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MSTR cannot be broken, even with Bitcoin at $30,000.
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But in protecting its balance sheet,
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the company just destroyed a fifth of its Bitcoin per share in three months.
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That's exactly what my guest today, Dan Hillary, explains.
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Strategy set up their balance sheet so it can't be broken.
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You can't bankrupt the company by sending Bitcoin down to 30k.
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Over the past three months, they've destroyed Bitcoin per share in the order of like 20%.
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That's kind of his bottom behavior.
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As well as exactly why he believes Strategies MNAV gets capped at two.
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I'm surprised the MNAV is even positive,
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especially considering strategy is a seller at MNAMS around two. It would be kind of unwise,
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in my opinion, to think it's just going to explode. And why he still thinks the bottom
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is already in. Strategy selling the Bitcoin is a great bottom indicator signal. I think the worst
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is behind us. Markets top on good news. They bottom on that. And stay to the end for why he
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says the four-year cycle correlation broke on the day we recorded. His take on the metaplanet
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controversy and why MSTR eventually hits $1,000 per share. I'm your host, Rob Wallace. Let's get
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into it. All right, Mr. Dan Hillary, welcome back to the show. Hey, it's good to be here, Rob. It's
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been too long. Cheers, man. Yes. Last time we talked, it was June 10th. I looked up the date
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and that was right before it really felt like the wheels came off when it came to STRC, MSTR.
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And it really, it really was the bottom, you could say this whole entire cycle was the,
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the strategy FUD that happened just a couple days after we talked. So let's go back to those days
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in mid-June when it did feel like this whole entire trade was blowing up and there was calls
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for a death spiral for MSTR. Let's go back. What were you thinking when everything really looked to
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be imploding? I think everyone had their eyes on the cash reserve, right? So the context leading up
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to June is really important. Strategy has this product, STRC, which is their variable rate,
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fixed income, preferred equity security, and it is supposed to trade around par, that $100 price
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point. And it was trading at $100 for like three or four months straight. And every time it hits
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$100, Strategy is able to issue more via the ATM. They use that capital they raise to buy more
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Bitcoin. This increases the amplification or the leverage on the balance sheet for the common
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equity. And, you know, it is grows a market cap for stretch. So it hit a hundred, they'd issue
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more, blah, blah, blah. And then, you know, on their balance sheet, they have this cash reserve,
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which is used to pay dividends in the case that, you know, they can't raise capital from a common
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or Bitcoin goes down. It's just kind of a security measure. And they use the cash to pay off a convert.
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And if you're kind of a spreadsheeter, you would, you would understand that by doing this,
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it was actually credit positive to STRC. So STRC sits below the senior debt on the balance sheet.
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So if you use the cash to pay off the senior debt, there's more collateral for the STRC on the
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balance sheet. But the market didn't view it this way. Now there's less cash backing the dividends,
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and it seemed like the market got really scared. And STRC started trading off. It started trading
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off, and Bitcoin was simultaneously trading off from $80,000 to essentially $58,000. And
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And, you know, simultaneously, STRC was trading from 95 to 94 to 80 to 85 to 80 to 75.
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And so it was kind of a disaster.
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And, you know, combined with all of this, strategy has these converts that come due.
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And the put dates are about a year before the converts come due.
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And so those are considered kind of near-term liabilities that they have to meet.
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And up until this point, strategy hadn't sold Bitcoin since 2022, the bear market in 2022.
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to, and they're a lot less relevant then, right? And so the market was kind of pricing in either
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one strategy, you can have to sell a ton of common equity below one times MNAV to pay off the converts
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at some point in the future if Bitcoin doesn't recover. And two, if they can't raise more capital
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from stretch and they have all these dividend obligations, how are they going to meet them?
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And so strategy's plan to kind of assuage the market was, look, we're going to sell a lot of
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Bitcoin, rebuild our cash reserve, try to get the stretch back to par. And then that cash reserve
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will be both kind of serve two purposes. One, to cover the stretch dividends and rebuild confidence
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and stretch. And two, to potentially meet convert obligations as they come up if Bitcoin doesn't
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recover. And so I think the market saw this kind of strategy puking Bitcoin at the bottom and common
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equity sales at one MNAB as like, okay, strategy is prioritizing their common holders. The market's
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not dumping even further the Bitcoin market as strategy selling. So it was almost a reverse
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bullish catalyst, right? Markets top on good news. They bottom on bad news.
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I mean, it's pretty funny that Saylor sold at the bottom in 2022. And then again here,
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and a lot of that came with the fact that he had said, never sell your Bitcoin, right? And then
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strategy goes and does it. And then he comes out and says, I never said for us to never sell our
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Bitcoin, but for you to never sell your Bitcoin.
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Talk about the messaging there and the fact that they did it looks like sold both bottoms I mean I think being dogmatic about how you invest in Bitcoin look I don have like really
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strong feelings about this never sell you a Bitcoin, but then he then he sold his Bitcoin.
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I mean, they're a public company operating in the best interest and a fiduciary duty towards
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their shareholders, that being all the common shareholders and the preferred shareholders.
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And things change, landscape changes. Like that's the story of entrepreneurship is you must,
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you have to be able to pivot and change your perspective in the way you're executing your
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strategy. So I just think people are a little bit, look, you can fault them for it or whatever,
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but these guys are in the market learning how their securities trade. And ultimately,
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what they're trying to do is a creep, Bicklin, Per Share for the common and half stretch trade
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at par. And they're doing whatever they can to make those two things work simultaneously. And
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that's a very difficult job as the market's putting pressure from all sorts of directions
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on you. So yes, I do believe, however, though, that strategy selling the Bitcoin is a great
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bottom indicator signal. And I think there's a lot of big fish, a lot of big Bitcoin traders
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looking at this and saying, okay, this is what we needed for kind of a capitulation style event.
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Yes. And since then, they've been able to recover. STRC is back in the high 90s after
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falling to the mid 70s. But before we get to that recovery story, did you feel as if there was ever
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a point in which they were in real trouble? I think the only point of real distress was when
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stress was trading at kind of $70. Bitcoin is a kind of 58k. And they had these convert obligations
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coming up in the next 24 to 48 months. And they were issuing common to raise cash at a discount.
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and it didn't look like bitcoin was going to recover anytime soon um so you know if bitcoin
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had traded off to 40k it would have been really problematic for the common like it would have gone
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very very low and the amount of effective dilution on a percentage basis of the common that was needed
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to raise the cash to rebuild the cash reserve would have been even higher so i think that could
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have been a problematic scenario but the fact that they were willing to sell bitcoin was very important
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with regards to rebuilding the cash.
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So look, there was never really an existential threat.
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It was just like, how low does the common equity go?
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It was kind of the main question,
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but that's always the question, right?
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How high does it go and how low does it go?
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Price, price, that is truth in markets.
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And one thing they've done,
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they've sold a lot of MSTR and Bitcoin to raise cash.
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And I mean, of course,
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Saylor always says that the story
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that got him into Bitcoin was the fact
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that he was sitting on a billion dollars
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in his corporate treasury
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and called it a melting ice cube.
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And now they've got over 6 billion melting ice cubes sitting in their treasury in the form of USD.
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Talk about the raising of cash, how they did it, and is it at a level now that is sufficient?
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Yeah, I think their cash reserve is more than sufficient, about four years of dividend coverage.
