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- [00:00]
A
But now this structure that a strategy has created, it shifts that away from belief in bitcoin to now you have to have faith in the team at strategy. My personal take on this is that this is also a departure from the bitcoin ethos. It's literally kind of going back to what Michael Saylor has been criticizing where, you know, he has criticized the US Dollar, you know, he calls it trash, like a melting ice cube, you know, whatever. And the dollar is something where there's kind of like a small group of people, they're sort of in charge of, you know, how it's managed. And so you have to have faith in those people. You know, strategy has sort of created their own version of that. And so it's, it's just not really aligned with Bitcoin's philosophy. Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I'm your host, Laura Shin. Before we dive into today' today's interview, we will take a quick break to hear from the sponsors who make the show possible.
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B
Fidelity has been investing in blockchain since 2014. They're not wondering if digital assets will shape the future. They're hiring the talent to help ensure they do. Explore opportunities today@crypto.fidelitycareers.com Fidelity is an equal opportunity employer. This episode is brought to you by Kape, America's Privacy first mobile carrier. Same premium service you'd expect from any other carrier, but designed so your number, your location and your data actually stay yours. Get 33% off six months at Cape Co Unchained.
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A
Today's guest is Parker White, CFA and the founding contributor and chief investment officer at Apex. Welcome, Parker.
- [01:50]
C
Thanks for having me, Laura.
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A
Strategy today announced its largest bitcoin sale ever of 3588 Bitcoin for $216 million to pay dividends on its preferreds. That brings its USD total in its treasury to 2.55 billion. And this is what I've seen multiple market observers call for noting that the company's Runway for paying its preferred seems to be a drag on the price because the Runway was too short. And indeed we did see that the MSTR price and STRC price rose after this announcement. MSTR is trading at about 104 or it was like an hour or so ago. And STRC is trading at about $91, which of course is still below par but improved from before. However, the company had a 20% loss on the price of bitcoin on those sales it sold at an average of 60,197. And this sale happened shortly after and had actually purchased roughly the same number of Bitcoin, 3,657. And that was at an average price of 64,577. So basically in the last month they had a net increase of 69 bitcoin. But when you kind of net out the, you know, the, both the purchase and the sale, those 69 Bitcoin were acquired at a price of about $290,000 per Bitcoin. So what did you think of their recent move to sell bitcoin to extend the Runway? They have to pay for these perverts.
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C
Sure. So you really need to zoom out when you look at strategy. If you, you know, to use this example here, and I'm sure what they're doing is their tax off loss harvesting. Right. So what you do is you use specific, it's called spec id, so specific, lots of bitcoin. And so they didn't sell the bitcoin that they bought a couple weeks ago. They sold the bitcoin that they bought back in, let's say 2020 or 2021. And so if you used their actual accounting for the way they did it, then they had like a, you know, 6x or 5x or 4x, whatever it was gain on the bitcoin that they sold here. So I mean, it doesn't really matter which bitcoin is being sold. The point is you really need to zoom out and you know, to look at the kind of capital allocation decision. But at a much broader level, strategy has faced a couple of challenges. And one of the big challenges is that the credit rating agencies, so S and P Moody's and so on, when they evaluate the credit worthiness of the company, they hold the value of the bitcoin at zero, which makes obviously no sense. And so that's why the preferreds have a junk rating, a B minus rating, because it's only the software business that's being used to, you know, in their eyes, service the liabilities. And so the point the strategy has been trying to make to the rating agencies is like, look, we can use this bitcoin, it's as good as cash, cash. We can use it to fund the dividends. And so now they just prove that, like, hey, look, we can actually sell some bitcoin to fund at least a month's worth of dividends and also the quarters for the, you know, the other preferreds. And so bitcoin is a, an actual asset. It's not just this accounting thing. Sitting on the balance sheet that's never going to be touched. It can actually be utilized. And kind of the holy grail here is if strategy can get their rating into that investment grade category because bitcoin is an actual asset that they can use, then that opens up a whole bunch of additional fund mandates that are required to only invest in investment grade securities. And so there's a bunch of reasons they would do this tax loss harvesting, proving that dividends can be paid from the bitcoin. For the rating agencies, I could continue to go, but I think it's a smart move. It makes a lot of sense. $200 million worth of bitcoin is kind of a drop in the bucket. I'm sure they'll be back to buy more bitcoin pretty soon.
