The crypto infinite money glitch appears to be broken and we may
never truly know what went wrong.
The way it was supposed to work is that you could take an
irrelevant company, raise capital to buy Bitcoin or some
other token. They're all basically the same.
Then tweet something quasi religious about the future of
money and put a lot of effort into creating AI memes as good
AI memes will definitely drive the token price up.
I mean, that's in corporate finance Xbox at this point.
This starts the flywheel spinning.
The crypto goes up, pushing your stock price up.
Then you sell more stock to raise money, buy more crypto,
rinse and repeat. If there are any annoying
questions about cash flow, PE ratios, or the fundamental loss
of thermodynamics, that's possibly just a sign that you
need to crank out more AI memes. Why run a business which is dull
and boring and can go wrong in many, many ways, when you can
just buy something, tweet about it, and pump its price?
And possibly making it sound too simple?
One of the real innovations of crypto treasury companies, as
they became known, was to monetize the volatility of your
stock. If your stock price jumps around
like a caffeinated squirrel or has a high standard deviation,
as nerds would say, you could monetize that volatility by
issuing low or 0 coupon convertible bonds.
The more volatile your stock price is, the more the embedded
conversion option is worked, and the convertible bonds will be
bought by hedge funds who don't necessarily believe in your
company or the underlying crypto token.
But they are able to make money through gamma trading, which
I'll explain in more detail later in the video.
But it involves buying a convertible bond short, selling
the stock against it on a ratio so that your market neutral, and
then constantly adjusting your position size as the stock price
moves around. The hedge fund can make money
from this while keeping its combined position stock price
neutral. These guys don't care about the
company or the Shiba Inu based token that you're claiming
drives its value. They just care about the stock
price moving around a lot. Which your AI memes and unhinged
tweets are supposed to 'cause this is a virtuous circle or, or
some sort of a circle anyhow, as it allows the CEO of a once
failing company to raise cheap capital to buy stupid tokens
while providing hedge funds with profitable market neutral
trading opportunities. Look, you can be as negative
about this as you want to be, and I know you guys can be
judgmental, but it worked like a cheat code in a video game where
companies could raise funds to buy crypto.
That buying drove up the token prices.
The firm stock price often went up even more than the crypto did
as idiots would buy the stock. Your quasi religious tweets and
memes stir up your followers on the everything app.
We're good for social media platforms and provided a real
use case for Sora too. This was hype capitalism at its
best. Or do you like it or not?
It's just how things work. It's maybe even how things
should work as why have a company that does something when
you could just have a company that buys something and pumps
its price up. It's better.
It's more efficient. Over the last year, crypto
treasury companies revolutionized the way that
businesses worked. And while it started with micro
strategy and Bitcoin, managers of other irrelevant companies
worked out that you could stuff pretty much anything into this
structure, as if you think about it, everything can be scarce if
you raise enough money to buy all of it.
The way I see it is that business has just been too
complicated for too long. The guy with the high pitched
voice and the bitcoins worked out that businesses, if you
separate them from business activity, can be much more
efficient. Elon Musk, who spent billions of
dollars on AI so that he could have a cartoon girlfriend, says
that most jobs will eventually become optional, comparable to
hobbies like playing sports or gardening.
He explained at AUS Saudi Investment Forum that this can
all happen as long as we create an AI that cares deeply about
truth and beauty. And you're not going to find a
group that cares more about truth and beauty than the people
attending an Elon Musk speech at AUS Saudi Investment Forum.
In this brave new world where everyone is living large and no
one is working, we're going to need our infinite money glitches
to keep all afloat. But the problem now is that the
cheat code seems to have stopped working.
Strategy is no longer trading on animal spirits.
It's been dragged down by financial gravity since the
company went all in on Bitcoin. It has hardly any other sources
of revenue and now owes $800 million a year in dividends and
debt interest payments. The massive premium to net asset
value, which was the magic dust that made the share issuance
accretive, has evaporated to a pedestrian 1.15 times worse than
that. Some of the copycat firms are
now even trading at a discount to their crypto Navs.
Look, no one loved the crypto boom more than me.
I love the people. SPF and Caroline the Wood Nymph
provided endless entertainment. There was the art, the games and
of course, the music. Who can and forget the music.
A lot has changed over the last few years, however.
The people are now politicians. 1 is even a FIFA laureate, and
SBF went from being the most generous billionaire to a guy
who can't even afford to buy himself a pardon.
Presidential pardons in 2025 became the new NFTS.
