1 00:00:00,160 --> 00:00:04,280 The crypto infinite money glitch appears to be broken and we may 2 00:00:04,280 --> 00:00:06,440 never truly know what went wrong. 3 00:00:06,800 --> 00:00:09,680 The way it was supposed to work is that you could take an 4 00:00:09,680 --> 00:00:13,480 irrelevant company, raise capital to buy Bitcoin or some 5 00:00:13,480 --> 00:00:16,000 other token. They're all basically the same. 6 00:00:16,280 --> 00:00:19,480 Then tweet something quasi religious about the future of 7 00:00:19,480 --> 00:00:24,040 money and put a lot of effort into creating AI memes as good 8 00:00:24,120 --> 00:00:27,440 AI memes will definitely drive the token price up. 9 00:00:27,760 --> 00:00:31,440 I mean, that's in corporate finance Xbox at this point. 10 00:00:31,920 --> 00:00:34,160 This starts the flywheel spinning. 11 00:00:34,360 --> 00:00:37,360 The crypto goes up, pushing your stock price up. 12 00:00:37,680 --> 00:00:41,600 Then you sell more stock to raise money, buy more crypto, 13 00:00:41,720 --> 00:00:44,360 rinse and repeat. If there are any annoying 14 00:00:44,360 --> 00:00:48,480 questions about cash flow, PE ratios, or the fundamental loss 15 00:00:48,480 --> 00:00:51,920 of thermodynamics, that's possibly just a sign that you 16 00:00:51,920 --> 00:00:56,760 need to crank out more AI memes. Why run a business which is dull 17 00:00:56,760 --> 00:01:00,560 and boring and can go wrong in many, many ways, when you can 18 00:01:00,560 --> 00:01:04,080 just buy something, tweet about it, and pump its price? 19 00:01:04,360 --> 00:01:06,680 And possibly making it sound too simple? 20 00:01:06,880 --> 00:01:10,360 One of the real innovations of crypto treasury companies, as 21 00:01:10,360 --> 00:01:13,800 they became known, was to monetize the volatility of your 22 00:01:13,800 --> 00:01:16,360 stock. If your stock price jumps around 23 00:01:16,360 --> 00:01:20,560 like a caffeinated squirrel or has a high standard deviation, 24 00:01:20,560 --> 00:01:24,600 as nerds would say, you could monetize that volatility by 25 00:01:24,720 --> 00:01:28,040 issuing low or 0 coupon convertible bonds. 26 00:01:28,320 --> 00:01:31,880 The more volatile your stock price is, the more the embedded 27 00:01:31,880 --> 00:01:35,800 conversion option is worked, and the convertible bonds will be 28 00:01:35,800 --> 00:01:39,520 bought by hedge funds who don't necessarily believe in your 29 00:01:39,520 --> 00:01:41,880 company or the underlying crypto token. 30 00:01:42,120 --> 00:01:45,280 But they are able to make money through gamma trading, which 31 00:01:45,280 --> 00:01:48,200 I'll explain in more detail later in the video. 32 00:01:48,440 --> 00:01:51,920 But it involves buying a convertible bond short, selling 33 00:01:51,920 --> 00:01:56,360 the stock against it on a ratio so that your market neutral, and 34 00:01:56,360 --> 00:02:00,440 then constantly adjusting your position size as the stock price 35 00:02:00,560 --> 00:02:03,560 moves around. The hedge fund can make money 36 00:02:03,560 --> 00:02:06,920 from this while keeping its combined position stock price 37 00:02:06,920 --> 00:02:09,800 neutral. These guys don't care about the 38 00:02:09,800 --> 00:02:12,960 company or the Shiba Inu based token that you're claiming 39 00:02:12,960 --> 00:02:16,080 drives its value. They just care about the stock 40 00:02:16,080 --> 00:02:20,280 price moving around a lot. Which your AI memes and unhinged 41 00:02:20,280 --> 00:02:25,000 tweets are supposed to 'cause this is a virtuous circle or, or 42 00:02:25,120 --> 00:02:29,120 some sort of a circle anyhow, as it allows the CEO of a once 43 00:02:29,120 --> 00:02:33,320 failing company to raise cheap capital to buy stupid tokens 44 00:02:33,480 --> 00:02:36,440 while providing hedge funds with profitable market neutral 45 00:02:36,440 --> 00:02:40,200 trading opportunities. Look, you can be as negative 46 00:02:40,200 --> 00:02:42,960 about this as you want to be, and I know you guys can be 47 00:02:42,960 --> 00:02:47,200 judgmental, but it worked like a cheat code in a video game where 48 00:02:47,200 --> 00:02:49,760 companies could raise funds to buy crypto. 49 00:02:50,040 --> 00:02:52,360 That buying drove up the token prices. 