Is Michael Saylor playing a high stakes game of Monopoly or has
he actually discovered the ultimate infinite money glitch
for the 21st century? I've been interested with how
digital credit is being used to strip away bitcoins volatility
and sell it back to the legacy world as a safe yield.
But I wanted to learn more to really understand it.
So in the next hour, macro strategist and MSDR expert Dan
Hillary reveals why risk is the asset and why the very thing
that makes a lot of people nervous Sailor telling that he's
going to sell Bitcoin is. Actually one of the most
bullish. Signals we've ever seen this is
real deep dive into the background and plumbing of MCR
and stretch and I've learned a lot and I think it will also be
valuable for you if you're enjoying my content.
It would mean a lot to me if you could subscribe to the channel
and like my video to support my journey.
Thanks a lot. Now let's dive in to this
episode. Dan, Hillary, welcome to Bitcoin
for Millennials. Hey Bron, thanks for having me.
Yeah, thanks for coming on. I I thought it would be timely
to talk to you right. Like I've talked to to Jeff
Walton a few times about strategy stretch etcetera.
You are also very deep into this also working with Jeff right
with with True North. So I thought it would be nice to
to get you on and kind of like talk through what's I think a
lot of people are not getting, but also I want to ask you some
questions that that I still have, right, Maybe maybe just to
start, because it's something that I didn't know before and I
think is is very important, right?
A lot of people say like, oh, well, but who is buying stretch,
right? Like who is buying these
products? And I saw that that you kind of
argued for, for Bitcoin to, to win, to really be established in
the world, right, it has to eat away at this bond market that is
basically, you know, 100 trillion that that goes on in
there. Why, why is that the case?
And why does that actually establish Bitcoin as you know,
this pristine collateral or the best collateral, however you
want to define that? Absolutely.
I think that's a great place to start.
Well, simply because obviously the M2 money supply is about a
$20 trillion market. And for Bitcoin to serve as a
encoded monetary policy asset or digital capital, there's another
word for that. You need to attack kind of where
value resides across all markets and in a fractional reserve
banking and a debt based monetary system, most of that
value is in debt. It's in the bond market, right?
A large part of that bond market is government bonds.
Obviously there's corporate bonds and different other forms
of, of fixed income products in those markets, but Bitcoin
ultimately needs to address those markets to start replacing
Fiat backed credit. And so for example, you know,
the most pristine form of Fiat backed credit is AT bill, right?
It's a government debt that trades in the in the open
market. And stable coins are effectively
A transaction layer, an extrapolated transaction layer
that is a payment mechanism for for for T-bills and for Fiat
monetary policy. Stretch is this new form of
collateral of debt that's backed by Bitcoins monetary policy.
And we can get into some of the mechanics later and it's a
little bit technical, but the point being is I think you need
to think a lot of you need to think about stretch as a Bitcoin
backed short duration credit instrument much like AT bill is
to the US government's monetary policy.
So I want to talk about why Bitcoin is good collateral.
We'll, we'll get to that. But first I saw you also talk
about how the risk is, is the asset and we are just talking
about how Bitcoin is the collateral, IE the asset.
So what does risk is the asset mean?
Because all the financial advisors in the world always
say, you know, diversify, lower the risk, etcetera.
What does selling risk mean? Like what?
Like why is sailor selling risk? Why is he talking about, you
know, I'm stripping the volatility and it's lower the
risk? Like what?
What does that even mean? Absolutely, and I think it's
important to start from the point of like what do you own in
your brokerage account or when you own AT bill, right And what
kind of risks are there? So when I own AT bill, it's it's
backed by the good faith of that asset is backed by the good
faith of the United States government.
That's the collateral R Feds monetary policy.
There's also extrapolated layers of risk there like the brokerage
could get shut down, your bank account could be insolvent,
etcetera, etcetera. There could be a run on the
bank. Obviously fractional reserve
banking makes it such that your deposits aren't there, right?
And so there are risks associated with owning these
instruments. Now with MSR, with strategy,
they're acting as a de facto central bank or issuer of this
Bitcoin backed instrument, right.
So if you read through the prospectus of STRC, we're
specifically talking about STRC right now.
It's not collateralized by the Bitcoin.
It's backed by the good faith in the credit quality of MSTR,
excuse me, of Strategy that owns a lot of Bitcoin.
So this is a traditional way in which insurance companies
structure their balance sheets. Again, like if something were to
happen to Strategy, you're not directly owed the Bitcoin, but
Strategy has protections to investor protection such that
they have to pay out the STRC dividend.
So when we say STRC is backed by Bitcoin, you can look at all the
different public markets accounting functions on their
balance sheet and determine how much Bitcoin they hold as a
company that can be used to continually pay out the
perpetual dividend on STRC based on its priority in the capital
structure. And that's really how you
determine the credit quality of the instrument.
So basically you're saying just like with an insurer, right, or
a bank, there's a stack of, of capital that, well, you either
understand or not, right? Like you understand Bitcoin or
not, or you understand all the land the US owns, or you
understand, you know, the balance sheet of a bank or an
insurer, right? Like for example, mortgages with
a bank, the collateral are old homes, right?
So they're basically saying if all these people default or if
the bank goes bust, we get, well, if the bank goes bust, we
can still sell the homes. It's XYZ over collateralized and
therefore people can get their money back.
That's exactly right. And I think the key, the most
important key point to understand about STRC and these
products is that it's not. So for example, like let's say I
were on my on a fictitious MSTR balance sheet, they had one
Bitcoin and that was worth $80,000 and they issued $80,000
of STRC against that one Bitcoin.
If this were the case right that STRC would be as risky as owning
the Bitcoin and the 13% yield wouldn't be attractive.
The only way to issue a outstanding liability or a
preferred equity that has a stable yield it is it has to be
over collateralized by the Bitcoin on the balance sheet.
So strategy has to own more Bitcoin than they're issuing USD
nominated values of liabilities or of preferred equity.
So they have to have generally it's about, you know, 3:00 to
1:00 they have to own 3 to 1 Bitcoin relative to preferred
equities outstanding because that way as bitcoins volatility
goes up and down, up and down, up and down, the
collateralization remains for those senior products.
