high in 2021 at $69,000, there was a fraction of the liquidity in the market that we see today. Today the price of Bitcoin Is at the 200 week moving average, but it's still trading 25 to $50 billion of liquidity a day. On top of that you have institutions like Strategy, like Strive, like other Bitcoin, treasury companies and ETFs that are buying Bitcoin consistently. Now there's different periods of time where like the markets are, the markets are good and markets are bad. But what this graph is showing is that over the last eight months, this blue bar down here on the bottom, this is showing 5 year plus dormant Bitcoin that's been distributed. So that's Bitcoin 5 year plus dormant Bitcoin that's been sold on the market. And The Purple is ETF's net absorption or, or outflow. And then the red is MSTR purchased. Okay, so what, what this is showing and this black line is showing the cumulative. So it's the cumulative net result of each one of these bars summed together. In the last eight months there have been net roughly 120,000 bitcoin that have been sold over and above in excess of what MSTR has purchased and what the ETFs have purchased from only Bitcoin holders greater than five years old.
- [42:01]
A
Really
- [42:04]
B
what you can see here, this is the IPO moment. These are people that have held Bitcoin for more than five years, have consistently been dripping Bitcoin out into the market and capitalizing on that opportunity to access the liquid market. Why are they doing that? Because this is the biggest year for capital markets opportunity in the entire world. Because they can't. They're going to go participate in the SpaceX IPO. That was a rational move. If anybody sold bitcoin to go Participate in the SpaceX IPO, there was 100 to 200 billion dollars that was minted in three days. In the first three days of trading on SpaceX.
- [42:50]
A
Yeah.
- [42:51]
B
If you had the opportunity to participate in that at scale, you did it, right? That is a rational move. That is a rational decision. So we've just, we've seen this, right? This is what's happened. We are experiencing it, we are living it in real time. I think the one silver lining here is once these five year plus dormant Bitcoin wallets have sold, you can only sell once Once it moves hands, it's moved hands and then it's onto somebody else. And I think there's a really high likelihood that the distribution of the bitcoin has gone significantly wider than the original holders as well. So it might just been 25 or 50 people that have $5 billion of Bitcoin and that's now getting spread across 5,000 people, 25,000 people, 50,000 people. We are living through it right now. The data shows it. You can look at this data on chain.
- [43:58]
A
Yeah, I remember I used to watch the order book sometimes like 2019, if somebody put a 500 bitcoin or 1000 bitcoin sell wall in there, you just knew the price was going to be stuck, it wasn't going anywhere. But now you could probably blast through amounts even that high with the liquidity that we have today.
- [44:20]
B
So it's crazy, man. You can buy, you can buy $100 million in an hour. You could sell $100 million an hour. I think Parker actually posted this. I think he went to an OTC desk and he got quoted a $2 billion sale. If I wanted to go sell $2 billion of Bitcoin right now, how much could you, like, what could you clear it for? And I think they quoted a 3% discount on a $2 billion sale, which is crazy, right? You want to go move $2 billion and you can do it at a 3% discount. That, that is a wild amount of liquidity. That means somebody is either stepping up in between to take on the risk of holding the instrument for a short period of time, they're hedging it. You've got institutions that are utilizing it. It's ibit, it's blackrock, it's Citadel, it's Jane Street. It's everybody that's operating in and around the liquid ecosystem and that's. That exists. This is real. This is very real.
- [45:20]
A
Yeah. And you can't. I mean, some people were saying, you know, if you want to blame somebody, blame the OGs that are finally selling. But, you know, if you get a chance to do something cool, you've been sitting on a stack of Bitcoin for over 10 years and you got something cool you can do with it, like try to see if you can get enough SpaceX to get the first ride to Mars or something. Go ahead. Right on.
- [45:42]
B
Yeah, right on. Okay, maybe we shift into, maybe shift into digital credit, because that has been a hot topic of the NFT profiles are, are coming out of the woodworks to yell about it. So let's let's jump into it. You cool with that?
- [45:59]
A
Yeah, let's go for it.
- [46:00]
B
Okay. Digital credit boom. Let's share my screen. Okay, so this. This is the price of Bitcoin over time. You can see that in the candlestick chart here. And the green bar is the price of STRC, and the blue bar is the price of SATA. So the price of STRC, I think, closed the day somewhere around 81, 82. Significant volatility to the downside. And then the price of SATA closed somewhere around low 90s. Now, the reason I point out this chart is because a bunch of people are saying, it's not working. It's not working. It's all. It's all super volatile. Well, this is the price performance since inception. And you can look at the underlying Bitcoin. Which one is more volatile, the underlying Bitcoin or the preferred equities? Yeah, right. What's the point of it? In this chart, Soleil also excludes the dividends that have been paid over that period of time. So SEDA, our instrument sitting there at 0.64%. It's actually more positive than that because we paid out the dividends over time. So if you're looking at a total return over that period of time, that relative performance performance, same with strc, is also. It looks different. So just pointing that out, the concept here. These are credit instruments. Why do we call it digital credit? These are. These are hybrid equities. They are hybrid equities that are paying a yield. What is the yield a function of. The yield is a function of the credit risk of the underlying issuer. If you are analyzing this and you have more than two brain cells, you look at the balance sheet, and you're underwriting the issuer's ability to pay that dividend into the future. That is called credit risk. You are underwriting the credit risk. That's very similar. If you were to go underwrite a debt instrument, what do you do? You go look at the balance sheet, you go look at the vehicle, you go look at the company's ability to pay a dividend into the future. And that concept, despite it being equity, that concept of analyzing the credit risk is the same. Now, your math might be a little bit different, which is why we talk about this stuff all the time, because the math is unique. The math is novel. It's. It's interesting. The market market is finding this interesting. So credit, credit risk, volatility, the volatility profile, These instruments, I think, have been more volatile than strategy anticipated, has been slightly More volatile than we anticipated. We thought these instruments were going to have some volatility and that's why we talk about them as being moderate duration capital instruments. I think that can continue to evolve. There has been a lot of frustration with the communication and the marketing around it. I think a moderate duration capital instrument is very tactical. It's very reasonable when you're thinking about managing capital into the future. And the credit risk profile and the liquidity profile. A couple interesting takeaways. So over the last week, last Thursday, we saw significant volatility in strc. Now the reaction from the broader market was, oh my gosh, all of these leveraged degens are looping this and they're all getting liquidated and this is terrible for the bitcoin ecosystem and this is going to cause bitcoin to crash and all this stuff. Okay, so we went into the weekend and we were calling people, having conversations, trying to understand. We're doing a postmortem analysis of the market and surprisingly what we found is there was weakness in the security. So there was somebody that was selling the security in scale in the traditional market. None of this is happening on chain. This wasn't a tokenized version. It was happening in the traditional market. There was weakness in the security. And what appears to be a leverage liquidation event occurred in the traditional financial markets, not the defi tokenized leveraged loop markets, which is the complete opposite of what everybody anticipated. So you've been hearing people.
- [50:27]
A
That was my first suspicion as well. It was like, okay, everybody who was double, triple leveraged or whatever got flushed out of their positions.