- [06:13]
A
Last week the company also published a digital capital framework. It now has a board approved USD reserve policy that allows the USD reserve to only be used to support the dividend payments on preferred stock. Also interest on outstanding debt, and it requires the company to keep a minimum of 12 months of coverage. It also increased the dividend rate on STRC to 12%, had been at 11.5% and announced a $10 billion repurchase program for both the preferreds and another $1 billion repurchase program for MSTR common stock. In addition, it announced that it would sell bitcoin to fund dividends and buybacks. As we on today's announcement, how do you think this framework helps strategy and helps allay concerns that the market had?
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C
Yeah, so I think another problem that strategy has had is basically their bitcoin accumulation has been this kind of one way door and that has created too much predictability in the market where other market participants, namely shorts, can take advantage of this situation. So if a short believes that there is no circumstance where strategy would ever sell bitcoin and they will only tap their different securities to raise capital, then you can reliably short ms, the MSTR common short STR strc because you know that they're never going to sell bitcoin and buy any of these things back. And even when they announced it, I think a lot of people in the market didn't take it seriously. So now as a short, you have to take a step back and realize that strategy made good on their promise to sell some bitcoin. What if they make good on their promise to buy back some STRC? If you're short here at STRC at 90, they might come in and bid it back to 100. Or if you're short the MSTR common stock at, you know, 100 or whatever, they might come in and buy it to 120. And strategy has far more capital than most shorts out there are willing to allocate to a single position. And so that it injects this kind of, you know, risk effectively and it increases the risk for our short. And so it helps the market become more balanced and should just improve trading overall for, you know, all strategies securities. So I think that's a big factor here and what's going on trying to kind of balance out the longs and the shorts and create a more healthy marketplace. Because ultimately, the problem with stretch has nothing to do with their ability to pay the dividends. It's all just price, right? And price is just determined by buyers and sellers. And so you want a more healthy marketplace. And I think that's what they're trying to build here. And so I think, you know, selling some bitcoin really makes good on one of their promises. And who knows, they may announce that they did some buybacks this week. You know, announce it next week. I don't know, but I don't have any inside information here. But, you know, I would assume that they're thinking about this.
- [09:48]
A
So I want to ask about something that you said. I forget the exact phrasing. I think you said something like about how people's concern doesn't have to do with their ability to pay back STRC or something like that. But I think that's actually what kicked off this whole drama, right? It's like they initially had enough Runway to cover the dividends for a few years, but then when they paid down some debt, suddenly that Runway got short, and that is what caused all the initial consternation. Isn't that how you. Or tell me, tell me how you interpret what happened these last, like, six weeks is.
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C
Yeah. So I think, you know, everybody's going to look for a reason in the market, but the fact is that, you know, they spent. I don't remember the exact number, but I think it was 1.5 billion, roughly, on bond buybacks. You know, they've got $60 billion or at the time had $60 billion worth of Bitcoin. So, you know, this wasn't like some giant percentage of their bitcoin stack. And they could, you know, very easily service the dividends with bitcoin, assuming bitcoin didn't drop to, like, you know, a thousand dollars a coin or something crazy that no one actually expects to happen. And so I think really, what I think you had is a Situation and I'll kind of dive in a little bit here, but a situation where STRC trades at a hundred and it's never going to, or at least the market believes it's never going to trade above 100. So that actually creates a very interesting setup for a short where if you shorted at 100, your downside is capped. Right? You know that strategy is going to come in and run the ATM right at 100. So if you shorted a hundred, you've got unlimited upside as a short and basically capped downside. And so I think, and you've seen this a few times where the price of stretch tanks and then pops back up. And that's, I believe, due to short sellers coming in, pushing the price down, causing people to freak out, and then covering when people freak out and decide to sell. And so I think that's really what you had here. And I think a good piece of evidence here is that SATA, you know, the other main variable rate non convertible preferred in the market, did not have nearly as violent of a reaction. And for a number of days when stretch was starting to trade down, say it was just trading right at 100. And now you could say, well, but Strive has two years of cash set aside for dividends. Yes, but they also have a lot less bitcoin to back the dividends and preferred. And so they're actually in a more vulnerable balance sheet position than strategy with stretch. And yet the market was trading down for stretch. And so I think this really was just situation of the shorts kind of latching on to an opportunity and then people panicking, grabbing hold of a narrative and selling. And strategy, to their credit, has responded to that.