50 00:02:52,560 --> 00:02:56,240 The firm stock price often went up even more than the crypto did 51 00:02:56,240 --> 00:03:00,240 as idiots would buy the stock. Your quasi religious tweets and 52 00:03:00,240 --> 00:03:03,520 memes stir up your followers on the everything app. 53 00:03:03,640 --> 00:03:07,440 We're good for social media platforms and provided a real 54 00:03:07,440 --> 00:03:11,840 use case for Sora too. This was hype capitalism at its 55 00:03:11,840 --> 00:03:13,920 best. Or do you like it or not? 56 00:03:14,040 --> 00:03:17,240 It's just how things work. It's maybe even how things 57 00:03:17,240 --> 00:03:20,960 should work as why have a company that does something when 58 00:03:20,960 --> 00:03:23,840 you could just have a company that buys something and pumps 59 00:03:23,840 --> 00:03:25,800 its price up. It's better. 60 00:03:26,080 --> 00:03:29,960 It's more efficient. Over the last year, crypto 61 00:03:29,960 --> 00:03:32,720 treasury companies revolutionized the way that 62 00:03:32,720 --> 00:03:35,800 businesses worked. And while it started with micro 63 00:03:35,800 --> 00:03:39,880 strategy and Bitcoin, managers of other irrelevant companies 64 00:03:39,880 --> 00:03:43,360 worked out that you could stuff pretty much anything into this 65 00:03:43,360 --> 00:03:47,480 structure, as if you think about it, everything can be scarce if 66 00:03:47,480 --> 00:03:49,400 you raise enough money to buy all of it. 67 00:03:50,080 --> 00:03:53,360 The way I see it is that business has just been too 68 00:03:53,360 --> 00:03:56,480 complicated for too long. The guy with the high pitched 69 00:03:56,480 --> 00:04:00,280 voice and the bitcoins worked out that businesses, if you 70 00:04:00,280 --> 00:04:03,680 separate them from business activity, can be much more 71 00:04:03,680 --> 00:04:06,360 efficient. Elon Musk, who spent billions of 72 00:04:06,360 --> 00:04:10,200 dollars on AI so that he could have a cartoon girlfriend, says 73 00:04:10,320 --> 00:04:14,240 that most jobs will eventually become optional, comparable to 74 00:04:14,240 --> 00:04:16,720 hobbies like playing sports or gardening. 75 00:04:17,000 --> 00:04:21,279 He explained at AUS Saudi Investment Forum that this can 76 00:04:21,279 --> 00:04:25,360 all happen as long as we create an AI that cares deeply about 77 00:04:25,360 --> 00:04:28,280 truth and beauty. And you're not going to find a 78 00:04:28,280 --> 00:04:31,480 group that cares more about truth and beauty than the people 79 00:04:31,480 --> 00:04:35,560 attending an Elon Musk speech at AUS Saudi Investment Forum. 80 00:04:36,160 --> 00:04:40,120 In this brave new world where everyone is living large and no 81 00:04:40,120 --> 00:04:43,920 one is working, we're going to need our infinite money glitches 82 00:04:43,920 --> 00:04:48,000 to keep all afloat. But the problem now is that the 83 00:04:48,000 --> 00:04:50,280 cheat code seems to have stopped working. 84 00:04:50,480 --> 00:04:53,680 Strategy is no longer trading on animal spirits. 85 00:04:53,800 --> 00:04:57,360 It's been dragged down by financial gravity since the 86 00:04:57,360 --> 00:05:01,360 company went all in on Bitcoin. It has hardly any other sources 87 00:05:01,360 --> 00:05:06,000 of revenue and now owes $800 million a year in dividends and 88 00:05:06,000 --> 00:05:09,640 debt interest payments. The massive premium to net asset 89 00:05:09,640 --> 00:05:13,520 value, which was the magic dust that made the share issuance 90 00:05:13,520 --> 00:05:19,160 accretive, has evaporated to a pedestrian 1.15 times worse than 91 00:05:19,160 --> 00:05:21,600 that. Some of the copycat firms are 92 00:05:21,600 --> 00:05:24,840 now even trading at a discount to their crypto Navs. 93 00:05:25,160 --> 00:05:28,080 Look, no one loved the crypto boom more than me. 94 00:05:28,280 --> 00:05:31,400 I love the people. SPF and Caroline the Wood Nymph 95 00:05:31,600 --> 00:05:36,280 provided endless entertainment. There was the art, the games and 96 00:05:36,280 --> 00:05:39,000 of course, the music. Who can and forget the music. 97 00:05:39,320 --> 00:05:42,400 A lot has changed over the last few years, however. 98 00:05:42,640 --> 00:05:47,120 The people are now politicians. 