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BTC241: Bitcoin Treasury Companies w/ James Check (Checkmate) Bitcoin Podcast
01:28:36
James and Preston take listeners through the shifting dynamics of the crypto market, highlighting the transition from spot to leverage dominance, declining on-chain activity, and lessons from past cycles.
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- [00:01]
Tip
You are listening to Tip.
- [00:03]
Preston Pysh
Hey everyone. Welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. On today's show, I'm joined by James Check, also known as Checkmate, one of the most respected on chain analysts in the bitcoin space. We cover a wide range of topics like the shift happening from spot to leverage driven markets to the mechanics of the bitcoin treasury securitization and even the role of KYC and mining incentives in long term network security. We also unpack some of the lessons James Learned from the 2021 cycle and how he sees bitcoin dominance evolving in this weird narrative fractured market. All right, so with all that said, let's jump right into the interview with the insightful and knowledgeable Mr. James Check.
- [00:48]
Tip
Celebrating 10 years, you are listening to Bitcoin Fundamentals by the investors podcast network.
- [00:55]
Preston Pysh
Now for your host, Preston Pys. Foreign. Hey everyone, welcome to the show. I'm here with Checkmate. James. Welcome back. Excited to chat with you. You always have amazing takes. So welcome back to the show, sir.
- [01:16]
Tip
G' day, Preston. Good to be here, mate.
- [01:18]
Preston Pysh
All right, so you have some prolific writing in the space and the reason I love reading your stuff is you usually have a contrarian take on what everybody else in the space is talking about, but it's, it's backed up by a lot of research and a lot of data and that's why I just love reading it and talking to you. And we just saw each other in Seoul, which was amazing. Which was fun event. Yeah, it's always fun being in Seoul, but let's start here. So one of the things that I see you writing about is the blockchain, as far as the mempool goes, is just dead. I mean, we're looking at, I don't know how many blocks deep we are right now. I'll look it up, but we can't be more than a couple. Yeah, yeah. So what are your thoughts on this? Why is this important for people to even think about and then kind of frame it up on a maybe a larger context?
- [02:10]
Tip
Yeah, it's funny that you label as contrarian because generally speaking of just writing about what I think is happening in like the real world, I think what's probably more interesting is how quickly and consistently the narrative on Twitter diverges to the most bullish possible scenario or the most bearish possible scenario. Yeah, as always, reality is dead through the center. I'm like, guys, I can see reality. It's like right in the middle. But this is a very interesting topic. And it actually comes back to a degree of PTSD for myself as an analyst. So something that I'm very, very aware of is that in the 2020 and 21 cycle, and I can say this with great confidence, there's not a single analyst in the world who anything about how to use on chain data. Yes, we knew what they were, we kind of like we understood what the metrics stood for. But actually using them in a live fire exercise, nobody had the experience. It was just too early. Most of these tools already being invented in 2019 at best. So that's kind of the background. Now I made two major mistakes in the 2021 cycle. I think I joined Glasstone in February 21st. I'm about three months away from that first major sell off. And in that first sell off I was bullish as everybody was. And the thing that I primarily missed is the GBTC and also the amount of leverage that had built up. So the first lesson I want to take away from that cycle, do not miss. When you move from a spot driven to a leverage driven market, which is natural in all markets, you get to the euphoric peak and everyone goes levered long because the market's bulletproof, it can't go down. That's exactly the time when it's going to get down in a very big way. So that's the first lesson. Now the second one is after we sold off we had about a 50% sell off, went from 60k all the way down to 29. We spent about 2 months chopping around there in June, July and then we finally rally back to a new all time high and that second all time high all the way up. The one thing that I was looking at is going guys, there's no activity, the mempool is empty, blocks are not full, we've got very few transactions. Volume is kind of in a strange like it was picking up but it wasn't really a very organic pattern. And anyway we got to 69,000 and me being the young naive analyst that I was, I said okay, I guess my data is wrong. And I flipped from being guys, I'm a very cautious analyst at this point and I flipped saying look, the market's proving me wrong, we're going up. And of course I flipped bullish at the exact peak. So that was the second lesson learned from the 2021 cycle amongst many others. But they're the two big standouts. So now when I look at our current market, if we wind back to November, December, the blockchain was packed right People are transacting, there's volume flowing through, nothing to be bearish about whatsoever. Since April we have more or less seen that second dynamic, both of those two dynamics in our current market structure and that is that leverage is exploding through the roof. We're seeing futures, open interest, options, open interest, even lending markets are really starting to speed up, which makes sense. People are starting to feel like this market is more bulletproof at this point. We're seeing a lot more speculation, a lot more of those funds. But also the network itself is very, very quiet. But we have a very interesting dynamic. So as I mentioned, blocks are almost empty, transaction volumes are still quite high. And I was doing a breakdown study of this yesterday. Most of the transactions we're seeing now are very large, so there's not many of them. But the, the mean is moving around like several hundred thousand dollars. And if you think about how means and medians work, if your mean is starting to creep up because you've always going to have a Pareto distribution of lots of small transactions and a handful of big ones, what we're basically seeing is those handful of big ones are carrying most of the volume. So on chain volume is actually very high still, relatively speaking, it's off the peak. But spot volume is declining, has been since November, ETF trade volume declining since November, futures volume all time high. So we have watched this pivot from a spot dominated market even as close as April, all the way into a futures and leverage dominated cycle. So important just for people to recognize that we have truly phase shifted over the last three months.
- [06:08]
Preston Pysh
That is really fascinating and I love the call out from the previous cycle of like what your major learning point was. How much of the, you know, if we're looking at the mempool and we're seeing how little transactions are happening there, relatively speaking to other periods in time. How much of it do you think has just been moved over to the ETFs because so many people own Bitcoin this way. And if Coinbase is moving the net on a one day, every day at the close, they only really need one large transaction to settle. Whatever the differences are, is that kind of maybe throw a wrench into some of the way that you're looking at it or comparing it to a previous cycle.
- [06:48]
Tip
Yeah, so this is a very good question, one I get all the time, this dynamic of do the ETFs break some of the on chain data and on chain metrics? The answer is absolutely not. And the reason is because we have two different buckets of on Chain metrics. There's various ways we can slice and dice it, but there's metrics that describe coins that are moving and metrics that describe coins that are not moving. So if we're looking for a sentiment profile of what's going on in the market, we only look at coins that are moving. That's going to be your net flows, that's going to be your exchange inflows and outflows. And here's another important stat on any particular day, even today with the ETFs somewhere between 60 and sometimes 80% of all, all on chain activity is coins going in or out of exchanges, deposits and withdrawals. So basically what we're doing is we're looking at that 60 to 80% of all transactions and saying, is there a signal in what people, are they taking profit? Are they locking in losses? What's their overall, how old are the coins? So we're getting a profile of that and saying, okay, do we think that's a representative sample of everything else that's going on? And generally speaking, if you've got fear in the market, you'll see it in on chain data, you'll see it in futures data, you'll see it in ETF data. Now there's no question, right as lightning is going to take some retail transactions. When we're in Seoul, we had a dinner and there's probably, I don't know, 20 people, two dinners and everyone paid with lightning. So yes, there's probably 30, 40 transactions that didn't happen on chain. That said half of us had to do an on chain transaction to get into lightning in the first place. So yes and no, the ETFs really, it's no different to the the spot exchanges. People would deposit their coins to binance or deribitation and they do their trading. So all of these things are telling you the same story. But we've got to remember that there's still a whole stack of people out there holding individual coins. And the higher that the price goes, the more they go, you know what, I'm actually going to start locking in some profit. And what we saw over the last three months, this rally in particular, it's actually the first time we've seen it this cycle. Coins age three to five years. And if you just think about where three to five years is, this is 20, 22 bottom buyers, right? People from literally from the previous cycle who bought low and are starting to distribute this rallies where we saw the first wave of them selling, it was nothing close. We saw in November And December, that was like 86 billion a month. I think we scored up to about 30 or 40 billion a month. 35. So we're at decent levels. But no, generally speaking this looks like a very, very quiet market and it seems like a lot of the speculation activity has shifted. There is definitely more derivatives, but I think these treasury companies are also just where all the punters are going.
- [09:10]
Preston Pysh
So this is the question I have is long term, do you see this to be something that's just a unique situation right now where we don't have much action in the mempool because there's this whole host of people out there that say long term we need transactions to be picking up in order to substantiate the fees and everything that miners are going to continue to work towards. Like that, all of that piece of it. Do you see this as like a real issue long term or do you think it's just kind of where we're at right now in the cycle and with more time you're going to have a lot more transactions that pick up. Call it five, ten years from now.
