Bitcoin-Backed Credit: Rethinking Risk with Michael Saylor, Matt Cole, & Jeff Walton

We made it.

>> Okay. Um

well uh

Matt and Jeff, I've had my experiences

with credit. Uh but why don't we just

start by uh why don't you start and tell

us about your background in credit and

your experiences and give us your the

most interesting question I have for you

and for you is

given your view of the credit markets

thinking about all of the credit markets

in in all of the world which credit

markets do you think are are most uh

either vulnerable to disruption with

Bitcoin back credit or which are the

best fits for Bitcoin treasury companies

and how do you see it? You start.

>> Yeah. So, first on my background with

regards to credit. So, I actually was at

Kalpers for 16 years. I managed a $70

billion bond portfolio of structured

credit on one hand and then also US

treasuries. And so, I was one of the

largest buyers of US treasuries. That's

part of my my Bitcoin story. on the

credit risk. It's more about the

structured credit. And when I used to do

corporate credit and where I think

there's the max room for disruption is

actually thinking about what Bitcoin is

as an asset. It doesn't produce income.

In my view, it's the longest duration

asset that exists. And so I think from

the credit side, you should be pairing

that with the longest duration credit

that you can. And that's a perpetual

preferred equity instrument where you

never have to repay the principal. That

is a matching of the asset side with the

liability side. Just like when we had a

pension, we're thinking in terms of

decades, hundreds of years. How do you

meet your liabilities? I think that's

the the best instrument, which is why

when we launched our our strategy, we

did not do a convertible note. We we

kept ourselves debtree and we've

announced ambitions to you know really

watch what strategy's been doing with

perpetual preferred equity that I think

is super innovative and they've done it

in a couple different ways but I think

that's the room for disruption but the

disruption is not to say that the the

perpetual preferred equity market is

small and so I think it's telling that

story going out and educating and you

know we'll talk about from the fixed

income side Jeff from the insurance side

how to think about risk in this markets

I mean the the TLDDR are is I think

strategy right now on the prep side is

AAA debt and we can get into the

framework of actually how I think that

that's a multi-deade or long-term

framework that I think for the market to

accept but in the interim while they

don't accept it that's where alpha's

made for people that can underwrite

Bitcoinbacked risk and do it well.

>> Yeah. So I I'm Jeff Walton uh and now

chief risk officer at Strive. My

background is in risk. I was a

reinsurance broker for 11 years. So I

sold insurance to insurance companies to

protect volatility of insurance company

balance sheets and insurance companies

they my background in credit. So most

insurance companies have to hold fixed

income products uh to that they leverage

against in order to take on risk. So a

majority of the insurance market is

holding 80% bonds or you know fixed

income like instruments and the other

20% is equity-like instruments. So uh

Michael to your question I obviously the

biggest opportunity in Bitcoin is

infinite duration credit markets and to

the extent that those can be built and

expanded to access the fixed income

market. But I I do think that the

insurance and reinsurance industry, the

balance sheet side, not necessarily the

risk and the underwriting side, but the

balance sheet volatility side is ripe

for innovation. And there's an

industryle lid on the industry itself

that is preventing the industry, the

insurance industry from adding Bitcoin

to their balance sheet or even the

perpetual preferred equities to the

balance sheet. So I I think there's

avenues to to tackle that with AI and

Bitcoin backed products.

Okay. Um,

let's do an audience poll. Uh, how many

people in the audience have uh a bank

account with cash in it? Raise your

hand.

H how many people's uh have their money

in a bank account in some kind of uh

money market that yields more than 3%.

You have a bank that yields 5%.

6%.

>> Where do you keep your money? I just

want to know.

>> That's We appreciate it.

>> Okay. Just a quick second question. How

many of you would like it if your bank

gave you 10%.

>> Okay. Uh, how many people actually own

an ETF that's a fixed income ETF like

PFF or any kind of um any kind of

corporate credit ETF that generates

yield?

Raise your hand.

Interesting.

>> Very few.

>> Yeah, very much fewer.

>> How many people own any corporate bonds

directly?

Yeah. Uh,

how many people own uh, by the way, how

many people own equity like uh, you

know, any kind of common equity like a

four-letter ticker equity?

>> Okay.

So it seems like by the way the magic

thing is to take the bank account idea

crank up the yield and put it in equity

right?