1 is even a FIFA laureate, and 99 00:05:47,120 --> 00:05:51,120 SBF went from being the most generous billionaire to a guy 100 00:05:51,240 --> 00:05:53,800 who can't even afford to buy himself a pardon. 101 00:05:54,120 --> 00:05:58,800 Presidential pardons in 2025 became the new NFTS. 102 00:05:58,960 --> 00:06:01,960 If you're big in crypto, then you'll have a collection of them 103 00:06:01,960 --> 00:06:05,360 framed on your wall. To understand the strategy 104 00:06:05,360 --> 00:06:09,160 collapse, you have to understand the bizarre arithmetic that 105 00:06:09,160 --> 00:06:13,040 drove the boom. The entire strategy trade relied 106 00:06:13,040 --> 00:06:16,280 on a single fragile variable, the premium. 107 00:06:16,520 --> 00:06:21,120 For most of 2024 and 2025, investors were willing to pay 108 00:06:21,120 --> 00:06:25,640 around $2.00 for every $1.00 of Bitcoin on strategies balance 109 00:06:25,640 --> 00:06:26,760 sheet. Why? 110 00:06:27,000 --> 00:06:29,720 Because Strategy offered something you couldn't get 111 00:06:29,720 --> 00:06:32,880 elsewhere leverage without the margin call. 112 00:06:33,080 --> 00:06:36,880 If you took a leveraged position in Bitcoin on an exchange and 113 00:06:36,880 --> 00:06:39,320 the price crashed, you got liquidated. 114 00:06:39,680 --> 00:06:43,160 If you bought strategy stock, you got loads of Bitcoin 115 00:06:43,160 --> 00:06:46,720 exposure, but if it tanked, you still had a huge loss. 116 00:06:46,920 --> 00:06:50,440 But you could hold on to your position and hope for a bounce. 117 00:06:50,600 --> 00:06:54,040 I made a video about crypto treasury companies last summer 118 00:06:54,200 --> 00:06:57,400 and in the comments section Strategy cheerleaders were 119 00:06:57,400 --> 00:07:00,840 arguing that the business was valuable and should trade at a 120 00:07:00,840 --> 00:07:04,360 premium because without it investors could didn't easily 121 00:07:04,360 --> 00:07:06,600 get leveraged exposure to Bitcoin. 122 00:07:06,840 --> 00:07:10,440 But even then, there were more than 100 other companies already 123 00:07:10,440 --> 00:07:13,880 doing the exact same thing, many at lower premiums. 124 00:07:14,080 --> 00:07:17,400 It just didn't make sense to pay $2.00 for a dollars worth of 125 00:07:17,400 --> 00:07:21,040 Bitcoin. This premium above now was a 126 00:07:21,040 --> 00:07:24,560 good thing according to strategy investors, however, as it 127 00:07:24,560 --> 00:07:29,040 created a recursive loop. If the stock trades at $200.00 128 00:07:29,040 --> 00:07:33,240 but represents only $100.00 of Bitcoin, the company, they said, 129 00:07:33,400 --> 00:07:38,120 could issue a new share of $200 by $200 worth of Bitcoin. 130 00:07:38,480 --> 00:07:42,760 And suddenly the Bitcoin per share of the existing holders or 131 00:07:42,840 --> 00:07:46,400 huddlers went up. The way investors saw it, 132 00:07:46,560 --> 00:07:50,760 dilution was actually accreed. It was a magic trick where the 133 00:07:50,760 --> 00:07:55,240 more stock strategy sold to buy Bitcoin, the richer the existing 134 00:07:55,240 --> 00:07:58,160 shareholders became. As of the time of this 135 00:07:58,160 --> 00:08:02,840 recording, Bitcoin is trading at around $90,000, which is down 136 00:08:02,840 --> 00:08:07,000 about 5% year to date. That includes dividends and 137 00:08:07,000 --> 00:08:10,080 other cash flows. Strategy, on the other hand, is 138 00:08:10,080 --> 00:08:13,920 down around 40% year to date. Which is worse? 139 00:08:14,320 --> 00:08:17,840 Strategy is and was a very volatile stock. 140 00:08:18,120 --> 00:08:21,920 While it wasn't an S&P 500 member, it was more volatile 141 00:08:21,920 --> 00:08:25,640 than any other stock in that index, even meme stocks like 142 00:08:25,640 --> 00:08:29,520 Tesla and Palantir. It's high volatility enabled the 143 00:08:29,520 --> 00:08:33,200 convertible bond issuance that I described earlier, but for a 144 00:08:33,200 --> 00:08:37,280 certain type of investor, the most volatile stock wasn't 145 00:08:37,280 --> 00:08:40,640 volatile enough. Retail traders piled into 146 00:08:40,640 --> 00:08:47,480 leveraged single stock ETFs tied to Strategy like MSTX and MSTU, 147 00:08:47,640 --> 00:08:52,720 which are down around 85% year to date, according to Bloomberg. 