- [09:44]
Tip
Yeah, it's a little bit of both. And I think there is, there's definitely a valid case to say that like for me right now I'll do a handful of transactions a month, part of my regular dca. But generally speaking most people are hodling and I think that's in this monetization period. It does make sense that more people are going to huddle. Now I am surprised when I log in or I look at some employee space, I say 115 waiting transactions of like you tell me there's 115 people in the whole world who want to transact in the next ten minutes. Remarkably quiet. So I don't really have a good read on why it's suddenly gone this quiet. It's definitely like if I call back to my 2021 analyst self, it's generally a signs like Wolf people aren't really using Bitcoin. Probably not the best sign. It would naturally be far more bullish if loads and loads of transactions are waiting to be mined. So I think that's probably the first dynamic to take away in terms of the long term arc of miners. I actually wrote a piece sometime back on securing the bag and what I was trying to capture is my like long term thoughts on the mining picture and probably the key insights that I pulled from that. The first one is that we have to separate miners and mining. One is an individual company or an entity and frankly they are expected to Go bankrupt all the time. This is part of the natural cycle of bitcoin. They are fighting the most ruthlessly capitalist, I don't even know what you call it, right. The difficulty adjustment wants to send you broke and it's a really, really cutthroat industry. You don't control your energy prices, you don't control your output prices. The difficulty adjustments always making it harder and people keep coming on trying to fight for that black reward. It's just an impossible industry to win in. So miners are expected to go bankrupt all the time, but they are also forced to innovate. They have to find the cheapest energy. They've got to come up with the most creative and ingenious solutions, long term power contracts, flaring methane, landfills, whatever it is that they can do to stay alive. So the second insight that I took away from it is that the one dimensional argument of look, subsidy going down mean bitcoin debt is a very, very surface. You know, there's really no depth to it. It takes away the idea that miners have to innovate. And look, if a miner goes bankrupt they will have to fire sale all of their rigs. And this is the other key insight. The rigs have a cost basis. So yes, it may not be profitable for somebody who just bought a new fleet of the latest gen aces, but if they have to fire sale them at 10% it's going to be profitable for that dude anywhere in the world. So you sell those rigs at the right price, they will always be profitable to mine somewhere in the world at some point in time. So it's really this transition of rigs between balance sheets. And all of this insight came down from a very, very simple observation. Hash rate is always at all time high at and after a halving which makes no sense if we've just had a cut down issuance. Why is the hash rate ripping to the upside? And there's only two ways this can happen. New rigs coming online of the old generation, which is Capex or new rigs of a new model coming online and they're more efficient which required R and D&CPEX. If an industry, the mining industry, not miners. If the mining industry was stressed, they wouldn't be investing more money in R and D&CPEX. They wouldn't have the cream on top of their revenue to do this. They would purely be just running the OPEX as long as they could. To the fact that we see hash rate climbing means that there's enough cream on top of the industry to continue to invest Capex. So they're actually in a. Continue to be in a very, very healthy spot. So far there's no evidence that declining subsidy is bearish for the mining industry. Certainly bearish on miners.
- [13:08]
Preston Pysh
Yeah, yeah. I think long term, I think the concern that I have with this particular topic is people just want to get into the code and start making updates and changes because they're looking at how little action is currently happening this month in the Mempole and they're saying, we need to do something long term. This is going to be bad. And it's like, no, a free and open market. You really need to take your hands off of it. And I love your point about if you die because you didn't have cheap enough energy or you just really were bad at operations or whatever the case might be, those rigs are going to be resold at some type of discount to somebody that is doing that better, or eventually they'll flow into the hands of somebody that's doing it better. And I think that's so important for the space to understand is really you got to take your hands off this thing and not mess with. What's the word I'm looking? It's like physics, right? Like you don't want to go in there and start adjusting the dials of gravity or these key inputs to that. Everybody has to build foundations on top of.
- [14:09]
Tip
And the other thing that Eric Voskill's done a very good job of explaining in his book Crypto Economics, which is a dense read but very, very good, is he basically describes that fees are the only thing that protects bitcoin from censorship. Because if you're an attacking miner and you're doing some kind of 51% attack, let's just say you're mining empty blocks, you're getting the block subsidy too. So putting a tail emission on actually just gives your attacker the exact same reward as your honest miners. The only thing that stops that attack if somebody is mining empty blocks, is that all the transactions that want to get mine start banking up and they have to start out bidding themselves and putting my higher fee pressure. And eventually that fee pressure gets big enough that all those dusty S9s and all those other miners that are in people's cupboards, people will pull them out, plug them in, because they want to collect those rewards. So there becomes an incentive to get back above that 51% and kick that miner off. Right, and start earning the rewards instead. So the block subsidy doesn't actually secure Bitcoin, it's the fees that secure Bitcoin from censorship resistance. Let's take a quick break and hear from today's sponsors.
- [15:08]
Preston Pysh
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- [17:46]
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- [18:22]
Tip
All right, back to the show.
- [18:24]
Preston Pysh
This is a topic that the casual listener, somebody who's interested in bitcoin, they might not understand the deeper, not mentioned topic that you're addressing here, which is filtering and spam on the blockchain. So tell people what. Because I think this is a really nuanced, like, insider. Like, if you're really close in following bitcoin, a lot, you understand what we're getting at. But for the casual listener, help them understand what the deeper context is to what you're saying there.
- [18:53]
Tip
Yeah. So at the end of the day, what do miners do? They're responsible for building the blockchain. So taking all the transactions that are out there in the mempool, putting them into a block, and that selection of what goes into that block is a debate that we're currently having of what miners put into that block. But effectively, the way the bitcoin protocol was designed is miners can choose from whatever is waiting to be confirmed. And generally speaking, they'll choose the ones that pay them the most. Right? The ones that are paying the highest fee. So within that context, if you have a miner. Come on. Or a mining pool, at the moment, that's really one of the biggest risks, is the centralization we have in mining pools. Really, you could say that the bitcoin mining pool network, probably about three or four mining pools, all that, you know, some of them are even the same entity. So that's definitely a risk factor. But they're designing what goes into that block. Now imagine that. Let's just say, for example, if you've got four entities that control the pools, and let's just say for argument's sake, the Chinese and the American government decide to lean on both of those pools, you might have 80% of the network. Now that's getting leaned on, say, okay, you have to mine empty Blocks you are not allowed to put transactions in. You now have a situation where all of those mining pools will be mining empty blocks and all the transactions are effectively being sent. Now if, let's just say there's 10% of the hash rate that chooses to mine everything as per the standard rules and they don't care, they're not being leaned on by any government, that means that 1 in every 10 blocks on average will actually mine your transactions. So this idea of censorship, it's a spectrum, it's never going to be. If you've got 51% of the miners, they're not going to include anything. There's still 10% that will. The risk is that those that 80, 90%, they could say we're actually not going to build on top of any of the blocks that the 10% mine. So the 10% mine block 100,000 and they say, no, we're actually going to remind 100,000 and there's a 1 in or 9 in 10 chance that we're going to do that. And we're basically going to sense your entire chain that you're building. So that's another risk that comes into this whole dynamic is why pool centralization is a major risk. But at the same time as those fees build up, right, it would be tremendously disruptive for the Bitcoin network. But this is the most important thing, it's not fatal. There is a recovery process here where essentially the fees continue to build up. The miners who are recognizing that this is probably destructive to their pool, to the hardware and the Bitcoin network, by and large, individual miners can then say, oh, you know what, I'm going to switch my hash rate somewhere else. This is obviously tricky when it comes to, you know, if there are governments leaning on pools, because if, if you're a regulated U.S. miner and you're in the U.S. and the U.S. is saying you have to mine through this pool, suddenly it gets very tricky. But there is the option for miners to point their hash rate somewhere else. It's why a lot of this stuff going into legislation, particularly in places like the US is quite important. Just giving that right to mine and all these dynamics. So there is definitely a risk over the long term of this pool centralization. But effectively they can say, well, we're not going to include these transactions, but that fee pressure will build and that's this natural incentive for miners say, but I want to collect those fees and the bigger they get, the juicy the reward becomes. And actually this is even more so when the subsidy is lower. Imagine the subsidy is 5, 6, 7, 10 halvings away and we're well below 1 bitcoin per block. Suddenly you've got 20 bitcoin worth of fees. This is a gold mine. They're going to turn around. You know what, I have to point somewhere else and collect these fees. So there is a natural incentive to recover from this.
- [22:14]
Preston Pysh
Yeah, I think when you just kind of look at the game theory that plays out in some of those scenarios that you're saying you do see now you have pool operators or individuals that are going to go out there and try to start a new pool that isn't going to be censored by the government as well. And I think that there's just a lot of. When you think of the second and third order effects of governments trying to do something like that, the robustness of all of these incentives really start to shine and really start to come out and express themselves. You have your newsletter, which is amazing. And one of the things that you recently talked about was this is a quote unquote weird cycle. So what do you mean by that? We had a little bit of the discussion at the start of the show, but help us understand this framing of it being a weird cycle.