- [12:57]
A
I think that opportunity was created because strategy gave them an opening. Because. And this is a point I made on some show, but I'm not even sure if I made it on Unchained. I might have made it on the chopping block. But the point is that basically a strategy, ever since its inception was this bitcoin accumulation vehicle. And as long as you kind of like believed in bitcoin long term, since the only thing they were doing was acquiring bitcoin, like that, that one thing made sense and it was aligned with belief in bitcoin, right? Which is decentralization, censorship, resistance, like, you know, all those things. But now this structure that a strategy has created, it shifts that away from belief in bitcoin to now you have to have faith in the team at strategy. And you know, I also, my personal take on this is that this is also a departure from the bitcoin ethos, it's literally kind of going back to what Michael Sailor has been criticizing where, you know, he has criticized the US Dollar, you know, he calls it trash, like a melting ice cub, you know, whatever. And the dollar is something where there's kind of like a small group of people, they're sort of in charge of, you know, how it's managed. And so you have to have faith in those people. And now, you know, strategy has sort of created their own version of that. And so it's. It's just not really aligned with bitcoin's philosophy anymore. Would you agree with that?
- [14:40]
C
I guess I'd be curious to hear what. What components of faith you have to have in the strategy team that has changed. I mean, as long as they don't lose the bitcoin, like the bitcoin's there.
- [14:53]
A
I mean, so this goes to the question about. You were saying that you felt like the shorts were making this opportunity, whatever. But to my mind, the reason they. And it's not even just about the shorts. It's because the way you're framing, it's like it's only an attack. But I feel like strategy lost the faith of investors. Right. It's like people saw, oh, hey, they made a series of financial decisions that just caused people to lose confidence in their ability to manage this whole structure. You know, paying down, doing the bond buyback when they didn't have to and then having that shorten their Runway to the point where, you know, people were concerned and, like, it just goes on. So do you see how. And strive is just a different story. They didn't have a series of, you know, I'm just going to call them missteps that cause people to lose confidence in them.
- [15:52]
C
Sure, yeah. I mean, I think strategy is certainly, you know, learning through all of this. Right. I mean, they. I believe it was in. Well, it was earlier this year when Stretch traded down and they decided to implement a cash reserve in the first place. And they caught some flack for that. Hey, what are you doing holding USD like, you should only be holding bitcoin. But they're like, hey, no, their market wants this. And then it seemed, you know, the price recovered quite a bit on Stretch. And so then they, you know, thought, hey, maybe we don't need as much of this cash reserve, so we'll go ahead and buy back some bonds. You could argue the market didn't like that. And I would say some know, certainly some market participants didn't like that. And so that's why they've been addressing that. And they've gotten the, their reserve back up to 18 months with the 2.5 billion. And then they've shown that they can also cover dividends with some bitcoin, you know, a very modest amount of bitcoin sales. And so I think, you know, the business is certainly growing and they're certainly learning and you know, you could say maybe mismanagement, you know, strive has just kind of copied them and followed them. So when you're the market leader, you are going to take steps and sometimes the market responds in a way that it's tough to predict. Right. I mean from my perspective, I would prefer personally for them to hold no cash and just use bit bitcoin because another two and a half bit billion into bitcoin right now I think would be fantastic. But the corporates of market participants have said, hey, we want some more cash. And they've been out there talking to a lot of market participants from what I can hear. And so I need the cash to
- [17:38]
A
pay the dividends so.
- [17:41]
C
Well, they can. I mean last week they raised or two weeks ago they raised over $1 billion on the MSTR common. So that would cover their dividends for like seven, eight months. So they don't need cash sitting there. They sold enough bitcoin to cover more than a month's worth of dividends last week and one week. So they don't actually need cash. They can tap the ATM on the common. They can tap bitcoin to get, you know, to raise the cash that they need.
- [18:14]
A
Am I right in thinking that they sold the bitcoin because they, they can't tap the bit ATM at this moment?
- [18:22]
C
Well, no, they, they have, you know, two and a half billion dollars now worth of cash and the common stock is trading at a premium to the, you know, the net asset value. You can go to the website, you could check it out. So they could tap the common. But this is all about kind of market.