148 00:08:52,960 --> 00:08:56,600 That puts them among the 10 worst performing funds in the 149 00:08:56,600 --> 00:09:01,800 entire USETF market at a more than 4700 products currently 150 00:09:01,800 --> 00:09:07,960 trading one of these leveraged strategy ETFSMSTP was only 151 00:09:07,960 --> 00:09:11,800 launched in June and is down almost 85%. 152 00:09:12,120 --> 00:09:15,680 If you invested in these, you should probably keep quiet about 153 00:09:15,680 --> 00:09:19,480 it so a court doesn't order Britney Spears's dad to look 154 00:09:19,480 --> 00:09:23,400 after your money for you. Bloomberg reported earlier this 155 00:09:23,400 --> 00:09:27,640 week that investors in these three leveraged ETFs have lost 156 00:09:27,640 --> 00:09:33,080 around $1.5 billion in assets since early October, at the peak 157 00:09:33,120 --> 00:09:36,920 of the crypto treasury company craze and the leveraged ETFs 158 00:09:36,920 --> 00:09:39,840 that love them. Robin Wigglesworth wrote in the 159 00:09:39,840 --> 00:09:44,840 FT about the launch of the Bank Income Blast ETF with the 160 00:09:44,840 --> 00:09:47,960 subheading. Every day we stray further from 161 00:09:47,960 --> 00:09:51,640 God's light. The article quoted an SEC filing 162 00:09:51,640 --> 00:09:55,960 for an ETF that would invest in Bunk, the social layer and 163 00:09:55,960 --> 00:10:00,200 community meme coin of Solana with deep integrations as a 164 00:10:00,200 --> 00:10:04,480 utility token across a wide base of application and protocols 165 00:10:04,640 --> 00:10:09,320 within the Web 3 ecosystem. Fortunately, no one has lost 166 00:10:09,320 --> 00:10:13,680 money on this one yet as it's still waiting for approval, but 167 00:10:13,800 --> 00:10:18,680 its goal is to buy bank call options and sell bank put 168 00:10:18,680 --> 00:10:23,080 options to generate the full bank upside that you would get 169 00:10:23,200 --> 00:10:27,320 by simply buying bank, but with potentially greater capital 170 00:10:27,320 --> 00:10:31,080 efficiency by generating bank derived income. 171 00:10:31,440 --> 00:10:35,640 The prospectus does warn of the potential for significant losses 172 00:10:35,760 --> 00:10:39,200 if the price of bank declined times anyhow. 173 00:10:39,480 --> 00:10:43,320 Copycat crypto treasury companies who are underwater on 174 00:10:43,320 --> 00:10:46,920 their crypto purchases have started dumping tokens to fund 175 00:10:46,920 --> 00:10:51,560 stock buybacks or to service debt. the FT reported that 176 00:10:51,560 --> 00:10:56,200 nicely listed chip maker Sequins sold $100 million worth of 177 00:10:56,200 --> 00:11:00,400 Bitcoin to pay creditors just four months after pivoting to a 178 00:11:00,400 --> 00:11:04,480 digital asset treasury strategy. It's CEO told the press. 179 00:11:04,640 --> 00:11:08,760 Our Bitcoin treasury strategy and our deep conviction in 180 00:11:08,760 --> 00:11:13,960 Bitcoin remains unchanged. Metaplanet, Japan's biggest 181 00:11:13,960 --> 00:11:18,720 Bitcoin holder, raised a $130 million loan against it's 182 00:11:18,720 --> 00:11:22,360 Bitcoin stash after it's stock fell 80%. 183 00:11:22,640 --> 00:11:26,320 Smarter Web Company, the UK's poster child for crypto 184 00:11:26,320 --> 00:11:30,760 treasuries, is down 44% and trading at a discount to the 185 00:11:30,760 --> 00:11:33,960 crypto it holds. But amidst this graveyard of 186 00:11:33,960 --> 00:11:36,960 copycats, there was one hilarious exception. 187 00:11:37,240 --> 00:11:39,880 GameStop. When the original meme stock 188 00:11:39,880 --> 00:11:43,320 king announced that it was pivoting to a Bitcoin treasury, 189 00:11:43,480 --> 00:11:47,560 the stock actually fell 10%. Why did this happen? 190 00:11:47,800 --> 00:11:52,640 Well, because unlike Strategy, GameStop has an actual business. 191 00:11:52,720 --> 00:11:55,480 Sort of. It sells video games and Funko 192 00:11:55,480 --> 00:11:59,000 Pops to people in shopping malls, not all of whom are also 193 00:11:59,000 --> 00:12:03,040 GameStop shareholders. The market realized that if you 194 00:12:03,040 --> 00:12:06,560 have real revenue and real customers, you're judged on 195 00:12:06,560 --> 00:12:09,160 them. It turns out that the infinite 196 00:12:09,160 --> 00:12:12,400 money glitch only works if you're a hollow vessel. 