And this is important and why this can really only be done in
a seasoned public market season issuer in a public market
structure in a vehicle like that, so.
What is the? Strategy.
What is the seasoned issuer? So a seasoned issuer is someone
who's been issuing securities in the public markets for a greater
than a three-year period of time.
There's a bunch of different, there's a bunch of different
kind of requirements that you have to have a certain
outstanding market cap, you have to have issued a certain amount
of equity over the past few years.
But strategy right now is the only seasoned issuer in the
market. Strive has not yet hit that
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My idea now is that Sailor is using Bitcoin.
That's why he talks about Bitcoin being digital capital,
right? He's using.
So instead of the capital on the balance sheet of a bank, you
know which, you know, the, the, the, the Fiat capital or the
portfolio of a real estate that has mortgages with them, right?
Or you know, all the, all the premiums of an insurance
company, etcetera. He's saying, you know, I'm, I'm
doing it with Bitcoin. So conceptually these are the
same, but he's doing it with Bitcoin, which is obviously, you
know, digitally native, right? So he calls it digital capital,
right? And now there's a lot of people
that say like, well, this is not, you know, what Bitcoin is
or how you should use it, etcetera.
But capital is just pooled money, right?
So he's talking about digital capital.
I would say he's still talking about money, right?
But then people are saying, well, this is, you know, Bitcoin
derivative, paper, Bitcoin, etcetera, this and that.
Why are Bitcoin derivatives good and why would they be bad?
Or, or maybe more importantly, like if, how could like a poorly
designed derivative market on on Bitcoin potentially kind of like
blow up, right? I think these these are
questions that that people have like why would it be a good
thing? Why would it be a a bad thing?
Yeah. That's, that's a great question.
And I think specifically with these instruments, right,
they're U.S., dollar denominated fixed income products backed by
Bitcoin, there's a real ratio that the companies, the issuers
have to get right. And that's the amount of these,
I call them liabilities, even though they really aren't,
right? A preferred equity isn't
technically a liability, but for the sake of argument, let's just
call it say it is the ratio of these liabilities to the total
capital assets, that being the Bitcoin.
And the balance sheet has to be maintained in a responsible
manner because if it's not, then the credit quality of these
liabilities of STRC of these preferred equities is, you know,
it becomes less superior, it becomes less credit credit
worthy. So for example, right now
strategy has 33% amplification. That's what we call
amplification and that's the ratio of the outstanding SDRC
convertible debt and other preferred equities relative to
strategies of total Bitcoin holdings.
Forsake of argument, let's say that went to, let's say they
just Willy nilly went and issued a lot more stretch tomorrow.
Let's say they issued another 16 billion of stretch tomorrow.
Now their amplification or the ratio of total liabilities to
capital assets, that being Bitcoin would go closer to 50%
or 60%. And in the case that Bitcoin
were to fall by 50% over the course of a short period of
time, now all the liabilities outstanding would be equal to
the total Bitcoin on the balance sheet.
And if something like that were to happen, right, this is this
is my example of an irresponsible Capital Management
vehicle, then there would be no over collateralization to pay
these instruments and the instruments would trade all
crazy. They would start trading down,
they would start trading up based on credit quality.
So again, it's that over collateralization in these
public vehicles that allow over collateralization be meaning
more Bitcoin than outstanding STRC that allows for bitcoins
volatility to continue, but for the holders of the preferred
equity to not experience that volatility because they're
insulated by extra Bitcoin in the capital structure.
Yeah. So by having this buffer.
Buffer. Buffer's a great word, right?
Yeah, buffer's a great word because they.
Have this buffer. This is what they mean.
When it's stripped, the Vol is stripped the volatility right?
So it is a exactly? Yep, a, a, a a it is not
Bitcoin, right? You, you can always buy, buy
Bitcoin, but the risk profile of Bitcoin or well, risk, you know,
I, I don't think volatility is risk, but so I don't know if
that's the word I I need to use right.
I like volatility. Profile, I think that's a great
way, OK. Yeah.
So the return profile, yeah. So of Bitcoin is way different
also in time frame, right? Like like holding Bitcoin for a
year is volatile in its own way, but it's in five years it is
volatile in a in a different way.
So if I'm understanding correctly, right, like when
using Bitcoin to create a product like Stretch, you're
saying the, you know, with this pack with 100, it basically
moves around 100, right? So that is why some people say
like Stretch, you can also see it as a stable coin, right?
Like a stable coin is not always $1.00, right?
Sometimes it's $0.96 or 94 and then up and down, whatever is,
is that a good way to describe it then?
Right. Like it, it's just a, it's a,
it's a, it's a different thing. It is definitely not Bitcoin,
right? It's a Fiat money product, but
you're connecting it to, to Bitcoin.
And I, I find it interesting because if we go back to the,
the comparison with the risk of a country, right?
I think, and, and also just companies in general.
I think Jeff used in his coffee Zilla interview the, the 60 year
bond of Ford, right? Like Ford has a 60 year bond.
I saw Austria has 100 year bond, which is already down 40% or, or
something like that, right? So, so no one will ever trade
that anymore. I, I, I think this is where we
should look, right? Like these are the, there are
pools of capital that are actually looking for places for
long duration allocation with a low volatility.
Is that, is that a good way to describe it right.
Like there is money that is looking for those places.
Absolutely. And I go as far as SO I totally
agree with what you're saying and these, but the one thing
like you mentioned this, you know Austria bond is down 40%.
When you take a bond for example US10 year note it doesn't, it
doesn't necessitate that the principle is stable, right,
Because interest rates can change, the credit quality of
the issuer could change. So bonds can be quite volatile
over long periods of time in those.
Years, you mean? Right.
Like exactly in those years. Yeah, exactly.
So it's like you don't know what's going to happen with Ford
in the next 60 years, right? It's quite a quite I, I would
say it's quite risky if you if you if you do that, right?
But again, different people have different risk profiles, right?
So. Yeah.
But just on that same point, it's like in that interim
between the point at which the bond is issued and the point at
which the principal is returned, plus all the coupon payments
over the lifetime of the bond, the value of the bond can go up
and down. It could start at 100, it could
trade down to 80. It can trade up to 120, right?