- [18:41]
A
I think last week it was like at one,
- [18:47]
C
I mean we can go, you can take a look at it right now, but it's, it's about a 10% premium. So.
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A
Yeah, I mean today, today, today it's up. Yeah, for sure, sure.
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C
And, and most of last, actually all of last week it was up. It was like Monday of last week when they announced, boom, it re rated because the market.
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A
Right, I meant the week, the week before.
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C
Sure, the week before. That's right. It closed, it was at 10% premium and kind of closed down. And so this week or last week, I guess they didn't need to sell any bitcoin to fund anything. But the point was to show the market, hey, we can sell some bitcoin if we need to. This is another tool and we will use it. They've got a lot of tools in their toolbox here.
- [19:29]
A
Okay, I did see that JP Morgan in a report said, quote, the possibility that strategy would be selling bitcoins introduces two way risk into crypto markets, inducing more uncertainty and volatility for bitcoin prices that could have been avoided if it instead issued equity to rebuild reserves for future dividend payments. So it sort of feels like they also feel like this wasn't necessary. But what's your response to that?
- [19:58]
C
Sure. You know, I would say them selling bitcoin last week. Yeah, it certainly wasn't necessary. They have the cash. They could have tapped the common ATM for plenty. I think the point is just showing to the market, showing to the rating agencies, showing to anyone else that has a problem with them never selling bitcoin that like, look, we can actually sell some bitcoin. And in terms of introducing a risk, I mean, they sold 200 million roughly over the course of an entire week. Bitcoin trades many, many, many orders of magnitude greater than that. They could have sold that in a single clip with a 50 basis point haircut offspot. I'm sure they t whopped it, but that number is just not like that does not move the price. And we saw that evidence bitcoin last week was up and yet they were selling. So we know JP Morgan is kind of talking out of both sides of their mouth. Right. I mean, they are basically as anti crypto as it gets. We know what Jamie Dimon has said about Brian Armstrong and about the rest of the crypto space. They are the primary blockers for the Clarity Act. So you know, them saying it introduced some big risk, like, I take that with a grain of salt.
- [21:14]
A
All right, well, so to go back to my question about the bitcoin ethos, I have one other issue which I'm curious for your take on. You know, in the beginning, strategy was all about bitcoin and it was all about accumulating bitcoin. You know, sell your kidney before you sell a bitcoin. And now it feels like the company has to put US Dollars above bitcoin. It needs US Dollars to pay the dividends. You know, as we just discussed, they're selling bitcoins at a loss. To do that, they're raising more via the atm. And when they do that that dilutes the bitcoin per share of MSTR holders. And so this kind of feels like a change in the direction or philosophy from Michael Saylor and from Strategy. What is your take response to that?
- [22:05]
C
Yeah, I'd say it's, you know, I'd say it's a little bit of a tweak, right? I mean, strategy last year, right around this time, actually, I think it was July 5th. It might have been a little bit later in the year though, when they IPO'd stretch, and it was the largest IPO of 2025 of any kind. Now, 2025 wasn't a big year for IPOs, but the fact that a preferred stock was the number one IPO for an entire year in the entire world is pretty incredible. And Stretch now is by far the highest volume, most liquid, most widely held preferred stock of any preferred stock ever in history. And in fact, probably all combined like all the other preferred stocks out there, issued by banks and some other industrial companies and so on. And so they are completely rewriting the script when it comes to just finance in general. Right. They're taking a pretty big step here with the issuance of Stretch. And so it would make sense for them to need to tweak their capital management strategy a little bit going in. And, you know, you can't really fault them for not fully predicting the future. Right. I mean, when they launch Stretch, yeah, in hindsight, they should have come out and said, hey, we've got this dividend or this cash strategy. We're going to hold this amount of cash and whatever all the things that they've done, they should have started out paying daily dividends, right? All these things. But you know, they're building a business, right? And they're. If you look at Stretch as a product, just like you might look at a SpaceX rocket as a product, there's going to be some, some learning and some growing along the way. And so I would argue that, you know, holding a little bit of USD relative, relative or versus prior, just holding all bitcoin is some learning and some tweaks to the product that make the product better, make it easier to sell, make more people want to buy it. And any company should be doing that with their products. Any company that launches a product on day one and doesn't change anything about it is irresponsible. And so I think I like seeing them make these tweaks. And sure, you could argue the business
- [24:22]
A
is a little more complex, the word tweak. Like we can, we can debate that because to me, it feels more like changing direction, like a flip flop. Right. It's like bitcoin is first and then now it's like, well, they have to put the dollar first.