If you're big in crypto, then you'll have a collection of them
framed on your wall. To understand the strategy
collapse, you have to understand the bizarre arithmetic that
drove the boom. The entire strategy trade relied
on a single fragile variable, the premium.
For most of 2024 and 2025, investors were willing to pay
around $2.00 for every $1.00 of Bitcoin on strategies balance
sheet. Why?
Because Strategy offered something you couldn't get
elsewhere leverage without the margin call.
If you took a leveraged position in Bitcoin on an exchange and
the price crashed, you got liquidated.
If you bought strategy stock, you got loads of Bitcoin
exposure, but if it tanked, you still had a huge loss.
But you could hold on to your position and hope for a bounce.
I made a video about crypto treasury companies last summer
and in the comments section Strategy cheerleaders were
arguing that the business was valuable and should trade at a
premium because without it investors could didn't easily
get leveraged exposure to Bitcoin.
But even then, there were more than 100 other companies already
doing the exact same thing, many at lower premiums.
It just didn't make sense to pay $2.00 for a dollars worth of
Bitcoin. This premium above now was a
good thing according to strategy investors, however, as it
created a recursive loop. If the stock trades at $200.00
but represents only $100.00 of Bitcoin, the company, they said,
could issue a new share of $200 by $200 worth of Bitcoin.
And suddenly the Bitcoin per share of the existing holders or
huddlers went up. The way investors saw it,
dilution was actually accreed. It was a magic trick where the
more stock strategy sold to buy Bitcoin, the richer the existing
shareholders became. As of the time of this
recording, Bitcoin is trading at around $90,000, which is down
about 5% year to date. That includes dividends and
other cash flows. Strategy, on the other hand, is
down around 40% year to date. Which is worse?
Strategy is and was a very volatile stock.
While it wasn't an S&P 500 member, it was more volatile
than any other stock in that index, even meme stocks like
Tesla and Palantir. It's high volatility enabled the
convertible bond issuance that I described earlier, but for a
certain type of investor, the most volatile stock wasn't
volatile enough. Retail traders piled into
leveraged single stock ETFs tied to Strategy like MSTX and MSTU,
which are down around 85% year to date, according to Bloomberg.
That puts them among the 10 worst performing funds in the
entire USETF market at a more than 4700 products currently
trading one of these leveraged strategy ETFSMSTP was only
launched in June and is down almost 85%.
If you invested in these, you should probably keep quiet about
it so a court doesn't order Britney Spears's dad to look
after your money for you. Bloomberg reported earlier this
week that investors in these three leveraged ETFs have lost
around $1.5 billion in assets since early October, at the peak
of the crypto treasury company craze and the leveraged ETFs
that love them. Robin Wigglesworth wrote in the
FT about the launch of the Bank Income Blast ETF with the
subheading. Every day we stray further from
God's light. The article quoted an SEC filing
for an ETF that would invest in Bunk, the social layer and
community meme coin of Solana with deep integrations as a
utility token across a wide base of application and protocols
within the Web 3 ecosystem. Fortunately, no one has lost
money on this one yet as it's still waiting for approval, but
its goal is to buy bank call options and sell bank put
options to generate the full bank upside that you would get
by simply buying bank, but with potentially greater capital
efficiency by generating bank derived income.
The prospectus does warn of the potential for significant losses
if the price of bank declined times anyhow.
Copycat crypto treasury companies who are underwater on
their crypto purchases have started dumping tokens to fund
stock buybacks or to service debt. the FT reported that
nicely listed chip maker Sequins sold $100 million worth of
Bitcoin to pay creditors just four months after pivoting to a
digital asset treasury strategy. It's CEO told the press.
Our Bitcoin treasury strategy and our deep conviction in
Bitcoin remains unchanged. Metaplanet, Japan's biggest
Bitcoin holder, raised a $130 million loan against it's
Bitcoin stash after it's stock fell 80%.
Smarter Web Company, the UK's poster child for crypto
treasuries, is down 44% and trading at a discount to the
crypto it holds. But amidst this graveyard of
copycats, there was one hilarious exception.
GameStop. When the original meme stock
king announced that it was pivoting to a Bitcoin treasury,
the stock actually fell 10%. Why did this happen?
Well, because unlike Strategy, GameStop has an actual business.
Sort of. It sells video games and Funko
Pops to people in shopping malls, not all of whom are also
GameStop shareholders. The market realized that if you
have real revenue and real customers, you're judged on
them. It turns out that the infinite
money glitch only works if you're a hollow vessel.