>> Yeah just one note on on the actual

yield when you say 10%. That's greater

than the rate of fiat currency

debasement which is in the 8% range. And

so you flipped the notion of fixed

income from something that is being

debased. So if you're in a treasury at 4

and a half% or something like that or a

corporate credit at 5 a.5% or six you're

being debased relative to the pace of

fiat currency debasement 10% you're

actually accreting cash versus the

debasement. I think that's where you can

start to become interested as someone

that might need or want income depending

on where you are in your life.

>> Anybody from Switzerland or Germany in

the audience or what do your bank

accounts pay in terms of interest?

Oh, Z zero. I gota The zero travels far

across the room. Um,

yeah. So, I I think credit is the most

fascinating thing and it's something

that I in my life never really paid much

attention into until I got into the

Bitcoin world. But, I mean, I borrowed

money for obviously I know I know

consumer credit. I know credit cards.

I've done leasing. I've done bank loans.

I've done senior financing

not quite a junk bond and I've done

convertible bonds and and uh you know

I've done you know I've done uh a quasi

margin loan from a bank live to tell

about it. I've never done like a 40x

levered loan from Binance or Hyper

Liquid or whatever where you crank it up

and you know to 20x or 30x or 40x. I I

advise against that. Sam Bankman Freed

actually called me once and he pitched

me on that. He was like, you know, you

should put your Bitcoin at FTX and we

can give you margin credit.

I I I actually got pitched by the Three

Arrows guys, too. I also got pitched by

Genesis. I also got pitched by Celsius.

I also got pitched by BlockFi. I I I

think I got pitched by just about

everyone that went bankrupt during the

crypto winner.

>> Well, you saw it. You didn't do it. So

yeah, so some some I normally say yes

enthusiastically in public, but in

private I say no a bunch. Uh but but

coming back to credit uh you know the

interesting thing to me is I think

theoretically

the best kind of the best kind of

digital credit if we're just inventing

the world a new from a blank sheet of

paper is uh is a liquid publicly traded

preferred

stock and a preferred stock can look

like a bond and it can look like an

equity. Like if you take one extreme

like uh STRD, it's a non-cumulative

preferred

and that means that you know you're

paying a dividend. Right now the

dividend we pay is like 12.7%

or something. You're paying a dividend

but it's non-cumulative which means that

you never pay the principal back. So

it's like a th000 years forever. You

never pay the principal back. pay 12%

dividend yield and you pay that forever

to someone that buys it. But if you ever

were in a credit crisis or a credit

crunch, you can suspend the dividend

without prejudice, without penalty. Now,

the company would have the option to not

suspend it, or the company could suspend

it and say, "Well, we're going to pay

you back anyway." If we put out a press

release saying we're suspending it this

quarter, but we intend to make up for it

next year, uh, the preferred stock would

fall. And if we put out a press release

saying we're suspending the dividend,

we'll probably never pay you back. It

would fall a lot, right? And then if it

if we didn't actually reinstate the

dividend for two or three years, it

would be tanked, you know, start to look

like total distressed third world debt.

But

what you've really got there is equity.

like you're like, "Why would I buy

that?" It you're really buying like an

equity that pays 12.7% dividend. And if

you ever think about buying equity,

you know, you buy the equity and the

company that pays the dividend and the

company could suspend the dividend and

they and they don't have an obligation.

And so, and a lot of people buy, you

know, Verizon and AT&T and, you know,

there's a there's a lot of of dividend

bearing equities in the world. So, you

can do that, but the difference is, of

course, you're giving someone some

precision about what it is. And when I

think about that, I think I just created

an equity that's a perpetual swap where

I'm giving you the first 12.7% of the

Bitcoin return forever and then I'm

taking back the rest for my common stock

shareholders and I'm giving you a

liquidation preference and I'm giving

you some more certainty and and I'm

giving you uh a commitment of the

company that we're going to do it. So

that's one extreme credit instrument.

The other extreme you know would be you

have a preferred and you basically say

it pays this much. It's cumulative.

There are penalties and you have a put

rate. You know there's a call there's a

put in three you know in three years or

whatever. You can put it back to the

company and that starts to look like

debt.

you know if you in the extreme you can

make it look like extra like perfect

like super senior debt and um I I think

the beauty of that preferred instrument

is it's a it's a programmable container

and you can program that container with

any amount of delta you can you can put

60 delta 80 delta 10 delta you can put

any conversion rate you can put any

duration you can put any credit duration

you can put any yield duration, you can

put any representation,

you can put any penalties and and rates

you want. You know, you can stack them

all up and you can put it in in any

currency basis you want. You could even

plug in all sorts of floaters and

indexes plug you can index at the sofur

and index it to the Japanese bank rate.