- [50:38]
B
No, surprisingly there hasn't and there wasn't tremendous leverage in any of those ecosystems. I don't think Saturn liquidated a single share of strc. I think there was a small, small, there was small outflows of Apex, I think to the tune of $3 million, which is like 1% of the daily trading volume. And then there was, and I don't think there was anything in Pendle. Very muted, I guess is what I'm saying. There's a very muted response in the DEFI ecosystem. And what it appears to be is that there was leverage in the traditional financial ecosystem. And that might have been people that were borrowing on margin and they were looping it in the tradify system. People that were potentially using the instrument as cash secured put selling. So they were selling puts on more volatile instruments and using the underlying as their security. And if you're using the underlying as the security of your secured put, as you can imagine if you lose 10% on that instrument, you probably get a little concerned. You're going to get put on the volatility and the underlying. So we've seen this is anecdotal and it's really difficult to tease out exactly where any of this has come from. But the biggest surprise was it hasn't been from the DEFI ecosystem. It was very likely from the TRADFI ecosystem. And a function of the underlying weakness in somebody that was selling the security to begin with. Now why did somebody sell the security to begin with? That could have been because of the usage of the cash to pay the convertible debt. It could have been from the underlying price in bitcoin going from 84,000 to 60,000. It could have been in management or the concern in the instrument or a forward looking view. It could have been they were selling the instrument in order to get access to the ipo. It could be that people are shorting the instrument to make a levered bet in some other direction. There are so many ways that this could have occurred and it was probably some combination of all of them at the same time. Another interesting takeaway is it seems like, and we've heard this anecdotally in the market as well, the price of seda. Looking at SEDA relative to Stretch, as the price of Stretch drew down, the price of SEDA drew down with it as well. So it's like as the effective yield flipped, the effective yield of seda, there were people that were selling SEDA and buying Stretch because they were identifying that the effective yield is about the same. And I have a capital appreciation opportunity as the instrument comes back to Paris. So there's this like, it's almost as if the liquidity pool of SATA itself is, is a, is a ballast or like a bolster for strc. And it, I would think it will likely try to help drag it back up. Like as there are multiple securities in the ecosystem that, that could help drag it back up. And I think these market, these instruments will probably move pretty similarly in tandem if, if there's any computers that are arbitraging like a true credit spread between the two. Yeah, that's interesting.
- [54:05]
A
I hadn't thought about that one because once Stretch dips far enough, your effective yields become equal.
- [54:12]
B
The effective yields become equal. Yeah.
- [54:15]
A
Note about cash secured put selling, that doesn't surprise me because I do that as well. But when I'm trying to just capture yield and I avoid taking possession of those shares. But it sounds like, and I would kind of assume that a Lot of the retail that own prefs are probably option sellers within the bitcoin treasury company space as well. So they're probably selling the cash secured puts on the publicly traded bitcoin treasury companies. I'm guessing there's a fair amount of overlap there. Right.
- [54:50]
B
That's correlation. So you're talking about correlation risk. Right?
- [54:54]
A
Yeah. And, but that's, that also says to me that they're viewing the current equity prices as favorable entries. If they're willing to go ahead and unload their pref to pay to exercise and take possession of the hundred shares, then they like those shares at this price. If they're willing to go long and, and take the possession. So it could go either way in that sense. I usually just try to roll a little bit if I don't want to take the position of the shares. But if I want them, then yeah, I'll just make that trade.
- [55:29]
B
I think that's happening at scale and we've seen it. We've seen people make this trade literally on X. I've heard anecdotally other people making this trade as well. Not just in small personal accounts, institutional accounts as well.
- [55:47]
A
We don't have to call them small accounts.
- [55:48]
B
Yeah, they're just personal accounts. You're right. They're PAs. They're just PAs. Yeah.
- [55:54]
A
Yeah.
- [55:56]
B
Another fascinating thing that I've just been watching is short interest. SATA, for example, has $58 million of short interest on it. That's interesting. That is me like, like why, why does that exist? STRC has $200 million of short interest on it. So people are somebody willing to pay
- [56:26]
A
that dividend every single day to hold SATA or to short seda.
- [56:31]
B
Yes, yes.
- [56:33]
A
So they're expecting to make some change every day. Doing something. Doing something with that money.
- [56:38]
B
Doing something. Right. So a couple things are, are fascinating to me about this one. There's a liquidity pool that's interesting enough that you can draw from. So people, anybody shorting this like in an institutional scale is almost viewing like shorting these stocks as like an atm.
- [56:58]
A
Right.
- [56:59]
B
Like I could go get capital, could go get capital and I could go deploy it somewhere else and that that can be deployed. People could be shorting SEDA and buying stretch, vice versa.
- [57:14]
A
Yeah.
- [57:15]
B
And they could be because if you took the view that the credit spread between the two needs to compress and it gets too wide in any one direction, you may take a directional bet on one of the instruments relative to the other instrument or move it in the other direction. It's just surprising. To me that there's $58 million of short interest on SEDA and about $200 million of short interest on Stretch. And again, I think this could be speculation, right? It could be several different things, several different reasons for people doing this. But if you're a market maker and you wanted to take a directional bet against Bitcoin, or you wanted to try to move Bitcoin in a certain direction, or shake confidence or hedge or do anything, you look for every possible location to do it. So if you wanted to express a short Bitcoin trade and you wanted to do it in scale, or you wanted to do it in multiple different ways and hedge that short Bitcoin position, you do it anywhere there's liquidity to do so. And one thing that's been fascinating about these credit instruments is there's liquidity there. So you can actually go and short that instrument. You could do it in the credit instrument, you could do it on the underlying Bitcoin, you could do it in ibit, you could do it in the derivatives market, you could do it in the options market. And all of that plays out into how these instruments are trading. So all of this to say, these instruments are so young, they are so novel. There's never really been anything that's existed like it before. It is a credit instrument in an equity wrapper with credit risk associated with it and correlated to the underlying Bitcoin. And the market is going to build on top of these things. Seita's nine months old. We've only paid five daily dividends so far. We have the capital to pay 12 plus years of daily dividends as of today. So that's assuming the price of Bitcoin doesn't move at all. If it goes up at all, that number explodes. And we are going to continue paying daily dividends and we're going to continue coming here to New York, going to different capital markets, Miami, Dallas, Boston, and talking with people about building on top of these instruments. And we're just getting started. Obviously, there's some regulatory certainty that needs to kind of clear out of the way with Clarity Act. And I think if Clarity act gets through, there's also some support on adjusting and altering Basel Risk frameworks. As there's more regulatory clarity, there's more, I guess, clarity, to use the word again, there's more clarity for a regulator to take a structured, to make a structured position for a risk framework for Bitcoin and for Basel right now, the Basel risk framework right now, it's literally as low as it can Go, it can't go lower. The Basel 3 risk framework is 1250% risk weighting for banks and institutions. So basically those companies cannot hold Bitcoin on their balance sheet because they don't have any ability to leverage against it. If that changes at all, if it improves at all, the incentive structure to hold Bitcoin improves. That improves any bank's willingness to custody it and hold it and think about how to, how to leverage it.
- [61:15]
A
So that's good news. But that is, that's libertarian in me. Every time I hear the name of a government bill, I just assume it means the opposite. So it's the unclarity act, probably for me.
- [61:27]
B
Probably.
- [61:27]
A
I just assume that there's some, you know, something going on there. But sticking with the, the market manipulation theme, I was wondering, because I know I don't personally use stops. Like if, and if I did, I would just keep it in my head, maybe I'd set an alert. I just have this paranoid feeling that they know what your stops are and they know, they do what level, you know what I mean? To short you, you know, to, to, to short it to. They, they know the target they have to short it to in order to get your stops to kick in, which panics it even lower. And then they can just buy in cheaper after the panic, you know, sell off. So that's my conspiracy theory. And so I, I mean, not financial advice, of course, but I guess even if I was going to use stops, I would set an alert and then I would manually make those trades instead of just, okay, let me go ahead and set stop loss, you know, good for 90 days. Like, no, I don't want them to know. I'll keep my stop in my head.
- [62:38]
B
You don't want the data out there?
- [62:39]
A
Yeah, no, I don't want, I don't want them to know when I'm going to get flushed out of that position. So. Right. Yeah, I'm sure they're watching. I'm sure they're in the room with me right now.
- [62:47]
B
The house always wins. Crazy actually. So I was, I went to the New York Stock Exchange today. I had, I had some media with FinTech, FinTech TV, which was pretty interesting. But walking into the New York Stock Exchange floor, so fascinating. You walk in and there's just computer screens everywhere. There's like, there's remnants of the old New York Stock Exchange, right. Of people in there, like trading papers and stuff. But silly, I shit you not, there's guys with like a single computer screen that was like a 50 inch TV, right. And he's got like 12 Bloomberg screens up at the same time. And just sitting there like it was. It was totally a meme is just sitting there, like looking at all of this, these numbers that are just kind of like floating. Floating across the screen. And that's. Everybody that's there is. Is doing that. This is all like computers that are communicating to each other. There's like, hardly any people. It's like the floor is relatively quiet. There's screens with numbers, you know, fluttering across the board and stuff, but there's just hardly any people that are there. And a couple people that I did see there, they were like yelling like, no, we're not doing that. Or like, get off the phone. Like, yeah. Oh, it was. I mean, it was tumultuous day. I think everything was very red in the entire market today. So, you know, a pretty. A pretty big day everywhere.