197 00:12:12,520 --> 00:12:15,560 If you're empty inside, you can be filled with dreams. 198 00:12:15,680 --> 00:12:20,280 If you sell used copies of FIFA 2019 for $4.00, you're just a 199 00:12:20,280 --> 00:12:23,320 retailer with a strangely volatile balance sheet. 200 00:12:23,640 --> 00:12:29,200 The entire machine is like a quadratically reflexive 201 00:12:29,280 --> 00:12:32,840 engineered instrument. And you could say, well, 202 00:12:32,840 --> 00:12:34,800 Michael, you're a financial engineer. 203 00:12:35,080 --> 00:12:38,360 Yes, I am. Strategy, however, has a 204 00:12:38,360 --> 00:12:40,000 strategy. Sort of. 205 00:12:40,320 --> 00:12:43,800 Last weekend, Michael Saylor posted a stock price chart 206 00:12:43,960 --> 00:12:47,360 covered with orange dots, which highlight when the company 207 00:12:47,360 --> 00:12:50,160 bought its bitcoins with a teasing question. 208 00:12:50,360 --> 00:12:52,680 What if we start adding green dots? 209 00:12:52,920 --> 00:12:55,960 The implication was that he might buy dollars. 210 00:12:56,360 --> 00:12:59,720 For a company whose chairman famously compared the dollar to 211 00:12:59,720 --> 00:13:03,720 a melting ice cube, hoarding Fiat currency is a stunning 212 00:13:03,720 --> 00:13:06,880 capitulation. This Monday, the company 213 00:13:06,880 --> 00:13:11,400 announced that it had issued $1.4 billion of equity not to 214 00:13:11,400 --> 00:13:14,720 buy Bitcoin, but to build a dollar reserve to cover the 215 00:13:14,720 --> 00:13:18,960 dividends on its five classes of preferred stock for the next two 216 00:13:18,960 --> 00:13:21,920 years. Now, Michael Saylor does have a 217 00:13:21,920 --> 00:13:24,760 point. Issuing stock to raise cash is a 218 00:13:24,760 --> 00:13:27,000 lot like issuing stock to buy Bitcoin. 219 00:13:27,200 --> 00:13:31,040 But cash has a special use case where it can be used to make 220 00:13:31,040 --> 00:13:35,160 payments and even buy stuff, even stuff that's not available 221 00:13:35,160 --> 00:13:38,440 on the dark web. At a high point in the crypto 222 00:13:38,440 --> 00:13:43,200 treasury company mania in October 2024, Microstrategies 223 00:13:43,200 --> 00:13:47,960 Chief Executive Officer Fong Lee explained on an earnings called 224 00:13:48,120 --> 00:13:52,200 why they were selling a record $21 billion in new shares to 225 00:13:52,200 --> 00:13:55,880 fund crypto purchases. He explained that the dollar 226 00:13:55,880 --> 00:13:59,600 amount related to the children's book The Hitchhiker's Guide to 227 00:13:59,600 --> 00:14:03,040 the Galaxy, where a supercomputer explained that the 228 00:14:03,040 --> 00:14:05,520 meaning of life is the number 42. 229 00:14:06,000 --> 00:14:09,800 He went on to say we believe it's a unique number with some 230 00:14:09,800 --> 00:14:14,280 special characteristics. It's the sum of 21 + 21. 231 00:14:14,520 --> 00:14:19,080 We all know that 21 is a magic, a magical number in the world of 232 00:14:19,080 --> 00:14:22,120 Bitcoin. There can only ever be a maximum 233 00:14:22,120 --> 00:14:24,960 of 21 million Bitcoin and so circulation. 234 00:14:25,440 --> 00:14:30,520 An actual CEO said this on an earnings call in all seriousness 235 00:14:30,680 --> 00:14:35,080 and people, actual adults, had to listen to it without pointing 236 00:14:35,080 --> 00:14:37,040 and laughing because that would be rude. 237 00:14:37,560 --> 00:14:41,200 I needed to be sure. So I googled him because maybe 238 00:14:41,360 --> 00:14:44,000 they actually put a little boy in charge of the company. 239 00:14:44,160 --> 00:14:48,120 But here he is on the strategy website and the AI picture seems 240 00:14:48,120 --> 00:14:52,040 to be of a grown man. There was probably an analyst on 241 00:14:52,040 --> 00:14:55,200 that call straight out of Harvard Business School, maybe 242 00:14:55,200 --> 00:14:58,520 on his first day of work, turning to his boss saying I 243 00:14:58,520 --> 00:15:01,000 think we're on the wrong call. I think this is some sort of 244 00:15:01,000 --> 00:15:03,320 dial in horoscope lucky numbers line. 245 00:15:03,600 --> 00:15:06,840 You dialed 1800, right, not 1900. 