So, you can do pretty much anything. And

that's the beauty of those instruments

if you're a public treasury company.

for the most part, uh, you can craft,

you know, a perfect piece of credit and

then you could sell it 144A or you could

take it PBO, but but my view with, you

know, credit is the real innovations are

you create a credit instrument that you

can sell to the public as easily as they

can buy an ETF. And then the next

innovation is can you get it on the

NASDAQ and then can you get it on other

foreign exchanges? is how many exchanges

can you get it on? And then the next

innovation is can you put a shelf

registration on it? And after you've

done all that, then the question is

what's the collateral backing it? And

how do you want to run the rest of the

company? And and uh I think

I think it's a you can lay out the

perfect ideal strategy, but coming back

to the impediments and these are I'm

going to ask you guys about these,

right? The impediments to doing that are

if you do it unrated, you've got to go

market that instrument to public

investors and retail investors that will

buy an unrated instrument. So, you have

a marketing lift. If you want to sell

that to the insurance industry, there's

I think there's organizations like

Mercer and the like that are creating

model portfolios and they're

gatekeepers. And then you have the

credit rating agencies like Moody's and

Fitch and S&P and they're also

gatekeepers.

And so what you find is a conundrum is

the stuff that's easy to sell, you don't

want to sell. And the stuff that you

want to sell is not easy to sell. And

we're at this crossroads right now where

the question is do we create the perfect

instrument that scale could scale up to

tens of bill

stride for STRD? You could sell a

hundred billion of it risk-free.

You could sell a trillion of it risk-f

free, right? So, there's some things

that you definitely want to sell

that are new, and then there are other

things that the market wants to buy,

like they want to buy a three-year bond

with, you know, leans on all the

company's assets, senior in the capital

structure, and that of course creates

massive amounts of of risk. So I guess I

start with you and say what how do you

think that the existing credit

establishment will evolve and can we

actually bring over the Mercers and the

S&P and and the fitt food the Moody's

and the Fitch credit rating agencies and

sell these things to the traditional

institutional investors the pension

funds and the whatever or do we have to

actually completely build a new market

of new investors new credit rating ideas

and sell it to a new uh you know a new

product to a new set of investors.

>> Yeah, I think the answer is both. And

I'll give you an analogy to why I think

that's the case. After the great

financial crisis in structured credit

around mortgages, there evolved new

rating agencies that started to rate

debt because they took advantage of an

opportunity that the market's confidence

in the traditional rating agencies

plummeted after the great financial

crisis. And so you started to see new

rating agencies rating commercial

mortgages and stuff like that. And

Kalpers used them because their models

were really innovative and they were

they were strong. So I think there's an

opportunity for startups to in a

thoughtful institutional way think about

a credit framework for Bitcoinbacked

credit. On the other hand, I think that

also creates competition for the

incumbent rating agencies. And so just

like when Strive was founded and we were

competition against the Black Rockcks

and the Vanguards of the world, we were

a check on the system that if you don't

actually start to consider to rate

these, this startup's going to take your

business. And so I think that's it's

it's both there. And then on how do you

evolve it into the market when you start

issuing securities that aren't rated for

most actively managed income funds, they

usually have a bucket where they can

either rate themselves or buy unrated

securities. So you start to see people

like the capital groups of the world

start to buy from an institutional

perspective which then on that end puts

pressure on the rating agencies to rate

them because the asset managers are

buying them. And so I think having more

issuers more Bitcoin treasury companies

issue prepare preferred equity

innovation that has more issues in the

market which makes the rating agencies

care competition on the rating agencies

and then asset management adoption. So,

I think it eventually happens, but I

think it's building out that ecosystem.

>> Jeeoff, what do you think about the

gatekeepers and the traditional credit

investors and how will the market evolve

and how would you approach it?

>> Yeah, I think you got two sides of the

coin here. You've got the risk story and

then you've got the regulatory hurdle.

And the risk story is actually

incredibly compelling because thinking

about the risk framework here of these

different instruments, it's you can

calculate it 24/7 365. This is unlike

anything that's ever existed before.