- [64:15]
A
So it sounded like an argument at Waffle House at 2 in the morning.
- [64:18]
B
Yes. Skirmishes going around. Yes.
- [64:21]
A
I talked to a guy last night at the. There was a bit devs meetup, interestingly enough. Okay. So I thought it was a joke. I thought someone was trolling. But there's a bit devs meetup and it was in Tysons, Virginia. And they're like, oh, it's at Strategy Inc. And I was like, for real? And so apparently they sponsored it, but the link to the thing said pizza is going to be provided by Strategy. And I thought they were trolling from the pizza day thing where people were mad that he bought it with cash instead of bitcoin. And but then it turned out that they really legit had pizza. And. And like, the freaking. It was. We. We had it right in strategies break room for the employees. Yeah, dude, it was freaking cool up there.
- [65:11]
B
Yeah, interesting.
- [65:12]
A
And there was freaking beer on tap. And the guy who was hosting the event, I mean, like, legit. They didn't bring taps of beer. Like, there's beer on tap in there. And the guy was like, oh, yeah, Fong Li made that happen. And I was like, all right, we're gonna have to change his name from Fongly to Beer Bong Lee. But it must be a cool dude to work for. But yeah, it was a fun time. It was a bit devs meeting. I've never been to one of those. I'm not a dev, but there's some cool bitcoiners around everywhere. It's fun to meet these people.
- [65:46]
B
It's great to meet the people in person. 100%. I mean, what was the sentiment there? Right, like BitDevs1, you're in the strategy HQ, so you probably have to be a little bit tolerant of strategy. I've gone to a couple of bit devs meetings and I've been like the outsider that some people hate me and some people like me and it's a bit awkward.
- [66:10]
A
I was nervous, I was nervous, but I went there specifically. I had a friend in town so I had to go meet him as well. But I'm in a group chat with some bitcoin veterans. They have an annual conference as well in Nashville. And so one guy was like, hey, going to the bit devs. Anybody going to be there? And I was like, I'll drive down. It was like an hour and a half and I'm thinking like, okay, it's in strategy. But I'm like, bit devs like this is going to be hardcore OGs and am I going to get thrown out for saying I'm in bitcoin treasuries or whatever? The two guys I ended up talking to, we legit talked about the stock market the whole freaking time. It was crazy. The one guy actually just got his financial license. He was like studying and testing for his financial advisor's license. And and then the other guy, he told me a story which is what reminded me of it. He said when the stock exchange back in the day, like everyone had color coordinated jackets and even like occasionally there would be some retail people on the floor and they had their own retail color jacket so you would know who were the official people or who was in which camp or whatever. And so I heard a couple of cool stories like that. And it was kind of crazy because I wasn't sure if bitcoin treasury company was going to be mud with these super toxic Maxis or whatever, but everybody was cool and all kinds of different strategies and people were trading around these products. So I was really surprised that it was so suit coiner tolerant, I guess.
- [67:50]
B
Well, yeah, that's a good, I think a good thing in my opinion. You think about why bitcoin exists and how it exists. It exists because the stock market exists. It exists because there is electronic trading of securities in the market. And that created an innovation of 24,7 trading that hadn't really existed before. And because of that, that has now spawned so much innovation in the capital markets. It's just so inherently tied to the equities market. And I think that's something that a lot of I guess traditional bitcoiners get a little bit frustrated about. But it's just the reality. I mean, there's hundreds of trillions of dollars of capital that sits in the New York Stock Exchange or the nasdaq. And those companies like aren't going away. They're going to be part of our future and they're going to be systemically correlated and tied and there's going to be liquidity pools and profiles in between. All of these is the market makers are not going away. The computers are not going away. Trading is going to get faster insights and risk analysis is going to get faster. That is just the trajectory that we're going. This, this system is going to exist whether you like it or not.
- [69:15]
A
Yeah. And this could be cope for me justifying my own existence and participation in the whole thing. But the way I think about it is let's just assume that we get hyper bitcoinization at some point in the future. I want to live long enough to see the kind of world that exists when that happens. But do you imagine when that happens that there are no companies? Right. A company exist and what will they have? They'll all have Bitcoin. Right. And do you imagine that people won't want to invest in companies? And do you imagine that there won't be a functioning stock market in hyper bitcoinization? Is that going to just magically vaporize and not exist anymore?
- [70:00]
B
It's going to merge. It's going to merge.
- [70:04]
A
Not everything with, you know, how much potential, you know, market manipulation or, you know, maybe I don't like the way that the SEC or the government manages whatever. But you know, even if I get my way with my little libertarian leanings, like private security is still just a police force that the locals pay for. You know what I mean? So all of the, and it's not exactly menarchy, but you know, all of the structures that we have today will exist. Just hopefully there will be less fiat control in, inside them. You know what I mean? So. Right, yeah, maybe that's just a justification on my part, but that's, that's the way that I see the future. And I don't know if that's 50 years from now and I'll still be like clinging on to last, last few crumbs of my, of my lifespan or whether it's 100 years and maybe our great grandkids or something will be enjoying it.
- [70:59]
B
Well, I think you bring up a really good point here. It's like, do you expect one day to just go to sleep and you wake up the next day and it's like hybrid bitcoinization, and everything's priced in bitcoin the next day.
- [71:11]
A
Well, and if it did, 99% of the world doesn't have any, so it would purge.
- [71:16]
B
It would just be like chaos, guns, whiskey.
- [71:21]
A
You'd be begging each other to come back for a few weeks.
- [71:24]
B
Yes, you would. You would. And so what is it? What is a orderly transition look like? Yeah, it's.
- [71:36]
A
There's a bunch of maxis that get mad at us because they're like, oh, you should be onboarding people to bitcoin. And I'm like, I mean, what happened to you get bitcoin at the price you deserve? You know what I mean? Once you do the work, once you listen to 25 hours of sailor on what is Money? Podcast, and once you, you know, go and your own conviction.
- [71:54]
B
That's a good point.
- [71:55]
A
Then. Then you deserve bitcoin at whatever price that is. But it's almost kind of like, I know we say, we romanticize, oh, this person orange pilled me, or I orange helped orange pill this person. But you really have to do the work yourself. And so I think it's a little bit too much to expect. And like, I know we want to make it easier for the next generation or the next set of bitcoiners to come in, but if you make it easy for them, do they really develop the diamond hands and the conviction? Right. So I'm not saying we have to, like, make it harder for them on purpose, but, like, I don't know if there's any shortcuts really, to, to developing conviction.
- [72:40]
B
I completely agree. And it just, it takes time and conversations. I, I, I talk about digital credit with people, but in that same conversation, if they're willing and open to talk about bitcoin, I talk about bitcoin. It's in the same conversation. It's not even only, look at this. It's like, how is this possible? Well, it's possible because we have a bitcoin balance sheet. And it's like if they ask another question, we start talking about bitcoin. It's actually a great conversation starter, and it's been far more easy to talk about than just straight to bitcoin. Actually, I'm going to use the term wasted. I've wasted thousands of hours trying to talk to people about bitcoin, to people coming to me. The government's going to ban it. Electricity is going to get shut down. It has no intrinsic value. I can't touch it. It's too volatile. You know, every single lay of the land. And I've done that with large scale institutional capital. I've literally gotten laughed out of rooms in Bermuda and London and New York by insurance companies that managed hundreds of millions of dollars of capital. And I was the crazy guy. And now, now here, the. I'm also seen as the crazy guy. And literally on my ex, people are calling me a scammer. It's like, no, I just. I speak both languages. Like, I speak tradfi and I speak bitcoin. And they've kind of bridged the gap, and now both sides kind of are frustrated.
- [74:13]
A
Yeah, but that's when. When the. When the price is like this. Everyone just hates everyone. So it's.