246 00:15:07,000 --> 00:15:09,000 We might be being charged for this. 247 00:15:09,400 --> 00:15:12,880 He possibly wondered if he was being hazed on his first day at 248 00:15:12,880 --> 00:15:15,960 work with a fake earnings call. Like the way construction 249 00:15:15,960 --> 00:15:18,840 workers will prank the new guy by sending him around the site 250 00:15:18,840 --> 00:15:22,680 looking for a left-handed hammer or getting him to return the two 251 00:15:22,680 --> 00:15:26,000 by fours that aren't 2 inches by 4 inches in dimension. 252 00:15:26,440 --> 00:15:29,200 The stock didn't even crash that day. 253 00:15:29,360 --> 00:15:32,880 In a normal world it would have, but over the last few years a 254 00:15:32,880 --> 00:15:35,480 different type of person started investing. 255 00:15:36,160 --> 00:15:38,400 So why the sudden love for the dollar? 256 00:15:38,600 --> 00:15:42,520 And why $1.4 billion? Is that a children's book 257 00:15:42,520 --> 00:15:46,200 reference that I'm not aware of? Maybe it was the number of wands 258 00:15:46,200 --> 00:15:49,240 Harry Potter owned it. Harry Potter and the chain of 259 00:15:49,240 --> 00:15:51,280 Blocks? I haven't read that one. 260 00:15:51,880 --> 00:15:53,000 You know those Harry Potter books? 261 00:15:53,000 --> 00:15:54,280 You know they're for children, don't you? 262 00:15:54,280 --> 00:15:56,440 They're aimed at children, The Harry Potter. 263 00:15:56,440 --> 00:15:57,840 They're children's book. You do go to me. 264 00:15:57,880 --> 00:15:59,480 Have you read the new Harry Potter book, Stu? 265 00:15:59,480 --> 00:16:02,040 It's good if you read it. No, we haven't read it because 266 00:16:02,040 --> 00:16:05,080 I'm a 40 year old man. I should read it. 267 00:16:05,080 --> 00:16:07,000 Seriously. It's about a wizard in school. 268 00:16:07,120 --> 00:16:09,000 I'm not reading it. I'm a I'm an adult. 269 00:16:09,600 --> 00:16:12,600 Well, The thing is that the company has issued preferred 270 00:16:12,600 --> 00:16:18,760 stock with aggressive names like Strife 10%, Coupon Strike 8%, 271 00:16:18,880 --> 00:16:23,680 and Stretch a variable rate currently near 10.75%. 272 00:16:24,000 --> 00:16:27,120 These dividends are high and they mean that the company needs 273 00:16:27,120 --> 00:16:30,080 to come up with hundreds of millions of dollars every 274 00:16:30,080 --> 00:16:32,680 quarter. For a while they were issuing 275 00:16:32,680 --> 00:16:36,840 stock, not at a huge premium, but Bitcoin was still going up. 276 00:16:37,000 --> 00:16:40,560 And if you issue stock at 10% to buy Bitcoin, which you think 277 00:16:40,560 --> 00:16:44,120 will go up at more than 10% a year, then that's an accretive 278 00:16:44,120 --> 00:16:46,640 trade. But if Bitcoin goes up by less 279 00:16:46,640 --> 00:16:51,520 than 10% or falls, then you're still paying that 10% a year to 280 00:16:51,520 --> 00:16:53,960 those investors and destroying value. 281 00:16:54,400 --> 00:16:57,240 Now technically these are dividends, meaning that the 282 00:16:57,240 --> 00:16:59,920 company isn't legally obliged to pay them. 283 00:17:00,120 --> 00:17:03,400 They can choose to accrue them, but doing this would likely 284 00:17:03,400 --> 00:17:07,040 torpedo the company his ability to raise any more capital for 285 00:17:07,040 --> 00:17:10,119 quite some time, ending the game immediately. 286 00:17:10,359 --> 00:17:14,319 So strategy is stuck. It's now selling common stock to 287 00:17:14,319 --> 00:17:18,040 raise cash so that it can make dividend payments to preferred 288 00:17:18,040 --> 00:17:20,920 shareholders. Now, when you start raising 289 00:17:20,920 --> 00:17:24,560 capital from new investors to payout old investors, your 290 00:17:24,560 --> 00:17:28,040 strategy starts to seem like more of a scheme. 291 00:17:28,680 --> 00:17:31,920 As Bloomberg Matt Levine noted, we're selling billions of 292 00:17:31,920 --> 00:17:34,240 dollars of stock at a premium to NAV. 293 00:17:34,240 --> 00:17:37,400 To buy Bitcoin is maybe a great story. 