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That doesn't include.
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So I was just on a call with strategy, and it's really important the distinction between the USD cash or the USD reserve and the USD cash.
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I'm not using the right terminology, but so the, I think it's, let me look right now.
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So the larger of the two is reserved only for dividend payments and it's the USD reserve.
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And that's $5.1 billion.
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And that to be used for anything other than dividend payments on the converts or the preferred
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securities there, it requires board approval.
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So it essentially has to be used for dividend payments.
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It can't be used to pay off a convert like the mistake that we saw in June or July.
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There's also $1.3 billion of USD cash.
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And the USD cash is more of an opportunistic cash pile, which they can use to buy back stretch, buy back the converts, pay dividends if they so choose.
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But looking at those two, those combined, you get roughly over four years of dividend coverage.
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And I think that's very important. And for any sort of market participant, I think that's more coverage than what depends on how you consider free cash flow as dividend coverage for debt, like valuing a traditional equity.
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But this is a really robust, strong balance sheet with regards to dividend coverage into the future.
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And I think it's plenty. I think it's more than enough. And over long periods of time, the cash will be a drag on the common.
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So I think it should come down over time, but that's up to the management team.
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Have they made anything clear that we have enough cash now that we've hit our level, or is it purposely ambiguous?
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I think it's purposely ambiguous. I do think a trap they've run into is making hard and fast guidance and then not necessarily adhering to it. And in a lot of those circumstances, it was the right move not to adhere to it because the market conditions change and they were unable to continue adhering to those capital market policies or guidance.
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but I think they're staying away from saying, this is exactly what we will do. Clearly,
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they stopped raising cash So I think I take that as good as any as a signal that they done raising cash in the meantime It really funny in markets how the more ambiguous you are the better off Because once you set lines in the sand you create targets and they are on your back
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And other market participants will come in and try to sniff those out and hunt you there.
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Talk about that in terms of the attacks on Sailor, the guidance and the levels that they've set.
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Yeah, I mean, I think the market always has this kind of liquidation target for Saylor or, you know, his average cost basis is also kind of this boogeyman that the market tries to nail down.
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And everything you said is right.
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Yes, there are kind of targets and the market participants are looking to capitalize on these pain points.
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You know, a lot of this comes from strategy having this unique dynamic where they're a net seller of equity into the market and also a net buyer of Bitcoin.
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So that creates pricing dynamics in both the MSTR market and the spot Bitcoin market.
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And so a lot of traders trade around that.
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But I think that's all kind of short term, short term noise and like long term, like strategy set up their balance sheet so it can't be broken.
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If they had a bunch of secured debt and there were like margin call provisions and stuff like that would be a different story.
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This is why the preferred securities were invented in the first place, or not invented, but incorporated in strategy balance sheet is because they're permanent capital and you can't bankrupt the company by sending Bitcoin down to 30K.
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So they've incorporated these preferreds into their company strategy, and it seems as if that is the most important thing at MSTR at the moment.
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But define the dynamic between STRC, MSTR, and BTC.
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And do these things sort of hold each other hostage?
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How does it really work out in total?
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Well, the whole idea is like you've got this Bitcoin and in strategies management's belief,
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it's going to go up 30% a year for the next 20 years.
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So if you have this non-counterparty risk, sovereign asset, bearer asset, you ideally
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want to take leverage on that.
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But if you want to outperform Bitcoin, that's kind of the goal of strategy or MSTR, the common equity.
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So if you want to outperform Bitcoin, how do you do it?
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You lever it, but you don't want to lever it such that, you know, you take on liquidation risk.
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And so the idea with the preferred equities was simply, you know, we can issue preferred securities at a higher cost of capital than we could get a typical loan.
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And we will reinvest that into Bitcoin.
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The preferred securities holders will make a very healthy yield, whereas the common holders will make the difference between the Bitcoin price appreciation and the cost of capital via the preferred securities.
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And they'll also make kind of Bitcoin outperformance over a long period of time without the sort of margin call or debt risk, debt financing risk that we may run into with different forms of straight debt.
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And, you know, the icing on the cake is with the preferred securities, you have an ATM shelf registration. So strategy is able to continuously lever up their balance sheet by issuing more STRC as kind of the Bitcoin price grows.
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So there's a lot of kind of frictionless leverage that's able to be employed without the liquidation risk via the preferred securities. And again, the preferred holders have the benefit of all the collateral on the balance sheet, and they're paid a very healthy return over long periods of time.
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It's like a carry trade, right?
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You're getting this fiat decaying cash flow that's backed by the price appreciation of Bitcoin.
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That's how I would think of kind of SGRC.
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And common shareholders of MSTR, I think over the last year, have sort of felt like the redheaded stepchild that they've been put in a corner, forgotten about, and have been diluted.
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What's the message for them?
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Of course, it should go up when Bitcoin goes up, but everything that strategy has done in the past year, how do you think the common shareholders should feel after all of it?
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Look, I mean, I think a lot of people just, I mean, I was a common shareholder for a long time.
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And a lot of people put way too much emphasis on management's ability to manipulate market prices of the security amidst kind of natural market price fluctuations, right?
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Like if the ComEquity trades up to 3MNAV, there's no way that management can ensure that it continues to trade at 3MNAV.
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And it's your kind of, it's your impetus.
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Like you need to make the decision to allocate based on your valuation of the company.
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No management team can set what PDE their stock trades at.
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They can only help or they can only encourage growth.
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They can only drive growth of the equity And so I think you have to do your own valuation framework for the common equity And like okay so strategy down back to a little bit above its 2020 all high They accreted Bitcoin per share over the past four years Over the past three months they destroyed Bitcoin per share in the order of like 20 That kind of just bottom behavior But look I think there this going narrative that the long fair value multiple over net asset value of the company is somewhere a lot of people think it somewhere
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in the multiples of MNAVs. And I just really don't believe that. You look at any sort of
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long-term holding company like Berkshire Hathaway, JP Morgan, they trade at modest multiples like
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sub two over the book value of their assets. Now, that's not to say during Bitcoin bull markets when
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it's really running, the amplification should drive higher MNAVs. So like there will be hot
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periods of sustained higher MNAV during kind of aggressive Bitcoin runs, but during Bitcoin
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drawdowns, it's a leverage. It's just a kind of the price of the leverage. I think of the MNAV
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in these equities as the price or the cost of the leveraged capital structure. So when the leverage
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is really valuable, when the price of Bitcoin is running and the amplification is taking hold,
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The MNAV will expand, but in a bear market like we're seeing now, I'm surprised the MNAV is even positive or was positive during the last drawdown because the amplification works in both directions.
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So that's how I look at MNAV, and I think you need to be tactical about your allocation and when you enter these equities.
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So yeah, long term, we shouldn't expect an MNAV above two, right?
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I don't think. I mean, especially considering strategies of seller at MNAVs around two, as we've seen historically, it depends. I mean, they could buy cash flowing businesses or whatever. But again, MNAV is the price of the future Bitcoin accretion, which largely is driven Bitcoin per share accretion, which is largely driven by amplification and the terminal CAGR Bitcoin.
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And so you can kind of price that MNAV based on your expectations, but it would be kind of unwise, in my opinion, to think it's just going to explode.
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Like, this is just a crazy kind of idea.
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Yes.