- [22:59]
Tip
It is a weird cycle. And I wrote another piece yesterday called Same, Same but Different. I've been exploring this idea of how the cycle is different, how it is the same and it is a bit of a strange cycle and it's thrown a lot of people for a bit of a loop. I think the first one that has definitely confused people and this is one of my base cases for this cycle is it's just going to confuse people. They're going to lose track of where we are, where the floor was, where the ceiling was. Did we top that? We bottom? I just think there's a lot of dynamics that's going to break people's existing mental models. Strangely enough, we are still following the quote unquote four year cycle. If you measure cycle bottom or the cycle low. But we've got to remember that we're 100 times bigger than we were in 201617 and you get a lot of the behaviors. If we look at people's unrealized profit or loss, the way that that's trading, the way people are accumulating at their cost basis and selling it slightly above it. All these dynamics look very similar to 2016, 17, but we're 100 times bigger. In the piece I did yesterday, if we look at the ETFs, they got $132 billion in a. If we combine that with some of the biggest treasury companies, we're like 220 billion. The Bitcoin market cap peaked at 260 billion in 2017. So just the capital that's in the ETFs and strategy and a couple of other companies is the entire 2017 market cap. So you kind of look at that and go, really? It's amazing that it's behaving the same way, but really it shouldn't be because it's so much bigger that it doesn't really make sense. It's quite remarkable. It's a bit of an anomaly that we're following such a similar pattern. Now there's another thing that's really thrown people and that is no question, that is bitcoin dominance, which has been a 3.6 year unrelenting, unstoppable uptrend. And I think there's just a lot of crypto investors who have just been left at the altar holding bags of stuff that nobody actually wants. And look, even amongst the bitcoin crowd, there's going to be a lot of bitcoiners out there who also wanted to speculate, play some fiat games. And they're even there being re reminded, hey, remember when you were bitcoin only? This is why. And people are now starting to shift back again to this. Like if you go back to 2018, 19, 20, the Bitcoin dominance started to peak in like June 2019. It was about a one and a half year period of all claims getting crushed. And then they started to slowly recover. It has been nonstop, just perpetual bleeding for 3.6 years, which is more than double what we saw in the past. So it's really just thrown a lot of people for a loop. Why are we now seeing a lot more?
- [25:22]
Preston Pysh
Why do you think that is? Why did the altcoins. Because, I mean the last cycle it was crazy. I remember just like, how are people everything this mental to be? And it was just all speculation. Like people knew they were buying something that was a scam, but they didn't care because everything was just bidding and so they just jumped in. But you haven't seen a trace of this on this cycle. It's almost like it just died on the vine. I think so many people. Maybe it's because they all got wrecked so bad in the last cycle.
- [25:50]
Tip
Yeah, no, there's a lot of elements here and I think the first thing to understand is that, and I've been an astute observer of the crypto ecosystem for a Long time. For the first and foremost reason that we got to watch all the reason, we got to watch Wall street get built, bug for bug, error for error. And we got to see why the world has regulations. Because if you just give, if you allow people to speculate whatever they want, they're going to create fugazi tokens and just take people's money. So we got to actually speed run and see how the financial world got set up. So to me as a, as an engineer, I'm like, wow, I get to speed run and watch how the financial system came to be. So every cycle has been defined by a new distribution mechanism. In 2016, 17 was ICOs. People could launch their own tokens on Ethereum. That's a crowdfunding. They then move towards this VC funded, right? Because suddenly they realize, oh, we probably shouldn't fleece retail like this. And then VCs go, don't worry, we'll invest and get it up to a $6 billion round and then we'll issue it to the public. And then they were just down every coin. That list on Binance was just down early. So retail go, okay, we're getting scammed again. So then they invented yield farming. And this is another key element. If you go back to the 2017 cycle, you had to buy Ethereum to trade on these ICOs. So that's where the demand from ETH came from. And I think the Ethereums got a lot of things wrong this cycle. They believe that people actually wanted the eth. They forgot that they actually had to buy the ETH as the casino chip in 2017. In 2020 and 21 you had to buy ETH to plug it into these yield farms and get 16,000,000,000% APYs. But again it was the casino chip. And same for NFTs. You had to buy ETH to trade NFTs. If you then go across to this cycle. Solana has been the darling for all the crypto investors. But they also didn't recognize you had to buy, sold or speculate on meme coins. And the meme coin phenomena also turned out to be a huge grift. We saw what happened with the Libra token. If anyone's seen that interview with Coffee Zilla with I feared his name, Hayden Davis or whatever. It was a real like eye opening, I mean no surprises, but grift upon grift upon grift. So I think that a lot of crypto investors have just finally worked out. First thing, retail got destroyed in ftx. Absolutely destroyed. I don't think a lot of people really understand probably the perm. Now I'm over the view. I knew will be long lasting, but I now think it's permanent. I think the reputation of crypto got so unbelievably destroyed when FTX blew up. There's a lot of retail who would just never come back.
- [28:10]
Preston Pysh
Isn't it fascinating that Solana is effectively FTX coin?
- [28:15]
Tip
Yes.
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Preston Pysh
Right. Isn't that crazy?
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Tip
That and the other thing that I ran a study a little while back where I pulled four different metrics and I was trying to just like how do you plot the strength or the breadth is probably the better term, the breadth of alt season because I was trying to understand like how these cycles have changed over time. So I did four different metrics. Are we seeing capital inflows over the last 30 days, yes or no? 50% of the coins in profit or loss based on their on chain level. 50% of investors in profit or loss. Remember this is 50%. This is not like ripping to the upside. This is just not bearish. And then is the price trading above its 200 day. And I ran this study for the top thousand, top thousand, non bitcoin, non stablecoin tokens. And what you can see in 2021 and from 2019, it's slowly building. All four of these traces are building up into that final crescendo in 2021, this cycle we saw a very, very brief blip where we only just got above 50% of all coins being not bearish. And even then it was only the 200 day. And then it died off about two weeks later. We haven't seen this like sustained altcoin bull run. We saw flash in the pan and it's all over. So I just really believe that the world has clicked and gone. You know what? There's just no there there. And you've shown me now for a decade. There's no there there. And I think Alex Thorne from Galaxy had a really good line. He goes, crypto's been like the dog barking at the postman. And he's finally caught the postman and he doesn't know what to do with it because he actually didn't build a product. There's no thing there now you've caught the bike. All right. You've made a lot of noise, buddy. What are you going to show me? And there's just. There's very little to show aside from stablecoins. There's just not much there.
- [29:54]
Preston Pysh
Yeah, that seems like that's the real innovation with all of it, which is you've been able to tokenize sovereign debt and saleable all around the world in a way that for a lot of this it's like especially tether. This is like non kyc. If you want to be able to buy something in dollars, you don't have to buy some ETF that isn't saleable that you can spend as a token. That seems to be the real innovation that's yet to be seen whether that turns into tokenized equity which then can be used in a very similar way as the stable coins for real businesses and not some clown coin.
- [30:31]
Tip
And then even so, what's the value in that system? The value is the equity. So yeah, the platform that you're tokenizing stuff on now, there's no reason for that to attract any value. So really what we're actually finding is that yes, you've got this baseline infrastructure. I do believe that at some point there's going to be equities and tokenized stuff moving around. There's no question that Wall Street's going to go down this path. That doesn't mean there's going to be any value accrual for the L1 token that it sits on. Same way that protocols on the Internet don't accurate any value.
- [30:59]
Preston Pysh
I think this point is a massive, massive foot stomp for anybody on Wall street that's playing in this space. That point is so important because look at the Taproot asset protocol is just one example where you can do all of this stuff on top of Bitcoin and you don't need some native token like Ethereum or Tron or Solana to be able to do it. And this is the part that I think is really important and that's missed on non engineers, is when you look at how that's built, you get faster transactions, you're going to have lower fees, right? The incentives that are built on top of the lightning network by issuing tokens on top of that, you're just getting better performance and you have better infrastructure and better software engineering underneath of it. And so long term I just don't know how those networks are going to be able to continue to compete against something that has lower fees, faster transaction settlement and has a more robust network of nodes that are all running the software. Like I don't know, I just, I don't see many people talking about that and I see it as being something that is super obvious and super important for where are we in five years, where are we in 10 years with respect to tokenizing? More stable coins and tokenizing actual real companies equity and making it salable when.