- [74:19]
B
Right,
- [74:21]
A
there's a little bit of scapegoating.
- [74:22]
B
It's your fault. It's your fault that the price of bitcoin is down. No, it's your fault the price of bitcoin is down. It's like, no, you shouldn't exist. Yeah, it's like, you shouldn't exist because you're not a true puritan bitcoin bitcoiner. It was like, well, I. I've probably bought more Bitcoin than 90, 99% of people, like, through our company. We've. We've actually deployed quite a bit of capital into the bitcoin network and buying into this thing long term. And we're underwriting into the future. One other just.
- [74:57]
A
Oh, yeah, go ahead. I was going to say, sometimes when I go in the. In the sauna, I'll let like 5 to 10 seconds of uncomfortable silence settle. And then I go, are we talking about football or bitcoin? And, you know, let them decide, you know, what the. What the topic. Yeah, usually it's football, but occasionally I get a bite. You know, it's like, I'll talk about bitcoin or somebody will be like, oh, yeah, I'm into bitcoin. I made 50 grand on XRP. And I'm like, well, that's not what I meant. Whatever. We talk about that too, I guess. Then I try to weasel my way into the bitcoin angle. But you can't tell somebody anything after they make money on a shitcoin. They got to figure it out for themselves. They got to deal with the rug pull, and they learn. Then they'll be back.
- [75:44]
B
So I do want to talk one more thing before we talk about bip110 and we start to think about filters and stuff. So I'm here in New York. I'm here. I've got several different meetings. I've Got media, I've got meetings across the next couple days. And then Friday there's bitcoin event and just a couple anecdotes to share. I had a meeting this morning and this is a capital manager, a multi strat hedge fund. And we're talking about what we're doing and they're kind of familiar with the space. They said this verbatim. So when people say this doesn't exist, I call them liars. Because this is verbatim what he said. And I wrote this down. We take directional bets against Bitcoin and we buy other assets to get exposure to Bitcoin. So that's literally what he said.
- [76:40]
A
To get short and access to Bitcoin.
- [76:43]
B
No. So they take directional bets, event driven directional bets in Bitcoin. Okay, and they buy exposure to Bitcoin. Yes, but they don't buy the Bitcoin itself. They can't.
- [76:57]
A
Okay, they can't.
- [76:59]
B
They can't. They can't. They can't buy the Bitcoin itself. Why? Because they don't want to deal with like the custody solution and like how it's held and having it on an exchange and like doing that whole thing. So they do it via securities. This, like that concept didn't exist before 2020 with MSTR. Right now it exists in several different expressions. You can do it in IBIT, you could do it in Options Market on IBIT, you could do it In MSTR, you could do it in SSD, you could do it in any of the 2x or 3x leveraged ETFs on this. You could do it in BITA, you could do it in several different expressions. And this company literally said, we cannot do it with Bitcoin. And this is why it exists. This company manages. What is this, 10 figures of capital.
- [77:58]
A
Wow. Okay.
- [78:00]
B
So it told me to my face, we cannot buy Bitcoin. We get directional exposure via securities. Yeah, it's just, that's just the fact, like this is one meeting sitting across from one person on like floor 30 of a single high rise here in New York. How many other trading firms are here that have the exact same mandates? Thousands. Thousands. There are ten. I was doing some analysis on this. I think this number is right, but caveat that it might not be right. I think there are roughly, based on my analysis with perplexity, there's roughly 10 million finance professionals in the United States. 10 million. Okay. I think probably at least a million of them work in New York. Probably more like 3 or 4 million of them work in New York. So you think about all of the high rises here, all of the people that are managing capital. This is the capital markets hub of the planet. Meanwhile, I go hop on a spaces at midnight last night and there's 200 people on there talking past each other about how the securities are bad for the bitcoin market. It was like, okay, well you're 200 people. There's 200 people in this 50 yard radius of where I'm standing right now. And there's millions of people here that literally manage capital and act like they access bitcoin exposure through securities. The meeting that we had was with a company that likes volatility. We also had several meetings with companies that don't like the volatility as much and they're more interested in low volatility securities. These conversations just need to happen. That takes time. So that's perspective. The other perspective is building on top of digital credit in the traditional financial ecosystem takes time. And we're talking about the structured product idea where I'm talking about making a wrapped senior digital credit instrument that's got a term on it with an equity tranche that is called capital formation. And that takes six to 12 months at least to get it off the ground. Assuming that you have investors and capital lined up and regulatory environment squared away in your jurisdiction and your distribution, that takes six to 12 months at least to get it off the ground. So that stuff is moving. But if you're going to create systemic, large, scalable institutional capital vehicles that's not made overnight, a lot of people on X think that stuff is built overnight. It takes just so much time. There's just legal capital structure and capital formation that needs to take place and that's in the process. I've spoken to several people. People are moving forward in this direction and figuring out how to build on top of this stuff. Doing very similar things to what's happening in DeFi, but it's happening in Tradfi. And that opportunity will continue to present itself in time over the future. I don't think the credit instruments are in a death spiral. I don't think that's a thing. These companies will continue to pay their dividends. I think there will be more interest that comes back into the market at a future point in time. Obviously the price of bitcoin improving would help, would help the general interest in the credit instruments. But our goal is to open the door to significant capital to be able to come in the door. Well, I kind of may have not heard of this.
- [82:12]
A
Yeah, I'm kind Of reminded of the first thing that came to me when I heard about the press and really started analyzing them and moving away from convertible bonds is like in this type of environment strategy could get a bond deal, right. But they just might not be able to get as favorable of terms. And it looked to me like they were just starting to vertically integrate, kind of like Tesla does. If Tesla wants needs chips for their cars and you can't supply them, let's make their own chips, you know what I mean? They'll just go out and get them themselves. They'll just screw it, we'll build a factory. And that's kind of the way that I look at the press because if you don't want to have to go and subordinate yourself to the bond dealers, you can just take it to market. And so the way that I look at it is this is like, is efficient of a capital raise as you can possibly get. Because if people don't want to push the press to par at the current interest rate, you just go to your guidance and you bump it up 25 or 50 or whatever it says in the, in the, the agreement that you're going to push it up to. And you do that until the market agrees. I am willing to give you this capital at this rate. And to a certain extent it's almost kind of like it can't get any more efficient than that because if you negotiate a deal with the bond dealers, like it's almost like buying a used car. You don't know if you got the. Absolutely. Like would they have caved another, you know, 25 basis points or something? Like could I have gotten this or could I have gotten that? But if you're going straight to the market, the market is going to tell you exactly what they think your cost of capital should.
- [83:52]
B
It's marked, it's marked. It's marked at the market.
- [83:56]
A
Yep. Yeah, I, I think it's going to take much longer. You know, trading below par is going to have to trade this way much longer to invalidate my, my thesis. I, I don't know. I, I know I set my, my falsification criteria in the thesis at like, you know, four or five years when the press came out. But I guess I don't, I mean I don't know if the press traded below par for 12 straight months. I think that would potentially be a problem. But I don't know, I don't know what a reasonable time to wait would, would be. I'll probably have to think about that and, and maybe set myself a Falsification criteria around the time to get to par or something.
- [84:43]
B
Yeah, a time to par. I mean, obviously the volatility has an impact on how people see it in the future. It kind of depends on the reason somebody would buy the instrument. Like, are you buying the instrument for income or are you buying the instrument for. For principal protection? If you're buying the instrument for principal protection, you're going to see it very differently than somebody that's buying it for the income. The interesting thing is that the income potential, like somebody posted about this today. It was Dana, right? Dana said Jeff, like, does the price of the instrument going down change the dividend that you pay? It's like, no, we're paying $13 per share. And so as the price goes down, the effective yield goes up and there's opportunity for somebody to come in and buy it with a higher effective yield and even get principal growth opportunity. And people are going to see that in the market on both of these instruments. And whether or not it's the people on X that are making a bunch of noise about it or institutions that come in and identify opportunity, there's opportunity out there for, for people that are looking at these insurance. But if you initially bought the instrument for the fixed income.