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And we've seen Staler.
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I mean, they're learning in the public, right?
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They're a public company.
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They have to experiment, try new things.
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And, I mean, that comes with its bumps and bruises because every single move is going to be scrutinized.
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But it seems as if the final call is that STRC is the way.
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Let's talk about the other preferreds.
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Are those going away?
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And is STRC going to be the only thing they offer in the future?
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The other preferreds are super interesting.
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The other preferreds, their traded volume is on the order of single digit millions per day.
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So they're very illiquid, meaning they don't trade a lot.
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If you want to buy the fixed rate preferreds or you want to sell them, you can't really do so without moving the market.
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So that's kind of problematic at the moment.
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SDRC has on the order of $150 million of traded volume a day.
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And that's a lot more appealing to larger investors.
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Any sort of size, you need that sort of trading volume to get in and out without affecting the price.
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And we've seen that with it stabilizing near par.
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Will the other preferreds be retired?
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I don't think so.
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I think the other preferreds, the amount of money it took to IPO these preferreds was significant and provides massive optionality into the future.
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and the only preferred that senior to stretch in the capital structure is strife and they've
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generally kind of made a indication they won't issue much much more of strife so the main focus
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is retiring the converts as they come due um is stretch the main focus yeah stretch is the main
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focus i mean it makes a lot of sense for strategy to focus all of their efforts on liquidity of a
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single instrument because the liquidity is the single biggest factor when it comes to you know
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large players allocating. So, you know, focus all your efforts on concentrating liquidity on one
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instrument, that being stretch, it's clearly demonstrated its sort of adoption in the market
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and, you know, leave the other preferreds outstanding. And, you know, I really think
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there's a case like down the road where the other preferreds become very attractive. And even
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strike, for example, strike is the convertible preferred security. You know, it's strike price
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is $1,000 MSDR. There's no reason MSDR won't someday hit a thousand and strike will still
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be outstanding. And then once MSTR hits 1,000, there's all these arbitrageurs that start to occur
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with the strike security relative to the common because it has this conversion right into the
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common. So the trading volume will tick up massively in STRK because of all these arbitrageurs
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that arise. And so over time, I think these things will gain traction in trading volume.
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But then again, I mean, the US 10-year has a lot lower trading volume than the two-year note. So
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So yeah, it may just be a duration thing.
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And when it comes to STRC, of course, we saw it fall down to the 70s, now back up to almost
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100, but not quite there yet.
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Why hasn't it been able to hit that $100 par?
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Yeah, that's a great question.
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Obviously, Strategies employed about a billion dollars to buy back STRC, gradually released
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week by week or gradually used week by week over the past two months.
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And why has it hit 100?
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I mean, I think there's a lot of individuals, you know, I've talked to individuals who used capital with the intention of capital appreciation, not dividend income, to buy stretch at 73 and then ride it up, right?
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And once you're done with your expectation of capital, you know, you're done capturing that capital appreciation, right?
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you no longer want to hold the instrument because the goal of that fund or that position or whatever,
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that money you have is not to collect a dividend. It's to make kind of capital bets. And so I think
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there's been a lot of rotation at these higher prices out of STRC into other kind of maybe people
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rotate back into Bitcoin or whatever they do. So it just takes time to work through that kind of
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selling pressure here. And strategy has been a big part of why this recovery has happened. One,
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the cash reserve building, and then two, this kind of constant buyback mechanism. And I think
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the constant buyback mechanism will likely continue. I don't see a need for it to really
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continue at these high, high prices. I mean, Stretch is trading at 98 today, up a percent,
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you know, two days after the ex-dividend date. So there's still just a lot of confusion and
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volatility and that will iron out over time. How many apps does it take to run your life
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Saylor bought 136 million worth of STRC, which seems like a lot. Is it healthy when the parent
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company is buying back this much of their own offering? Yeah, absolutely. I mean, the only
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thing that buying back STRC does is it reduces the amplification on the balance sheet, right?
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So if you have this STRC and you issue it at 100 and you buy it at 97, then you make money there, right?
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Notwithstanding the Bitcoin price.
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Maybe you bought Bitcoin at a higher price and you sold Bitcoin at a lower price to buy back the STRC.
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So that's problematic.
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But let's just assume the capital on the balance sheet is static.
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Then if you sell the security at 100, you buy the security back at 97, you made a 3% profit on that trade, notwithstanding the transaction fees.
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okay so like however but i thought this was permanent capital right like we talked about
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these preferreds it's like oh that strategy can raise these preferreds they never have to pay
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back it's permanent capital it's bitcoin on the balance sheet that they never have to never have
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to pay back but in the case of stretch they're kind of paying back the bitcoin you know over
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long periods of time if you want amplification to increase on strategies balance sheet while
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bitcoin goes up so if bitcoin doubles from here the amplification goes from
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30% to 15%, and they're going to need to sell more stretch, right? They're going to need to
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sell more prefers. There's clearly not enough demand for the others. So the only way that's
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going to be possible is if there's increased demand of stretch. Stretching, the market cap
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of stretch will have to grow over long periods of time for this to work, right? It will just have to
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have to happen. So then the point stands like buying back stretch is counterproductive.
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This bet strategy is making is that if they can use buybacks opportunistically to bolster the
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performance or keep the performance of stretch right around that $100 price point, that long
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term that will lead to a lot more adoption, and they'll be able to grow the market cap of stretch
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and reamplify the entire balance sheet. So I think it's kind of short term loss with regards to
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Bitcoin per share for long term gain of the ability to continually amplify over the next 20
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years via stretch issuance. And when stretch first came out, they marketed it as something that is
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extremely non-volatile. Well, I think that story has gone out the window after this summer.
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What's the pitch now? Yeah, well, the story now is a little bit different, right? Saying it's a
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market is not probably the right framing, but to say, you know, it's a short-term money instrument
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where strategy has a host of capital tools to maintain the par value, and it's in their
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kind of in, it's in their guidance that they will look to keep stretch at a hundred is
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very advantageous to an investor, right? Even if it doesn't trade just between 99, 100,
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maybe it trades between 95 and a hundred and there's a spike down to 85 or, or whatever it
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may be, you know, you don't have exposure to interest rates. It's largely a market neutral
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or Delta neutral instrument that is a strong addition to any sort of fixed income portfolio.
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And so that's the value problem, but it's not perfect, right?
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00:26:09,108
You not going to have zero mark volatility on the instrument Like there has to be stuff built on top That what I working at UTXO to do is build kind of a tranche structure so that you can export that
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sort of volatility. So you have one investor class that has almost no volatility, but stretch-like
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performance with a lower dividend. And then another investor class who has extra high performance
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stretch, but it bears all of that volatility risk. So you get a really kind of volatile, but
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high-performing stretch-related instrument. And let's look at the composition of who's
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actually buying this thing. Last I heard, it was 80% retail, 20% institutional. Are those numbers
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still accurate? And what are you seeing in terms of any more institutional interest?
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Yeah. I mean, obviously, Strive is going out aggressively to capture some more of the
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institutional market. And a lot of these credit allocators have small buckets of kind of alts
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00:27:02,988
that they're willing to invest. Alts are like an alternative sleeve of their credit bucket
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into something like stretch or Seta. And over time, the adoption will continue. And generally,
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what's expected is three years of track record of the security. So just time is the biggest factor
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00:27:23,528
here in my opinion um with regards to institutional investment though look like it's still an equity
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it's a income like equity so i think there's going to be need to be a whole host of products built on
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top that fit existing mandates a little bit better right it's not an actual credit instrument so
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institutional adoption is picking up but there will have to be other forms of instruments built
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on top of STRC and SEDA that meet the institutional investors where they are.