Like you're saying. And that that can be really
problematic for people trying to just protect money, save money.
And that's what Stretch ultimately solves.
And the way to think about this is, and everything you're saying
is, is spot on. A specifically like let's use
U.S. government debt, right, Treasury bonds.
So if you bought a 10 year Treasury bond today and the 10
year note is yielding, I think it's like 4 1/2% if interest
rates over the period of your hold.
So you buy it for $100 and you're getting 4.5% annualized
until you get the principal repaid at the end of the 10 year
period of time. If interest rates, you know,
generally controlled by the Fed, were to increase, the value of
your bond would go from $100 in that interim period of time to
$80.00 or $70.00 because you have to discount the future cash
flows of that note in the future based on inflation.
Yeah, Yeah. With stretch it's amazing
because it's price based on the 30 day trailing volume weighted
average price of stretch to be designed to trade around 100.
So you don't take on interest rate risk, you don't take on
principal risk in the same way you would with a fixed, fixed
term bond. But the interest rate can
fluctuate. For example, if the sofa rate or
the short term funding rate were to go down to 2%, it's likely
over a period of time that stretches annualized yield could
drop from because there be so much demand from 11 1/2 to 11 to
10. So by holding Stretch, you're
not guaranteed an interest rate, but you are based on the
creditworthiness and the execution of strategy.
As a management team, you are betting that the principal will
stay stable. And for a lot of people, that's
like a bank account. They want the stable principal
and don't want to have to speculate on where interest
rates will be in the future. So that's what's amazing about
this product. And it has to be done in a
preferred equity with a preferred equity instrument with
an ATM on it. And we could talk about that
later, but it's actually a novel structure, stretches the only
product like it in the market. Yeah.
So for millennials that listen and who hear credit market,
right, a lot of people would probably think about the 2008
crash. I've I've talked quite a lot
about this and then I wonder what do you think?
But like how is a is a Bitcoin backed credit system
fundamentally more honest than than a similar type of of
product or scheme in in a Fiat system?
Yeah. And I haven't spent too much
time thinking about this, but the way I I think about it in my
mind is you can think of Stretch as so when a bank issues, you
know, credit in the form of money, it's fractionally
reserved. So the bank doesn't have the
reserves to back all the outstanding liabilities, that is
the circulating M2 money supply with Stretch.
It's over collateralized by the Bitcoin holdings.
So you could argue that it's instead of a fractional reserve,
it's an over collateralized reserve or a fully reserved note
or outdoor paper money issuance that's backed by the Bitcoin.
So I think we're seeing this new form of, you know, we're seeing
this in stable coins too. And this is a bit of a tangent,
but stable coins are an example of a fully reserved, a fully
reserved asset, right, because they are backed by T-bills and
verifiable assets held on the issuer's balance sheet.
Although those those assets may be impaired and and losing money
over time, which I would argue they are, it's not a fractional
reserve. So stablecoins are a fully
reserved kind of new type of banking system and Stretch is a
Bitcoin reserved Bitcoin collateralized instrument.
And the reason you can offer such high yields on something
over collateralized by Bitcoin is because of Bitcoins
performance relative to the US dollar, Yeah.
And I think this is a great point because this is where kind
of like the divergent, I would say takes takes place, right?
Because if you, if you don't understand Bitcoin or agree on
the, the thesis of where it's going in the future, I think
this is where a lot of people actually, and, and I want to
emphasize, you know, I'm not a fan or a hater.
I just think it's interesting because it's also new and, and
again, I haven't been as deep in it as as you, but I'm happy to
hear that I do get it up until a certain degree.
What you're saying about, you know, the I, I, I, I think a
similar thing is happening here with, with, with trying Bitcoin
in the mix, right? Like people don't understand
Bitcoin and therefore they have no clue how all of this works.
What what we're talking about. But the interesting part is that
they also have no fucking clue as to how a bank works in
general, right? Or what the full faith and, and
credit worthiness of, of the American government even even
means. Or how deep, you know, the
rabbit hole of exporting inflation around the world and,
you know, IMF and all that stuff actually goes.
I mean, the whole industry of financial advisors that advise
you to buy, you know, T-bills and blah, blah, blah.
Like it is all part of keeping this facade up, right?
And I think you're saying, you know, stable coins are, are
fully backed by treasuries, but then still, you know, what are
treasuries worth? We just talked about it, right?
They are, they are not worth anything.
You know, over time, you are nominally, you know, it's, it's
a, it's a, it's a real negative rate of return eventually in
purchasing power, which is the entire goal of actually
deploying capital into a certain asset, right, to mitigate the,
the, the debasement, right. So I think this is where a lot
of people kind of glitch because if you have the anti Bitcoin
credit product argument, do you automatically have the pro, you
know, government Fiat Ponzi argument?
I don't necessarily think so, but this is the point where you
actually have to understand the the the Fiat credit Ponzi as
well in order to actually have a side by side opinion.
Does that does that make sense? Like does that resonate?
No. That makes perfect sense and
really interestingly, I mean how Thinny actually wrote about this
in a talk forum in 2010, he said.
I forget the exact quote, but it's something along the lines
of Bitcoin as serving as a reserve asset, a collateral
asset between banks that settled between banks, against which
banks issue their own kind of paper currency collateralized by
the Bitcoin, and they'd offer different rates of returns for
holders based on how over collateralized their issuance
were by the Bitcoin. That's exactly what STRC is
happening. Yeah, it's exactly.
What's happening and yeah, and even more so like we're seeing
the competition between strive and and and MSN strategy, right?
Like STRC offers 11.5% Strive, which has a higher leverage
ratio, or they issue more SATA against their Bitcoin has to
offer a higher return. So 13% because it's by nature a
little bit riskier. So that that's exactly what how
Finney predicted between banks. That's just happening in public
markets, yeah. So you now I kind of want to
switch to maybe a bit bit deeper in in stretch like I've called
this. Part.
Jokingly part serious, it's kind of like an infinite money
glitch. If if there is so much money
that is, you know, sloshing around trying to find a way to
mitigate the debasement essentially, right.
So preserving of capital before potentially growing, growing it.
