Bitcoin and business financial engineering

Hi everybody, I'm Rodrigo Batista. I'm the founder of digital.com, Cryptocurrency Exchange

based in Brazil, but serves globally. I'm also co-founder of Star.finance, which is

a security token exchange that is authorized by the Brazilian regulators. And we are today

the second largest security exchange in Brazil. Today I'm here to interview Michael

Sailor. I'm fan of this guy. He's one of the most no person in the crypto industry. And

I'm going to count on Diego, which is my partner for a long time, to help me with this interview.

So I'm going to spend all my doorlingo lessons in the next one hour.

Well, my name is Diego. I'm the president of AB FinTech, the FinTech Association in Brazil.

I'm also the co-founder of Star. Star is a token platform. We negotiate tokens that is

fully regulated by the Brazilian Securities Commission. And also we use the technology

in order to reach people that do not have access to this kind of assets here in Brazil.

And I'm quite excited to be part of this conversation with Michael. It's an honor to have you here.

Thanks for having me.

Mike, I'm going to be very brief on my first question here. Yesterday we had a dinner that

for the first time I heard the financial engineering that you put in place to have microstrategy

as a company that buys Bitcoin and is starting in its treasure. And that it involves like

issuing bonds like convertible bonds and options markets. It's a kind of complex structure

that allows you to leverage Bitcoin and offer leverage Bitcoin to the market.

I know it's a technical question, but I'd like you to show to our audience how do you

came up with this idea and could you explain this idea to us on how you converted your company

in exposure to leverage Bitcoin?

Yeah, it didn't all happen at the same time. It was an evolution over the past four years.

So what started in 2020 was our company with a bunch of cash. And it was about $500 million

of cash and we were generating 0% interest. And our problem was we either needed a

generator return on the money or we needed to return it to the shareholders. And we felt

like if we basically bought the stock back and returned all the cash to the shareholders,

we would be very vulnerable to having all of our employees picked off by our big tech

competitors and it would be difficult for us to continue as a going concern. So we started

looking for something we could buy with the cash that would appreciate and value faster

than the cost to capital. I mean, what can you buy that will go up at the rate of the

S&P index or faster? And after we looked at all the options, we concluded that Bitcoin was

the best option because it's commodity, not a security. And there are a lot of technical

benefits to a publicly traded company owning a commodity or property. If you own securities,

normally you're limited to no more than 40% of your liquid balance sheet and security.

So that was one reason. But the second reason is we thought that Bitcoin was digital gold

on the dominant digital monetary network. And so the idea of investing in the Facebook for money,

10 years before everybody else in the world agreed with us. Struck me as being a good investment.

So we did a lot of work and we concluded that Bitcoin was sort of like the premier digital

property of the 21st century. And we bought $250 million of it. Now we didn't buy $500 million.

You might say why? Well, a lot of our shareholders might have been shocked when we invested so much

in a crypto asset. So when we bought the $250 million, we paired it with a stock buyback.

And we announced that we were going to do a Dutch auction where we give the marketplace 20 days

to consider whether to tender their shares. And we offered to buy back $250 million worth of stock

at a premium. Our stock was trading about 121, 122, and we offered to buy out our other

shareholders at 140. So that Dutch auction took place for 20 days. Well, the stock traded above

that price for a while. All the people that liked Bitcoin, they bought the stock, and all the people

that didn't like Bitcoin, they sold the stock. So at the end of the 20 days, we only had a small

portion of that amount tendered. And we ended up with 175 million extra cash that we could invest.

So our first transaction was a 250 million. And the next transaction was $175 million at more

Bitcoin. This was a little bit more of a brave transaction because we had lost about 10 or 15

percent of the principal by the time we got the second transaction. Bitcoin, we bought the first

at like 11,700 and then it traded down to 9800. So the second tranche was a low 10,000 tranche.

But we had a strategy. We believed that and we figured that it would continue to appreciate

over time, even though it was short-term volatility. We did that second tranche around September,

early September of 2020. And then Bitcoin started trading up and our stock traded up.

And when our stock traded up a bunch, we ended up with more cash that we were able to buy more

Bitcoin with. And so we bought another tranche of Bitcoin with it. And Bitcoin rallied

another company, I think, Square bought some Bitcoin. The market got very enthusiastic about

Bitcoin in the fourth quarter of 2020. And at the end of the fourth quarter, someone said,

you know, you could probably go and issue a convertible bond if you wanted. And at that point,

our stock was trading in the high 200s or the 300s. So it was trading about two and a half to three

times as much as it had been trading before. So this is very successful for our shareholders.