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00:27:55,048
So now let's compare STRC to SEDA. SEDA, of course, has the daily dividends and a slightly
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00:27:59,228
higher interest rate, correct? Correct. Yeah. 13 versus 12.
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00:28:05,848
And just looking at my trading view on a daily basis, I see SEDA at 100 a lot. And I haven't
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00:28:12,488
seen strc at 100 in quite some time uh what's going on here and is sata eating strc's lunch
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yeah i really don't think so just because sata is an order of magnitude smaller than strc uh the
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00:28:26,088
total outstanding strc is about 9.3 billion whereas you know sata is about a billion um
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these are just massively different market caps and i don't think you can compare them apples to apples
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Like we could get into all the credit, the relative credit profiles of each of the instruments and the fact that strategy has some converts above stretch or the fact that, you know, Seda has no debt or blah, blah, blah.
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Like ultimately, a lot of this is simply marketing and investor confidence in these instruments, largely the cash reserve.
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So I don't think we're at the mature stage where credit spreads between stretch and SEDA can be compared in like a meaningful way or even credit spreads between stretch and the U.S. 10-year can be compared or the U.S. 2-year in a meaningful way.
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So SEDA is trading fantastically. I don't think a lot of that has to do with daily dividends. I know a lot of investors love that and I think it's a great feature.
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I think the smaller market cap of SEDA and the way they've been able to issue into the market and continually raise capital has kind of encouraged its trading near that par value.
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And strategy obviously had some hiccups with regards to management guidance, but they also issued, you know, $6 billion of this in like three months.
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So if you add that much supply to the market, the pricing dynamics are just a lot, lot different.
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So let's watch SEDA grow to $10 billion, and then we can compare kind of the trading behavior.
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And then when it comes to that volume, I mean, that $10 billion came relatively quickly, right?
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And I think the volume really has fallen off quite a lot for STRC since the June crash.
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Do you think that $10 billion was too much too fast?
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And how do you compare the volumes then versus now?
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Yeah, I don't think it was too much too fast.
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Like their mandate, and they continue to hold this to be true, is that they will issue a stretch at $101 penny.
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And they will keep the price there.
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I think they'll continue to do that.
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into the future. So that's just the issuance schedule. If there's massive issuance and those
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holders aren't necessarily long-term buyers, then you obviously get kind of price dislocations to
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the downside. And there wasn't a buyback facility in place. The only kind of mechanism was dividend
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rate hikes. And there's a lot of flack now that strategies are not raising the dividend. They
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talked to a lot of institutions. The institutions were saying, raising the dividend doesn't increase
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the credit quality of the instrument anymore. Like you need to rebuild the cash and use buybacks to
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kind of buffer the price of stretch independently. And so that's what they've switched to doing.
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And I think that was the right move, absolutely, to bring it back to par.
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And you know the strategy team well. How much outreach have they done to institutions,
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credit investors to find the right moves forward How much outside research and influence have they gotten from Wall Street for this product Yeah I mean I think they on the road 24 talking to the biggest institutions biggest funds pitching this product talking with people building products on top of it
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And it seems like there's positive traction from investors over time.
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And so, I mean, I think, you know, they understand the holy grail here, like retail gets doors, you know, it gets the ball rolling, but the holy grail are large institutional allocators.
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And so they're trying to break into those circles.
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00:31:54,784
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And the one other big headline or development about MSTR this summer
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00:32:53,124
is now that they have net zero debt, correct?
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Yeah, effectively they have net zero debt
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because they have the cash offsetting
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and the total converts outstanding.
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And how big of a deal is this?
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I mean, there's a process which you can undergo
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called the fee sense where you take all the cash.
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So you set aside cash and put it into T-bills.
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It offsets the interest payments.
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Enough cash, put it in T-bills.
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that offsets the interest payments on the rest of your debt outstanding.
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And then you put it in an escrow account.
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And for the purpose of gap accounting,
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it offsets the debt and you technically have zero debt and it protects you in
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a bankruptcy proceeding. So like that is one process,
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which they could go down and they're obviously not doing that.
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So in the term, in the fourth, like from the perspective of gap accounting,
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this is not zero debt. And obviously, you know,
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5 billion of it can't be used to pay off the converts.
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It has to be used for dividends to meet dividend obligations.
368
00:33:50,704 -->
00:33:51,924
You can't pay off the converts early.
369
00:33:52,984 -->
00:33:56,164
So look, yeah, you can say zero debt or like it just doesn't matter.
370
00:33:56,364 -->
00:33:57,824
Like the whole point is you want to leverage.
371
00:33:58,684 -->
00:34:04,284
And so having the converts outstanding is like fine because it provides, you know, the extra leverage on balance sheet.
372
00:34:04,504 -->
00:34:09,324
And the converts are such a small fraction of the total Bitcoin outstanding.
373
00:34:09,484 -->
00:34:14,224
It's not like, you know, Bitcoin is going to fall to 5,000 tomorrow and then like wipe out the value.
374
00:34:14,224 -->
00:34:22,204
it. And now let's zoom out, because I think this time last year, it was sort of like the last
375
00:34:22,204 -->
00:34:28,864
throws of the paper Bitcoin summer. Lots of companies were still expecting a huge blow off
376
00:34:28,864 -->
00:34:34,904
top in Q4. And a lot of their plans were based upon that. And over the last 12 months, we've seen
377
00:34:34,904 -->
00:34:42,424
a lot of the wreckage. And so we've seen companies like Satsuma, Saquon, Empory, Prenetics, Genius
378
00:34:42,424 -->
00:34:49,084
group, they've all sold their Bitcoin. Do you think this was the right move? Should they have
379
00:34:49,084 -->
00:34:54,764
held on or it was good for these guys to get out of the market? Yeah, I don't know the exact
380
00:34:54,764 -->
00:35:03,944
specifics of their balance sheets. I think there was a lot of emphasis on pure play leverage Bitcoin
381
00:35:03,944 -->
00:35:07,704
equities when there shouldn't have been. The corporate Bitcoin treasury strategy is a pretty
382
00:35:07,704 -->
00:35:13,444
simple strategy. You have a business and it buys Bitcoin. So, you know, I know a lot of private
383
00:35:13,444 -->
00:35:19,344
investors or private business owners who have been using this strategy even before strategy
384
00:35:19,344 -->
00:35:22,304
started using the strategy. And they're like massively successful because they have these
385
00:35:22,304 -->
00:35:26,924
huge cash flowing businesses with massive amounts of Bitcoin collateral and their balance sheet,
386
00:35:26,984 -->
00:35:30,984
and they're private. They don't go out there and like raise money in public markets. So look,
387
00:35:31,104 -->
00:35:35,084
I don't know. I'm just not, I'm not a huge believer that everyone needs to be a leveraged
388
00:35:35,084 -->
00:35:40,004
Bitcoin equity. And I don't believe this story of selling common equity until you're a multi-billion
389
00:35:40,004 -->
00:35:44,684
dollar company really exists anymore. That was kind of a one-time sort of market inefficiency
390
00:35:44,684 -->
00:35:50,744
and market euphoria that won't continue. So yeah, I think it's good. It's over. And I think we can
391
00:35:50,744 -->
00:35:54,884
move on to Bitcoin structured products, which are the most important thing in the market. And I think
392
00:35:54,884 -->
00:35:59,244
a lot of the banks and large institutions, including Strategy and Strive, will be the leaders
393
00:35:59,244 -->
00:36:02,704
of the kind of financialization of Bitcoin moving forward.