- [32:24]
Tip
I peel back the onion. I've looked at the whole scaling concept from several angles, but the thing I've always found very interesting is we've more or less accepted the blockchains don't scale. They're a very inefficient database. Now if we look at it, and this is my contrarian take about Ethereum, a lot of people will say that it's not decentralized, it's controlled by a small cohort. And you know, parts of that may be true, but the reality is I actually think it's too decentralized. They have over designed the system that it's trying to support when if Tether and circle turned off all their stablecoins, the whole defi system collapses. So at the end of the day, your real weakest link is tether and circle. So this is where you then look at something like Solana, where they've tried to speed everything up and basically have very, very high compute nodes and all this kind of thing. And they've sacrificed the illusion of decentralization. But in many ways that's actually more in line with the level of centralization of your weakest link, which is your stable coins. Without your stable coins, your whole system collapses. But the other thing is that with Ethereum they've tried to scale a blockchain with more blockchain. We know the blockchains don't scale, whereas Lightning, and it very much remains to be seen whether we're going because Taproot Assets is very early and whether we do actually get some kind of adoption. The user experience challenges and liquidity and all that's a real challenge. But Lightning is infinitely scalable because it is strictly not a blockchain. And this is why it's quite interesting. Just as an observer, we're still many years away from some kind of serious scale there. However, it is infinitely scalable. It's not constrained by all these blockchain dynamics. And like in many ways they're over designing the system for what it's actually trying to do.
- [33:53]
Preston Pysh
And everything that's being issued on top of these quote unquote blockchains are. They've got an issuer anyway, which is centralized. Call it tether or circle or whatever. It doesn't matter who you are, if you're issuing something on top of it, you're a centralized entity anyway. So I just think so much of this is missed, especially from the technical standpoint as to where the incentives are going to drive this in the future.
- [34:19]
Tip
But the assumption that the blockchain is a piece of technology, that's useful. But the reality is the concept of a blockchain has been around long before Bitcoin. There's a reason why nobody was building on this stuff for many years because they've basically looked and gone. There's not really an edge here, it's a database. And the, really, the main benefit from any of this blockchain technology having any kind of decentralization is really, really some form of arbitrage. So for Tether, for example, there's a jurisdictional arbitrage and it's actually in the US's interest that people can access dollars. So for example, tether is heavily adopted in the emerging markets. And for whatever reason tether has, it's not Circle, it's not usdc, it is tether. And maybe that's because they have the allure of being somewhat KYC free, despite the fact that they actually freeze far more funds than Circle have to date. So they actually are more prolific with their censorship than USDC is. But the emerging markets have selected it nonetheless. So there is that kind of maybe it is KYC free in the us, benefits from it being a bit KYC free. I struggle to see tokenized equity in Apple stock. I struggle to see the brokers allowing that to be KYC free. So suddenly you're like, okay, you're probably still going to have a walled garden here for this stuff to work. So how about, do we really need a blockchain?
- [35:34]
Preston Pysh
How about 20 years from now? Because I, I agree with your point. But on the timeline, if we really go far out, I think there's going to be a huge push for KYC to be lifted and it, for it not to be used.
- [35:46]
Tip
I mean, I certainly hope so.
- [35:47]
Preston Pysh
Yeah, I think that's where it's all going. But timeline wise, I think it might be out there a lot further than many of us would like for it to go. But I think that the natural incentives and the competition from a global perspective is going to naturally take it there. Would you agree with that?
- [36:03]
Tip
I would certainly hope so. Because the challenge with KYC is first of all, it's obviously there's just a privacy element, but these things become honeypots. And how many times do you see people losing or companies or even government agencies losing big honeypots worth of people's data that you really shouldn't have to collect these things? And a part of freedom is that you don't have to KYC for everything that you do. So I would certainly hope so. Consider me a little bit more skeptical on government's willingness to let go of that kind of secure surveillance state, but we'll see. I certainly hope it happens.
- [36:31]
Preston Pysh
Yeah, I think it will happen. I just think it's way out there. I think they're gonna.
- [36:34]
Tip
I think that's probably right.
- [36:35]
Preston Pysh
Very hard to keep it in place. Okay, so you described all these rug pool things that happened through the previous cycles. You have a lot of rumblings online saying that the bitcoin treasury companies are the next wave of this. Well, I don't want to give you my opinion. I'll tell you my opinion after you kind of respond to that.
- [36:57]
Tip
Yeah, so I think I put a tweet out the other day. Bitcoins, call them what they are. That's basically what I think treasury companies are now, by the way. That's okay because every single. Remember, how did every single cycle in the altcoin space happen? It was a new distribution mechanism. So it used to be ICOs, then became yield farming, then it became meme coins. There's always a new way. It is funny that this cycle, the coins are equities who are now buying bitcoin. And the idea is if you give that company money, they will buy more bitcoin than you otherwise would be able to and their stock price will go through the roof, which will allow you to buy more bitcoin. It is literally the same mechanics. For a bitcoiner who's looking to build more bitcoin in a very fast and, you know, high adrenaline environment. It's coin trade. It's exactly the same thing. Now, that doesn't necessarily mean that the companies are going to be coins per se, but in a just a very rudimentary framework they are. And when I look across all these different treasury companies, it quickly becomes apparent that most of them, like any company or any business is going to be a Pareto distribution. There's going to be some that are going to really kick ass and stand out. And I wrote a piece the other day just about analyzing treasury companies and looking at various metrics, M nav days to cover a metric that I kind of iterated on called days to replace. Kind of like stock to flow. But for treasury companies, how long it's taken to double their overall stack price performance, A whole bunch of different things. I didn't look at all treasury companies because they're popping up like mushrooms at the moment. But the ones that I did look at it very quickly. If you run through these different filters. Basically strategy and Meta Planet were the only ones that really stood the test. There's going to be a bunch of other ones that are popping up here and there, but they're the two that stood out. The other ones like Semla has been really underperforming and all the miners have been very much underperforming. And some of my key insights here was go hard or go home. This is just very, very clear. If a company is not going all in on this treasury strategy, the market's just simply not rewarding them with a serious premium. So they have to be and you can see it right, Metal Planet hit gets to 10,000 bitcoin, sailor buys 10,000 bitcoin the next day. So this is like go hard or go home mentality. Over the long arc of time, M Nav has been compressing towards one. I've had this long term thesis that the gravity not the result, the gravity is towards one. And what that means is it. And I run this by going to the extremes. If a company stops doing all treasury operations tomorrow and said we've got enough, we're happy, we're good, that company would trade towards its Bitcoin treasury value plus whatever premium their operating business is worth. That's really what I would expect to happen. If the stock goes too high and the premium explodes out the roof, then the company has a massive incentive to sell stock and buy Bitcoin, which is going to increase your denominator and reduce your stock price. So they also have an incentive to push it back towards one. So there's always this gravity that wants to pull it towards one. And the companies that are going to be the most successful are the ones that continue to generate, whether it's excess volatility or some kind of premium. How do you keep the premium going? If we take the other extreme where let's imagine bitcoin on the balance sheet is normal. Every company does it. It's just part of day to day. You're a value investor. How would you value a company? Swap Fiat or the US dollar for Bitcoin? How do you value a company? Book value plus whatever their growth potential is the exact same story. So M Nav, the gravity is towards one. That doesn't mean it has to be one. There's jurisdictional things like Meta Planet where I think it's like a 50 or 45% tax to hold spot Bitcoin, but it's much cheaper to hold the equity. So there's a 2x premium that kind of makes sense. Baked into it. But again, it all depends when people buy the stock. If you're buying early in their growth curve and at a premium, that's not too excessive. If it goes, if the stock goes higher and they buy bitcoin and the premium stays at a high level, then you win. If you buy like strategy. A lot of people bought when the Premium was at 3x. We saw about $42 billion trading on the top. The premium has compressed like 1.4, 1.5. That means you got crushed. And there's a lot of people who didn't quite understand these dynamics and they bought when the premium was very high. The actual bitcoin balance could be the same, it could be higher. Premiums, compression, that's what squeeze people. Let's take a quick break and hear from today's sponsors.
- [41:04]
Preston Pysh
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- [44:44]
Tip
All right, back to the show.
- [44:46]
Preston Pysh
I think that last point, as a value investor and somebody who loves those principles, I mean, this was Ben Graham's big thing, was like, hey, if you're gonna pay. And he would always talk about growth stocks versus value stocks. And it's like you're paying 50 times earnings. You better be prepared for it to go to 20 times earnings and get absolutely annihilated. And it's a very similar concept. We're talking about balance sheet growth with bitcoin versus, you know, what Ben Graham was talking about was basically the income statement and the company's ability to grow its earnings and the multiple that's paid over that and for people that aren't familiar with any of these ideas, which I would argue was probably most people, they just kind of. They might hear a podcast, they might hear Michael go and talk or whoever, and they're like, wow, they sound really smart. I'm going to buy that stock. And that's the end of their analysis. They don't understand any of these financial terms or even the difference between an income statement and a balance sheet for a lot of them. And I'm not trying to say it and frame it that way as if everybody's dumb. People are just busy with what they do for a living, their livelihood, and they're trying to preserve what they've made and not lose it. And they listen to a little bit and they just go and make a decision on that because they don't have the time to know all this other stuff. So I think your point is really, really important. For people that are buying these things in lieu of just buying Bitcoin, you better know what you're doing. You're going to get destroyed if you don't know what you're doing because of the M navs 3 Michael or whoever who's ever running one of these companies. They're highly incentivized to capture that premium over the M Nav by selling more stock and trying to transmute it into more Bitcoin. And if you don't understand that and.
