Bitcoin Credit 101 with Michael Saylor, Jeff Walton and Matt Cole

First, I'm going to bring up Jeff Walton

and Matt Cole from Strive. Uh they're

making big waves in uh the Bitcoin

ecosystem. And of course, Max, who's up

next

and this is Michael Sailor.

>> Oh, there he is. Oh, hi, Michael. Good

to see you again.

>> All righty.

>> Okay, we'll leave it with them.

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 debt free 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 as far as I think

strategy right now on the pref 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

Bitcoin backed 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 industry

level 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 and 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 the

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've 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?

>> Zero. I got 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 and until I got into the

Bitcoin world, but I mean, I borrowed

money. 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. is 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 think I got pitched by just about

everyone that went bankrupt during the

crypto winter.

>> 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 thousand years forever. You

never pay the principal back. you 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 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,

right? 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, and if you in the extreme, you

can make it look like ext 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, right? 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 it to 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

you could sell it 144a or you could take

it paw. 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 that

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? 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 what

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-free, right? So, there are 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 Rocks 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 prepar 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 six months as Donald Trump has let

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

pieces of this. So 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

Carlos 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

a 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 a 100red 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. Hi. Yeah, 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 I'm 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 in 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 hundred

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 gonna own who's gonna

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? Yeah. 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

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? Well, 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 cl 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 know the

credit instruments that issued are a

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 and 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. Well

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 then you can get

liquidity and how long that's going to

take is anybody's guess, right?

>> Yeah. But 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 can't stay

on schedule. 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 was your last answer to

the previous question is a good segue,

which is how do the operators of these

treasury companies effectively operate

the companies 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 in 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.

>> Michael here,

>> you can cut us off when you want, Ed,

but you just decide how long you want to

go. Okay.

>> 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 ATA.

>> 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 going

to give you 60% interest and I'm going

to go find a way to outperform that. And

that 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 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, yeah, 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. And 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.

>> Okay. 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

back 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 AA 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. By the

way, our our debt trades at the same

level as distress 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

a 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

not 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 back 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 Pagon 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 derisking 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 a.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 makes10

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 strikes, 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 ver a very, do I want

to put on the ETH network, the Salana

network, the whatever network? Do I want

to post it to Hyperliquid 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 preps 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 that 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 preferred 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