There is so much money. There's way more money than any
general person can imagine, apparently, right?
There's there, there at least 100 trillion that's trying to
find that that place. It's just that's a, that's a
crazy number, right? So it's there's basically like
this menu of all these different types of things that you could
buy. They all have their different
durations risk profile according to how much I would say you
understand the collateral or if you look at the Moody's or like
you know, or the, the, the, the rating, however you judge the
risk, right? You are looking for places to to
put that money you talk about stretch as a variable cost of
capital. Now I'd never heard about that.
So maybe you can kind of explain why having a like fluctuating
cost of of money is actually a competitive advantage for this
flywheel that sailor, but also strive, you know, is is is
trying to to create with the goal again, I would say to
acquire as much of the hardest money to ever exist, the best,
most pristine collateral, etcetera to to ever exist.
OK. So I think the place to start is
to look at your bank account. And so if you have a bank
account and you want to store money, you can put it in a high
yield savings account. And generally what the banks do
is they loan out the money. When you deposit money into the
bank, they loan it out, they get a return and they pass through
some of that yield, that return to you and your savings account.
Another way to get a return on your money without having it
fluctuate up or down is to put it in a money market fund.
And that money market fund will have a variable yield because
it's backed by a ladder of short duration U.S.
Treasuries. So one month it may be yielding
4% in the next month it may be 3.9%.
But what you can count on is your $100 being $100 overtime.
So this is a variable variable rate or variable return, but
stable principal instrument. In public markets, there have
been attempts to have this similar sort of product or
instrument and one of those is so obviously we talked about how
bonds, the principal fluctuates over time because of the change
in the credit quality of the company or the change in
interest rates between issuance and the point of repayment.
There have been other instruments that have tried to
stay stable that are issued by public companies.
One, for example, have been preferred equities that are
benchmarked to SOFR. For example, I'm a company and I
issue a preferred stock and I say it's going to, you know, if
the SOFR or the short term fed funds rate goes down by 1%, my
instrument will yield 1% less. So it'll go from issuing it
being 8% yield to 7% yield. However, as the company's credit
quality changes, as you know, developments happen as the
company succeeds or fails, the market begins pricing it
differently and it's difficult for the principal to stay
stable. So your $100 may go to 95 or 80
and not recover. OK, so what's what's novel about
STRC with regards to the public markets?
Well, it's really the only instance.
It's the only instance in history where there's been a
security issued by a public company that has successfully
maintained a stable price. And the way they've done it is
with the ATM. The ATM facility is a public
company's ability to issue new shares in real time.
Strategy uses it to limit the price at 100.
So whenever the price of SDRC hits 100, they issue a lot of
shares that's sell pressure in the market and they keep the
price pinned there at 100. Now how do they limit, how do
they increase the price of it? If it were to slip below 100,
right, STRC falls to 95, for example, they have to be able to
raise the dividend as a response to the market pricing the
instrument. So that's the major, major
unlock is they, they change the dividend on a monthly basis for
STRC based on the 30 day weighted price over the prior 30
day trading days. So for example, if STRC is below
99, they increase the price, the dividend rate, which should push
the instrument up. So those two mechanisms are the
two mechanisms by which they stabilize it at 100.
And before STRC, there was no preferred equity in the market
that had a shelf registration ATM on it.
So they couldn't limit the price at that upward bound.
It's completely new. So in in that previous instance
it was also more tied to the performance of the company then
also right. Like is that correct exactly?
So the the unlock. Let me try to say it more
clearly. Prior to SDRC there were
preferred equities that benchmarked off the sofa rate,
so they they would offer 500 basis points, which is a fancy
way of saying 5% above the sofa rate right now.
That's about 4% to. To be attractive to to get
capital. Exactly.
And that's how they very standard.
Rate. Yeah, exactly.
Yeah, OK. And they tried to.
Stabilize the principle that way, right?
Because a lot of bonds will change in price based on the
change in sofa. They're saying we'll change the
yield based on the change in sofa, but that was ultimately
flawed. And so because the credit
quality of the company could change with STRC, now the yield
is priced based on the price at which the market values.
STRCSTRC goes down, the yield goes up.
I know it sounds kind of simple. Now we're talking about it like,
you know, STRC down, yield up, pushes price back up to par.
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can actually be 11%? Is that like necessary to to
just like kick start the capital flow and it eventually goes down
to, I don't know, 9 or 8 1/2, which is still way above, you
know, let's say baseline interest rate, especially toward
the future, right. I think that plays in into it.
But also, and I don't know if that's connected, but in my mind
it is like, I wanted to ask you like, but yeah, but what if over
the next 10 years, you know, they issue, I don't know, 100
billion extra stock certificates, right?
Like, would that actually matter?
Like does it matter how much outstanding units of stock there
are? Look.
It's a great point. And I think there's a lot of
variables here and it's all reflected in SCRC demand, right?
So as long as there's demand at $100, strategy can issue more
stretch. And if there's a lack of demand
at $100, then strategy will increase the interest rate.
And the amazing thing is it's really the market finding that
equilibrium and the higher for longer strategies willing to
keep the interest rate on stretch, the more they can issue
at 100 because there will be increased demand at the demand
for stretch is really only a function of the creditworthiness
of strategy so that Bitcoin is collateral and the interest
rate. So, you know, Sailor on the most
recent earnings call said he'd be willing to keep the interest
rate at 11.5% for a sustained period of time in order to issue
more stretch. Like for example, if the
interest rate, if stretch, if there was just unlimited demand
for stretch, if there was, then strategy has two options to curb
that demand, essentially to limit the price at 100 and
that's to continue issuing at 100 to cap the price or to lower
the interest rate. And there will come a point in
time where they will likely lower the interest rate.
Saylor has talked about the cost of capital over over 10 years
being about 8% for stretch. So he's saying it will likely
come down. But that's a function of them
kind of selling out of stretch, of having so much demand that
they've issued so much that their balance sheet no longer
has capacity for more stretch issuance.
I don't think we're anywhere close to that that point yet.
OK, so also in the, in the earnings call, there was a lot
of noise, right? That on, on, on X and wherever,
you know, Sailor mentioned, you know, possibly selling etcetera.