Like a traditional fixed income

instrument that's a function of future

cash flows. You may not know what those

future cash flow the sustainability of

those future cash flows may look like

until each quarter. You get the

quarterly earnings results or I guess

every 6 months as Donald Trump has let

us know now. Uh so you you've got two

pieces of this. You got this risk story

which I I think the right message needs

to be explained that you can you can

calculate the mathematics of the risk of

each of these individual instruments

24/7 365 you can run Monte Carlo

simulations and have an understanding of

the probabilistic distribution

>> because they're digital

>> because they're digital. Yeah. It's the

the same infrastructure. And then the on

the rating agency side uh in the

insurance market there are similar to

the banking industry there are multiple

different rating agencies that provide

capital adequacy framework for the

market. There's an the old guard is

ambest but there are these new rating

agencies that are a little bit smaller

that the entire industry doesn't adopt

where they're a little bit more flexible

with capital requirements so that that

to the extent the insurance industry

shifts away from the old guard into

these different rating agencies.

>> So we need to orange pill them. you need

to orange pill the the new the newer

rating agencies.

>> So I you know I think we want to take

some questions from the audience if

anybody has questions. I mean this might

be an interesting group. So while you're

working that out I guess the observation

I make is there's a lot of mortgage back

credit you know we securitized real

estate. Think about how big that got.

There's a lot of corporate credit. We're

securitizing cash flows of corporations.

There's a lot of fiat credit. We're

securitizing the ability of a company to

print more currency and to win their

wars, right? There's and now this I see

is the industry that creates the digital

credit. And everybody in the room is is

at the beginning year one of the

creation of digital credit. And you

know, and you can go out there and brag,

you know, the most successful corporate

bonds in the last 5 years are digital

bonds. The most successful convertible

bonds are digital bonds. The most

successful preferred instruments are

digital, right? You know, when you put

Bitcoin, when you put a collateral asset

appreciating at 50% a year and even 30%.

Even if it's 20%. The truth is, if

Bitcoin only appreciated at the rate of

the S&P, every single credit instrument

built on top of it would outperform

every other credit instrument because

every other credit instrument I just

named underperforms the the collateral

underperforms the S&P. So, we're on the

verge of the creation of a digital

credit market that right now it looks

like 2030 billion a year.

By the way, I'm going to throw that. I'm

That's a throwaway. It's 30 billion a

year and no one's noticed it exists yet.

It's 30 billion a year. And the Wall

Street Journal and the New York Times

and for they haven't noticed it exists

yet, but we're about to go to 50 billion

and 100 billion and 200 billion. And so

think about a trillion dollars of

credit. And when it's a trillion dollars

of credit, it's not 1% of the credit in

the world. And people still don't notice

it exists. And so the real opportunity

for all these companies

is to issue billions, then tens of

billions, and hundreds of billions of

digital credit. And the reason that your

equity is going to go to the moon is

because the equity is going to be valued

based upon the spread between the credit

you're selling, right, and the

underlying asset you're buying. And

you'll be able to capture that with

massive amount of leverage. The more

credit you issue, the faster the credit

you issue, and the better the credit

terms, the more valuable the equity is

going to get. So, question.

>> Yeah, I I have a question. Um, so I uh

been following MSTR since you guys

decided to make the the pivot into the

Bitcoin strategy and trying to follow

with my own company as a small private

software company. Um, and I thought uh

Michael what you said earlier today when

you said you really didn't know in a in

a humble way you say you don't know

about the company that you became. You

couldn't predict that back in 2020 or

2022 until you found this. How do you

view that towards the future and how to

value MSTR or a company like this

issuing all kinds of securities? How

much I guess what you're trying to say

is how much of that do you think is

predictable versus if you're buying MSTR

equity, you're buying a call option on

future products that we don't know yet.

>> So, how do you how do you value

Microsoft or Google the first year after

they went public?

>> Go look how did you value Amazon the

first year after it went public? How did

you value you know Facebook the first

year after they went public? the stock

crashed,

you know, it actually it traded at 40%

of the IPO price or something. So, I I

think we're so early in the first year.

It's very very difficult. You got to

look at all these companies and at the

end of the day the management teams they

have the world to create and you know if

MetaPlanet can go from a $5 million

hotel company to a $5 billion entity in

12 months and they they have yet to

issue their first serious credit

instrument.

It's like yeah I think I think

MetaPlanet will be the most valuable

hotel company in the world. I think

they'll also be the most valuable

company in Japan.