- [86:05]
A
Yeah, that hasn't changed your hasn't changed,
- [86:08]
B
the income hasn't changed. So yes, your portfolio will look different. But again, it comes down to why did you purchase the instrument? What is your duration for holding the instrument? I think the challenge with humans is there's emotion tied to volatility. And the fact that these instruments are marked to market every day causes emotion. If any of these people were. You think about buying a traditional bond. A traditional bond is, let's just say you bought the Ford 2066.5% bond. Right.
- [86:51]
A
I don't know why you would, but
- [86:52]
B
I don't know why you would. I don't know why you would, but it exists. Like you could go buy it if you wanted. You could, you could it that instrument when you buy it, you buy it for the income. And it's actually not marked to market every day because it doesn't trade every day. But if you needed to go sell it, you need to go find somebody that'd be willing to buy it from you. And there's no liquidity. So how, how do you go, how do you go sell that instrument to the market? Well, somebody's got to go analyze it and find out what it's worth. And it's like, oh, well, last quarter, Ford's financials were Pretty shit. So I'm actually going to give you a haircut in order to give you liquidity on the instrument. It's the same as not mark to market. Yeah. It's just not marked to market like 24 7, which changes the emotional profile. You can literally feel it on X. Right. Like the emotional profile associated with it is palpable. So yeah, it's a bit tricky. It's like bitcoin being mark to market all the time too. Right. 24 7, 365. Like the fact that it is volatile does cause emotion. But if you're looking at your portfolio on a 200 week moving average, what does your portfolio look like on a 200 week moving average?
- [88:12]
A
Did you ever see the meme where the guy's like gonna go all in on bitcoin and then the people pulling the strings behind the scene when he goes to sleep at night, they're like, dump it. And then wakes up in the morning and this whole portfolio is red. That's what it reminds me of.
- [88:33]
B
Accumulating. Accumulating capital is very hard. It's very hard. The market generally knows more than you do. Taking it. In my opinion, taking a long structural, directional trade is the most rational thing I've got. Math. I can use math to rationalize a position which I can't use math to rationalize any other equity on the planet, but I could use math to rationalize a position in any one of these equities or any one of these preferred instruments or bitcoin. I use math in my position in bitcoin. Why? There's 21 million of them and if I have more than the average, if they were spread equally to get that exposure of bitcoin spread equally amongst everybody across the planet, I think that would cost like 150 or $200 today. So mathematically I like if I think bitcoin is going to be, you know, everywhere. I like that mathematical profile of taking along a long term bet there. So anyway, I think it's. We've, we've beat the dead horse quite a bit. We've got a bunch of data. I've even got more that I haven't shared, but maybe we'll, we'll find another time.
- [89:53]
A
I mixed my metaphors today because I, I said something about, I was trying to say barking up the wrong tree, but I mixed it up with beating a dead horse and I was like beating up a dead tree. I was like, what the hell are you talking about? The market's going to. And my brain just liquefied That's a sign.
- [90:06]
B
That's a sign of genius. Soleil.
- [90:08]
A
Oh, okay. I appreciate that.
- [90:12]
B
At least that's what my, that's what my family tells me. I do it all the time. Over to you. Let's, let's, let's talk about the spam, the spam debate, the spam war and the timing segue.
- [90:24]
A
Because you're the guy, right? You like to analyze risk, right? That's your thing, I heard.
- [90:29]
B
Yeah, yeah.
- [90:30]
A
And so let's say you got an open source project and I had to have you analyze the risk of just a single line of code, right? And then I said, okay, now we're going to write another line of code. You'd have double the risk of potentially having a bug or, you know, somebody putting a backdoor or just whatever, you know in there. And so. Or let's say you have a filter in place and you want to remove that filter or you want to double the size of the filter, okay. The risk has probably increased. And we don't necessarily know what the second and third order effects are going to be, but you would have to kind of imagine that the, the surface.
- [91:11]
B
The surface is bigger.
- [91:13]
A
Exactly. And the attack surface would have increased for that software. And so the reason I bring that up is because that is what's happening with Bitcoin right now. So every time we make a change to bitcoin, we introduce some type of risk. And actually Saylor's comment comes to mind. He said the greatest threat to Bitcoin is telling a well intentioned developer to make it better. Right. Because they're going to be like, oh, okay, I'll add some code. And then of course that code that they add could have bugs. It could just do a bunch of things and maybe even make it less, make the use case for money less than it was before. Right. And so let's just put you in your capital raise hat again, right? I called you guys continuous capital raise companies, right?
- [92:05]
B
I like that framing.
- [92:06]
A
Yeah. And so let's just say you go and you get in the room with the guy and you're like, hey, I want to raise some capital. I want you to give me some money, I'm going to go buy some bitcoin. And let's just say the guy's a complete normie and he's like, well, explain Bitcoin to me. Are you going to pitch the guy that? It's so cool, right? The core devs are putting in this new feature. You're going to be able to put like monkey butts and dick pics on the chain. Right? You're not going to pitch that to them. Right. There's no monetary value. Right. The guy's going to be like, he's going to throw you out. Okay. You know what I mean? And then we talk about the seasoning for the prefs. So, you know, three years from now, they're seasoned. We can, we can put them up side by side with these other products. Let's pitch these to institutions. You know, you're going to have the same conversation that, hey, yeah, they're blowing out these filters and anybody, you know, we're going to use Bitcoin as distributed, free, distributed data storage and anybody can just put any image they want on the blockchain. How does that sound? You want to invest in something like those lines, like the risk for some of the actions that the core developers have taken. The network has kind of revolted against this. Right. So core, everybody used to run Bitcoin Core. It was like damn near 100% of the market share of the nodes were running this. And so over the last several years, there have been a series of upgrades. Segwit created a discount for certain types of data. And then the Taproot upgrade, there was an inscriptions bug that was reported by one of the core devs, but it was rejected. They said, oh, well, this isn't a bug. This is working as intended. And what that did is that expanded the ability to add these images very cheaply under the Segwit discount. And so that expanded this, the ability for images to make their way onto the blockchain. And then with Core V30, they decided to raise the limits. Previous increases in the limits for the size and amount of data went from like 40 bytes to 83 bytes over a certain period of time. And then with Core V30, they're like, let's just blow it to 100,000. And then in the future we're just going to deprecate it completely and remove the limit. So just no filter whatsoever. And so all of these things, you can imagine that this has increased Bitcoin's attack surface. Okay, Right. If you subscribe to the theory, you know, don't ascribe to malice. What can be described to, what is it, ignorance or, you know, stupidity or whatever. You don't necessarily have to believe that this is a coordinated attack. There is some evidence that maybe that has actually happened. Hodlanat has a, a really good article series that, that describes some of the, the, basically the DEI hires. I mean, it's literally the case over several years, which I almost kind of find a weird. I don't know if it's irony or just the. The. It just seems like a confluence of. Or a coincidence. But Strive, the history of Strive, was founded as a, like, rebelling against the DEI push. And Bitcoin itself has hacked, actually had to kind of deal with this DI push as well. So, you know, certain people, if they. If their demographics were, you know, a certain diversity, they were getting grants while other people were either, you know, getting pushed out of Core completely. Some of the OG devs were not getting funded. And so there's a lot of kind of little shenanigans that were going. But even if you don't believe that, you have to at least admit that mistakes were made. And it led to this point where anybody who wants to run a node has to download tons and tons of these images onto their data, onto their hard drive. Right? So data, the bloat is just expanding here. And so the, the challenge with that being.
- [96:34]
B
The challenge with that being memory is expensive over time. The concept is memory gets cheaper due to Moore's Law and the. I guess that the core camp would say memory is going to be damn near free. That the bloat isn't an issue because Moore's Law.
- [96:54]
A
Exactly.
- [96:54]
B
Memory gets cheaper.
- [96:56]
A
Exactly. And so, so Moore's Law is kind of dampening that effect some. But you used to be able to run it on your phone or like a Raspberry PI and like, good luck getting those things to. You know, I guess if you had a super, super high download speed, you could get the, the initial block Download in like 24 hours.