And we thought, okay, well, let's go see. We can raise more money. And when we went to the market,

we offered this convertible bond. And it was so oversubscribed that we were able to upsize it.

And we ended up making it a $650 million bond. The nice thing about that bond is it was,

it was struck with a very low coupon about 75 basis points. So it's three quarters of one percent

interest. And it was unsaccured, no recourse. So in essence, we just borrow the money in a bond,

pay three quarters of a percent interest for about five years. And then we took that $650 million

and we bought Bitcoin with it. So we're kind of borrowing money less than one percent interest.

Now Bitcoin over the last four years has been going up about 40 to 50 percent, 45 percent compounded.

So we're borrowing money less than one percent. We're loaning it out or we're buying Bitcoin at 40 percent plus.

And because it's no recourse unscured debt, the volatility doesn't matter that much because it's

not going to come due until the very end of the term. So we did that. Bitcoin rallied our stock

went up to a thousand dollars a share. And you can imagine what we thought. Let's go do it again.

So we went and we tried to do a $600 million. We said, we'll ask for $600 million this time.

But the volatility of the stock had taken off and people that buy convertible bonds want to buy a bond

from a company with a very volatile stock. And that's because they're buying the bond and sometimes

they're selling the volatility and the amount of yield they get to function the volatility. So a

highly volatile stock might be the equivalent of getting paid 40 or 50 percent interest. They're

just selling the options. So we went and we offered the second bond and it was oversubscribed.

And the first bond was the best performing bond of the year. Everybody that bought that bond had

doubled their money. And so they all came back and bought the next bond. That bond ended up getting

upcited from six up size from 600 million to a billion. Well, 600 million and 900 million with

a $150 million green shoe they call it. At the end of the process, it was a billion, 50 million

dollar bond. And the coupon was zero. So we paid zero percent interest. And basically it was a

billion dollars of money for free. Unsecured for five more years, six years, six years,

six year bond. So it was a billion dollars for free for six years and you can guess what we did

with the money. We bought Bitcoin. So now you start to see a pattern. We were a company with

$500 million of very non volatile asset cash that's not no one's ever going to get rich by

holding cash and waiting for it to go up in price and dollars. It's $500 million. It's going to be

$500 million. But we converted it into hundreds of millions of Bitcoin and then billions of Bitcoin.

So at that point, the company became known as a Bitcoin company and we went from being the first

buy was kind of defensive. We're going to do it out of desperation. And the second buy was

opportunistic. We're going to do it because we can. And that first bond, you know, more opportunism.

And then by the second bond, we said, this is really a strategy. And we said, we have a Bitcoin

strategy. We're going to keep buying and holding Bitcoin. Well, so what happened next is the Bitcoin

roller coaster. It goes to $6,000. It comes down to $40,000. It goes back to $6,000. It comes down

to $16,000. It goes back up to $70,000, right? All along the way, every quarter, we always asked,

how can we buy more Bitcoin? So some quarters we took cash flow from the software company, we bought

Bitcoin. Another quarter, we did a $500 million senior secured debt issuance. And we basically borrowed

as like a junk bond almost. And now that we had to pay more and we had to pay six, six percent

interest or six and three eights or something like that. And we bought Bitcoin with that.

And then at one point, the stock rallied and Bitcoin rallied and we sold a billion dollars

worth of stock at like seven or eight hundred dollars a share. When we're selling the stock,

we were selling the stock at a premium to the underlying Bitcoin. Because we're an operating

company, we're not an ETF. So it's possible for a premium to develop in our equity.

And we filed a shelf registration. And the shelf registration allows us to sell equity when we want.

So we would sell a billion dollars of equity back by six hundred million or seven hundred

million in Bitcoin. And then we would buy a billion in Bitcoin. So it's kind of like

you're selling the Bitcoin at 80,000 of coin and buying it back at 50,000 of coin, thousands and

thousands of times. Arborage. Exactly. Okay. And that built the capital base of the company.

And so we did these successive leveraging and D leveraging and we did more than a dozen transactions.

And we eventually got to the fourth quarter of 2023. And there we did about a one point two billion

dollars worth of equity issuances at a premium and bought Bitcoin. And our shareholders loved it

because they realized we're basically just we're giving them a Bitcoin dividend.