And every day I get up and I'm like,

crap, I have to go to work because the

MetaPlanet people are gonna outrun me if

I don't,

you know,

because I cuz I I'm sure Simon and Dylan

are cooking up something. I'm like, "Oh

jeez." Okay. So, uh, but that story is

that story could be told in a 100

markets and and and within one market

when you just go to US, you're like,

"Okay, well, who's going to own

insurance? Who's going to own who's

going to actually partner up with the

first bank to offer the 8% bank treasury

account? Like, you know, there's so many

at the end of the day, everybody's got

limited bandwidth and there's there's so

many things to be done. We're talking

about rebuilding a $300 trillion market

and if we wanted to swap out 10% of it,

that's $30 trillion of stuff that has to

be done. That's room for $30 trillion

companies, right? And and then even to

go one layer deeper on that, you think

about insurance company or a bank

company, but also how much leverage

there's different buyers that care about

different leverage profiles, the

different types of innovation in the

prep market. There's are going to be

real differentiators of both risk and

return across the ecosystem to be built

out. And one company cannot be every

single one of those things to everyone.

And obviously, there's going to be the

largest company with Bitcoin holdings

ever in strategy. And then there's going

to be companies that take more risk are

smaller the growth companies. It's

there's just so many different ways to

differentiate.

>> So the future is bright, but it's very

bright. Next question.

>> Hi, Michael. Uh do you think that at

some point in the future indices such as

the S&P will have to outperform Bitcoin?

Because from an investor's point of

view, why would someone take on the

operational risk of investing in an

equity when they can get a superior

return in an asset that you can

self-custody? And um if we do reach this

hypothetical future, uh will it still be

a profitable business model to borrow

against the um Bitcoin as collateral to

purchase more Bitcoin? I I kind of

expect that Bitcoin will outperform the

S&P forever because the S&P is always

going to be loaded down with real world

assets and entropic conditions. There

the companies are going to be currency

derivatives and they're going to have

have real world assets that depreciate

and they're going to be political issues

and there's going to be chaos and war

and expropriation and tariff and taxes

and and all of those things. But in

theory, if the majority of the index was

made up of I if the S&P 500 was made up

of 500 Bitcoin treasury companies and

they were all wellrun

and if the politicians didn't

expropriate the assets of the companies,

then in theory the S&P is a very

interesting index. But I I don't think

we're getting there anytime in in the

next 30 years. I think what'll happen is

Bitcoin companies will creep into the

index and as they creep into the index

they will improve the performance of the

S&P and the S&P will start to creep up

or client will be improved

uh while Bitcoin will grow mature and

it'll decelerate

based upon the fact that it gets

integrated into all other aspects of the

economy and that's what I think I we can

speculate hyper bitcoinization world

where everybody's a Bitcoin treasury

company. What does that mean? But that's

not in the next decade. And so I don't

think it's all that constructive to

speculate because the difference between

you being 10,000x more than what you are

right now is what you do between now and

the next decade. Right? It's and if you

tell me what the perfect thing to do is

hypothetically 25 years out, well, like

you know, in the long run, we're all

dead.

Sorry, that's Keynesian a joke. Go

ahead.

>> Yeah, I I I had an additional question.

I just want to add add on this is uh I'm

curious to think about how you view the

liquidity profile of the preferred

instruments and how that conversation

and communication goes with the fixed

income investors because as Matt and I

have been contemplating a lot, these are

far more liquid instruments than

anything that's ever existed in the

market from a fixed income perspective.

And does the market conceptualize that

and does that mean anything? Is that

important?

>> Yeah. Well, I think the liquid the

liquidity is important, right? Uh and I

think that the traditional status quo is

most well-run companies aren't in the

business of issuing securities

strategically. They're in the business

of buying securities. all the if you

look at the net capital flow I would

guess that most great companies they're

buying 95% of the capital flow is them

buying not selling so they're buying

their equity and the only companies that

are selling credit are either doing it

as a tax arbitrage

or they're doing it apologetically and

they they wish you didn't notice and so

no one is strategically issuing credit

which means that all the you the credit

instruments that issued are regulatory

arbitrage or requirement. They're all,

you know, and and to be blunt, they're

all garbage. So, so most preferred

stocks issued are garbage. Therefore,

they're not good investment instruments.

Therefore, they don't have a lot of

liquidity. And no one in the traditional

market ever wanted to make them good

instruments. JP Morgan could sell $50

billion of a preferred with a billion

dollars or two billion of liquidity a

day with a bid ass spread of a penny.