- [97:13]
B
I got my nodes set up, I got my nose set up, and it, it took like 30 hours.
- [97:18]
A
Yeah, yeah, yeah, I, I did the same. And so that was just kind of me setting up where I'm going with this. So there was some of the network kind of said, look, we don't like the direction that this is going. So an alternate implementation came out. It's called knots. And then subsequently BIP110. And BIP110 has several points to it, but the main ones are that it's going to patch the inscriptions hack. So there were some opcodes that were being used in order to gamify getting images onto the blockchain. And then it's also going to limit and put that filter back in. So 83 bytes is going to be the limit. Which the resolution on 83 bytes is pretty pathetic.
- [98:10]
B
We did this on one of our last episodes. It looks like, oh, it's eight bit, right?
- [98:16]
A
Yeah, it's nothing. It's nothing. So those are the two main things that it does. And it's very limited. It's trying to stay very narrow and focused so that it doesn't overreach and touch anything that it, that it shouldn't. Any of the stuff that's already on bitcoin is grandfathered in. So like no one's going to lose access to their money or anything that so. And the reason why I think that this segues in from the digital credit products is the whole thesis is we're building the company on top of a bitcoin balance sheet and we're building the prefs on top of a bitcoin company that has bitcoin in the balance sheet. But what if there's uncertainty not only in the market and in the macro, but also uncertainty in the bitcoin network itself?
- [99:06]
B
Right.
- [99:06]
A
And so this risk, that's a risk vector.
- [99:09]
B
Yeah, that is a big risk factor. I think what comes to mind is what does this impact settlement on chain? It's like, does any, either decision, if I were to boil this down, this would come down to does this impact settlement on chain and that like, how does that impact.
- [99:37]
A
Yeah, and so this war, the civil war, if however you want to describe it, will come to its conclusion in August. So maximum security is like right now, or insecurity, Excuse me. Uncertainty is basically between now and in August. We don't know if the bip110 effort to reign in spam will successfully activate or whether it will fail to activate. But we will know the outcome of the decision in August. So there could be some, some of those market uncertainties reverberating into strategy, into strive, and then maybe even into the prefs. So I think a lot of, a lot of this uncertainty goes away in August. So I, I think there's some pain, more pain coming. But we will, we will get to the other side of it, just like we got to the other side of the block size wars. For me personally, I am running knots with bip110 and I think that it's the solution to increase the moneyness of money. Right. So if anybody's looked at the, the what is Money? Series on Robert Reedlove, he's got the whole list of monetary properties, right? There's fungibility, acceptability, you know, scarcity, all those different things. And I think it's objectively true that spam, which is also referred to as arbitrary data, it erodes a couple of those properties One is fungibility, because every SAT is supposed to be equal one sat. Right. But if you're attaching images and you could say that that image makes that SAT more valuable because it's got something special set. Yeah. Or maybe it makes that set less desirable because it might have some kind of degenerate image that you don't approve of. Right. So a fungible money is supposed to be identical. Right. A quarter is a quarter dollars, a dollar Bitcoin. One bitcoin equals one Bitcoin Bitcoin. And so I think arbitrary data erodes fungibility and I think it also erodes acceptability. So you want people to recognize it as money and accept that it is money. Right. And so I don't think that anyone objects to like George Washington's dumb face on the front of a $1 bill, but you could imagine some kind of image on a $1 bill that if someone tried to pay with it, you might just have to punch them in the face. You know what I mean? Like, look, you can't give this. I'm not accepting this as money. So those are the two things that I think objectively makes spam and arbitrary data degrade Bitcoin as perfect money. We want it to be sound money. And I think that those specific properties, I think it's objectively true that spam is an attack on those two properties. And so that's from just kind of a first principles standpoint. That's why I personally run BIP 110. And I'm, you know, hopeful that, that it is. That it is a successful activation and we can talk about the game theory of that and something there is something that people, the retail folks need to be aware of. And also the bitcoin treasury companies do need to be a little bit aware of during this activation period. So you want to go in either of those directions or you have other questions?
- [103:08]
B
Yeah, well, I think some of the game theory is interesting. The way that spam gets on the blockchain to begin with is that you have to pay for it to get under the blockchain. Right. So there's a threat or not a threat. It's like a toll. Who's. I think one of the big questions is how should the market determine who gets to decide what goes on that?
- [103:42]
A
And so I want to steel man a little bit. I'm going to call it the core side to be polite. Usually I just call them spammers. So to be fair, they will say, and this is a somewhat reasonable argument, they will say that the fees are the filter. Okay, you'll hear that a lot. And so their claim is that the free market will drown out spam's use case, I suppose if people are paying more for transactions. Now, I think the problem with that is the issue of moral hazard. And in a completely free market, I send you some Bitcoin, you give me a product or a service that is a consensual transaction. And if I accept your service, I take on the risk that it's valuable. Right. And in this case, the spammer that wants to put an NFT or whatever kind of image he's paying the miner. Right. So they're exchanging value, but the burden of storing that data is transferred to a third party, which is the node runner, and that person is not benefiting from the transaction. So it's not a free market expression.
- [105:01]
B
Negative. It's negative externality. It's like smog.
- [105:04]
A
Yeah. Which, so that's interfering with free market signals. So I don't really believe that the fees are the filter because the free market, you know, cannot really get a true signal when you're outsourcing all of the risk to a third party that, that doesn't get any of the benefit. So I understand their point and it's kind of like a, a free market maxi position to take. I just, I just don't think it really checks out if you, if you understand it from a, I don't know, Austrian perspective or from a libertarian perspective.
- [105:45]
B
Yeah, that's, that's the concept of a negative externality. Right. If you drive your car, you pollute the air, you benefit, everybody else gets polluted.
- [105:57]
A
It. What I, it may be tragedy of the commons. I hope I'm not mixing up that one. But it's like, yeah, tragedy commons. Like every, you know, all, everybody shares the same grass, but if one person over grazes, then everybody suffers. So the nodes are the volunteers of the system. They're basically Bitcoin really is the nodes. I mean, there's lots of ways to define it. Okay. It's a protocol. It's a distributed ledger of transactions. It's a bunch of different things depending on how you want to look at it. But ultimately what I don't think it is is free distributed data storage for perverts. That's not, that's not my idea of what bitcoin is. And a lot of people will wag their, wag their finger at me as like, you know, bitcoin doesn't care what you think it should be, you know, like, okay, well, I think it's money. So if it's not money, then yeah, I'm not, I'm not thrilled about its use.
- [106:57]
B
Well, the other, the other concept, I mean, because it's permanent, it's. This is the most valuable data storage platform on the planet. You think of it that way too.
- [107:10]
A
Yeah, that's the other side of it is if the fees were the filter. But you have to use adversarial thinking, right? Evil people do exist. And what would it cost to drown out the incentive for this person to get free data storage to infinity, like to get thousands of people all around the world to store their data? That's an infinite bid. You cannot bid their desire for degeneracy. Okay, so I kind of have to reject the fees of the filter argument on those multiple bases. And you're basically saying at that point, okay, I'm willing to be extorted forever because if, if they raise the price to keep it off the chain to here and you pay it, well, they're just going to increase the, the extortion fee. So in that sense, I think you have to, you have to put the filters back in place and you, you cannot. Well, here's the other steel man. For the, for the spam side of the argument is it is true that you cannot eliminate all arbitrary data, right? So you know when they say that, they're like, well, if we can't eliminate it entirely, then you just kind of have to deal with it and let Jesus take the wheel or whatever, it's out of my hands kind of a thing. But to counter that, I would say no bitcoin is the bitcoiners. So it's up to the bitcoiners to make sure that bitcoin is money. And you can vote with your node, you can get some hash power and you can vote with your hash power and I don't know, maybe learn to vibe code, come up with your own implementation of the protocol. Go participate in the frickin open source project. There's no excuse why we shouldn't have a billion people working on the protocol.
- [109:07]
B
The protocol.
- [109:07]
A
Yeah. You know what I mean?
- [109:10]
B
Yeah. It's interesting. Are any of the miners signaling the miners kind of. I mean, they've got a lot of hash power, right. So they would probably be on the side of collecting fees.