- [46:32]
Tip
You'Re not, you don't know where the yield is coming from. It's probably because you're the yield.
- [46:35]
Preston Pysh
You're the yield. Yeah, but that's talking more about the amateur investor that's trying to buy this and trying to really kind of wrap their head around it. But where I would push back a little bit is in the framing that they're all a coin company. This is a super complex financial thing that's playing out right now globally. And what I want to say about this is, what I think is happening is you're having somebody perform a service. If they're doing it at a premium of, this is hard. This is hard to explain. Let me explain it like this. Microstrategy. And I'm going to use them as the example because I think they're the ones that are doing this.
- [47:15]
Tip
They're the benchmark.
- [47:16]
Preston Pysh
They're doing this responsibly. And people might hear me say that and roll their eyes and say, what do you mean they're doing it responsibly? They're doing it in billions per week. But listen to what I've got to say they're providing.
- [47:26]
Tip
Fully agree, by the way, that this is my conclusion as well. The strategy is the correct benchmark, which everything else should be compared.
- [47:32]
Preston Pysh
Yeah. And I think to the point you made about Meta Planet, I think they're doing it somewhat responsibly, but they're in a unique position because of the setup that they have from a legal regulatory standpoint where it's so hard for people in that country to buy Bitcoin. And they've got this really unique setup where they can do it responsibly because of this gift that they kind of have by being in Japan. But let me just frame this from Michael's perspective. He is providing a service and he's being paid handsomely for this service that he's providing. And what the service is, he is securitizing fixed income, and he's doing this through convertible debt issuance, and he's doing it through preferred stock issuance. Okay, so what in the world does that mean? Okay, if you go today and you want to buy fixed income because let's just say you're in your 60s or your 70s and you just want some income on all the money you've made for your life, let's say you saved $2 million and you want to live off that $2 million and you need some type of fixed income percentage off of that $2 million. And let's just say the number is 5%, which would give you $100,000 a year. If you can lock in 5% somewhere, that's in fixed rate terms. There's always risk associated with putting your money in some type of fixed income instrument that might be if it's in a sovereign, it's the whether the government's going to out debase that percentage of 5%. You know, if the government debases the money by 7%, well, you just lost 2% of your buying power by not keeping up with debasement. If you're a corporate, if you're buying corporate debt, the risk isn't not only just the inflation rate of the currency, it's also whether the company can actually pay you back if they would go bankrupt. And if you're a preferred shareholder, it's even more risk than that because they might pay out all the, let's say they go bankrupt, they're going to pay out the fixed income bond holders first and then they're going to pay out the preferred, and then they're going to pay out to the common. So the risk is there. When you're talking about Corporates. So what is Michael doing as a service? When I say he's securitizing fixed income, what he's doing is mind blowing. Because if you look at traditional fixed income, they're going out and they're issuing this debt. They're taking all this money that they raised by issuing the fixed income or the preferred stock. They're taking that money that they made in the hope that they can make it all back and then pay that investor the dividend coupon, or the dividend or the coupon back to the investor. They either have to take it, they have to build some infrastructure, they have to make a product or service, and then they have to earn it back into the future.
- [50:10]
Tip
And.
- [50:10]
Preston Pysh
And it's all based on their ability to collect future cash flows. That's the risk to these investors today. And for decades, what Michael's doing, okay, which is drastically different, he already has the money. He doesn't have to go out there and earn it over the next five or 10 years or perpetuity if it's preferred in hopes that he can give you that dividend or in hopes that he can give you the coupon. He already has it. In fact, he's got like 5x what it is. And so what's so different is when we look at microstrategy as an example, if you add up the coupons that he's got to pay out and all of the dividends that he's got to pay out for everything that he's issued to date, guess what that number is?
- [50:54]
Tip
It's way more 2%. Right. I think I did these calculations, I looked at it. I'm like, it raised like $3 billion a month from memory is what I last looked at. So if he's raised 3 billion, I forget what the number of the coupons is, but. And this is before the latest stride issuance. Yeah, it was like 1.6 or 1.8% of his raise is being paid out. But it is a drag. And actually I'm curious about this the more that he issues these preferreds, because an insight that you had in Seoul, which I hadn't actually clicked to, is that he set them at 8% and 10%.
- [51:24]
Preston Pysh
Yeah.
- [51:24]
Tip
As a reflection of the monetary debasement to make it absolutely attractive over the long term. So I never quite clicked to that, but I always looked and go it's quite high because he was doing converts at zero, basically. Or he's got like an effective coupon of, you know, 5%.
- [51:39]
Preston Pysh
I framed it as well. He just looked at the M2 debate, global M2 or US M2, and like, he's just like, well, I'll just pay that. But I think if you talk to Michael, and I haven't, obviously I think that he would probably frame it more of, well, if you go into the preferred market Today, it's paying 6 or 7% and I want mine to be the most desirable. So I can afford to pay more because I'm fully backed with this $60 billion treasury of Bitcoin. But the point that I really want to hit home to people is if you look at the coupons that he has to pay and you look at the dividends that he's got to pay, it's around like 100 to 120 million annualized. Okay? That's not including the face value of the debt that he has to pay back. I'm going to put that aside. But if you just look at it from an interest expense, and I know dividends aren't interest expense, but let's just kind of treat them like interest expense. If you look at these numbers, $120 million to Michael, who's sitting on a 60 billion in treasury is a pittance. It's an absolute pittance. If we're just going to round the numbers and say they're 100 million. This is literally 600 times he has in the treasury of what he's got to pay out in the dividend and the coupon. And here's the other point that I think is really crazy for people to kind of wrap their head around. He can print more stock certificates and raise more cash to pay this stuff back if he really wants to. And I think that that's lost on these people saying he's, oh, microstrategy is going to have a margin call. Like that is the most brain dead thing. And we did hear that on the stage at Seoul. That is the most brain dead thing I've ever heard in my entire life. It's somebody who just literally hasn't done the math or even understands the math like at all. So when I say he's securitizing debt, what he's doing is he's literally, he doesn't have to go out and earn the cash flows in the future. He's already got them. They're sitting in the bank vault 600 times over what he's paying out in interest expense on an annualized basis. And this is, there's nothing on Wall street even close to this. And when you look at the fact that he's paying more, at least in the preferred market. He's paying 200 basis points higher on these coupons in the preferred market than anything else that's out there with literally a hundred times less risk. Like, bitcoin could go down 50% tomorrow. And like, he's got it for years in decades. He's got it for decades to make these payments. What's so interesting is he's securitizing fixed income and he's already got all the money in the vault to back it all up. And that's the thing that's blowing people's minds. And here's the recursive loop that everybody's missing and why this is so different than clown coins that were issued in 2017.
- [54:35]
Tip
Okay?
- [54:36]
Preston Pysh
He is securitizing this debt. They're going out and buying it. It's putting more bitcoin on his balance sheet, which then makes the common stock run. Okay, and what's he doing when the common stock runs? He's issuing more common stock so he can get more cash and buy more bitcoin, which allows him to. To securitize more debt or fixed income or preferred issuance. So there's this recursion. So somebody might look at this and be like, preston, come on, this sounds like a Ponzi scheme, right? But what I would push back is, what you're missing is that under the petrodollar system for four decades, you had central banks that literally just continued to pump and pump and pump printing into the fixed income market. They did this for 40 years. Right? And if you don't think that bubble is unraveling in some capacity or some way, you are out of your mind and you don't understand it. And so for people that are looking at microstrategy or any of these treasury companies, bitcoin, treasury companies that are number one profitable with a real operational business at the helm, and then securitizing fixed income, whether that's through preferred or convertible debt in a responsible way that's actually back. They actually got the bitcoin in the vault many times over what they're issuing. I just don't think that you, as the person who's skeptical or maybe calling this a scam, actually understands what's unraveling with a 40 year bubble. And fixed income's a 40 year bubble. I'm sorry, it's. It is. But I also want to preface something that you said, James, that I think is really important. There's going to be a lot of fakers out there that try to do this that literally have nothing. Like they don't have a company. They just, they're going out there and they're trying to securitize and they're trying to get this thing rolling. And I think that to do this you really do need to have a company. It needs to be profitable at a minimum because if you're not, you're going to definitely have to sell bitcoin. But yeah, those are some of my thoughts and I think there's a lot of jargon in there and people will hear the jargon and they immediately say this person's a snake oil salesman and they are a scammer because they don't understand like some of the terminology and they don't understand the 40 year fixed income bubble that's bursting and they don't understand like there's a lot going on here to kind of wrap your head around. But those are some of my thoughts.