If you're empty inside, you can be filled with dreams.
If you sell used copies of FIFA 2019 for $4.00, you're just a
retailer with a strangely volatile balance sheet.
The entire machine is like a quadratically reflexive
engineered instrument. And you could say, well,
Michael, you're a financial engineer.
Yes, I am. Strategy, however, has a
strategy. Sort of.
Last weekend, Michael Saylor posted a stock price chart
covered with orange dots, which highlight when the company
bought its bitcoins with a teasing question.
What if we start adding green dots?
The implication was that he might buy dollars.
For a company whose chairman famously compared the dollar to
a melting ice cube, hoarding Fiat currency is a stunning
capitulation. This Monday, the company
announced that it had issued $1.4 billion of equity not to
buy Bitcoin, but to build a dollar reserve to cover the
dividends on its five classes of preferred stock for the next two
years. Now, Michael Saylor does have a
point. Issuing stock to raise cash is a
lot like issuing stock to buy Bitcoin.
But cash has a special use case where it can be used to make
payments and even buy stuff, even stuff that's not available
on the dark web. At a high point in the crypto
treasury company mania in October 2024, Microstrategies
Chief Executive Officer Fong Lee explained on an earnings called
why they were selling a record $21 billion in new shares to
fund crypto purchases. He explained that the dollar
amount related to the children's book The Hitchhiker's Guide to
the Galaxy, where a supercomputer explained that the
meaning of life is the number 42.
He went on to say we believe it's a unique number with some
special characteristics. It's the sum of 21 + 21.
We all know that 21 is a magic, a magical number in the world of
Bitcoin. There can only ever be a maximum
of 21 million Bitcoin and so circulation.
An actual CEO said this on an earnings call in all seriousness
and people, actual adults, had to listen to it without pointing
and laughing because that would be rude.
I needed to be sure. So I googled him because maybe
they actually put a little boy in charge of the company.
But here he is on the strategy website and the AI picture seems
to be of a grown man. There was probably an analyst on
that call straight out of Harvard Business School, maybe
on his first day of work, turning to his boss saying I
think we're on the wrong call. I think this is some sort of
dial in horoscope lucky numbers line.
You dialed 1800, right, not 1900.
We might be being charged for this.
He possibly wondered if he was being hazed on his first day at
work with a fake earnings call. Like the way construction
workers will prank the new guy by sending him around the site
looking for a left-handed hammer or getting him to return the two
by fours that aren't 2 inches by 4 inches in dimension.
The stock didn't even crash that day.
In a normal world it would have, but over the last few years a
different type of person started investing.
So why the sudden love for the dollar?
And why $1.4 billion? Is that a children's book
reference that I'm not aware of? Maybe it was the number of wands
Harry Potter owned it. Harry Potter and the chain of
Blocks? I haven't read that one.
You know those Harry Potter books?
You know they're for children, don't you?
They're aimed at children, The Harry Potter.
They're children's book. You do go to me.
Have you read the new Harry Potter book, Stu?
It's good if you read it. No, we haven't read it because
I'm a 40 year old man. I should read it.
Seriously. It's about a wizard in school.
I'm not reading it. I'm a I'm an adult.
Well, The thing is that the company has issued preferred
stock with aggressive names like Strife 10%, Coupon Strike 8%,
and Stretch a variable rate currently near 10.75%.
These dividends are high and they mean that the company needs
to come up with hundreds of millions of dollars every
quarter. For a while they were issuing
stock, not at a huge premium, but Bitcoin was still going up.
And if you issue stock at 10% to buy Bitcoin, which you think
will go up at more than 10% a year, then that's an accretive
trade. But if Bitcoin goes up by less
than 10% or falls, then you're still paying that 10% a year to
those investors and destroying value.
Now technically these are dividends, meaning that the
company isn't legally obliged to pay them.
They can choose to accrue them, but doing this would likely
torpedo the company his ability to raise any more capital for
quite some time, ending the game immediately.
So strategy is stuck. It's now selling common stock to
raise cash so that it can make dividend payments to preferred
shareholders. Now, when you start raising
capital from new investors to payout old investors, your
strategy starts to seem like more of a scheme.
As Bloomberg Matt Levine noted, we're selling billions of
dollars of stock at a premium to NAV.
To buy Bitcoin is maybe a great story.
We're selling a billion dollars of stock at NAV.
To pay interest on the loans we previously took out is
considerably less fun for strategy.