- [24:40]
C
Well, they, you know, they still have north of $50 billion worth of Bitcoin. So less than 5% or about 5% of their balance sheet is in cash. You could argue, well, they sold, you know, the 3,500 Bitcoin this week, but they still have about 850,000 Bitcoin. So, you know, anything less than 10%, you know, 5%, this is less than 1%. I don't know, like 50 basis points worth, less than 50 basis points worth of sales. Like that feels like a tweak to me. Yeah. If they went and sold half their bitcoin stack or 20% of their bitcoin stack and they raised $10 billion worth of cash, you could start to say, well, that starts to look like a fundamental change of business. But, you know, holding a fairly minor amount of cash on a, you know, relative basis, you know, 5% or selling 50 basis points of their bitcoin stack feels like a tweak to me. Yeah, you could argue it's a flip. But, you know, just putting the numbers into perspective, this is like pretty small on a relative basis, and this is relative to bitcoin at a price level that's been depressed. If we're talking 120K Bitcoin, again, obviously, you know, now less than two and a half percent of their balance sheet is in cash. So pretty, in my view, pretty relatively small numbers.
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A
Okay, well, in a moment, we'll talk about much bigger numbers, but first we're going to take a quick word from the sponsors who make the show possible.
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- [27:50]
A
Back to my conversation with Parker. So there is a much bigger issue that strategy is facing than the dividends and that is that starting next year there is going to be this upcoming cliff of convertible puts that starts in September 2027. Matt Walsh of Castle Island Ventures was the first to flag this that I saw. Maybe somebody else had flagged it earlier, but basically strategy is going to potentially owe a total of $6.7 billion. You know, regarding these converts. So this is like just leaving aside the dividends. It doesn't include the dividends on the preferreds. So basically, if the price of mSphere is not above $183 by September 2027, then strategy will have to pay the holders of those $1 billion in cash in March of 2028. If the price of MSTR isn't above $433, that strategy will have to pay back $2 billion in June of 2028. They'll pay another $1.5 billion if MSTR isn't trading above 672. And then by September 2028, another $800 if it's not above 150 a share, another $604 million the same month if MSTR is not above $233 a share, and yet another $800 million in June of 2029 if the price $204 a share. So again, this is not including the dividends. And Matt calculated and so I don't know exactly what the price of Bitcoin was when he did these calculations, but it's been treating kind of roughly in the same range the past few weeks. So he estimated that Paying the first three puts would require a strategy to sell 74,000 bitcoin and that paying all the puts would require them to sell 111,000 bitcoin. So what, you know, how do you think about this potential issue that strategy is facing?
- [29:59]
C
Sure. So I would say this is, you know, this is definitely a focus, it would seem, for the management team because if you remember, they used a bunch of their cash to buy back some of the converts. And the one that they chose, the convert that they chose was the one that was trading at the steepest discount. And the reason it was trading at the steepest discount to par was because the convert premium or the stock strike price was the highest, effectively. And so, you know, this is why strategy is migrating away from the converts to the preferreds is because they don't want to have these essentially these bullet maturities or put dates where you have to, you know, all at once, kind of in one period address a situation. And so there's a couple things that strategy could do here. The most likely one would simply be to issue a new set of converts. So all these convert investors and you'll notice the converts are trading all right around par still. And so that's because of the volatility. So even though the stock is way down from when strategy issued these converts, the volatility is so high that the volatility premium embedded in that option is also so high. And so these traders, they're not just buying the bond and holding onto it for the coupon. Actually there's no coupon. In many cases they are simultaneously shorting the stock. So what happens is buy the bond, short the stock and they have a, basically a gamma trade here where they kind of squeeze off that gamma. And so these guys would love to just go again, right? Hey, issue a new convert, new put date, couple years out in the future, new maturity date, lower strike price on the common stock and get back to it. So I think most likely all of these would be refinanced with a new convert and a lower strike price. And strategy would not have to come up with the cash. However, let's just look at the, like them needing to come up with the cash. Matt's analysis. I don't have the numbers exactly in front of me, but you know, let's just take them for their face value, assume that they're correct. That's, you know, not that it's like a 10, 15% of strategies balance sheet and that assumes that bitcoin stays flat all the way until 2028. And so if it, if that happens, the four year cycle would be completely broken for one. But two, that assumes that strategy doesn't do anything at all between now and then. And they've shown that in a single week they can raise over a billion dollars on the common atm. They've also shown now that in a single week they can raise $200 million off selling Bitcoin. And yet the price of bitcoin goes up. And so there's a lot of things that can be done between now and late 2027 and mostly in 2028 if they actually needed to raise cash. But my guess is that all of that will either be bought back because they will be able to raise cash by selling more preferred or more common atm or they'll simply refinance and roll to another series. So not really a big problem in my view. You know, there's lots of time and lots of options.