294 00:17:37,640 --> 00:17:40,200 We're selling a billion dollars of stock at NAV. 295 00:17:40,440 --> 00:17:43,920 To pay interest on the loans we previously took out is 296 00:17:43,920 --> 00:17:47,240 considerably less fun for strategy. 297 00:17:47,360 --> 00:17:50,920 If there is no recovery in the price of Bitcoin, the real pain 298 00:17:50,920 --> 00:17:54,960 will begin in 2027 when the firm's convertible debt starts 299 00:17:54,960 --> 00:17:57,920 to mature. It's borrowing right now is 300 00:17:57,920 --> 00:18:01,520 modest relative to its assets, but it's lack of alternative 301 00:18:01,520 --> 00:18:05,200 sources of income may force it to start selling its Bitcoin. 302 00:18:06,360 --> 00:18:09,040 So why has crypto been tanking recently? 303 00:18:09,280 --> 00:18:12,320 I don't really know. It doesn't really do anything, 304 00:18:12,320 --> 00:18:15,800 It's just a number to bet on. It's not even that useful for 305 00:18:15,800 --> 00:18:19,240 illegal payments, as things like stable coins are better at that. 306 00:18:19,480 --> 00:18:23,240 So the price of things like Bitcoin just rise and fall based 307 00:18:23,240 --> 00:18:26,040 on whether people think it'll rise or fall in the future. 308 00:18:26,280 --> 00:18:30,000 It seems to have become highly correlated with tech stocks, but 309 00:18:30,000 --> 00:18:32,760 there's no real reason to believe that that will continue. 310 00:18:33,120 --> 00:18:37,880 In 2013, Joe Wiesenthal wrote a column called Gold is a Bet on 311 00:18:37,880 --> 00:18:41,960 Human Failure, where he argued that buying gold is a negative 312 00:18:41,960 --> 00:18:45,920 economic act because it represents a bet that a shiny 313 00:18:45,920 --> 00:18:49,320 rock will hold value better than the collective ingenuity of the 314 00:18:49,320 --> 00:18:53,640 human race represented by stocks and productive companies. 315 00:18:53,880 --> 00:18:57,680 He argued that when investors buy gold, they're essentially 316 00:18:57,680 --> 00:19:01,680 hedging against total political breakdown and the failure of 317 00:19:01,680 --> 00:19:06,040 peaceful human interaction. He has since extended this logic 318 00:19:06,040 --> 00:19:09,640 to include Bitcoin, which he describes as an even more 319 00:19:09,640 --> 00:19:13,760 profound form of shorting the system, arguing that Bitcoins 320 00:19:13,760 --> 00:19:18,040 appeal is based in a complete loss of trust in state capacity 321 00:19:18,040 --> 00:19:21,680 and institutions. The Economist wrote a good piece 322 00:19:21,680 --> 00:19:25,000 last month called Crypto Got Everything It Wanted. 323 00:19:25,160 --> 00:19:28,440 Now it's sinking. In the piece, they argued that 324 00:19:28,440 --> 00:19:31,640 the crypto industry has gone from being an object of mockery 325 00:19:31,800 --> 00:19:35,520 to being broadly accepted by politicians and regulators. 326 00:19:35,960 --> 00:19:39,600 But this victory has created a paradoxical problem. 327 00:19:39,840 --> 00:19:43,960 The thrill of the chase is over. Every major rally in recent 328 00:19:43,960 --> 00:19:47,480 years was fueled by the anticipation of specific 329 00:19:47,480 --> 00:19:51,560 milestones, like the approval of ETFs or the backing of a 330 00:19:51,560 --> 00:19:55,880 friendly US administration. Now that those battles have been 331 00:19:55,880 --> 00:19:59,240 won and investors have no trouble getting their hands on 332 00:19:59,240 --> 00:20:02,760 Bitcoin, the market has exhausted its most potent 333 00:20:02,760 --> 00:20:06,080 bullish narratives. Without a new catalyst or a 334 00:20:06,080 --> 00:20:10,080 forbidden fruit story to sell the next wave of buyers, crypto 335 00:20:10,080 --> 00:20:14,360 is left as a purely speculative asset with no fresh reason for 336 00:20:14,360 --> 00:20:18,000 the number to go up. One of the reasons for thinking 337 00:20:18,000 --> 00:20:21,720 Bitcoin could go up forever was a belief that strategies 338 00:20:21,720 --> 00:20:23,800 infinite money glitch would work. 339 00:20:24,320 --> 00:20:27,840 My friend Zeke Fox appeared on Dan Toomey's YouTube channel a 340 00:20:27,840 --> 00:20:30,800 few weeks ago, and if you haven't watched that video, you 341 00:20:30,800 --> 00:20:32,480 should. I'll put a link to it in the 342 00:20:32,480 --> 00:20:35,840 description. In it, he explained his