You know, tax deferred and they're and they're creating Bitcoin per share. If we sell the stock

when it's trading at a premium to Bitcoin, then we're just capturing that for our shareholders.

Then we got to the first quarter of this year. And the ETFs got approved. And people thought,

oh, well, when the ETFs are approved, it may not be good for you because you're trading at a premium.

But in fact, the opposite was true because we have a lot of Bitcoin and we're an operating company.

So what what what you can do or what micro strategy can do that an ETF can't do is you can borrow

against our stock. It's marginable. You can leverage we can leverage the stock. You can option the stock.

We have options puts and calls. You can short yes via puts you can go long via calls. And you can

buy our debt or trade it and we can sell the debt. So all the other spot ETFs are not marginable.

They have no options and they can't they can't issue equity capital via shelf registration.

They really can't trade at a premium. They get basically arbitrage back to net asset value. And

they can't issue convertible debt. Now, why would you want to issue convertible debt? Well,

because if you're a convertible arbitrage or you want to find a company with with three things,

you want volatility, massive volatility. You want liquidity. You want to be able to trade in the

spot market in order to hedge out your exposure. And you want durability or transparency. You want

to know that the company is a going concern is going to continue. So if you think about companies

like GameStop, they were very volatile and liquid, but that trade doesn't go on for years and years.

And with our company, we're basically holding a bunch of Bitcoin. Everybody knows we stand for

Bitcoin. Everybody knows we're going to buy more Bitcoin. Everybody knows we're not going to

sell the Bitcoin. So we're depend with credibility and we're durable. The S&P index has evolved

all over the world. I'll tell you about 12. Gold is 10 real estate 18 Apple 20 22 Tesla 45

Bitcoin 75. Micro strategy is levered Bitcoin with a passionate shareholder base

120 to 140 150 something, but more than 100. Okay. Okay. So if you know the Black Shoals equation,

if you plug volatility in the Black Shoals equation, it makes the option more valuable.

Nobody wants to buy an option that has low volatility. So we inadvertently we stumbled on a very

interesting opportunity because we're an operating company that can issue convertible debt.

And we were able to appeal to a variety of investment classes. For example, one class of investors

is public company investors. They want Bitcoin exposure. They can't buy Bitcoin. They can't buy

the Bitcoin ETF. They can buy a company that does something with Bitcoin. It's like I can buy a gold

minor, but I can't buy the gold and I can't buy the gold ETFs. So they have billions of dollars

of capital and they have to invest in an operating company. We became the most notable premier and most

the most transparent company. You know with Micro strategy, we're going to buy Bitcoin,

keep it and try to accrete more Bitcoin per share. There's another class of investors.

The Bitcoin maximalist. They love Bitcoin, but they have money in their 401k and they can't buy

Bitcoin with their 401k, but they can buy a stock like Micro strategy. Now why would they like us? Well,

would you like to be able to borrow money for seven years for no interest?

Exactly. And buy Bitcoin. You would like to, but you can't. Yes. But we can. So if you like that

prospect, they would buy our stock because they feel like they're along for the ride, right? They're

getting advantage of our ability to get cheap capital to buy Bitcoin. Another reason is would you

like to borrow against Bitcoin from your bank? Well, you can't because the bank doesn't take the

Bitcoin as collateral, but Micro strategy stock is marginable. So you could pledge it as collateral

and borrow it as so for a plus 50 or 100 basis points. So that way you get to keep your Bitcoin

and take a pretty cheap margin loan against it. So some people like that. A third class of investors

want volatility. There's something called MSTY. It's like an ETF that sells Micro strategy volatility.

It generates 100% plus dividend yield. So if you just sell the calls,

you could own the Bitcoin and sell covered calls out of the money or in the money and then you

generate some yields. So some people like that. You should buy you or buy someone else.

Oh, it's somebody else. Somebody else. Other people. But the reason that they do it against us

is because we have Bitcoin and we have options. There are billions. It's like $30, $40 billion of

open interest in the Micro strategy option market. Well, there are no options on the spot ETFs.

You see? And you can't borrow against them. They're not marginable. So we had this company that was

optionable, marginable. It was high volatility Bitcoin equity. But it's also highly levered

Bitcoin equity. So Bitcoin would go up and we would go up more. And so if you like Bitcoin,

then if you like the idea of taking all your money and buying Bitcoin, you would like the idea

borrowing a lot of money for free and buying even more Bitcoin. So a lot of those people decided

to buy in as equity holders, then you get the haters, right? People that don't like Bitcoin. Well,

if you want a short Bitcoin, then you could short our stock. Yeah, it's exactly. But what if you

wanted to short the stock with options and puts? Well, there aren't puts on the spot product. But

there are puts on Micro strategy. So you could go and you could buy and there are billions of

dollars of short options traded on our company. So there's those people. They just hate Bitcoin.