Yeah, I, I told you in the beginning my idea around this,
right? Like I'd, I, I don't think it's
an issue if you have to pay Bitcoin to, to pay for stretch.
That sounds very Ponzi ish, obviously.
But yeah, if if it makes you survive across, I don't know, a
bear market or a whatever, because you have a long term
thesis, right, 1020 year thesis or you know, the sailor talks
about 2042 before, right? Like as to where the value of
Bitcoin is, then in my opinion, it doesn't really matter.
But I would love to hear from you why?
Why it doesn't matter, or why it does matter, You know, why did
he even say that? So my, my thinking is that the
reason he said he'd be willing to sell Bitcoin is because it
makes it seem to credit rating agencies and index agents and
you know, indices like the S&P 500 listing committees that the
capital gains from Bitcoin are being paid are being used to pay
the stretch dividend by selling Bitcoin to pay dividends or
having the ability to it, it shows people that the dividends
are being paid by capital appreciation of the assets on
the balance sheet instead of by new capital in the door.
You know, right now strategy will continue to pay dividends
with stock issuance and they laid out quite clearly that
whenever stock is trading at a premium to NAV, it's more
accretive to sell the stock and use that to pay the dividends on
the preferred equities. But for example, of
Schwarzhammer, the stock below 1.2 * M NAV.
And that's just the scenario in which the common equity is
trading very close to book value.
Then they could trim some Bitcoin and pay the pref
divisions instead of selling the equity when it would be
destructive to Bitcoin per share to sell the equity.
That's that's just a complicated way of saying when the equity is
undervalued, MSTR, it's more advantageous or beneficial to
shareholders if they trim off a little bit of Bitcoin and pay
the dividends and it makes so that's that's the mechanical
reason for a Bitcoin per share basis.
There's the secondary reason is the optics look a lot better
when they sell a little bit of Bitcoin or have the option to to
pay dividends because it comes from capital appreciation, not
new raised capital. Yeah.
Exactly. So there's a huge difference
between the Ponzi argument and the actual mechanic, right?
And, and also, like you're saying, it also respects the,
the, the MSCR shareholders to to a degree, right, Because
diluting their, you know, the, the, the shares amount.
And also, I would say then he's actually using Bitcoin as
capital, right? Like, isn't that the whole point
that that he's using it? I would also say that it adds to
distribution of set Bitcoin. I think it also helps at
another, another, another question, obviously around, you
know, can he get too big? Well, if he uses, you know,
because that that's I think why he shouts it from the rooftops,
like, hey, guys, this is my playbook, right, Because I think
the optics are, are bad, right? If he has 22 million Bitcoin,
you know, I, I don't think that would be a good thing in
general, if still not enough people care about Bitcoin and
there's actually, you know, growing, growing demand.
So use it using Bitcoin as, as capital, right?
Just in, in a, in a classic way, like, you know, a country could
sell an airport or a harbor or you know what, whatever a
country can sell to actually pay for whatever obligation they
have, right? This is in my mind kind of like
a similar thing. Yeah, Yeah.
It's I mean, I think it's great signal for the market, OK, so.
If if the stretch yield is 10 to 12%, Bitcoin grows at a 25 or
50% kegger, you know, whatever model you want to follow to
maybe dismantle the Ponzi part, who's actually paying for the
yield? Is it?
Is it just like a transfer of wealth from from people that
have dollars to? The.
Holder of Bitcoin? Is it an arbitrage on kind of
like Fiat money ignorance? I heard a great analogy, someone
said my, my editor Gary, he said it's like sailor is selling sand
in the desert and people because they see sand around them, they
think sand is valuable or something.
But he's buying water, right? Like he's selling sand and he's
buying water or some something like that.
It is it just an arbitrage on, on, on, on, on, on ignorance or
is that, is that too simple to to to kind of like classify
this? Because if you understand
Bitcoin, right, like you have to understand Bitcoin to a degree
to get stretch or maybe you think not, right?
But like why, why wouldn't you buy the Bitcoin?
Like, yeah, I'd be interested to hear your thoughts on that.
Yeah. I think it's what we talked
about earlier. It's return profile, right?
Like different people have different necessities for a
return profile. Like for short term capital, if
I need to pay taxes with if I have 100 grand, I need to pay
taxes with in six months time, I can't, I can't stomach a 50%
drawdown with that capital over that period of time.
Obviously Bitcoin has had historical volatility, so you
need shorter duration capital that you can count on the
principal being returned and and that's the benefit of stretch to
that point. You know, bitcoins going to
bitcoins, the raw capital, it does what it does, it goes up,
it goes down generally over long periods of time, people, myself
included, are betting that it outperforms the interest rate on
the stretch dividend. So I think that's part of this
conversation that was really missed in the Coffee Zilla
interview as well, is for Stretch to work, you have to
have someone willing to take the bet that Bitcoin outperforms the
interest rate paid to Stretch holders.
And that ultimately is the MSCR shareholder, right?
Anyone who holds MSTR now benefits from the leverage
created in the capital structure.
The leverage being as an MSCR shareholder, you're, you have a
claim over this Bitcoin that you're then paying.
So, so as an MSCR shareholder, you essentially have a claim
over 150% Bitcoin, but that extra 50% Bitcoin you have a
claim over, you're paying 11.5% annualized to the stretch
holders to keep that leverage. So that that's kind of how the
capital structure was created. And so long as there's people
willing to take that bet, the leverage or amplified Bitcoin
bet, you can create something like stretch for holders who
aren't betting. I mean, arguably, as a stretch
holder, you're betting in whatever period of time you
decide to hold the instrument that Bitcoin won't outperform it
or you just want that return on a predictable basis with 0
volatility. So that's kind of the target
market, yeah. So here's one thing I would push
back on right? I think the, the, the, the, you
know, with a stock having a claim on, you know, XYZ Bitcoin
of that company. I, I don't want to say it's not
correct, but there is no, no claim, right.
It's more like you have a share in a company that has a machine
to acquire the hardest capital in the world that has a certain
value. And therefore, you know, then
you kind of go back to, you know, business business model or
your idea of how how well they can optimize their business
model of acquiring set capital, right?