Juggalo 343 00:20:35,840 --> 00:20:40,200 theory of Bitcoin resilience. Zeke argued that Bitcoin has 344 00:20:40,200 --> 00:20:43,600 developed a fan base has committed an impervious to 345 00:20:43,600 --> 00:20:47,600 outside criticism as the Juggalos, the die hard Insane 346 00:20:47,600 --> 00:20:51,880 Clown Posse fans who dress up as clowns and attend an annual 347 00:20:51,880 --> 00:20:54,760 gathering. I should mention that Dan Toomey 348 00:20:54,760 --> 00:20:59,000 is a huge ICP fan, so don't say anything bad about them around 349 00:20:59,000 --> 00:21:01,920 him. Zeke argued in the video that 350 00:21:01,920 --> 00:21:04,880 much like the way you wouldn't bet against the Juggalos 351 00:21:04,880 --> 00:21:08,040 attending their big meet up every year, you shouldn't bet 352 00:21:08,040 --> 00:21:11,880 against Bitcoiners showing up to support the Bitcoin price or 353 00:21:11,880 --> 00:21:15,040 showing up in my YouTube comments section to say that 354 00:21:15,040 --> 00:21:17,880 Bitcoin is somehow not the same as crypto. 355 00:21:18,360 --> 00:21:21,720 They are a cult. According to Zeke, that puts a 356 00:21:21,720 --> 00:21:25,640 floor on the asset price simply by refusing to leave. 357 00:21:26,000 --> 00:21:29,200 But Zeke then adds a critical twist to the analogy. 358 00:21:29,520 --> 00:21:33,120 Unlike the Juggalos, who congregate for the love of the 359 00:21:33,120 --> 00:21:37,680 culture, Bitcoiners have a powerful financial incentive to 360 00:21:37,680 --> 00:21:40,560 evangelize. What if by recruiting more 361 00:21:40,560 --> 00:21:43,200 Juggalos, you would get rich? He asks. 362 00:21:43,360 --> 00:21:47,680 If bringing in new fans directly increased your net worth, you 363 00:21:47,680 --> 00:21:51,520 would work a lot harder to recruit them, and suddenly the 364 00:21:51,520 --> 00:21:54,480 music might start to sound a whole lot better to you. 365 00:21:55,120 --> 00:21:58,640 It'll be interesting to see how things work out for Strategy. 366 00:21:58,880 --> 00:22:01,960 There's no underdog narrative left to drive the price. 367 00:22:02,120 --> 00:22:05,000 There's no institutional wall left to breach. 368 00:22:05,200 --> 00:22:08,920 Strategy issued so many convertible bonds that the gamma 369 00:22:08,920 --> 00:22:11,920 hedging, where the traders buy the stock when it falls and sell 370 00:22:11,920 --> 00:22:14,800 it when it rises, killed the volatility. 371 00:22:15,200 --> 00:22:18,120 The SEC is no longer the villain anymore. 372 00:22:18,200 --> 00:22:22,440 It's just a regulator, and the regulator run by a crypto guy. 373 00:22:22,760 --> 00:22:26,000 The US Secretary of Commerce is a crypto guy too. 374 00:22:26,360 --> 00:22:29,200 Black Rock can't be viewed as an enemy either. 375 00:22:29,400 --> 00:22:33,720 It's just the custodian. And the US President isn't just 376 00:22:33,720 --> 00:22:37,760 on side he's attained almost all of his wealth from crypto. 377 00:22:38,320 --> 00:22:42,000 If there are no walls left to breach, we're just left with 378 00:22:42,000 --> 00:22:45,800 Michael Saylor tweeting that Bitcoin is a swarm of cyber 379 00:22:45,800 --> 00:22:50,120 Hornets serving the goddess of wisdom feeding on the fire of 380 00:22:50,120 --> 00:22:52,320 truth. I'm not sure if that can be 381 00:22:52,320 --> 00:22:56,600 classified as a sentence, if it makes no sense, but that's what 382 00:22:56,600 --> 00:23:00,080 he said. For now, the cyber Hornets are 383 00:23:00,080 --> 00:23:04,120 quiet, the premiums almost gone, and the infinite money glitch 384 00:23:04,200 --> 00:23:07,520 may have been patched. And strategy investors have been 385 00:23:07,520 --> 00:23:09,720 learning the oldest lesson in finance. 386 00:23:09,960 --> 00:23:14,440 Leverage works both ways. The Uroboros has finished eating 387 00:23:14,440 --> 00:23:17,640 its tail and it turns out it wasn't very nutritious. 388 00:23:18,200 --> 00:23:21,240 Thanks for tuning into this weeks podcast once again, with 389 00:23:21,240 --> 00:23:25,200 special thanks to my supporters on Patreon whose donations make 390 00:23:25,200 --> 00:23:28,080 the podcast happen. Have a great week and talk to 391 00:23:28,080 --> 00:23:29,400 you again soon. Bye.