But that's a 21st century idea. And they

and the 20 20th century idea is most of

these things are sold in discrete

chunks, 500 to a billion 500 million to

a billion at a time and they trade over

the counter which in my opinion is an

antiquated uh an antiquated approach. So

the market's antiquated and it's uh it's

not really commercialized and what we're

doing right now is we're building a

non-crippled instrument. It it is 10 to

100 times better, but the market's been

conditioned based on antiquated garbage.

How many people in the room own a

preferred stock

other than say

other than other than one of mine?

Other than one of mine. Okay. Now

contrast that the number of people with

a bank account.

Okay. The preferred stocks pay more than

the bank account but you can see it's

like a 100 to one in favor of certain.

So the market's conditioned to buy

equity and to and to use banks. It is

not conditioned to buy these other

things and we have to grow the industry

and partly it's a chicken in the egg.

Like well they didn't buy because it was

a garbage product. Okay, now we have a

good product and people go yeah but

nobody buys those kind of products. The

other products our our plane and it's

got a nuclear reactor in it and it flies

you know forever. It's a like a hover.

It's a hover car and the other cars are

like donkey carts, you know, and you you

have to convince the world you've got a

better one than you can get liquidity.

And how long that's going to take is

anybody's guess, right?

>> Yeah. Well, one thing that's interesting

just in the in the insurance world, one

of the reasons the entire reinsurance

industry exists is because the insurance

company can't withstain uh sustain a

catastrophic event, right? So, they buy

reinsurance to protect against

catastrophic events so they don't have

to liquidate their illquid assets and

take a huge hit on them because the

reinsurance market is providing

coverage. So this concept really like

flips the entire insurance industry

upside down because that liquidity

profile may reduce the need for

reinsurance for these insurance

companies in the future if they were to

adopt these more liquid higher

performing assets.

>> So we're over time. Um I'm going to kick

these guys up or should we keep going?

What do you think?

>> Little plot. Yeah,

>> we'll keep this one going.

>> I think we found a format that Michael

likes. So, we're going to keep going

with this one. We'll do a couple more

questions here.

>> Hey, Michael. Uh, this is Nick at Bitco.

Um, nice to meet you. So, I had a

question that is your last answer to the

previous question is a good segue, which

is how do the operators of these

treasury companies effectively operate

the company so that it lasts 10, 100

years? Is it is it having an underlying

business with liquidity? Is it longdated

debt? Maybe the obvious answer is yes to

both, but curious of your nuanced

response to how operators can

effectively launch a treasury company

from scratch and and make it succeed.

>> I think it's simple. You raise as much

equity capital as possible. You buy an

appreciating asset Bitcoin

and and then if you enter any into any

kind of credit transaction,

you obsess over the credit risk like

like how how do I bankrupt the company?

Let me reverse it. I raise a billion

dollars. I borrow a billion dollars. I

buy a bunch of Bitcoin mining rigs that

depreciate 50% a year and I borrow the

money for 12 months and I pay 15%

interest and I have to pay it back in 18

months. So if you if you borrow

short-term and buy depreciating assets,

you'll be bankrupt in 36 months. If you

borrow long-term and buy appreciating

assets, you'll be around forever. The

challenge is just what I said earlier in

my presentation. The people that want to

give these companies money are going to

want to give you the money and take

shortdated

senior credit instruments. And if like

here's the here's the hierarchy. A pipe

that's the worst way to get money. Okay?

And what I mean by that is is if one

credit investor approaches a company and

offers to invest and then they craft all

the covenants, they make themselves

senior, they give themselves leans on

everything, right? Uh there's no there's

no negotiation, there's no liquid

market, right? That person basically has

a chokeold on the capital structure.

That's why you don't really want to

negotiate with one company on a credit

transaction. The next best is 144A.

You're selling a bond, a junk bond or a

convertible bond to up to 60 investors,

one market maker. It trades over the

counter, which means it doesn't trade.

Over the counter means it doesn't trade.

It's very illquid. The next best is you

take something public and you sell it to

100 million people. That's good, right?

That's hard,

right? And so I think that you just want

to be very careful about what kind of

money, what kind of credit you sell, who

you sell it to. And it's one of those

things where the easiest credit to sell

is uh is the most constrictive to the

capital structure,

and the hardest credit to to sell is

probably the most profitable thing

you'll ever do.

>> Am I good here? You can cut us off when

you want, Ed, but you just decide how

long you want to go.