- [33:42]
A
And if you were part of the decision making at Strategy, what would you recommend?
- [33:50]
C
I think it's, you know, kind of business as usual here. This, you know, you would look like to get Stretch back to par so that you could continue running the ATM on Stretch to raise capital from that and then potentially using some of the proceeds from, you know, selling more preferreds to start to whittle away at those converts. So especially the ones that are trading at a discount and you could step in and buy, you know, a million, couple hundred million, fifty million here and there each week as you're able to, you know, run the ATM on Stretch and maybe run the ATM a little on the common. So I wouldn't do anything drastic. This is a kind of slow and steady, wins the race a little bit at a time and I think that's ultimately what you'll see them do.
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A
All right, so now let's talk about Apex. The design of your project depends on mstr, so give us a basic primer on how it works.
- [34:51]
C
Sure. So Apex at a very high level is a tokenized wrapper around Stretch, SATA and other future variable rate non convertible preferreds. So we mix in some of, you know, we mix in Stretch, we mix in SATA along with some cash to build a yield bearing asset on chain that as long as you're not in a restricted Geo, you can buy and use throughout Defi. So you can use the asset in lending protocols, you can trade with it, you can do yield trading or interest rate strips with a platform like a pendle and you can hold it in your wallet. So all the great things that we love about Defi, now you've kind of got a yield engine and a tokenized wrapper around strc, SATA and so on. And so that's got a very high level, what we've built here. And we think it's a better RWA yield engine than something that's, you know, opaque and illiquid, like say private credit or reinsurance. And all these things have their place. But you're seeing a lot of these highly illiquid assets being used to back yield bearing tokens in crypto. And so we're creating or we're using a very liquid, very transparent asset to back, you know, our yield engine in crypto.
- [36:23]
A
So during this drama regarding STRC and MSTR, Apex USD dropped from a dollar to 90 cents. And there was a moment where you also pulled protocol Dex liquidity and there was a period where there was inflated nav. Talk through kind of what happened and what lessons you learned that will kind of like change how you manage it going forward.
- [36:55]
C
Sure. So the biggest challenge that we have in all RWA protocols that have a liquid backing have is, you know, crypto's 24, 7, 365. Our asset is not right. Stretch does not trade 24, 7, 365. And so you kind of have this liquidity mismatch now. Thankfully, the NASDAQ and a number of these alternative trading networks do support trading overnight. It's far less liquid, but there is some liquidity there. And then of course, you've got some of the crypto versions now of direct wrapped stretch, so Stretch X, you've also now got hyper liquid and lightr that have stretch contracts. And so this is really a function of the differences in settlements and trading times between crypto or defi and tradfi. And so bridging that gap is ultimately the challenge. And you know, we're building the systems to better support that. The example that you noted, we pulled liquidity on a Friday night. We re enabled it sometime Saturday the next day. And so we've built a kind of a V1 system to support overnight and weekend liquidity. We've onboarded a lot more liquidity partners. But you know, there's certainly going to be a V2, a V3 as we kind of help to bridge these worlds. And ultimately I think this is a problem that we can help solve for kind of bridging tradfi and defi at large and hopefully creating a world where ultimately you don't have tradfi and defi, you just have finance. And finance is 24, 7, 365 everywhere. And so I think crypto is going to be a big part of helping to unlock that. But these are just kind of Some growing pains to go along with that.