- [56:57]
Tip
Well, I agree with all of it and it is a fascinating trend that we're early in. I agree that calling out like a strategy, a meta plan, I'm sure there's others but they're the ones that so far from my initial gut checks have basically shown up and go. They are doing it as I think responsibly is a fair way to describe it. I would. And there's two questions I want to ask you actually. The first one is this idea of them selling the bitcoin. So basically the idea is that strategies already got the treasury.
- [57:21]
Preston Pysh
Yeah.
- [57:21]
Tip
But in order to service those preferred and granted there's a, there's a phase shift that has to happen. We're in, let's call the growth phase. They're in the accumulation stage. For Sailor to sell a single satoshi from that treasury I think would just break everybody's confidence in the whole model. So I actually don't think he can do that. So what he's really doing is buying the next hundred years worth of dividend payments. Something you said in Seoul, which I thought it's so obvious. If it is accretive when your stock has a premium to your nav, it is accretive. To sell stock, buy Bitcoin 100% flip that around. M nav goes below 1, which I believe that we will have a down period in bitcoin, it's going to happen. So if you've been convinced by any influences that we're never going to have a bear market again, I would unfollow because it's going to happen because it always happens when we have a bear market. Many of these companies will see their own go below one. And in that world it is actually accretive for them to sell bitcoin and buy the stock the inverse. Now I don't believe that Sailor and strategy are going to do that because that is more or less why I think they've launched Strike Strife and now Stride. Stride is preferred that he doesn't have to pay the dividend and it's going to trade more like a junk bond within my base case. So I've kind of got two prongs to this question. The first one is when the M Nav goes below one for some of these companies, how do you think strategy and these, let's call them the responsible bucket, how do you think they handle that situation versus some of the smaller ones? I think there will be just the same way that miners have always been pro cyclical. They buy too many machines, they huddle too many coins, they go through the bull market peak and then they you could all out at the bottom of the bear. Many of these treasury companies, the smaller ones, the ones that don't have the grit the shareholder like because the CEOs have to act in the best interest of the shareholders, not in terms of bitcoin. And if that requires selling bitcoin to protect their share price and they don't have any other avenues, they will do that strategies of a scale where they have tools to do this. So two questions. What happens in the M Nav below one scenario and the second one maybe this is just a different topic. The Strike Strife Stride, he's setting up a yield curve. You can actually see what a fixed income does. What he's tokenized bonds, fixed income with Strife convertible debt with Strike and Stride is a junk bond. My I've got all three tickers on my trading view now because when they start to trade above or below a hundred dollars, that's going to tell me does the market think he's going to be able to raise dividends? Because if they think he's going to be able to pay it without selling his bitcoin, they're going to trade at a premium to their face value. Yeah, right. He's selling a hundred dollars for $103.
- [59:50]
Preston Pysh
Especially with it being 200 bips over, you know, even more riskier things.
- [59:54]
Tip
Yeah, correct. And then when they start to trade back towards or below a hundred dollars, that's signaling the market's going oh, I think we might be getting long in the tooth on this treasury company trend. And I am very Confident that in this early phase there is only so much demand and money that's willing to pile into these treasury companies. Serious pension funds and institutional capital are not buying the 52nd Treasury Company. Right. They might buy the first one, maybe the second one. There's only speculative retail money that's going to jump into these smaller companies. So I think there's an exhaustion point there, too. But so ideas there to bounce around.
- [60:28]
Preston Pysh
Yeah, so help below one. Let's go M Nav below one. All right, so the math is very simple. If the company's M Nav is below one and they're optimizing for bitcoin per share, they sell the bitcoin, they buy the stock back and that's how they're going to acquire more bitcoin per share. It might sound antithetical to somebody to hear that, but I would challenge that person. Go get an Excel spreadsheet, go work the math. And what you're going to find out is that what we're saying is a truth. Will he do that? Or. Let's talk about Michael specifically. I agree with you. I don't think he's going to do it. Even though it's.
- [61:05]
Tip
Because that's the reputation that's actually more valuable to him, I think to his shareholders.
- [61:09]
Preston Pysh
Yes. I think that even though that is a truth that we just said that he will have more bitcoin per share for anybody that's a shareholder. If he would do that under that scenario, I still don't think that he's going to do it. Because what is his product? His product that he has been. You know, people will say it's a data analytics company and it is. They have that product line, it only makes 100 million a year. His real product is a service and that service is the securitized fixed income. And so what I think he does is he potentially spooks that market of anybody that's in fixed income that's buying these issuance. He spooks them when he's selling the treasury of bitcoin that's backing all of this securitization of the fixed income. So for that reason, I think that that's why he won't do it is because he knows his real product or his real service is the securitization of fixed income.
- [62:02]
Tip
And sorry, just to jump in here, there's one thing that I think it was his interview with Alex Thorne and this, he had this one line that just sat with me and I've been thinking about ever since. He goes, someone asked like if you're debt is trading at a low level. Right. Distressed level, are you going to go out there and buy it back? And Michael just goes, no, Mr. Bond Investor, that is your opportunity to go out there and buy my distressed debt at a cheap price because the face value is $100 and you can pick it up for 50 cents.
- [62:27]
Preston Pysh
Yeah.
- [62:27]
Tip
And I think that's a good example of him saying like no, the market can go and pick this up because the opportunity is there and I'm going to follow through. So I think that's something that sat with me ever since he said it.
- [62:35]
Preston Pysh
Yeah, yeah. I think he's very consistent in his messaging. He's very consistent that he is going to be the major player in the United States for securitizing any type of fixed income. That's what he is messaging to the market. And so far what I mean the amount of bitcoin that he has been able to put on the balance sheet by doing this is mind numbing. And just because you don't. Yeah. And just because you don't understand it or you think that all we're doing is just spewing a bunch of financial jargon, I would highly encourage you to dig way deeper. The other thing that I would say is the second part of your question.
- [63:13]
Tip
So the second part is as we go down this so m nav below 1 I agree that Sailor probably met a planet. I'd say that M Nav's compressed in a bear market. But my base case is that we're going to just like miners and I think miners which are also now treasury companies, they'll do the same thing. They will all puke out their coins at a low price whether to protect their share price or whether just because they don't have the CEO ownership that Saylor does and. Right. That the buying.
- [63:37]
Preston Pysh
Yeah.
- [63:37]
Tip
So a lot of these companies who don't aren't all in, they're kind of half in. And I actually strange enough and from my studies I would put miners in the same bucket as being half in because your operating business is incinerating capital. Miners job is to burn money and dig in a hole in the ground. So as a result that business will take over in the bad times. That's going to be your primary thing that you have to look after and your treasury is secondary to making sure that those miners keep spinning.
- [64:05]
Preston Pysh
So when we're thinking about this idea of securitizing fixed income, what it comes down to is having a pristine balance sheet that isn't imposing more Risk and not making the issuance riskier. And so when we think about a business that, let's just take a miner for example. Let's say that half of the revenue that's coming in is a lot of risk. And they're not like Microstrategy is a perfect example. If you got $60 billion worth of Bitcoin on the balance sheet, the operational business is a pittance of that. It's almost unnoticeable because it's so small in comparison. If you're buying the fixed income instruments that he's issuing through convertibles and preferreds, you're not worried about the impairment of the operational business really messing up the value of that because he can pay it for literally decades beyond what's been issued. And so you could make the argument that the smaller that the operational business is, as long as it's still kind of profitable relative to the size of the bitcoin makes him a better service provider of these fixed income instruments. Whereas a miner convolutes that risk through all of their operations and their sheer size and their capex and all these other things that they've got to potentially service and potentially impair the fixed income issuance.
- [65:25]
Tip
So and I think at the end of the day what we're looking at is that sailors that the bitcoin treasury company. I think this is what my biggest insight from this whole study. The idea of a bitcoin treasury company is not to just accumulate bitcoin, it's actually to accumulate bitcoin and develop some kind of a system like what Saylor is doing, which is a his to fly business line. Yeah, his business, exactly. His business line is actually the issuance of the debt. That is actually, that is what he sells as a product.
- [65:52]
Preston Pysh
100%.
- [65:53]
Tip
There is a huge market for volatility common equity. There is a huge market for fixed income, literally fixed income and fixed income, which is paying substantially more than everything else. Yeah, that is the product line. The treasury is the result and the means to the end. There's going to be a lot of companies out there that are like I'm going to buy bitcoin because buying bitcoin is what we do to get our stock price up. Those companies are not going to be in the same bucket as let's call the responsible. However we want to frame it, that is where there's a massive distinction. What is your product that you're serving? And Saylor has found a very interesting, very unique niche in this particular field.