Then there's people that are kind of they're not sure they hate our business. So like we're

going to short you and buy Bitcoin. Okay. Yes. Right. And so you have those arbitragers. And

and then there are people that don't even know what Bitcoin is. All they know is they can generate

100% yield going up. And then there's people that are the super option traders and they think,

well, you know, the option six months out or mispriced versus the options three months out. So I'm

going to sell the option six months out and buy the options three months out. And I'm going to

take advantage of that. And then you have the fixed income investors. They can only buy bonds. So

they could buy our bond. And then you have the convertible arbitragers. They need a convertible

bond and they're going to actually short the equity by the bond capture the yield. And then you

have people, what if you wanted to buy Bitcoin at the all time high, but you don't want to have the

downside? What if you want 80% of the upside, 20% of the downside? Well, if we sell a bond and it's

got it's a $500 million bond, but we've got $5 billion of unplaged Bitcoin, you have this collateral

like 10 to 1 collateral. And you could say, well, Bitcoin would have to trade down by 90% before

I'm in trouble. So so if you're risk adverse and you want Bitcoin upside, but you're afraid to

take one for one downside, you would buy the bond. And of course, you can construct any type of

instrument you want by trading the bonds, the equity and the options and you construct whatever you

want. So what happened then is micro strategy stock started trading a lot billions and billions of

dollars a week and then billions of dollars a day. And then the option started trading. And so then

we went back to the market and we did a bond issue and I guess it was going to be about 600 500

million, but it got up size and became 800 million. And we did that at 62 basis points at a big premium.

So we basically sell the bond for 62 basis points and then we buy the Bitcoin and we capture the

yield difference or we capture the premium. But then of course, we basically borrowed $800 million

for six years to buy Bitcoin. If Bitcoin goes up 24% a year, then you could double your money twice.

So maybe you actually make $2.4 billion on the back end, some hundreds of millions of dollars on

the front end. And you do it while you're paying half a percent or 62 basis points interest. So we did

that. People like that to stock trade it up, Bitcoin traded up. We announced because that they all

on Monday and we thought, why don't we just do it again? So we went back and we did it again on Thursday.

And we did 600 million on Thursday and we did 1.4 billion total in that two weeks. And why can we do

that? Because it's very hard to find a company with 100 vol with billions of dollars of liquidity

where you understand the business model. And we built a lot of trust and credibility with our

investors because they all know what we're going to do. I'm very famous for you do not sell your

Bitcoin. Yeah, we're going to buy more Bitcoin. We'll keep buying Bitcoin. If we were not transparent,

if I was not predictable, then you don't know what we're going to do for the next five years.

So you're not going to want to you're not going to want to take a five year bet or even a one year

bet. If you were if you hate Bitcoin, you want me to love Bitcoin because because the last thing

you want to do is short a hundred million dollars of our security and have me say over the weekend,

I reverse the need even if I hate you, I want you to be like trustful that you're going to be buying

like as you say. Yeah. But the opposite is also true, which is I don't mind if you hate Bitcoin.

If you're short or stock, that just means you're buying it in reverse. Like you're going to short it

now, but eventually you'll buy it later when I need you to buy it. And so what we did is we created

an operating company and we realized at some point now we're a Bitcoin development company,

like a real estate development company. So if you took a company public and you stole billions of

dollars of securities to buy those buildings, the trick is can you get the cheapest financing?

A public company has cheaper financing than a private company because it's more trustworthy and

transparent, right? You have to make thousands of pages of disclosures you're bound by a lot more

restriction. So so a public company in America is probably the most trustworthy of a corporate

vehicle for issuing security and raising debt. So you would have an advantage if you were a public

company and you were doing real estate development. But remember what I told you about volatility?

Yep. The volatility of real estate is 20 or 15. You can't sell 100-vol equity and invest in

20-vol assets because at some point the volatility in your equity goes to 20.