If there is no recovery in the price of Bitcoin, the real pain
will begin in 2027 when the firm's convertible debt starts
to mature. It's borrowing right now is
modest relative to its assets, but it's lack of alternative
sources of income may force it to start selling its Bitcoin.
So why has crypto been tanking recently?
I don't really know. It doesn't really do anything,
It's just a number to bet on. It's not even that useful for
illegal payments, as things like stable coins are better at that.
So the price of things like Bitcoin just rise and fall based
on whether people think it'll rise or fall in the future.
It seems to have become highly correlated with tech stocks, but
there's no real reason to believe that that will continue.
In 2013, Joe Wiesenthal wrote a column called Gold is a Bet on
Human Failure, where he argued that buying gold is a negative
economic act because it represents a bet that a shiny
rock will hold value better than the collective ingenuity of the
human race represented by stocks and productive companies.
He argued that when investors buy gold, they're essentially
hedging against total political breakdown and the failure of
peaceful human interaction. He has since extended this logic
to include Bitcoin, which he describes as an even more
profound form of shorting the system, arguing that Bitcoins
appeal is based in a complete loss of trust in state capacity
and institutions. The Economist wrote a good piece
last month called Crypto Got Everything It Wanted.
Now it's sinking. In the piece, they argued that
the crypto industry has gone from being an object of mockery
to being broadly accepted by politicians and regulators.
But this victory has created a paradoxical problem.
The thrill of the chase is over. Every major rally in recent
years was fueled by the anticipation of specific
milestones, like the approval of ETFs or the backing of a
friendly US administration. Now that those battles have been
won and investors have no trouble getting their hands on
Bitcoin, the market has exhausted its most potent
bullish narratives. Without a new catalyst or a
forbidden fruit story to sell the next wave of buyers, crypto
is left as a purely speculative asset with no fresh reason for
the number to go up. One of the reasons for thinking
Bitcoin could go up forever was a belief that strategies
infinite money glitch would work.
My friend Zeke Fox appeared on Dan Toomey's YouTube channel a
few weeks ago, and if you haven't watched that video, you
should. I'll put a link to it in the
description. In it, he explained his Juggalo
theory of Bitcoin resilience. Zeke argued that Bitcoin has
developed a fan base has committed an impervious to
outside criticism as the Juggalos, the die hard Insane
Clown Posse fans who dress up as clowns and attend an annual
gathering. I should mention that Dan Toomey
is a huge ICP fan, so don't say anything bad about them around
him. Zeke argued in the video that
much like the way you wouldn't bet against the Juggalos
attending their big meet up every year, you shouldn't bet
against Bitcoiners showing up to support the Bitcoin price or
showing up in my YouTube comments section to say that
Bitcoin is somehow not the same as crypto.
They are a cult. According to Zeke, that puts a
floor on the asset price simply by refusing to leave.
But Zeke then adds a critical twist to the analogy.
Unlike the Juggalos, who congregate for the love of the
culture, Bitcoiners have a powerful financial incentive to
evangelize. What if by recruiting more
Juggalos, you would get rich? He asks.
If bringing in new fans directly increased your net worth, you
would work a lot harder to recruit them, and suddenly the
music might start to sound a whole lot better to you.
It'll be interesting to see how things work out for Strategy.
There's no underdog narrative left to drive the price.
There's no institutional wall left to breach.
Strategy issued so many convertible bonds that the gamma
hedging, where the traders buy the stock when it falls and sell
it when it rises, killed the volatility.
The SEC is no longer the villain anymore.
It's just a regulator, and the regulator run by a crypto guy.
The US Secretary of Commerce is a crypto guy too.
Black Rock can't be viewed as an enemy either.
It's just the custodian. And the US President isn't just
on side he's attained almost all of his wealth from crypto.
If there are no walls left to breach, we're just left with
Michael Saylor tweeting that Bitcoin is a swarm of cyber
Hornets serving the goddess of wisdom feeding on the fire of
truth. I'm not sure if that can be
classified as a sentence, if it makes no sense, but that's what
he said. For now, the cyber Hornets are
quiet, the premiums almost gone, and the infinite money glitch
may have been patched. And strategy investors have been
learning the oldest lesson in finance.
Leverage works both ways. The Uroboros has finished eating
its tail and it turns out it wasn't very nutritious.
Thanks for tuning into this weeks podcast once again, with
special thanks to my supporters on Patreon whose donations make
the podcast happen. Have a great week and talk to
you again soon. Bye.