- [38:46]
A
Yeah. And I meant to say so initially I said it dropped to 90 cents, but actually I think at the lowest it went to maybe about 72. So, you know, this is sort of, you know, meant to trade at like $1. So, you know, do you feel like characterizing it more like a stablecoin or a synthetic dollar makes sense. Or like, should there be a different way you, you know, even describe it?
- [39:12]
C
Yeah. So the term that we've used is dividend backed dollar. And we know we've been very upfront and all the documentation that, you know, hey, look, there will be times when this thing is not going to trade right at a dollar. You can take a look at our docs, you can take a look at, you know, early marketing and conversation and, you know, discussions around that. And then we've, we're very transparent, showing the assets on the dashboard. You can go to our website, you can see the balance sheet, you know, the, the holdings, the mix. And so I think most people would, you know, that took 10 minutes to look at the project would be like, yeah, this makes sense. They've said it could trade below a dollar based on the asset base, it can trade below a dollar. You know, it traded below a dollar. And basically there may have been a few weekend little periods, but in basically all cases we have traded above the price of stretch, and that's because of the cash buffer. So we've had, we have had a little bit less volatility than stretch, which is great. And over time we hope to shift the mix potentially more towards cash to further reduce that volatility. But because we've got a liquid underlying and people can redeem out at any point in time, we're going to ultimately track the asset basket being stretch, SATA, some other things. And so it's a new, new type of asset. And right now we've gone with kind of the dividend back dollar terminology. Maybe that'll change over time. There's certainly some work to be done, some tweaks to be made on the marketing front.
- [40:55]
A
And in mid June, you ended up introducing Apex 2.0 and you replaced NAV with redemption value. And I see that there's some criticism because basically to redeem at nav, you now are calling a free put option. And then there are some critics who believe that you basically kind of change the term. So that way now you can have the ability to pay people less than the dashboard showed. So what do you say to that criticism?
- [41:30]
C
Sure. So the free put option problem Just for the audience here is basically the ability to. Let's just take an example. Let's say we were 10% over collateralized. So as soon as we start trading the, the underlying basket starts trading below par. So Stretch starts trading down. There's an incentive for people, if we're still redeeming out at $1, for people to sell or redeem at $1 and then buy the underlying basket. And that would deplete that over collateralization buffer, which only hurts everyone staying in. So our goal is ultimately and always has been to protect the long term users. And so typically a lot of the complaints that we've seen are coming from the active traders who want that free put option. They're like, give me the free put option, I want to trade against you, I want the free money. Whereas our long term users absolutely love that we've put this in place, that we are protecting the over collateralization buffer. They love Apex 2.0. So it really kind of depends on which side of the table you're on. And if you're trying to, you know, tap that free put option, like you're going to be upset when you're not being able to tap it. And so, you know, this is kind of what we've put in place to better explain the way the system works and to protect users long term and protect the protocol long term and kind of prevent these arbitragers from essentially hurting all the existing users.
- [43:09]
A
So let's walk through a future scenario where we see turmoil similar to what we saw over the last six weeks. Let's say Bitcoin drops lower, let's say strategy decides to defer the STRC dividend, what happens to Apex USD holders?
- [43:28]
C
Sure. So Apex is always going to roughly track the underlying basket. The price is likely to do that because, you know, we redeem at this redemption value, which is right around half. And so ultimately we can't completely eliminate the risk from Stretch without completely eliminating the yield. Right. We could fully hedge out Stretch, but then there wouldn't be any yield. We could get rid of Stretch and just hold cash, but then there wouldn't be any yield. And so we are creating this product that's designed to be a little bit higher yield than the Preferreds and a little bit lower volatility. And hopefully over time we can further emphasize the lower volatility as we can grow that over collateralization buffer. But ultimately the underlying basket is going to dictate the price in the market of APX USD and there's just no real way around that without kind of deleting the positives around apx, which is obviously the yield.
- [44:40]
A
And so one other thing that I find just interesting is you're building this Defi product, but it has this basis in tradfi. And so there's kind of different things about the two systems when they come together. There can be weird little dislocations or timing issues or whatever. So I'm just curious to hear you talk about what problems you see sort of still need to be resolved for those two systems to work together.