394
00:36:03,844 -->
00:36:05,524
So at the end of the day,
395
00:36:05,644 -->
00:36:08,964
how many Bitcoin treasury companies do you think will be left?
396
00:36:10,024 -->
00:36:12,364
I just don't think there's going to be that many relevant
397
00:36:12,364 -->
00:36:16,044
pure play Bitcoin LBE like SPACs.
398
00:36:16,924 -->
00:36:18,744
But I mean, theoretically,
399
00:36:18,744 -->
00:36:20,624
every company could become a Bitcoin treasury company.
400
00:36:20,764 -->
00:36:44,800
SpaceX Tesla they own Bitcoin on their balance sheet And I think that a better example of a Bitcoin treasury company If you a Bitcoin financial services provider like Strategy or Strive is today that a completely different offering That like you know that like saying like it like every it like you know there a difference between a bank and a company that holds cash in a balance sheet And so you know that kind of the same analogy here
401
00:36:44,800 -->
00:36:52,680
And so we've got the big players left, right? We've got strategy, strive, and then 21 and
402
00:36:52,680 -->
00:36:59,920
meta planet. Let's talk about the recent controversy with the meta planet C suite compensation,
403
00:36:59,920 -->
00:37:05,700
how it played out on X and how it was resolved. What's your take on the whole situation?
404
00:37:06,540 -->
00:37:10,660
Look, I mean, I just don't think like any of the like investors should have been reading
405
00:37:10,660 -->
00:37:14,360
the fine print of the prospectuses or just running them through Claude and stuff. And,
406
00:37:14,360 -->
00:37:19,040
you know, I get the upset nature. Like I totally get the upset nature was essentially,
407
00:37:19,040 -->
00:37:24,680
essentially extra dilution for common shareholders. Absolutely. No doubt the way
408
00:37:24,680 -->
00:37:31,260
the comp is structured, but nothing was illegal. Nothing was actually hidden. It was transparent
409
00:37:31,260 -->
00:37:37,160
in the offering documents. So, you know, you can say that it was deceptive or not right,
410
00:37:37,160 -->
00:37:44,840
But these were policies put in place before the switch to kind of the Bitcoin strategy.
411
00:37:45,640 -->
00:37:49,800
And I just think, I don't know, I just think people take, again, it goes back to this idea.
412
00:37:49,920 -->
00:38:00,540
It's like, you can't just like YOLO into 3x MNAV treasury codes and then get mad at management when the MNAV contracts because of open market dynamics.
413
00:38:00,540 -->
00:38:10,880
And so this is another one of the things like you need to do your research and your diligence, understand how the company is running their strategy and the nuances of the financial filings.
414
00:38:11,060 -->
00:38:13,600
And that's very important when investing in something other than Bitcoin.
415
00:38:14,160 -->
00:38:15,280
Like Bitcoin is Bitcoin.
416
00:38:15,800 -->
00:38:16,780
These are equities.
417
00:38:17,100 -->
00:38:21,020
And equities is a much different game than investing in Bitcoin.
418
00:38:21,120 -->
00:38:21,760
It's not saving.
419
00:38:21,960 -->
00:38:22,700
You know, it's investing.
420
00:38:22,940 -->
00:38:24,980
And there's a lot of extra risk.
421
00:38:24,980 -->
00:38:31,860
And so for viewers that might not know, there was a compensation package for the MetaPlanet
422
00:38:31,860 -->
00:38:38,420
C-suite that gave them 20% of all shares that couldn't get diluted, correct? Is that the right
423
00:38:38,420 -->
00:38:44,100
way to say it? Yeah, I don't know that exactly. Okay. But anyway, what I want to get to is the
424
00:38:44,100 -->
00:38:47,900
fact that- There's like an anti-dilution clause. Yes, anti-dilution clause. So as the total market
425
00:38:47,900 -->
00:38:56,220
cap of the company grew, a certain fixed allocation of the market cap in percentage terms was allocated
426
00:38:56,220 -->
00:39:02,620
to C-suite compensation. So the company goes, you know, as the company grows, the compensation grows
427
00:39:02,620 -->
00:39:07,980
in a linear fashion, not necessarily only based on share price, but based on market cap.
428
00:39:09,460 -->
00:39:15,140
And what I want to ask you about is that there was, of course, this big shareholder revolt on X,
429
00:39:15,140 -->
00:39:22,500
And then we had the C-suite come back and say, okay, we're going to take a haircut on this compensation in response to what our investors are saying.
430
00:39:23,300 -->
00:39:32,720
What do you think about this new dynamic of active investors on X having a say as to C-suite compensation and that dynamic on the internet?
431
00:39:33,660 -->
00:39:35,180
Yeah, I mean, I think it's good to have a voice.
432
00:39:37,200 -->
00:39:41,400
You know, previously, like, I mean, there's a precedent for this, obviously, with Berkshire Hathaway.
433
00:39:41,400 -->
00:39:44,580
a lot of investors that read the annual
434
00:39:44,580 -->
00:39:48,920
letters, wrote feedback to Warren Buffett and he'd read it and answer it.
435
00:39:49,420 -->
00:39:53,100
There weren't a lot of shareholders at the time of Berkshire
436
00:39:53,100 -->
00:39:54,360
and its early investment letters.
437
00:39:56,280 -->
00:40:00,820
X is the town square and you're able to provide feedback to management.
438
00:40:01,000 -->
00:40:05,080
I think that's very important. It's very
439
00:40:05,080 -->
00:40:08,800
democratic. I love it. Certainly interesting.
440
00:40:08,800 -->
00:40:10,760
Keeps the timeline popping.
441
00:40:10,980 -->
00:40:11,580
That's for sure.
442
00:40:12,600 -->
00:40:19,000
And then another thing that we saw this summer were the DeFi products built on top of STRC.
443
00:40:19,920 -->
00:40:23,440
You partook in that and then the company disbanded.
444
00:40:23,760 -->
00:40:27,240
But there are still some that are going on like Apex, correct?
445
00:40:27,880 -->
00:40:34,820
Do you think that there is a long-term future for these DeFi products that are getting leverage on top of the STRC?
446
00:40:35,660 -->
00:40:36,600
Yeah, yeah.
447
00:40:36,600 -->
00:40:41,640
So I briefly worked at a stable coin backed by STRC called Buck.
448
00:40:41,640 -->
00:40:45,720
We ended up returning all of the money to the investors, that being the Buck holders.
449
00:40:45,720 -->
00:40:46,760
So no one lost a dime.
450
00:40:46,760 -->
00:40:50,440
Everyone broke, broke positive on the stable coins are very proud of that.
451
00:40:50,440 -->
00:40:52,440
Very important to us.