>> So, we're all talking about a dollar

yield. Basically, all of these

instruments pay uh yield for people who

want interest in dollars and so on. I'm

wondering what do you think about uh all

of these kind of products, but for a

future in in Bitcoin? So, me as a

bitcoiner, I would like to get Bitcoin

yield, which is very hard to get uh you

need to let's say exposed to risk and so

on. But I believe that uh the real

future is when we start getting all of

these uh products. But for Bitcoiners

where we can actually get Bitcoin

interest, I believe from the buy side

that you are one of the only few

companies that could do something like

this uh maybe by raising Bitcoin and

lending to the ETF.

>> Thank you for the question. Let me be

blunt. That is a ticket to bankruptcy.

I don't think you should do that.

Bitcoin is going up 30% a year. So if

you agree to pay a Bitcoin dividend, you

are borrowing money at a 40% interest

rate.

And so my view is you ought to borrow

money at 10% or less and you ought to

invest it at 30% or more. When you talk

about Bitcoin yield, you're inverting

it. You're basically saying, I'm gonna

give you 60% interest and I'm gonna go

find a way to outperform that. and it

and and the whole premise of the

industry is there's no way to outperform

Bitcoin. Okay? So,

I'm not a fan. I don't think you should

do it. I don't believe in Bitcoin

dividends. I think that what you ought

to do is fund in the weak currency, the

yen, the the Swiss Frank, the euro, the

dollar. You'll pay anywhere from a base

rate of 0% to 4%. Tack on 400 basis

points. Give that to credit investors.

If you want a Bitcoin yield, my answer

is buy the equity.

Right? The way that we give you Bitcoin

dividends is you buy the equity and we

generate BTC yield. you can do it safely

in the equity, but the point is we don't

promise you 30% BTC yield for the next

decade because that's impossible to

promise. So I I leave the yield for the

equity and then fund with the credit if

you get that inverted.

Of course, all the Bitcoiners would love

to get the Bitcoin dividend. Of course

they do. But the point is, you've just

found a way to borrow money at 60% a

year

and now you've got to go invest it at

80% a year return to capture 20. I just

think that is like a bomb in the balance

sheet. I think it blows you up. That's

my opinion. And I I have very much, you

know, discouraged people from from

agreeing to pay the Bitcoin return for

their debt.

Thank you for the question. Um, I'm

curious. In my mind, the credit

instruments issued by Bitcoin Treasury

companies compete head-on with sovereign

debt instruments.

If you agree with this, I guess is the

first question. And if so, how do you

expect sovereigns to respond?

>> Yeah, I don't agree with it because, you

know, as a practical matter, nobody that

buys sovereign debt will even talk to

us. Like there is there is zero chance

that someone that's cap that's using

sovereign debt is going to swap out, you

know, their sovereign debt for a Bitcoin

backed credit instrument, right? We

can't get rated. We can't get an

investment rating. If you did get a AAA

investment rating, if you were Apple

with a AAA investment rating, you still

wouldn't be viewed as competitive to

sovereign debt. So if we climb up the

ladder and we get AAA investment grade

rated, we will be competing against

Microsoft and Apple debt. And right now

we're competing against private credit

and junk bonds and you know and ETFs

preferred. So really

that's the market junk bonds. But by the

way our our debt trades at the same

level as distressed debt. basically

bankrupt companies, companies going

bankrupt. That's what it trades at. So,

it's uh it's not a problem, right? Uh

sometimes the Bitcoin maxi thing is

well, oh no, you're going to topple the

government and collapse the currency and

blah what happens when the politicians

figure out that you're going to collapse

the dollar. It's like not a not a risk.

Not this decade, not in the next decade.

what we're trying to do is eat the junk

bond market and then we want to eat the

corporate credit market, you know, and

the CFO of Microsoft may get some

pressure from us in a decade, but right

now if you were to talk to Apple and

Microsoft, they don't think they're

competing against Bitcoin backed bonds.

And certainly the Treasurer Treasury

Department and the Bank of Japan doesn't

think that either. And so I don't think

it's a helpful narrative. I think it's a

distraction and what you ought to do is

focus upon why this digital credit is

better than junk bonds and private

credit and a bunch of other things that

people buy.