And that is, I would say in general, why you buy a stock,
right? Like if you have Apple stock,
you don't have a claim on the amount of iPhones in the
warehouse. Or, you know, if you have a
Boeing stock, you don't have a claim on the on on the on the
plane still be to be developed, right?
It's more about betting on the fact that they can actually
perform well, perform their business model better over time.
And, and that is what I wanted to say to you.
Like that is also why they call it income, right, Or a return,
right? Like, sorry, a Bitcoin per
share, right? It's kind of for me at least a
metric that kind of shows how well they are executing their,
their business model. Would you agree?
Yeah, yeah, I'm you're totally right.
Obviously, you know, no comic shareholder has a claim over the
Bitcoin, but you can argue in the case of liquidation of the
company or if the company sees to exist, this would be how much
Bitcoin each shareholder across the capital stack was paid out.
That's the way you can think about it.
But you know, and it's never that.
It's never that clean and in bankruptcy proceedings in the
United States. So you don't own the Bitcoin,
that's for sure. Well, but it's definitely
cleaner than some electronics manufacturer that goes bust,
right. And and that I think again goes
back to just the the pristine collateral idea of of Bitcoin is
the fact that any company attempting something with
Bitcoin actually just just by definition has a different risk
profile than, you know, planes or whatever types of products a
company is using as their, as their capital stack, just
because you can liquidate it so easily.
OK, so. You believe Bitcoin will
eventually. Eat this, you know 100 trillion
global bond market. I'm more I'm more convinced, you
know, slowly also just also because I I just didn't
understand from from the beginning, but just having the
understanding of there's so much money that's trying to find, you
know, a, a, a place we. Talked kind of about.
You know, also before and I think you also talk about it,
right, 6040 is kind of dead, right?
Like nominal returns are are dumb if you lose the purchasing
power, etcetera. What is the big idea here that
you know, track 5 Wall Street is just totally missing this, you
know, transition from Fiat type bonds to Bitcoin backed credit
bonds. However you want to define that
because it sounds, well, maybe it sounds too good to be true,
but it also sounds like it's working, or it looks like it's
working. Yeah.
I mean, I think it's. Going to take a long time to be
adopt, like a long, long time to be adopted.
And that's obviously the opportunity that presents self
for anyone who holds Bitcoin. But it's not I don't.
Think it's going to be for? Years until there's a rating on
some of these preferred products and until they're in them
trading in the market for three years plus most institutional
investors are unable to allocate to something like stretch or any
strategy preferred equities. So you know that there's a lot
of runway for Bitcoin accumulation over time, but I do
think. It will shape.
Kind of the like you can go, you can take it to an extreme like
you know, I, I have in the past talked about how STRC is
redefining the cost of capital across all public markets,
right. Like the S&P historically
returns 9 percent, 10% with dividends reinvested and you
know, it stretches turning 11.5% on a return of capital basis
tax, tax deferred, you know, predictably on what now will be
a two week time frame because dividends will be paid out semi
monthly. Like it's hard, you know, you're
going to it's arguably stretch is better than the SP.
You know, you could argue stretch is better than money
market, you could argue stretch is better than private equity,
you could argue stretch is better than venture capital,
etcetera, etcetera, etcetera. So you can take it to the
extreme, but these things move really slowly and you know, big
money moves very, very slowly. So I think this is definitely a
marathon of proving out Bitcoin back returns.
And I don't think Stretch will be the only, I think Stretch
will be the the winner long term of the most dominant player, but
SATA will likely take part of market share.
And then also, you know, we haven't even talked about this
yet and I don't want to derail a conversation, but I think
there's going to be short duration Bitcoin backed credit
that is very successful as well. So actual collateralized notes
or something like Stretch, but it's actually collateralized by
someone's Bitcoin that pays a lower yield because in the case
of, you know, because the the Bitcoin is is direct collateral
for the instrument. So we can talk about that later.
Let's. Let's talk about that,
definitely. Because that that would actually
eat even into short term T-bills and money market fund and and
stuff like that, right. Yeah.
So maybe, yeah, let's let's go there after this question
because it kind of ties into to what you just said.
So if Bitcoin. Actually becomes this.
Global hurdle rate, right? Either directly or powering a
product like like stretch, right.
You, you just alluded to, you know, that's better than S&P,
that's better than you know what, whatever and all these,
all these things that you mentioned which looks, looks
like it right, at least percentage wise what happens?
To all the. Companies, right.
I also kind of feel that the stretch product really is this
wedge in the sloshing around the Fiat money in the in the yeah,
I, I always just say the Ponzi scheme, right?
Just the whole thing propping up the S&P, propping up the, the
stocks, right, propping up real estate, all all that stuff.
It's just looking for for different places again, right?
I feel like stretch is kind of a wedge.
And it's also because what we talked about it has, you know,
arguably and, and I would say verifiably better, better
backing because it is Bitcoin, right?
Like you know, Bitcoin is better as collateral than than real
estate is better as collateral than Apple's inventory is better
than collateral as you know the. Ability of the US to pay back
its. Debt, right?
So what happens what what what happens if this is really a
wedge and Bitcoin is a global hurdle, right?
Like what happens to all the companies?
What happens to these these classic products?
What happens to pension funds, insurers, whatever, like all
these huge capital allocators that are, you know, in the field
money circle jerk sloshing it all around.
Yeah, it's a good. Question and I mean ultimately
it, if Stretch is successful at beating the returns of
traditional capital vehicles over one year, 2 years, three
years, four years, five years, it should continue to siphon
money away from those instruments, demonetize those
different investments and power up Bitcoin, the Bitcoin network
and sustain a long term growth rate in Bitcoin above all those
other assets. That would be, that's kind of
the thesis. Another aspect that's massively
important which will drive inflows into stretch over other
alternative investments is simply the liquidity.
And we've talked about that a lot on some of the in some of
our true North calls is, you know, bitcoins really the only
24/7 liquid globally traded asset in the world and now
you're using it to back a preferred stock.