- [109:25]
A
Exactly.
- [109:25]
B
But that's just, that's just the incentive structure. Right.
- [109:28]
A
And that's exactly the type of game theory that we're testing. So we've already proven the case that the miners do not control the network. Right. So in the block size wars, what we were testing is that core and the nodes kind of teamed up together, the node runners and core, and we didn't really know what was going to happen. But what we proved is that the miners incentive would be to get more fees, right? Yeah, but they were defeated. The miners are subordinate to the nodes. That was the ultimate valuable lesson that we learned in the block size war. It wasn't necessarily like, oh, I was team small blocks or I was team big blocks and I won or I lost. We proved that the miners, due to their own incentives, which you can't hold that against them, I mean they'd vote themselves to ban the halvings if they got a chance. Like why would they want half of the rewards to go down? But the reason why they can't just do anything that they want is because there's checks and balances, right? You've got devs, you've got nodes and you've got hash power and each one of those is kind of like a check and balance on the other interested parties, I guess you'd say. And because you've got people who just stack sats and chill. But. So that was the lesson that we learned. But now we're going to see if, okay, what if instead of it being core and the nodes on the same team, what if the nodes are trying to win a battle against the core developers? What if you suspected that the core core developers had been infiltrated or were just doing a bad job? Like if you want to give the most charitable interpretation is like, let's just say you didn't think they were doing a good job and you wanted to put someone else in charge of the updates or the upgrades or whatever. We're testing that theory now to see if the node runners themselves can push bitcoin in the right direction or at least turn it around from going in the wrong direction. So we're going to find that out and that's a very valuable thing to find out. And I guess I'm a half full kind of guy as much as I possibly can. And it's kind of good that we're doing this now and crashing from 120 to 60 than when Bitcoin is 10 million and it's crashing to 4 million or something, that's a bigger swing. So it is a valuable lesson. We need to learn it. And so the game theory that's going to come with this, the, the bip, 110 people are counting on the incentive of the miners, right. So you asked about who's signaling it. So for nodes, they're up to about 15% of the network, which sounds low, but the successful activation of BIP110 was around that. I think it was actually less than that. So there's already more support for this fork than previously successful forks. And the reason is because a soft fork is a little bit easier to push through because it's not expanding the rules. A soft fork is always a narrowing of the rules. If you wanted to expand the rules, it's much more difficult to like break consensus in that fashion. You have to do that with a hard fork. And you can imagine like a B cash or something. Any of those clones of Bitcoin that all went to hell and never became anything, Those were all hard forks. And so the game theory is that when mandatory signaling takes place at a specific block height, which will happen somewhere around the first week of August, all of the BIP110 nodes will start rejecting the blocks that miners submit that are not signal also signaling for bip110. And you asked what they're signaling like. The signaling for BIP 110 right now is super small. With the Miners it's like 0.3%. It's like nothing. Now that's alarming to some people.
- [113:34]
B
Like at home miner miners.
- [113:37]
A
Yeah, exactly. It's just a few of us and actually there's a few medium sized mining companies like Barefoot Mining, which is Bob Burnett, the gateway guy. He's into bip 110. I think most of his are signaling for bip 110. And there have been some bip 110 blocks mined. Right. The people are tracking it. You know how you were tracking? We're above this company on the S&F 500. There are people tracking Bitpoint, got a block today and it was mined by this version or whatever. So people are tracking all that cool stuff. So there's going to be no incentive for the miners to really defect. If you want to use game theory terms, there's no reason for them to defect against core now. Right. So that 0.3% is kind of meaningless.
- [114:22]
B
Yeah, yeah. You're not going to signal until the last minute.
- [114:24]
A
Yeah, you don't want to be first. But even worse than being first is being last. Because if you don't flip your signal during mandatory signaling or even actually probably before mandatory signaling, if you haven't prepared for that. And there's also an issue, I hate to sidetrack it, but there's also an issue with mining centralization. There's like, five or six mining pools that control 90% of the hash rate. And so really, it only takes about three of them to defect and cause this flip over to bip110. So if you look at it like 0.3 is nothing, but all you got to do is have three mining tools defect, and it's already a successful activation. Right? And that's what the BIP110 side is counting on, is that somewhere at the, you know, at the end, zero hour or whatever, there will be this cascade of one miner will flip, and then the fear of being last and having mining. If you mine a block that's not compatible with BIP110, and then your chain gets wiped out, you lose the entire block reward. And these mining companies, it's really tough to stay in business and to squeeze out of profit. And so there's a lot of competition. It's not like where sailors retweeting you and you're retweeting sailor, and there's, like, cooperation in the bitcoin treasury company is, like, holding hands. Kumbaya. It's not like that.
- [115:48]
B
It's not like that.
- [115:49]
A
Like, I want that block. And there's even been, like, allegations of people doing little shady stuff about, like, finding a block, but then not, like, reporting it to the network so that they get a head start to build on that block again. And like the miners, it's cutthroat. It's. It's a bloodthirsty kind of thing. So the game theory is that there will be a cascade of defections over to BIP110. It will have a very smooth, successful activation, and it will win. The other thing that could happen is that the miners just don't flip and then bit 110 dies. Right? And that would also be. If that happens, it would also potentially be a rapid, unsuccessful activation. In that case, there's probably not a whole lot of controversy. But the. The core side is banking on the miners just literally doing nothing and kind of like going in lockstep and saying, none of us are going to switch. But, like, you as a miner, you have to kind of be like, wondering, is the other guy gonna flip? And I don't want to be like, musical chairs. I don't want to be the last one, you know, caught standing up. And here's another little bit of additional game theory that I think applies not only to publicly traded miners, but also publicly traded bitcoin treasury companies, in that because the likelihood of getting an unsavory image, potentially even Maybe even an illegal image on the blockchain since it's going to be less with the BIP 110 chain. The lawyers at the mining company who's justifying, hey, we should just stay in this other chain, potentially lose our block rewards and have be on the hook when this becomes the degenerate chain and this other chain is clean and we can just hop over to it and not have to deal with, you know, all of these shitty images. I think that Bitcoin treasury company's lawyers would probably be asking the same question, like why, you know, do we need to make a recommendation to our custodians? Hey, look, you know, take a look at this, you know, this alternate implementation. We understand that it's very easy to remain on the legacy protocol, but we think there are these additional risks, you know, so there's, there probably needs to be some conversations, you know, maybe the, maybe the risk officers might have to meet with the lawyers and, and have those kind of conversations. So I think there's a little bit of a game theory for BIP110 to actually be successful. But the third possibility, and this is, I think it's a pretty unlikely scenario. But it is one thing that, that retail and Bitcoin treasury companies need to be aware of. Let's just say it's a contentious split, right? There's no. BIP110 doesn't immediately succeed and it doesn't immediately fail, right? So the core doesn't win and they don't lose. If it's like 50 50/ Power, then those chains are going to be like, neither one can gain dominance. And in that scenario you would have a chain split and it would be very dangerous, it would be potentially dangerous to transact during that period. So if it's a clean activation or if it's a clean success, you'll probably be back to business usual. But in the rare event that there is a contentious chain split, you don't want to be moving your Bitcoin around. I think the safest chain to be on would be the bip110 chain because there's a, this is another game theory thing is so the soft fork chain can wipe out the legacy chain, but the legacy chain cannot wipe out the soft fork chain. And the reason is because since a soft fork is narrowing of the rules, it's always backwards compatible. So bip110 blocks are valid on the legacy chain, but the legacy chain blocks, if they violate the limits of the data, are not valid on BIP 110. So that's another game theory advantage to the BIP 110 side.
- [120:11]
B
But, oh, man, it's all game theory.
- [120:13]
A
The whole thing is all game theory.
- [120:14]
B
It's all game theory. Holy moly. Okay.
- [120:18]
A
And so, yeah, so just be careful. I mean, keep an eye on it. Retail people, get your freaking bitcoin off the exchanges now. Get it in closed storage. You should be doing that anyway. And then if it's a contentious split, you just don't transact. But does that also, like, if no one's out there buying, what's the price going to do if everyone's freezing their bitcoin?