452
00:40:52,440 -->
00:40:57,000
The other founder, the founder, Travis left and now he's chief growth marketer,
453
00:40:58,040 -->
00:41:00,200
chief growth officer at Polymarket.
454
00:41:00,200 -->
00:41:02,040
So he moved on to bigger and better things.
455
00:41:02,040 -->
00:41:09,880
but the point being is there's still some of these kind of protocols around. I think DeFi is a tricky
456
00:41:09,880 -->
00:41:13,780
business. I think there's a lot of counterparty risk, a lot of third-party risk, a lot of transaction
457
00:41:13,780 -->
00:41:19,460
risk but they're obviously, you know, they have lots of AUM and there's a lot of people with
458
00:41:19,460 -->
00:41:24,140
trapped money. This is something I learned in Asia last month that there's a lot of trapped money that
459
00:41:24,140 -->
00:41:30,760
can't escape some of these regimes, these tax regimes like in mainland China and less so in
460
00:41:30,760 -->
00:41:39,960
Hong Kong. And so they use DeFi as the rails by which they can get their money out in kind of a, you know, a private manner.
461
00:41:39,997 -->
00:41:43,197
And so, yeah, these DeFi protocols are a great access to STRC.
462
00:41:43,357 -->
00:41:48,877
I think it's going to be difficult for them to compete with tokenized STRC by XYZ on Hyperliquid.
463
00:41:48,917 -->
00:41:57,977
And there's going to be all these sorts of different tokenized issuers that are going to be more reputable, lower costs, better liquidity, etc., etc.
464
00:41:58,197 -->
00:42:00,437
So, I mean, there have been statistics even today.
465
00:42:00,577 -->
00:42:03,697
We hit an all-time high with regards to on-chain tokenized assets.
466
00:42:03,697 -->
00:42:08,697
And those, I think, will be generally run by the most...
467
00:42:08,697 -->
00:42:13,377
know, a tokenized asset is not a permissionless, it's a permissionless equity, but there's still,
468
00:42:13,557 -->
00:42:16,697
there's still massive amounts of trust involved, right? Because you don't actually own the
469
00:42:16,697 -->
00:42:20,797
underlying security. It's not like it's in your hands. You don't have physical custody of it.
470
00:42:20,857 -->
00:42:26,777
There's still a counterparty that links the security to the token that represents it. And
471
00:42:26,777 -->
00:42:30,917
so there's still trust involved. And I think some of the biggest institutions will ultimately be the
472
00:42:30,917 -->
00:42:37,257
winners of the tokenized security or tokenized real world asset future. And out of curiosity,
473
00:42:37,257 -->
00:42:42,517
how did these DeFi tokens survive the crash back in June?
474
00:42:43,417 -->
00:42:46,897
I think a lot of them had significant lockups and gates with regards to redemptions.
475
00:42:47,137 -->
00:42:50,997
So they're able to kind of gate withdrawals during the stretch drawdown,
476
00:42:51,137 -->
00:42:54,737
which is ultimately like, like we talked about this a lot kind of in the early days.
477
00:42:54,937 -->
00:42:59,717
And we all concluded that some sort of gate mechanism was very, very important
478
00:42:59,717 -->
00:43:05,117
for protecting against kind of, you know, funds, issuer funds.
479
00:43:05,117 -->
00:43:07,997
A bank run on the DeFi token.
480
00:43:08,137 -->
00:43:09,117
Bank run, exactly.
481
00:43:10,177 -->
00:43:17,497
And I think one thing that ruffled a bunch of Bitcoiners feathers was Saylor was retweeting a lot of these projects.
482
00:43:17,797 -->
00:43:20,617
And that was his way of promoting them.
483
00:43:21,377 -->
00:43:26,677
Do you think that his focus is more on these type of things than, say, main Bitcoin issues at the moment?
484
00:43:26,677 -->
00:43:35,517
I mean, I don't really think, I guess you can endorse the DeFi protocol and then say like it's, you know, contrary to Bitcoin.
485
00:43:35,717 -->
00:43:41,037
But if ultimately the DeFi protocol, the success of the DeFi protocol is underpinned by Bitcoin, right?
486
00:43:41,077 -->
00:43:42,037
Bitcoin is the settlement layer.
487
00:43:42,157 -->
00:43:48,277
And these are just second or third order securitization layers built on top of stretches built on top of Bitcoin.
488
00:43:48,397 -->
00:43:49,917
I don't think it's necessarily like a bad thing.
489
00:43:51,497 -->
00:43:54,837
And yeah, so that's the first point.
490
00:43:54,837 -->
00:43:58,897
And should he be more concerned about the Bitcoin, other problems in the Bitcoin network?
491
00:43:59,277 -->
00:44:00,657
I mean, who's to say?
492
00:44:00,817 -->
00:44:05,337
I mean, he's his own cat and can choose the issues which he's most focused on.
493
00:44:05,397 -->
00:44:08,437
He's focused on Bitcoin adoption, not problems in the Bitcoin world.
494
00:44:08,557 -->
00:44:12,697
And what he's doing is to facilitate Bitcoin adoption as fast as possible,
495
00:44:12,777 -->
00:44:14,417
and he means possible, and I respect that a lot.
496
00:44:15,597 -->
00:44:17,257
So let's talk about Bitcoin itself.
497
00:44:17,257 -->
00:44:23,117
We saw the 23% run up in the middle of August, and now we've pretty much stuck the landing.
498
00:44:23,117 -->
00:44:29,897
And even after the Fed raised rates for the first time in three years, we still are holding steady.
499
00:44:30,737 -->
00:44:33,977
What do you take about Bitcoin's price action over the last month?
500
00:44:34,217 -->
00:44:37,057
And you called the bottom back in June, and you were pretty much right.
501
00:44:37,517 -->
00:44:39,457
Do you think it's off to the races after this?
502
00:44:40,217 -->
00:44:41,517
I think it's going to take a little while.
503
00:44:41,857 -->
00:44:45,817
Like 2023 was a long year as well, but we didn't really revisit that bottom price.
504
00:44:46,557 -->
00:44:48,657
You know, I'm a big believer in the power law floor.
505
00:44:48,657 -->
00:44:57,997
I think the power law floor is kind of the holy grail of what is the Bitcoin price based on adoption after all the speculative capital has been rinsed out of the network.
506
00:44:58,817 -->
00:45:03,097
And, you know, there's a little large metrics like, you know, 200-week moving average.
507
00:45:03,357 -->
00:45:07,057
And then we're about to cross the 200-day moving average.
508
00:45:07,117 -->
00:45:12,237
And there's a lot of, like, technical kind of levels down here that we're starting to see and witness.
509
00:45:12,237 -->
00:45:23,403
But I don I mean Bitcoin looks strong I don think it going to rip up in the next kind of two weeks but I think the worst is behind us for sure
510
00:45:24,583 -->
00:45:24,863
Yes.
511
00:45:24,883 -->
00:45:30,243
And as you say, the reverse Bart Simpson is a great signal to see.
512
00:45:31,163 -->
00:45:34,083
Oh, and my last point on that is like markets again,
513
00:45:34,243 -->
00:45:36,643
they top on good news and bottom on bad news.
514
00:45:36,883 -->
00:45:39,543
And there was just week after week after week of bad news
515
00:45:39,543 -->
00:45:41,623
while we're sitting right at that 60K level.