- [66:28]
Preston Pysh
Well, I think Semler is probably a really good example of exactly what you're saying, where they went out and bought Bitcoin. How much do you know how much.
- [66:35]
Tip
They bought and put on the 4200, last I checked.
- [66:39]
Preston Pysh
So they got 4200 Bitcoin. I looked up the financials. They made like 30, 40 million net income, I want to say, in the last year that they've. So they're a profitable company. They can continue to sweep those cash flows into Bitcoin, which historically has 40 to 50% annualized return profile. So when I'm looking at Semler and it's trading below its Bitcoin on the balance sheet, somebody would say, see, here's an example of a company that this doesn't work. Like what Saylor's doing doesn't work here. I just think that the market's looking at them and first of all, with a base of shareholders that's way different than the shareholders that are holding MicroStrategy and buying all of the stuff that they're issuing and the common stock itself. You're dealing with a medical company, right? And so you got to swap out all those investors for them to even think that they're going to try to do what Saylor's doing. And I don't even know that they're going to do what Saylor's doing by trying to securitize fixed income as a service in addition to their medical operational business. And so they're kind of caught in this limbo of like, what are they? And the market's confused and that confusion might continue to persist, you know, but if I'm the operator at Semler, I'm just saying I don't care what the market's valuing me at. I'm going to continue to do my operational business. I'm going to continue to make money and I'm going to continue to sweep this money into Bitcoin. And if the market just so happens to start valuing my business above the asset values of the Bitcoin on my balance sheet, maybe I'll issue some more common stock. Because it's really simple. If your company is trading at a m NAV of 1.5, let's say Semler gets to that at some point in the future because the market starts to value it differently. I mean, he's buying the bitcoin for a huge discount by issuing more common stock and just sweeping it into bitcoin. So he's incentivized to do that and he will have. And I think this is important too. For anybody that's doing this strategy of holding your treasury in bitcoin, you have this option at your fingertips to exercise if the market ever puts you in that position, which is amazing. So it is different. I think that in the future you're going to have some. A couple major players in this space. You know what's really interesting, James, is 21. So 21 comes out. I had no idea for the most part, like, what the operational business is. And going back to our original point of you probably need to have some type of operational business that makes money. I think that's all true. I stand by that. But what I think is really interesting about 21 is how capitalized it was in bitcoin terms. So that I think they can run the exact same strategy that Sailor is going to do, which is start issuing fixed income and securitizing fixed income that is backed by just a ton of bitcoin. So, like, why did they seed it with so much bitcoin? I think because they.
- [69:40]
Tip
Yeah, that's. You need the scale. You need the scale to get going, right? That's right. And one of my points in that, because there's a lot of people, and for my subscribers, I try to make sure that none of my subs feel like a deer in the headlights at any point. Right. I want everyone to be too surprised. And a lot of people that naturally a lot of people are going to feel FOMO as they see like Metal Planet ripping through the roof and this treasury company ripping through the roof. And I think it's really important to recognize, like for 21, for example, unless you were in the telegram group, where people were discussing that they're going to do a SPAC with cans or equity partners, unless you were in that group, you're never going to catch that initial pump. And since then, right, they immediately shot to an M nav of like 5 or 5 or something like that.
- [70:20]
Preston Pysh
But it's still not. It's still not trading like in the public market.
- [70:23]
Tip
They haven't completed the stack yet. So there's a risk factor in there as well. So, yeah, look, there's a potential and a possibility that they go and try to compete with strategy. And again, competition is good in all facets of business. So that would be a good thing. And I think obviously they've got the scale, they've got the backing, they've got, you know, tether's got a huge amount of bitcoin behind them. So there's a whole lot of things that they could do there. But just don't lump into these things. I know a lot of people have bought into this CP not realizing that that SPAC represents like 2.7% of the eventual shareholder equity.
- [70:53]
Preston Pysh
Yeah.
- [70:54]
Tip
So I initially did the calculation. I was like, hey, look, the Rev Nav is trading it like zero point. It was like, you know, 0.05. I'm like, hey, it makes sense. But then I found out it was a 22.7 equity share. And then you've got to flip it over like, oh, no, no, no. They're not trading at a. An M of 0.2. They're trading at him and have a 5. But suddenly you realize that you've got to be in the right room before these things move. Don't go feeling fomo. If you miss the latest treasury company, they're going to come and go all the time. And that's why I think spending more time studying on the really, the ones that have staying power, particularly when the bad times come, I think is going to pay a lot more dividends. And as a value investor, to me, a way more beneficial process.
- [71:31]
Preston Pysh
Two points on that that I think are really important for the listener. Number one is going back to what we said earlier in the show, which is as a retail investor or somebody who's looking at all this and saying, oh my God, I feel like I'm missing out because these people are going on these shows and talking about these things and they're really smart. I. It sounds like they're really smart might be the other the best way to describe it. And I need to own that. Like, if you're buying it at an m nav of 5 and it's just hitting the public markets, like, what in the world do you think is going to happen with that? It is going to be the most volatile, violently traded thing on planet Earth.
- [72:09]
Tip
As it drives the Bitcoin in 2013.
- [72:12]
Preston Pysh
Right? Yeah. I mean, you want a flavor of that.
- [72:14]
Tip
And a lot of people jump on the bandwagon like, whoa, it's volatile to the downside of, like, yeah, it's going to be volatile to the downside a lot.
- [72:21]
Preston Pysh
Yeah, well. And who knows, in the first days that it's listed, you might see a rip to seven, a multiple of seven, back down to two, then the four, and then the one and a half. And if you're, you know, if you're investing in this and you don't have the stomach because you don't even understand what I just said or what that even means, you are going to be in for the Pain train as to how these things are going to be received and hit into the public markets, especially considering it's something that we've never even seen before hit public markets. This idea of a company that's securitizing fixed income with bitcoin as its backing, like all this stuff is like never been done before. So that's the first thing I really want to impress upon people that are listening to this is be careful out there. If you don't deeply understand this stuff, buy. And you like bitcoin, buy Bitcoin, right?
- [73:13]
Tip
Just look at what the companies are doing. They're selling the equity to buy the bitcoin. They are telling you which part is the valuable bit. Just nothing wrong with just stacking stats.
- [73:22]
Preston Pysh
So that would be the first point. The second point that I just want to kind of foot stomp is going back to like, maybe you do have a competitor that's a worthy competitor to MicroStrategy simply because they have so much Bitcoin that they're starting out with on the balance sheet. And it seems like they deeply understand like what his business really is, which is the securitization of fixed income. And they're really trying to, to make a splash and go into competition with him. And what I think is an interesting talking and I'm really curious to hear your thoughts on this. How does this evolve from a competition standpoint? Is there a market for three of these types of companies in the United States? Is there a market for 10 of these companies?
- [74:05]
Tip
Is there a.
- [74:05]
Preston Pysh
Or is there a market for one of these companies in the United States? Like, how do you see the sizing? And I think internationally we're going to see a bunch that kind of crop up and kind of take different fixed income markets around the world. But in the United States, how do you see that competition playing out? Is there space for 21 to play against MicroStrategy?
- [74:25]
Tip
Yes. No. I think it's a very interesting question. The truth is I don't know. But what I do know is that there is not room for a thousand or ten thousand.
- [74:32]
Preston Pysh
Yeah, yeah.
- [74:33]
Tip
That's one thing I do know.
- [74:33]
Preston Pysh
So.
- [74:34]
Tip
And that's why I think it was good that we actually touched on the experience of last couple of cycles because we have already seen the lessons of how markets adapt when you give them a certain set of stimulus. In the ICO days, there was like a couple thousand coins and they all went up together in the yield farming phase, it went through waves. There was like, you know, the L ones went. Then this went and that went. And then in this cycle they're just. There was millions of tokens being printed every single day and the cycle lasted in a blink of an eye.
- [75:03]
Preston Pysh
Mm.