You see? Exactly. What we were doing is selling the 100-vol plus equity and then we're buying a

75-vol asset, leveraging it up to make it back into 100-vol asset. So if you're actually creating

a volatile balance sheet that will drive a volatile stock, that creates the options market and

that creates the opportunity to raise money for less than 1% interest, unsecured. Now,

that is unique to Bitcoin. Maybe it's the first time in the history of Wall Street, you have a

property asset or a commodity asset that is appreciating because it's hard-capped 21 million,

right? It's the scarcity. So it's appreciating and it's volatile. And most people in corporate

finance are taught to avoid volatility. Their taught that volatility is a bad thing. So they get rid

of all their capital and if they invest money, if you had a billion dollars on your balance sheet,

you wouldn't buy something volatile. You would buy treasury bills. But treasury bills are volatility

five. They're the least volatile thing you can possibly buy. So how do you arbitrage that?

And so you think about a big company. A big company, it's run to visibility for the next three years.

I give you guidance for the next three years. I want to know what I'm going to make a year from now.

I tell everybody and then I have no capital on the balance sheet that's volatile. So there's nothing

that's going to move and I consider that success. But if I know what's going to happen for the next

12 months, why would I trade the stock every day? I can just make a decision once a year.

So the result is micro strategy stock trades more than all these big large cop companies.

We in them because McDonald's and Coca-Cola and Nike and Walmart and Pfizer, they're all very

predictable. And predictable is good for people that are afraid of the future.

But predictable is awful for the options market and is awful for traders.

So in this particular case, what we've done, it represents a lot of different paradigm shifts.

First of all, it's based on Bitcoin, which is a paradigm shift. It's a digital commodity,

instead of a physical commodity. That's a big idea, a billion dollars of digital energy,

instead of a billion dollars of oil. The second big idea is Bitcoin does one better. It turns

the commodity into a scarcity. It's the only commodity in the world that's got a cap of 21 million.

Every other commodity like soybeans or oil or natural gas or gold is infinitely

producible. So there's a lot of price supply elasticity. That's why it doesn't make sense to buy

billions of dollars of oil and hold it for 10 years. That's why we don't use oil as a treasury

reserve asset because there's too much of it. So Bitcoin is a scarcity. That's the second revolution.

The third revolution is using Bitcoin as a treasury reserve asset instead of sovereign debt,

instead of treasury bills. Well, treasury bills have an effective after tax yield of 3%.

The cost of capital of a company is probably 12%. If you basically take the monetary inflation

rate and add in 4% for risk premium, so if your cost of capital is 12% and you're investing at 3%,

you're losing 9% of your capital every year. Well, Bitcoin's been appreciating at 20 to 50%.

So we're not doing a third or a quarter of the cost capital. We're doing double to triple the

quadruple. So if you have a treasury asset which beats the cost of capital, then it's not

deluded to carry the money. It's a creative. The conventional wisdom is when you sell stock,

you dilute the shareholders. But in our case, the more stock we issue or the more money we raise,

the more we accrete. And so hundreds of thousands of companies have assets on their balance sheet,

which are delutive. And Bitcoin is the first major asset which is accretive. So we turn the entire

treasury strategy upside down by actually accreating assets. Today, we have $15 billion of Bitcoin

on the balance sheet. And the operating company generates $75 million here in cash flow.

And the operating revenues are 500 million. So we made the balance sheet, the primary part of

the company instead of the PNL. Everybody else wants the balance sheet to go to zero or negative

and they want the PNL to be the primary part of the company. When we did that, the volatility of

the stock went through the roof because if Bitcoin goes up and down $2,000 and we have 214,000 Bitcoin,

then what happens is there's a billion dollar swing over the weekend. And if there's a billion

dollar swing in the balance sheet, that's the same as 15 years of lost earnings. So imagine the

company said, we're not going to make any money for 15 years, but yesterday we told you we would.

And then the company the next day says, oh, we were wrong. We're going to make the same

amount of money for the next 15 years. Okay. And in normal company, the investors lose faith in

the management team and they dump the stock. But in our case, the business model is still good.

The management team is still good. Just the traders think, okay, I got to trade the stock. I

got to trade the equity. So the way to think of it is I'm putting a crypto oscillator in the

middle of the balance sheet. It's a crypto engine. Right. And the entire crypto economy is driving

volatility and the volatility is driving the equity and the equity is driving the options and

the options are driving the arbitrages, which then are willing to give us billions of dollars of

capital for, you know, unsaccured no interest. It's like risk-free, interest-free capital,

which then we can invest back in the company to the benefit of the shareholders.