- [45:09]
C
Well, yeah, the other big problem is settlement. So if I go and buy a share of, or actually let's say I go and sell a share of SpaceX in my Schwab account as an example and I want to go buy some physical Bitcoin, I need to sell the share of SpaceX on Schwab, wait a day to get USD, withdraw the USD to my bank account, then send the USD from my bank account to an exchange like a Kraken, then buy the Bitcoin and then maybe I can withdraw to self custody or maybe it's not Bitcoin, maybe it's like some, you know, defi asset. And so then I can send it into Defi and do some things. And so there's all of these hops and you know, moving from USD or moving USD around only happens during banking hours and it can take multiple hours to do so. And if you're international it's even more difficult. And so there's just all of these frictions in addition to just the timing thing that I highlighted with trading. There's all these frictions which we kind of solve by holding cash on both sides of the ledger, if you will. Right. So we have some cash just sitting in, you know, in say in usdc, in our wallets, in Defi that we can use to facilitate redemptions for APX USD. But that's because then we are selling some stretch and then we do all these hops ourselves. We're not making users wait the like three or four days to do the whole round trip. And so ultimately this all needs to be solved as well for the worlds to fully come together. And some of that's going to maybe come from the tradfi side. You've seen Schwab recently launch actual crypto trading. You can fund an interactive brokers account with USDC in some jurisdictions now, which is a great step forward. But then of course you're going to see more tokenized assets, whether in a wrapper format or direct one to one trading on chain that also helps to solve that. But you're really seeing, I mean, the story of crypto for the last, say two or three years has really been these worlds starting to collide. And I think you're going to see that accelerate and ultimately these problems be fixed. But for now, it's like we kind of have to deal with this clunky old system.
- [47:37]
A
All right, so to circle back to strategy. I don't know if you've heard this, but I've heard multiple people call strategy things like the GBTC of the cycle, or even I've heard multiple people call it like the Terra Luna. And I don't think they mean that it's necessarily going to collapse, but they just mean that, you know, both of these things have like an outsized impact on the market. It's the kind of thing that works really well in bull markets, but has issues when it's not a bull market. And you know, there's basically like a sort of reflexivity on the way up, but then also on the way down. And I wondered what your response is to people who compare it to either of those things or really both? Both of those things, sure.
- [48:24]
C
So I'd say there's potentially some similarities, the main one being around perception. Right. So the Tera Luna blowup and I guess specifically FTX marked the bottom of the last cycle. And so pure abject panic about strategy may also mark the bottom here. I don't know. We'll see. You know, Saylor has famously come on your show and said they'll always be buying the top. So I don't know, maybe they sell the bottom too. But you know, the, the, the model here, the product is designed to be reflexive. MSTR is levered btc. That's why anyone buys it. And so something that's trading down more than bitcoin, when the market's down, when bitcoin's down, it just makes logical sense. I mean, it's actually trading down less on an MNAV basis than in the last bear market. And even on a relative to bitcoin basis, it's trading down a little bit less than the last bear market. And so there is kind of this higher, low setup going on. I mean, we'll have to see, right? We don't know if this is actually the bottom, but this is kind of how strategy designed to work and that's why people are interested in it. So it's not a replacement for just buying and holding spot bitcoin. It's for people that want that upside Exposure that want that levered. Exposure that want the reflexivity. But the reflexivity, it does have to work in both ways. But as long as strategy doesn't lose all their Bitcoin to a hack, you know, that's the main risk. Of course, then this is really not a similar situation to a Tera Luna or to an FTX or to any of these other situations in prior cycles that, you know, blew up and broke. This is just purely the market reacting and moving the price around. But the balance sheet of strategy didn't really change between the. Over the last few weeks, you know, composition, I guess, changed, they raised some more cash, whatever, but like, it's still around the margins. And so, you know, I could see some comparisons hyper focus on something that's really big and, you know, everyone's freaking out about, but structurally and systematically, just very different. And I think, you know, we'll look back on it and realize it was not something to panic as much as we did about.
- [51:04]
A
All right, well, Parker, it has been such a pleasure chatting with you. Thank you so much for coming on Unchained.
- [51:10]
C
Laura, thanks for having me.
- [51:11]
A
Nothing you hear on Unchained is investment advice. This show is for informational and entertainment purposes only, and my guests and I may hold assets discussed on the show.
- [51:20]
C
For more disclosures, visit unchained crypto.com SAM IT.