- [75:04]
Tip
This is the same idea. If you oversaturate the market with too many of these things, everyone just goes, ah, I can't. Like, how do I pick between these things? I'm just gonna buy an index, right? I'm just gonna buy an index and not worry about it. And then you get the balance waiting and you get the magnificent seven. That's what passive ends up looking like, where it just continues to wait towards the biggest. So I also think potentially you've got like a Microsoft and an Apple type scenario where you've got this kind of duopoly on these two different entities. So I think there could definitely be room for two. Competition is always good. You're probably gonna have one that's gonna be bigger than the other. I don't think there's room for a thousand. So it would probably somewhere in that gray zone far more towards the Pareto distribution dynamic. As we've seen in the bitcoin world. Right Strategy really is the bitcoin of treasury companies and every other business is trying to either find their unique niche or find where they sit in the broad spread of things. So that's my general mental model. I also think that going back to what we said at the start of this call, if we are in the euphoric phase of this bull where leverage is now, everybody's friendly and people are starting to get very confident in the bulletproofness of the bull, and I still remain bullish as long as we're above the short term cost basis. I remain a bull. But I'm also seeing a lot of signs saying we're later in this bitcoin trend for this particular cycle. Assuming cycles aren't going to be, are going to be the same. And they may not, they could completely evolve. But one thing I know is definitely a characteristic of late stage bulls. In every market, in every asset is leverage and speculation. And we are seeing a lot more leverage and speculation. But they're the things to just pay attention to. As these companies pop up, do they have the grit and the tools and the toolbox to survive in downtrend? And the downtrend may only be down 50, 50%, but it could take a year, it could take a year and a half. It could also be that there's an endless amount of printing that's about to come and go through the roof. All these things are Possible. These companies need to be able to survive all these scenarios. I'm just curious because I know we haven't touched on it. What are your thoughts on the strike, strife, stride? This I find such a fascinating idea.
- [77:03]
Preston Pysh
Yeah.
- [77:03]
Tip
As a civil engineer's background, I'm learning about bonds. I understand how bonds work, but I actually charted these things out and I showed the effective yield for the 8%, the 10%, and then where each of those assets currently live. And it was the first time I've actually like done the work and visualized how yields trade. Tom. How bonds and yield prices and yields change. I was like, ah, okay, that's really interesting. How do you think strategy. Because they are in this more mature position. So even if 21 does get to their scale, strategy has a much bigger toolbox at this later stage of the bull market in determining how far it goes. That toolbox. How does he deal with strike, strife, stride? The first two obviously have to pay the dividend. Stride is interesting because he doesn't have to pay the dividend.
- [77:47]
Preston Pysh
Yeah.
- [77:47]
Tip
So he's in a very interesting spot where if he wants to generate demand for it, he should probably pay the dividend. My assumption is he'll pay the first dividend, but there will come a point in time where he's going to sell stride, probably in the bear market. It's going to trade most likely at distressed levels, I would think. But he's really, really. What he's trying to do is take pressure off the common equity.
- [78:06]
Preston Pysh
He's really incentivized to pay that thing relentlessly, the one that he doesn't have to. He's to pay it relentlessly. Get the whole market in there believing, oh, he will always pay this thing so that he has the option to not pay it. And he does that after it does a whole bunch of more shares issued under that vehicle. Right. So it almost be like poker where you never lie. Anytime you have to flip your cards over, you're always telling the truth. And then at the very, you know, you're late in the game is when you pull up the massive bluff and you're paid handsomely for, you know, convincing everybody that you were always going to tell the truth. That's how I would. I know that.
- [78:46]
Tip
Interesting.
- [78:46]
Preston Pysh
That sounds horrible.
- [78:47]
Tip
No, no, I think that makes perfect sense. That was my, like, base case that he had to pay these things up front.
- [78:52]
Preston Pysh
Yeah.
- [78:52]
Tip
To generate interest. Because if he just immediately stops paying them.
- [78:55]
Preston Pysh
Yeah.
- [78:55]
Tip
It's. Yeah. It's going down to 30 cents.
- [78:57]
Preston Pysh
Yeah. Which then if he's Issuing more shares. He's only getting 30 cents on the dollar and. But he has to pay or he doesn't have to pay anything. But he can raise a whole lot more through that vehicle if he continues to convince the market that he's always going to pay the dividend.
- [79:11]
Tip
It's also very interesting that he's issued Strike, which was the convert, a tokenized convertible debt. Then he's done strife and he's got people used to this idea and then he's done Stride. It is very, very clever the way that he's actually structured this whole thing out the way I looked at it because my long running thesis for MSTR is I was hard for me to see how it did well in the bear market. There's a lot of people at the moment who are saying it's not doing well in the bull market either. But at the same time I was like, in the bear, it's going to be tough to raise capital. I can now see a bigger toolbox and I understand a lot more about how he's going to navigate the bear. Then I take a look at all the other treasury companies. I'm like, you guys are so far behind, you're not even close to the ability to withstand a drawdown.
- [79:53]
Preston Pysh
He's built a transmission, right? At the end of the day it's like a bicycle that, you know, it's a 21 speed bike. And if you're going up a really steep hill, call it a deep bear market. There's a lot of adversity in your environment that you're dealing with. He has a lever to pull that puts him in a different gear to be able to handle that environmental setting. And by issuing all these different securities into these different pool, think of them as like different pools of capital that you can issue the securities into. There are junk bond mandates that that's what this fund does is buy junk bonds. And so he wants to suck on that soda straw of capital onto his balance sheet to transmute it into Bitcoin. So he's just going out to all these different buckets of capital that are there and he's creating a gear for each one of these things that then he can use for his environmental setting that he's dealing with as that constantly is changing. If there's one constant in the world, it's that change. You better be ready for change, right? And so that's what's really unique about Microstrategy is I think that they are geared for all sorts of environments to try to continue to Keep the m nav above 1, because if it doesn't, then he's got this really challenging situation that we talked about earlier in the show.
- [81:06]
Tip
Or he then says, that's your job, Mr. Distressed Equity Investor. This is where you step in and that's your opportunity.
- [81:12]
Preston Pysh
He's on record saying that he's just going to sit there on his hands and wait for the environment to change. And what he's got going for him is bitcoin is just so volatile it can change on a dime. And if the governments print a bunch of money and flood it into the system, Bitcoin's going to rip and then the common stock is going to get whipsawed with it, as I think the way he would think about it. And then he's back in the business of securitizing fixed income.
- [81:37]
Tip
So it's funny, I wrote a piece of some, in fact, very early when I started the newsletter about a year and a half ago. And I called it the Flip Floppening, documenting my journey, how I came to the conclusion of being bitcoin. Yeah, I call it the Flip Floppening because through that journey, many of us will have done this. I was like, wait, Ethereum is the best thing, sliced bread? I'm like, actually, you know what? I don't think it's going to work. And I would keep going back and forth. And eventually the more that I studied, the more I go, no, it is, it's cooked, it's not going to make it. Yeah, for strategy. This is the only other time when I can like observe my own mental processing. And I have flipped through, flopped back and forth just the same way, but instead of falling on the side where I'm like, no, it's cooked. I'm actually flying on the side being like, you know what, this is kind of brilliant and it's fascinating. It's taught me so much about financial markets. So it's the only other time, I think in this space that I can remember doing so many back and forths, but just falling on the opposite side in a positive camp. And they are, they're just in a league of their own. It's a fascinating dynamic and I've learned a hell of a lot.
- [82:33]
Preston Pysh
I haven't sold my leaps. They come due in December, so we'll see. I'm still holding on to them and I don't know, I'm hopeful. But I think more interestingly is we are getting a master class in just financial engineering in macro. I mean, it is just beyond fascinating to study and to discuss from a financial media standpoint, because it's just endless. The. You're just seeing stuff that's never been done before.
- [83:04]
Tip
Totally.
- [83:04]
Preston Pysh
I mean, it's.
- [83:05]
Tip
The one thing that has struck me recently is bitcoin. As simple as it is, the orange boomer coin just continues to invent new narratives to bring it back into the limelight. They just can't keep it quiet. It's amazing to watch. And you compare that to the rest of this space and they don't have any narrative. So it's fascinating to watch that Bitcoin just reinvents itself. It just comes back from the dead time and time again. And here we are in 2025 and nothing has changed. Yeah.
- [83:33]
Preston Pysh
Well, James, I appreciate it. I really enjoy these conversations. This is what we were talking about when we were in Seoul. Right now we're just putting it on the airwaves. Thank you so much for coming on. Give people a handoff to your newsletter and anything else that you want to highlight.
- [83:46]
Tip
Thanks, mate. Head over to check on chain.com so our newsletter, we do two a week, written and video. And a lot of people, a lot of our subscribers have said that it's like having a second opinion because we all have our, like bitcoiner instinct. And a lot of people go, you know what, I just got to see the worked example. Like, that's why I felt that way. Okay, makes sense. So it helps people, like really articulate their internal thoughts and feelings. Just give them the data and the evidence and sometimes a brand new opinion on how these things shape out. But also check out our charting website. We've got all the charts are free. We've got stuff for strategy, treasury companies, and pretty much any bitcoin chart you could want. So head over there at check on channel. Com.
- [84:19]
Preston Pysh
All right, thank you, James. And we'll have to do it again soon.
- [84:23]
Tip
Good on you, mate. Thanks a lot.
- [84:24]
Preston Pysh
Thank you for listening to tip.
- [84:27]
Tip
Make sure to follow bitcoin fundamentals on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com this show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by the investors podcast network. Written permission must be granted before syndication or rebroadcasting.