That, to my knowledge, you know, I can't think of another time when that popped up. And you can see

if I tried to do that with gold, it wouldn't work. If I tried to do it with the S&P index, it wouldn't

work either because the volatility doesn't work or because there are all sorts of other restrictions. So

we were granted an opportunity with Bitcoin. We started out of desperation. It became defensive.

At one point, I hoped I'd have 500 million of Bitcoin. And then it became opportunistic.

Maybe we get a few billion. Then it became strategic. And then we realized that, you know,

our real opportunity is to securitize Bitcoin. And we're meeting the needs of a dozen different

classes and investors. They would like to invest in Bitcoin, but they can't buy the commodity.

They can't buy the ETF. They can't buy equity. They have to buy the option. They have to buy the debt.

So we give them what they need. And we're a bridge between traditional

conventional finance and the crypto economy. Okay. If I can jump in my question here,

you mentioned all those outcomes and benefits of the brilliant strategy.

Micro strategy was the first company to move forward with that. Do you believe

another company will follow the same strategy, another public company, or is something very

particular for micro strategy? I think in time, they will. I think in the year and the year is

between 20, 25 and 20, 28 or 20, 29, you start to see companies starting to adopt this strategy

because it gives you a very low cost to capital and because Bitcoin is a good asset because there's

a lot of demand, etc. But we were unique because we had a need. We were in the right place, the right time.

And as I said, we didn't really have the plan in the middle of 2020. The plan presented itself.

It's hard for anybody else to look at this because 18 months ago, Bitcoin was 16,000 and everybody

thought the crypto economy's gone to zero. So it's only really been in the past six months.

You could even argue 12 weeks. It's really January when the SEC approved the SPOT ETF that

the mainstream consensus in the world was Bitcoin is an asset. It's not going away. I used to say

if it's not going to zero, it's going to a million. But there are a lot of people thinking,

oh, it's too good to be true. The government will take away from you. It'll be banned. And I think

turning the corner was really essential. And the turning of the corner is when people realize it's

not a cryptocurrency. It's a digital property. And if it's a digital property, it's a store of value.

And I'm going to buy it as a store of value or buy it through the ETF and hold it a long time.

And when the SEC approved 10 Bitcoin ETFs, mainstream Wall Street consensus shifted to,

okay, it's going to be around and then open up an avalanche of enthusiasm.

And that kicked us into this Bitcoin gold rush error. For the next 10 years, every quarter,

there'll be more enthusiasm, more adoption, more awareness. But it's still, it's like year one

of Bitcoin's institutional asset. Companies will do this, but it's hard for them to move that fast.

And normally, if something is new for the last three years and you're in the fourth year,

you're an early adopter, that's how fast corporations move. So I think it does happen. But I think that

we're still very close to the crypto winter. So many bankruptcy, so many meltdowns, we need to get

a little bit of distance from that and stabilize. And at that point, more conservative companies will

start to move into the space. Yeah, because it would make a lot of sense for Coinbase, for the mining

companies. I know that I don't think that are Bitcoin companies listed in Brazil market, but

the mining companies that are listed outside, it makes sense, it would make a lot of sense for them.

Since I first heard you explain in this financial engineering, I didn't sleep. I heard, at first

time I heard about it, the full explanation was yesterday night. And the day before myself, we are

doing some stuff. And during our dinner, I started to message them, guys, look at this, look at

this. And despite we don't have exactly the same instruments here in Brazil, like the convertibles,

the options market is way lower, way smaller. But we could do something similar. And it

click at the right away. Why do you think like even crypto native companies, they don't, it's so

obvious after you understand that like it's so like, man, why do you think it's not obvious

even for those guys? I think that it does make sense for Bitcoin miners and the logical,

the logical ones that can make the transition quickest are publicly traded Bitcoin miners.

They already have Bitcoin on their balance sheet, they already have equity, they're already in

the public market. So that's the obvious one. I think that in the crypto space, there's so much

confusion, there's so many different things going on. Everybody's got so many different things

are working on. And also there's, there's so much chaos and volatility over the past few years.