That's 1000 times more liquid than any other preferred stock
in the market. And when you look at some of the
problems with private credit, venture capital and private
equity, especially with some of the redemptions that have been
halted over the past few months, investors are looking for an
alternative. So alternative investments are
private equity, venture capital and private credit, generally
speaking. And while they're illiquid, they
tend to return higher than the traditional S and PR index
funds. Now you have something like
Stretch, which is a liquid and returns higher than the S&P and
that liquidity there, there is a premium on liquidity.
So if you can get higher returns and higher liquidity and stretch
than you can in private credit, there's going to be tough to
make that case for private credit over a long period of
time. And I think that's what we'll
see, the demonetization of alternative investments and the
monetization of the Bitcoin network over time and so.
Let's talk about these these. Shorter duration products, do
you think that would be something that strategy would
issue or is that actually kind of like a market opportunity
that opens up perhaps even for these incumbents that, you know,
turn their Fiat capital into Bitcoin capital and then start
serving, you know, a different part of the market probably
right with with shorter duration type products?
Yeah. And I think it's.
A huge, huge question because I don't know what the market's
going to do. It all hinges on what
tokenization looks like in the future.
I don't know. So obviously stable coins are a
$320 billion market growing 40% year over year, most of that
volumes on Ethereum, Bitcoin. Is the largest.
Capital network and it will be the dominant capital network
moving forward. Obviously that takes place on
the the Bitcoin blockchain. And then we have the public
equities markets which trade on different exchanges like the
NASDAQ and those are being tokenized and you know, traded
24/7 in the near future. So I don't know where the
majority of equities trading, you know, in all of crypto or
just unregulated securities. So, you know, I consider that
part of the securities market in the future.
So I don't know where the securities market will trade.
But the thing was stretch that I think could be not improved
upon, but someone may be looking for is a Bitcoin backed, a
Bitcoin collateralized short term note that has no
counterparty risk. And so if you can program the
short term note to be collateralized by the Bitcoin,
you can offer a yield that's lower than that of stretch
because someone may look at it as being less risky.
And I think there is potentially, you know, a world
for that. Maybe it's on the NASDAQ, maybe
you know the NASDAQ in in whatever 24/7 trading looks like
on the NASDAQ, you can lock up a Bitcoin and issue a short term
note against it. But I think there's a
potentially a market where there's no third party in
involved in the issuance of short term credit against
Bitcoin. It's interesting.
Because I think this. Also kind of ushers in the the
transition to to Bitcoin as a as a unit of account, right?
I think definitely, especially for.
Strategy. The what's it called, like the
fair, fair value accounting, you know, and, and stuff like that.
Just the fact that they report as Bitcoin per share earnings,
etcetera is kind of, I think a little, a little star to that.
I, I saw you modelled like NVIDIA and Apple etcetera and
Bitcoin terms. I, I, I, I share this a lot with
people, right? Or like put the NASDAQ in M2 or
like put the NASDAQ in USD and then put it in M2, right.
And then like in in M2, it's higher or it's lower today than
at the.com bubble, which is, you know, arguably, you know,
factually wrong, right, in terms of tech value.
Then when you do when you do Bitcoin, it's even it's even
worse, right? Like it's like all time low.
When when did you start thinking about Bitcoin as a unit of
account in in in that way? Is it also a way to kind of like
view everything we've talked about in a in a different light,
right? Like, is it easier?
To see what's happening. When you, you know, put on the
Bitcoin glasses and, and use that unit of account versus, you
know, just the, the, the Fiat way.
I mean, I think, you know, I don't know when Bitcoin will be
used as a unit of account. I've been doing it for me.
It just came actually with index funds.
Like I believe the best way to invest in equities markets was
to invest via indices. And I've always believed
Bitcoins kind of the index for global productivity, which is
effectively the purpose of money.
And that's why I do believe that, you know, you can use
Bitcoin as a unit of account for your assets.
It's all it's all good. Do you?
Do you think like these companies like NVIDIA or Apple,
like would they be able to even start their own like digital
credit type instruments? Like do you think there will be
attempts to kind of combat the siphoning away of, of for
example, the, the, the automatic capital, right that goes into
the S&P 500 Max 7, etcetera? Like do you think that can be a
thing? Is that a threat or, or wouldn't
they even be able to do it without, without Bitcoin, right?
Like is, is this kind of a moment where it also shows like
you cannot really do it without Bitcoin?
Yeah. Is it a threat and will they
potentially create digital credit and use Bitcoin as
dividend account? I, I think it's pretty
complicated because you know, people look for historical
comparisons for equities markets.
And if you, if you really look at equities markets today, I
mean there's obviously massive concentration reminiscent of
that of the Nifty 50 in the late 50s.
But with the Mag 7 now deploying most of their free cash flow,
not into stock buybacks, but into capital expenditures
related to AI. Obviously the broader market are
looking for places to, you know, markets deploy Fiat into assets
that they believe will be more productive than Fiat.
And right now that's data centers and AI CapEx spend.
Those will probably be massively, you know, there will
be winners in those markets and there will be losers.
It's the idea of risk. What is risk?
And I think people misallocate towards risk, specifically large
corporations and Bitcoin is certainty amidst uncertainty in
public markets. And, you know, I think over a
long period of time, this is the reason why it would be difficult
to beat Bitcoins hurdle rate and why more and more capital will
be sucked into the certainty that is Bitcoin relative to the
uncertainty in public markets and disruption that occurs.
But that's not to say there aren't going to be like, I
believe there's going to be lots of success in public markets and
equities. There will be equities that have
compound annual growth rates of return because of AI that
outpace any equity in history. Yeah.
Yeah, exactly. I, I love that answer because,
but it will have a different risk, right?
Maybe that's a good that's good to add, right.
And also I've, I've talked a lot about, you know, is Bitcoin risk
on is it risk off like fundamentally
characteristically, right? I, I think is it is extremely
risk off, but the but the market trades in a different way.
But you just said something that made me think, well, Bitcoin is
a is, is good in bad times and in in in good times, right, like
it is, it is a superior savings vehicle.
Just, you know, as as as a way to park capital at least over,
you know, X amount of time, you know, depending on your risk
profile, right. So whether that's two years or
five years or or or 10, but it's also a totally separate,
fundamentally very stable value. Proposition, yeah, right.