- [120:41]
B
Could be volatile. Yeah, it could be volatile in both directions.
- [120:44]
A
So, yeah, just be careful with margin, be careful with leverage, be careful all these things. And I think once this is resolved, you know, we can, we can get God candles and we can resume the bull, but, you know, it needs to happen and it'll be all over in the next 60 days.
- [121:05]
B
It's big. It's big and it's out on the horizon and it's, it's part of the, it's part of the local narrative. It's part of how, how everybody transacts on the network and how they view it as money and ultimate, ultimate settlement and how people interact with it, interface with the, with the instrument. Yep, yep. This, this is a fantastic overview. Soleil. We are definitely going to clip that up and talk through it and, and you definitely have given some, some unique perspectives. I like how you walk through the game theory. You steel, man, it hit it from both sides and you walk, you walk through the whole process. I think that's really, really valuable to take a rational perspective on both sides of it. And investment grade. It was investment grade. Yeah, investment grade analysis of, of the market. So no, really, really appreciate it. We're at like 2 hours and 10 minutes already. But I, I'm gonna go like a quick speed run on some questions because people ask some questions. Damn right. And we'll, we'll just run through it here. I'm not even going to show them on the screen. I'm just going to read them off my iPad here. The first question here about 99 to 100 strc peg, how it works and at least what the response from management is about the deep pegging event. First of all, this concept of pegging is a concept in stablecoins. These are credit instruments. They do get priced to market every single day. The goal target trading range is for them to trade between a stable 99 and 1 101. And the the construction of the instrument is targeted to get the instrument to trade in a target stable trading range between 99 and 101. Obviously there's some volatility. The market is pricing these in real time. There's correlation to other assets, there's correlation to other things that are happening in the, in the entire credit market. I think it's helpful to think about these as duration instruments. And there as the prices do fall, there is a higher effective yield. So keep that in mind. And each of the prefs have a different level of volatility stripped from them to target investors with different risk appetites. Why are there being as volatile and more volatile than the underlying Bitcoin? As I pointed out a little bit earlier today, when you're looking at the price of the instruments over time relative to the price of the underlying bitcoin, there are people that have been holding these instruments for a very long time. The relative volatility on, on one specific day may be more volatile than the underlying bitcoin. But if you look at the performance and the total return of the instrument, not everybody has the same perspective of you as you. If you bought the instrument a week ago, you're going to have a different nominal bias of your price entry point relative to people that have been holding it for a longer period of time and are looking at the profile of the instrument into the future. So everybody's got a different cost basis. Everybody's emotion starts with their cost basis of where they enter the instrument and they view it from a different lens. But again, all of these things are connected. The entire capital market is connected. And obviously we've seen a little bit of volatility. There is ways to potentially hedge that volatility within the options market. And I think as these instruments mature, the volatility will continue to dampen and get smaller as the market starts to understand the risk profile and they get, they start to trade a bit better. Here's a good one. How do you mentally be okay during these bear markets, especially when you have so much on the line? I think talking through how you manage your emotions and stay positive will help investors. So I'm going to kick this over to you first and then I will go, yeah.
- [124:50]
A
So I think the important part is even though we're here and we're fighting FUD and we're really trying to deliver the true north of the situation, you have to develop your own conviction when you enter that trade. And so just like I described, I don't think bitcoin's going to zero. So to me, the likelihood of that is infinitesimally small. So I'm not worried long term. And I just think that's. If my thesis was invalidated, if strategy were to go four to five years from the onset of the prefs and underperform Bitcoin, then I would say, okay, my thesis is invalidated. But just on this period of time, if I look back a year, that's not enough time for me to really invalidate my thesis. So that's the conviction that I have. And I don't know, I guess once you've been in it long enough, you just kind of become numb once you see it come back from the dead so many times. And I'm talking about Bitcoin, it just seems like, oh, we're doing this again and then it's over at some point.
- [126:15]
B
Yeah, you can't, in the words of Ben Workman, you can't rent your conviction. Your conviction has to be your own. You have to understand the entire landscape of the things that you own. I think that's point number one. Point number two for me, operating in the capital markets, I literally, my job is to go come to New York and have meetings with people and talk about these instruments and how they're evolving and understanding that that capital markets are dynamic and they're moving. They're a function of everything that's happening in the broader capital markets. The conversations that I have with people, understanding how novel these instruments are, how even novel the concept of Bitcoin is to many of these large capital allocators gives me confidence. Additionally, as a manager in managing volatility and managing disasters of insurance company balance sheets, I think of the world in probabilities. So I look at, again, I go back to my conviction, which is mathematical, and I think about probabilistic frameworks. I think about the downturn that we're in right now with the underlying Bitcoin is well within normal standard deviations of historical downturns. It's. Well, look to your point, Soleil. Nothing has been invalidated with a thesis. No data point is jumping out at me is that this is invalidated the thesis. The underlying Bitcoin is incredibly liquid. The securities are trading. I mean, they're trading how they have traded historically with high beta to Bitcoin, the low volatility products, they have some volatility, but there's broad adoption. I mean, there's been $10 billion of the digital credit instrument that's been sold. There are people that are starting to build on top of it, that's evolving. And then just looking at the underlying mathematical framework, nothing has changed from my opinion except for the price. For me personally, yes, my technical daily net worth is down, but I don't think about my net worth that way. I don't think about bitcoin that way. I think about a long term view of my portfolio and I identify opportunities to accumulate along the way. Like I'm buying bitcoin every single day. When Bitcoin dropped below 60,000, I bought a little bit more than I would usually buy. And exploring options change and finding potential opportunities into the future as well. And I view my personal net worth as 3 month, 6 month, 12 month moving average. And I was talking with one of my co workers today and he's like, I share my financials with my wife once a year. At the end of the year I share my financials. And that's all she gets to hear and that's all she knows. And it's like taking a moving average view of your net worth. And I think that's a really healthy way to look at it. I've seen just recently some of the people that like the one guy, he sold his house in 2017 and bought 100 bitcoin and he's showing these images of him and his family over time and he's post his net worth with it and it's like him and his family taking vacations and it's like net worth 300,000, it's like net worth 600,000. It's like once a year he's got a picture of him and his family and it's like net worth 10 million and then it's down net worth 3 million and then it's net worth 6 million. Next net worth 15 million. And it's like that's. If you, if you take, if you take that view of like this is a long term directional trade. I want to be interested in this. That is in my opinion a healthy way to think about accumulation, opportunity, how you view your portfolio, a long term view and taking a moving view.
- [130:05]
A
Yeah. And to that renting conviction quote that you mentioned from Ben, if you are experiencing heartburn and sleepless nights, that means your position size has outgrown your conviction. And so you don't have to be 0 or 100. Right. You can have some boring stuff if you want to. Right. And if you are stressed out and you're going to give yourself freaking early grave and dig yourself into early grave, then maybe irresponsibly long is not for you at this point. You know what I mean? So it's okay to. To have, you know, the. The most volatile part of your portfolio being a smaller percentage. So I. I know, you know, the irresponsibly long thing is kind of a meme, and it's fun to joke about, but if it's stressing you out, then position. Position size is always key anyway. If it's. If your position size is such that it can wreck your future, then you have to figure that out and get a little bit more low volume.
- [131:14]
B
Totally. And time is your most valuable asset. It's more valuable than any number that you see on a computer screen. Go outside. Enjoy your time with your friends and your family. Be healthy. Go work out. Go spend time with your friends and family. Everything you see on the screen is a number on the screen. At the end of the day, time is your most valuable asset. Okay, cool, man. That's all I got. One of our longest episodes in a while, so appreciate the time. Soleil. Thanks for people.
- [131:49]
A
And we just talked more. How does that work?
- [131:51]
B
We did. Yeah. I kind of liked it. It's a good time.
- [131:56]
A
These guys are fired.
- [131:57]
B
All right, thanks. Thanks. Thanks, everybody for the time. Thanks for listening. Episode 71 of True north, the investment grade bitcoin podcast. And we will hope to see you next week. Cheers.