Yeah. You know, with the crypto winner, it's hard to focus. And of course, it all becomes clear

on hindsight. If you look back four years and then you get out of the crypto winner and you take

a deep breath, you're like, oh, I see how that works now. But even I didn't see how it was going to

work two years ago. Right? Yeah. Is there that? Like two years ago, I thought I'm going to do it

because I can do it. But I didn't understand all of the math and all of the economics and all

the theory. After you've done something three or four times and you've thought about a lot more,

the theory becomes clearer. And there's still a lot of regulatory uncertainty. I mean, it wasn't

clear what's going to happen with every single crypto application or use case everywhere in the

world for the past 24 months. So there's a lot of people been waiting for certain shoes to draw

up or for certain decisions to be made. I think that what you could say in the middle of 2024

is it's pretty clear in the US Capitol markets that the regulators have embraced Bitcoin as a

commodity, a digital commodity. And the investors have embraced Bitcoin as a digital property or

store of value investment. And those two things there's broad consensus on. And if you're building

something based on those two insights, you can build a very, very big business,

right? Like Micro Strategies gone from 600 million enterprise value to 35 billion. You can build

something big. But those two, but those two insights, they weren't clear two years ago. I couldn't

have said, you know, 10 companies on Wall Street will all agree on that two years ago. And the SEC

will let you sell that. So I think we're just 12 weeks into the institutional adoption phase.

And every day we watched, you know, money flows into the spot Bitcoin ETFs and you see 50 million,

100 million, 200 million. You can see it's starting to simmer. And I think that will cause people's

wheels to turn and they'll start to think about what's the next thing. And I mean, these are all

markets work, right? Like like markets very confused with 27 different ideas. And then all of a sudden,

one idea works. Remember like search engines. And there was a bunch. And then it was Google.

You know, remember about mobile phones. There was a bunch. And then it was Apple. You know,

they'll be a bunch. Remember mobile apps. There's a bunch. And then there's a few. Yeah. So I think

markets work like that. And then something starts to work. And that gets bigger. And it catches on.

And it catches fire. And then people start to copy it. And then it becomes something. And I think

we're still early. And that's a good thing, right? Because what that means is an opportunity for you.

Yeah. Yeah. Exactly. Okay. You don't want everybody to agree. You want everybody to be confused about

things so you can act. Perfect. I know you had a meeting with Roberto Campos, the governor of

the Brazilian Central Bank here in Brazil. He used to say publicly that the Brazil is moving

forward for a fully tokenized economy. And also the high commissioner of the Brazilian SEC,

João Pedro Nascimento, he used to say similar quote, something like the future is green and tokenized.

So what can you share with us the conversation that you have with Roberto Campos? What do you

understand about the Brazilian economy right now regarding the tokenization of the economy?

Well, I mean, I'm left with the impression that Brazil is very progressive country. And maybe

the big strength of Brazil, it is a progressive set of financial regulators and a progressive banking

central bank that's looking forward to the future. And it also has very progressive main banks

like Atu Atal, right? Atu Atal. And so you have large banks that are very progressive

and state large stable trusted institutions. And then you have support of regulators. And you're

sitting at the crossroads between America and that capital market. And then you see the markets

of Argentina and Venezuela and the like. And then I think Brazilians remember their own history

in the past 50 years. And so I think that it's a fairly sophisticated investor base.

You know, you can remember hyperinflation if you're above the age of 50 in Brazil. In America,

they don't. And I think that proximity to Argentina means you can see what happens when the

currency collapses. Brazil has a strong currency, has forward looking regulators, has strong progressive

banking institutions, has a population that has a good situation now. But remember,

is it difficult one and can see an even worse one? And I think that actually positions the nation

really well to be leaders in digital assets and leaders in the next stage of digital transformation

of finance. So much more so than other places. I think that in the US, we're doing well with

regard to Bitcoin and digital commodities and digital property. It's still going to be a while

before the large banks in the US become custodians or become exchanges and start trading crypto assets

like Bitcoin. And so perhaps they'll be inspired by Brazil. Nice. Nice to do that.

Change a little bit the subject like, but one criticism that I heard like for the last decade

when I first started talking about Bitcoin is that it resembles Ponzi scheme.

You probably get or got that a lot also because the way we understand it's something it's a new

a new company, a new Facebook, a new digital way of doing things that has its cap 21 million

and that's it. And because of there's so much thing to be created on top of it or people just buying it

like, as you say, like a digital property that we truly believe that the price today is almost

close to zero when compared to what it can be. What's your thoughts on this like a parallel of

Bitcoin and Ponzi schemes? I think that's a misunderstanding of what it is. Obviously Ponzi schemes

are operated by criminals with a lot of action behind the scenes to recycle capital. Bitcoin is

better described as a city and cyberspace. If you imagine a city that's 276 blocks high, 276 blocks

wide, 276 blocks deep, that would be about 21 million. And it's a network, a shared network that

people all around the world voluntarily enter into and you can buy one of those blocks and you can

take custody of that block and you can keep it for 100 years and you can give it to your children's

children's children. So if you think of it as digital property or the greatest city and cyberspace,

you know, it's when you move into Manhattan and you tell all your friends to move in Manhattan

and they all move to Manhattan because Manhattan is the greatest city in the US and the price of

land in Manhattan goes up. That's not a Ponzi scheme. That's an example of a place where everybody

wants to live because it's the best city to live in in North America and people have been moving

to Manhattan for 400 years and the price of real estate Manhattan has been going up for 400 years.