So in terms. Of in times of turmoil or chaos
or whatever, right? Yeah, you can actually exit the
the, let's say the Trat fi system to just park your money
in Bitcoin. And we are already seeing that
people are doing that right. Like whenever Bitcoin goes down
on the weekend, you know there's going to be a rough Monday on
the on on the stock market just because, you know, big capital
allocators are already using Bitcoin as their as their
accounts, right, their liquidity account because that's the only
thing that they can actually access on the weekend.
So I'm, I'm personally very bullish on that.
It's just interesting to see that, that it's already used
like that. Although, you know, obviously
the price goes down when they sell in the weekend, but it's a,
it's interesting to, to, to see that that is already happening.
So, yeah, maybe some like 3 short questions to, to wrap it
up, you know, talking about all of this, you know, looking at
what you're looking and researching what makes you the
most bullish on, on, on this role of Bitcoin that's evolving
in the US? You know, we have clarity act
coming, but also globally, let's say over the next decade, 2
decades, however far your, your outlook is what, what makes you
bullish? It's.
Simply. Returns generated by Bitcoin as
collateral, Bitcoin as a capital asset with low volatility.
So SCRC digital credit, I actually don't like that term
that much, but anything, anything that taps into
traditional Fiat markets that's powered by Bitcoin.
I think is the killer application of Bitcoin.
It is a killer application of Bitcoin because Bitcoin is it's
encoded monetary policy and which should theoretically
perform outperform monetary debasement significantly
especially along its adoption curve.
And we're seeing that play out in real time.
And the way to funnel more and more capital into that vehicle,
into Bitcoin, is to offer it in a digestible format for the
biggest money managers around the world.
Stretches the first time we've seen an instrument that's
actually digestible by money managers, people who have
mandates to be very low volatility.
Most hedge funds, most institutions cannot stomach
bitcoins volatility and won't be able to for 20 years.
In the interim, stretches a product that solves their
problems powered by Bitcoin. And I think there's nothing like
it. So what do you think is the end
game of? Of sailors that like, you know,
can a can a company become the central Bank of Bitcoin?
Some people say, you know, the US government will buy a share
like they bought a share in Intel.
Like how do you how do you see that progress?
Because I can imagine that if he gets too big, you know, maybe
not in in Bitcoin, well, maybe in Bitcoin terms, maybe not, but
just in the, well, the amount of capital that he can attract.
And therefore, by the way, obviously he grows the Bitcoin
stack and and so on. Right.
Yeah. Where where does that end?
Like what's the goal? What what does that look like?
Yeah, I'm I'm a pretty. Much a simpleton when it comes
to this, like he stated it briefly that his goal is to
drive Bitcoin to a million and then 10 million and he will.
I believe he will. All this hinges on performance.
I know a lot of Bitcoiners don't like to talk about it at the end
of the day, but digital credit is this idea that bitcoins
superior monetary properties support its outperformance of
traditional Fiat based assets. And so by raising more and more
capital with Stretch and with MSTR and continually building
his Bitcoin stack, building the balance sheet, he's sequestering
Bitcoin that will never move, that terminally pushes the price
of Bitcoin higher in the long term.
So I think every single bitcoiner should be cheering
what he's doing because he's working for Bitcoin.
Ultimately, he's working for Bitcoin, so.
It's like a, It's like the end of a.
Vacuum that keeps on getting bigger.
Kind of like if he takes 15% of the Bitcoin.
Supply Bitcoin like yeah, I think people forget that the
price will move aggressively in in the direct in upwards.
And once it does, I mean, people realize that he's he's bought
and secured and won't be selling the majority of his capital
stack. Yeah, OK.
I have an extra question. How long until people actually
take notice in other countries like other countries taking
notice, right? Like could you have sovereign
bonds backed by Bitcoin, right? Like this, this whole Bitcoin
bonds idea? I mean, there has to be a point
where someone thinks, you know, OK, this is, this is a bit too
much like this is a bit too much for sailor because I can also
imagine they, they can get capital from anywhere in the
world, right? I, I think there's a stretch
equivalent in, in euro denominated for, for example,
right? So, you know, yeah, I, I don't
know, like what what do you think?
Like I, I'm thinking about this just in Bitcoin terms for the
last five years, right. Like when is everyone going to
wake up about Bitcoin? But it feels like this is a
bigger threat to trade fight type products and and stuff like
that. Then, you know, spot, spot
Bitcoin. Yeah, I mean, tech tends to.
Centralized technology and financial products tend to
centralized around one or two dominant players.
So I actually think Stretch is one of the final incarnations of
this short duration Bitcoin credit instrument and its
continued existence will just be adopted in structured products
that are brought around the world.
So you know, the liquidity is so important on these instruments,
so you can trade in and out of them with big size.
Stretch is the only one with the If you want to buy $10 million
of Strike, you really couldn't do without moving the price.
Stretch. You can do it in a blink of an
eye, that liquidity. Will you know?
You want to instrument with that kind of liquidity, it
centralizes around stretch. Then you can create a product,
an ETF for example that has a FX swap of USD to Euro and send
that over to to Europe or you do JPYUSDFX swap and put sell that
product in Japan. And so I think Stretch has now
become much like Bitcoin is the foundation for these products
that offer high return like Stretch in the public markets.
There's plenty of financial infrastructure even in the
stable coin markets to package up stretch and ship it around
the world. And so I think all the liquidity
will concentrate around Stretch. And I actually don't think
there's that much base layer financial engineering that's
left to be done with regards to those products.
It's actually pretty interesting, right?
Like. Like like stable coins by
treasuries, you know, and there's that flywheel.
You can have Bitcoin stretch, maybe also stable coins right
that just have a stretch. Right, Exactly, exactly.
I think it's in this layer, it's the layered.
Layeredness, basically that that you're seeing.
All right, the last question, and I ask everyone the same
question, which is what is a core belief you will never let
go of? Core belief I'll never let.
Go of. Purpose of life.
Is to gain freedom and then find your purpose once you've
established freedom. Awesome man.
Well. Thank you so much for.
This deep dive, I thought it was very interesting and very
helpful, and I hope the people listening found that too.
So yeah, man, let's stay in touch and and see how this goes.
Thanks. Amazing.
Thanks, Bram. Great question.
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