516
00:45:41,623 -->
00:45:43,923
And if you look on the chart, it's like just a flat line.
517
00:45:43,923 -->
00:45:51,523
And so it's almost like, you know, every piece of news is trying to drive the price lower, trying to drive the price lower and just got bought under 60, just got bought under 60.
518
00:45:51,823 -->
00:45:53,983
And so I think that's a really meaningful metric.
519
00:45:54,083 -->
00:46:05,943
And then if you look at the long-term holder distribution charts and short-term holder distribution, so short-term holder selling has stopped and we're seeing accumulation by larger wallets and whales that are indicative of every sort of Bitcoin bottom.
520
00:46:05,943 -->
00:46:31,463
And as much as everyone wants to talk about like macro catalysts, this, that, and the next thing, M2 money supply correlation, equities markets correlation, we've completely decoupled from equities markets over the past year, like completely decoupled, right? Bitcoin has been down only, equities markets have been up only. So there's no real correlation there left. There's no real correlation between M2 left. Maybe you could argue there's like four-year cycle correlation, but that's breaking on September 17th today.
521
00:46:31,463 -->
00:46:39,403
And so, ultimately, you can just look at the actual on-chain data and if there's accumulation or distribution.
522
00:46:40,143 -->
00:46:42,803
And over a long enough period of time, if there's net accumulation, the price goes up.
523
00:46:42,963 -->
00:46:46,323
I think it's ultimately that simple, but very difficult to predict when that will happen.
524
00:46:47,963 -->
00:46:56,963
One correlation we are seeing gaining strength is Bitcoin and gold, the highest correlation between those two in, I think, since 2020 or so.
525
00:46:57,243 -->
00:46:58,283
What do you take out of that?
526
00:46:58,283 -->
00:47:13,943
Yeah, I mean, that could be the resumption of the debasement trade with long end rates going higher, like Besson's buying back more, he's approving more buybacks to the long end of the curve.
527
00:47:13,943 -->
00:47:25,163
And, you know, the yield on the 10 and 30 year continue to rise, even with the market price, you know, raising short term interest rates or the Fed funds rate.
528
00:47:25,363 -->
00:47:33,143
And we're seeing a long end rise as well as a result of expectations of kind of, you know, the problem with the fiscal situation in the United States.
529
00:47:34,043 -->
00:47:37,323
So, yeah, maybe that's the fuel for the debasement trade.
530
00:47:37,323 -->
00:47:44,043
I still don't really believe that Bitcoin is fully adopted as a debasement hedge.
531
00:47:44,243 -->
00:47:52,863
I still think it's very much so a kind of speculative, tech-like asset that's becoming a debasement hedge.
532
00:47:52,983 -->
00:48:02,123
But again, price is a lot of momentum, a lot of kind of distribution or accumulation factors.
533
00:48:02,303 -->
00:48:04,283
I think that's a lot more important than the debasement narrative.
534
00:48:04,283 -->
00:48:06,143
For gold, yes, the basement area matters a lot.
535
00:48:06,243 -->
00:48:09,343
But for Bitcoin, I still think it's kind of like, yeah.
536
00:48:09,783 -->
00:48:11,823
It's tech and debasement paired together.
537
00:48:12,083 -->
00:48:14,423
It's like tech and debasement, but it's also just its own thing.
538
00:48:14,763 -->
00:48:17,163
Like, I really believe it's just kind of like its own thing.
539
00:48:17,443 -->
00:48:19,823
And it goes up and it goes down because of all these market forces.
540
00:48:21,363 -->
00:48:28,583
And it finds correlations here and there and maybe catches a tailwind from, like, right now, it's catching a debasement correlation tailwind.
541
00:48:28,643 -->
00:48:29,703
But I don't think that will stay.
542
00:48:30,103 -->
00:48:31,843
It may catch a tech correlation tailwind.
543
00:48:31,843 -->
00:48:35,603
And it may not be correlated to S&P for a little while.
544
00:48:35,763 -->
00:48:37,663
So it's just its own kind of adoption curve, I think.
545
00:48:38,583 -->
00:48:42,843
And it's undoubtedly been a brutal bear market, particularly in sentiment.
546
00:48:43,223 -->
00:48:47,103
But the one gift it might have given us if the bottom is truly in is the fact that it
547
00:48:47,103 -->
00:48:48,883
just went down around 50%.
548
00:48:48,883 -->
00:49:07,470
And that is way different from 70 to 80 as we seen in prior bear markets From an institutional perspective how does this change the narrative for Bitcoin moving forward Yeah I think dampening volatility is a really really important part of the puzzle And dampening volatility is Bitcoin on its way to the promise of
549
00:49:07,470 -->
00:49:17,410
kind of a collateral, a non-counterparty collateral digital native asset that is low
550
00:49:17,410 -->
00:49:21,630
volatility, high performance, and is kind of a debasement hedge. And I think the lower the
551
00:49:21,630 -->
00:49:26,870
volatility is brought down in the short term, the more promise and the more models people will be
552
00:49:26,870 -->
00:49:31,510
making of like, okay, so in 20 years, what will be the model performance versus volatility of Bitcoin
553
00:49:31,510 -->
00:49:36,130
with zero counterparty risk? It'll be the same asset it's always been. And I think that those
554
00:49:36,130 -->
00:49:40,170
are kind of the meaningful takeaways for allocators. As the volatility continues to decline,
555
00:49:40,170 -->
00:49:46,850
it can take a position in a portfolio as a debasement hedge and adoption will continue.
556
00:49:46,850 -->
00:49:59,870
So as adoption continues, volatility will fall. We'll see what the long-term performance kind of sits at. But that's ultimately the holy grail is lower volatility means higher adoption in terms of institutional portfolios.
557
00:50:01,730 -->
00:50:16,430
And now taking it over to you, the last time we talked, you were playing a lot of golf. And I think you played the Bitcoin bear market right. You took the foot off the gas a little bit, enjoyed yourself, and now you have a new role. What are you doing now?
558
00:50:16,850 -->
00:50:29,750
Yeah, my focus for the past 18 months has always been on kind of the preferred securities. I think they're fascinating. I think this idea of digital credit, which isn't only preferred securities, but Bitcoin backed loans and notes and financial infrastructure is really, really meaningful.
559
00:50:30,530 -->
00:50:42,750
I've always taken my inspiration from Hal Finney's quote saying that, you know, Bitcoin will serve as a settlement layer between banks that issue their own currencies backed by the Bitcoin on their balance sheet.
560
00:50:42,750 -->
00:50:50,130
And that's essentially what strategy is doing with STRC. And so I believe this to be a very big idea and kind of the future of payments, settlements, and really investing.
561
00:50:50,130 -->
00:51:07,950
So that being said, I joined UTXO, which is an asset manager owned by NACA, but completely separate. All the LPs in UTXO funds are completely isolated in Delaware LP engagements.
562
00:51:07,950 -->
00:51:14,850
So, you know, the fund, Nakamoto's main fund, 210K, has performed at 44% annualized since inception.
563
00:51:15,170 -->
00:51:22,350
And so I came on to help run a new fund called UTXO Preferred Income Strategies LP, which is a different type of fund.
564
00:51:22,450 -->
00:51:24,390
And it's a preferred fund.
565
00:51:24,690 -->
00:51:33,030
So under the portfolio is right now stretch, but we're looking to add some SEDA into the future and diversify across issuers.