>> Hi um Valentina from Pentagon Markets

here. Firstly, thank you so much for

being here and I just wanted to ask

about not now but in a future where

these uh digital asset treasuries might

want to start putting their capital to

work. What do you guys think about the

admittedly very risky possibility of

lending Bitcoin but against private uh

market secondaries which tend to offer

similar returns to Bitcoin at around 30

to 50% a year as a means of de-risking

as opposed to lending it against private

stock.

>> I think that there's just there's a host

of ways to put it to work. The for

example when we sell credit we're

putting our capital to work. So when I

sell Stride at 12.5%

and you give me a billion dollars, I

generate a billion of Bitcoin yield up

front and I get about 80% to 8 to 90% of

the backend economics. And so the

company makes $10 billion over 10 years

when we sell Stride. That's a way to

make it put it to work. By the way,

what's the problem with it? I have to

sell it.

Like would I sell a trillion dollars of

it? Yes. Can I? No. So, there's a lot of

ways like that. Stride, strike, any

credit instrument. I could sell a lot

more convertible bonds. They have a

three-year duration and they have a much

wider credit spread and they have a lot

of credit. I could try to sell junk

bonds. Now, I what I said was I could go

write reinsurance, right? I could that

would take that'd be a new kind of risk.

I could go borrow money by pledging my

Bitcoin and now I take counterparty risk

to the borrower. There's a lot of I got

a chance to put my money with FTX,

Genesis, BlockFi, Three Arrows,

you know, and uh and Celsius.

They all came and sold the salespeople

will knock on your door and give you the

offer. All of them have different risks.

So, I'm not going to say what a Bitcoin

treasury company should do. They're

going to have a stack of capital, and

their choice is, do I want to do a deal

with a bank? Do I want to do a deal with

a crypto exchange? Do I want to do a do

do I trust the DeFi protocol? I could,

you know, do I want to put my, you know,

Bitcoin out on a ve a very, do I want to

put on the ETH network, the Salana

network, the whatever network? Do I want

to post it to Hyper Liquid or Binance?

They're all counterparties.

And there's no right answer, right?

Except in theory, the right answer is I

keep my Bitcoin and I use it as

collateral and I borrow money and

someone else gives me the money. That's

right risk. When I do that, the only

risk we have is the custodial risk.

Don't lose the Bitcoin. In theory, that

is the risk-free way to generate yield.

It's a good gig if you can get it right.

You just have to be what do you mean?

You have to go sell the credit

instrument. So selling prefs to the

public market is the hardest. Selling

prefs in 144A transactions is easier.

Selling bonds in 144A transactions is

easier.

You know there are other Bitcoin

companies they post their Bitcoin on

exchanges. They borrow against it.

The issue is who's the counterparty? Do

you trust them?

You know, is it a good deal? Maybe.

like uh I I can't I can't endorse it

unequivocally, right? Because that was

the brilliant I you know idea of Genesis

and they went bankrupt. At some point

someone it's like someone will mismanage

their credit control. Here's what I say

about this in general. Every company

public or private is free to use their

collateral the way they like and there's

going to be a hundred different things

you can do. But it used to be everybody

got in the reinsurance business after

the last hurricane and because every

company got wiped out and so they all

launched the new reinsurance companies.

They're like, "This is great. We're

getting 12% cash on cash yield." Then

they all got wiped out by the next

hurricane. So sometimes it looks good

and it's too good to be true and then it

doesn't. But they're all just different

businesses.

Uh private companies can move into any

of them. they can

uh here's what I say about a public

company and I'll shut up. The thing

about a public company is the reason the

equity has value

is because the equity investor

understands your business model and

wants to own it. Wants to own a piece of

it. So, for example, if you gave me a

choice, would I rather make a billion

dollars a year selling preferred

or would I rather make $5 billion a year

selling some preferreds and doing some

hedge trade and selling derivatives and

borrowing some money and writing some

reinsurance?

As a private company, if you have a

large ego, the answer is the latter. as

a public company. If you've lived

through 30 years of pain and agony and

if you've been humbled having done a

bunch of things and you've seen what

works, you would choose the former. I

would rather make a billion dollars in a

simple way that's transparent

than make 5x that much in an opaque

heterogeneous way. And the reason why is

because you the people on the other side

of the trade, the investors, they need

to be able to understand your business

and they need to understand it in a

split second. And as soon as you take on

each additional

uh counterparty, you create new attack

surfaces for the short sellers, new

attack surfaces for the complexity, new

risks, new sources of entropic lapse.

And so this manifests itself in the Wall

Street business where it's like you're a

hedge fund and you have PhDs at Goldman