566
00:51:33,030 -->
00:51:37,970
If new issuers come to market, we'll add new issuers, especially if we get good deals at the IPO.
567
00:51:38,690 -->
00:51:41,130
But the real kick is kind of this trotting structure.
568
00:51:41,230 -->
00:51:42,770
And this is something I thought about at Buck.
569
00:51:44,930 -->
00:51:50,450
Saylor had been talking all about this idea of digital money, 7.5% yield, no volatility.
570
00:51:50,890 -->
00:51:54,770
This is kind of the holy grail of the second layer built on top of stretch.
571
00:51:54,770 -->
00:52:02,470
and I couldn't figure out a way to do it without outhousing without segregating the risk
572
00:52:02,470 -->
00:52:06,490
to two different investor classes right if you just in-house the risk that's seven and a half
573
00:52:06,490 -->
00:52:12,270
percent so you hold stretch and then you hold 30 t-bills and then pay a dividend if stretch trades
574
00:52:12,270 -->
00:52:16,930
down people can redeem your your digital money and take all your extra over collateralization
575
00:52:16,930 -->
00:52:21,430
you get wiped out so as an issuer that's what happens so the answer to this is you need two
576
00:52:21,430 -->
00:52:22,750
different classes of investors.
577
00:52:22,750 -->
00:52:28,250
So in our fund, we have the senior investor who gets a 7.5% return after fees, and they
578
00:52:28,250 -->
00:52:41,557
have a 40 equity cushion of the junior class So again the senior class sits on top of the capital structure The capital structure is all stretched at the moment So all stretch senior sits at the top gets 7 monthly dividends
579
00:52:41,817 -->
00:52:47,697
and they have a 40% equity buffer that exists below them as the junior. The junior is first
580
00:52:47,697 -->
00:52:54,157
lost capital. So if stretch trades from $100 to $80, the junior experiences capital impairment or
581
00:52:54,157 -->
00:52:59,777
capital loss, whereas the senior is still, it's fixed rate and still pays out 7.5%, right? So if
582
00:52:59,777 -->
00:53:05,017
you're an institutional allocator who wants principal protection, the senior is for you. The
583
00:53:05,017 -->
00:53:12,177
senior withstands a lot of stretch volatility up to about $60 stretch, and then it will take a
584
00:53:12,177 -->
00:53:17,097
capital loss. The junior gets the excess return from the senior. So the senior is paying out seven
585
00:53:17,097 -->
00:53:24,157
and a half after fees or 8% with fees. So there's an extra 4% that the stretch underneath them isn't
586
00:53:24,157 -->
00:53:30,437
paying. So that gets allocated to the junior. So the junior is making 16 to 18%. But since it's,
587
00:53:30,477 -->
00:53:35,717
it's the first lost capital, it's stretch trades off $5, it'll trade off, you know, $7. And then,
588
00:53:35,877 -->
00:53:38,977
but if stretch recovers to par, it will recover to par, but you're making that higher,
589
00:53:39,297 -->
00:53:43,897
higher yield as the junior holder. So it's more of like an equity tranche. And the top is more of
590
00:53:43,897 -->
00:53:47,537
like a debt tranche. And, you know, there's a lot of different investors who want to invest in both
591
00:53:47,537 -->
00:53:53,257
of those products. And how has it been going out and pitching this? We really just started,
592
00:53:53,257 -->
00:53:54,377
We're just starting this month.
593
00:53:54,777 -->
00:54:01,277
And there's a lot of fixed income investors who are looking for a structured credit fund.
594
00:54:01,537 -->
00:54:04,717
And so I think we've had success talking to them.
595
00:54:04,777 -->
00:54:06,037
There's been a lot of interest in the senior.
596
00:54:06,157 -->
00:54:09,197
What I'm hearing in the DeFi markets is there's actually a lot more interest for the senior.
597
00:54:10,597 -->
00:54:13,697
In DeFi, there's this very similar trustee structure that exists.
598
00:54:14,117 -->
00:54:17,417
There's a lot more interest for the senior than there is for the junior, which I find kind of interesting.
599
00:54:17,797 -->
00:54:22,897
Because you'd think the junior would be more – if Stretch trades at $100, let's say Stretch trades at $100 for a year.
600
00:54:23,257 -->
00:54:27,137
As a junior owner, you're making 18% with zero vol.
601
00:54:27,337 -->
00:54:28,957
If stretch trades just at 100, right?
602
00:54:29,297 -->
00:54:30,897
But if stretch trades off, you experience more volatility.
603
00:54:31,297 -->
00:54:33,837
But the senior, you're only making seven and a half,
604
00:54:34,417 -->
00:54:37,437
but you have much, much less market market risk.
605
00:54:37,497 -->
00:54:41,417
So I think a lot of people really want that principle of protection.
606
00:54:41,837 -->
00:54:44,877
And that's why in DeFi, we're seeing a lot more demand for the senior.
607
00:54:45,417 -->
00:54:48,117
So we're yet to see how that shakes out in Tradify markets.
608
00:54:48,197 -->
00:54:51,897
I don't know the exact demand composition of junior and senior yet.
609
00:54:53,257 -->
00:54:59,597
Well, look at you, Dan, exploring the brave new frontier of Bitcoin financial products.
610
00:55:00,097 -->
00:55:00,957
Very exciting stuff.
611
00:55:01,837 -->
00:55:02,297
Cool.
612
00:55:02,837 -->
00:55:06,377
Well, if people want to find out more about you and your fund, where should they go?
613
00:55:07,297 -->
00:55:11,277
Feel free to reach out to me on X at Hillary underscore Dan.
614
00:55:12,037 -->
00:55:16,257
Also, UTXO management, UTXO.management is a website.
615
00:55:16,257 -->
00:55:23,657
but probably X or we have an investor form on the website as well are all potential places to go and
616
00:55:23,657 -->
00:55:30,017
get more info. All right, man. Well, it's been great catching up and I think you gave one of the
617
00:55:30,017 -->
00:55:35,217
best synopses of what's happened over the last three months for MSCR and Stretch that you can
618
00:55:35,217 -->
00:55:38,517
find on the internet right now. So appreciate you for that and got to have you back on.
619
00:55:39,117 -->
00:55:41,917
Thanks for the time, Rob. Always great to catch up. Cheers.
620
00:55:41,917 -->
00:55:46,557
All right. Thank you so much for making it to the end of this interview. If you enjoyed it,
621
00:55:46,617 -->
00:55:49,797
hit that like button. Leave us a comment. Tell us what you thought. If you're not subscribed,
622
00:55:49,977 -->
00:55:53,377
why not? Hit that subscribe button. Turn on notifications so you know every single time
623
00:55:53,377 -->
00:55:57,697
we put out a new interview. And if you want to dive deeper, be sure to check out our latest
624
00:55:57,697 -->
00:56:03,377
interview with Steven Lupka. He works at Nakamoto, but he has gone headfirst into AI. We dive into
625
00:56:03,377 -->
00:56:07,917
all the social, political, and economic ramifications of the biggest technological
626
00:56:07,917 -->
00:56:12,557
revolution we have ever witnessed. Yeah, great interview, really thought provoking,
627
00:56:12,717 -->
00:56:14,337
and I think you'll like it. I'll see you over there.