Imagine a city in cyberspace where 8 billion people want to live and you know, they don't live

physically but they live economically. Everybody in the world has a problem and the problem is they

would like to store their capital and preserve their capital and they'd like for someone not to steal

it. Right? So they all need this bank in cyberspace where they can store their life savings and

know that it will hold its economic value. If God came down from heaven and offered to set up a

bank with 21 million coins and keep the money in heaven and let you telepathically zap it back and

forth and make sure no one cheated anybody and do that for the next million years, that would be a

better bank than any bank we have and it would be a better currency than we have. But you know,

God's not going to do that and so the next best thing is if you create a bank based upon cryptography,

based upon computer science and you give a copy of that software to everybody in the world that

wants to use it and then everybody voluntarily buys and sells those units we call Bitcoin

and holds them if they wish to hold them and anybody that tries to cheat the system gets kicked

off the network. So Bitcoin is is better thought of as a protocol, a fair equitable protocol for people

to trade economic value or store economic value and it happens that the more people that use the

protocol, the more valuable becomes not so different than English, the language, the more people speak

English and the more money the people that speak English have, the more useful it is for you to

learn English and like New York City, the more people that move the New York City with more money

doing more things, the more valuable your real estate is in New York City. So it's basically a

network. It's the world's greatest monetary network, a digital monetary network. It's and what's

special about it is it's open permissionless, nobody owns it, no country controls it, no company

controls it, no individual controls it. It is the result of an experiment where the 50 predecessors

all failed and thousands and thousands of copies failed and it's the winner in this in this Darwinian

market economy for money and what you have is is a network where hundreds of millions of smart

people with money have entrusted hundreds of billions now trillion dollars or more of money to

the network because it's a much more efficient way to do things and that being the case, it's just

the worst first scientifically rational engineering protocol for economics, for economic

cooperation or for monetary interchange and that's something everybody needs, nobody can stop

but most people don't understand and the reason that it makes sense to spend a hundred hours

studying it right now and the reason it makes sense to buy Bitcoin is all of my best investment

ideas or things, nobody can stop, everybody needs and nobody understands.

Exactly, yeah, yeah, I'm sorry but I have to leave, I would like to thank you very much for your

time, okay, welcome to Brazil and have a very nice to see you, okay, pleasure. Bye bye, thank you.

So bye Diego, have a great flight man. So when we talk about like I like like as my first question,

we are talking about the financial engineering, so let's go to the software engineering,

seems that you know very deeply how the software works in the Bitcoin space, what amazes you

like on this, it's so many small things and even today I learned new things on how

Satoshi did why he did this and that, what amazes you, like what makes you think about and

the what impresses you in this software, let's talk about software, the Bitcoin software.

I think Bitcoin is a brilliant system engineering achievement because it is it is many, many parts,

it has several mechanisms in it, feedback systems, it has very intricate computer mechanisms

and economic mechanisms, but the things that I focus on that are very beautiful to me,

one is the idea of creating a crypto commodity, how do you create an asset without an

issuer that nobody controls that is self-sustaining, yeah, and that's a first in human history,

that is really a beautiful thing. Probably the only one, do you think we're going to get more of

that like another, another, and theory you can create other crypto commodities, but it's very hard

and if they're serving as money, you'll tend to have all the money collapse to one, like,

if people use gold, they won't use silver. And so it's definitely the king crypto commodity.

The other thing that's really beautiful about it is this brilliant leap from commodity to scarcity.

It's the first time in human history that we created a commodity with a hard supply. Every money

in history, glass beads and bales of tobacco and stone coins and copper tokens and paper currency

cigarettes and fiat currency, all of those things were uncapped. Every other commodity, soybeans

and oil and natural gas and gold and silver uncapped, we can create more of them. Land, timber,

real estate, you can even extract land from the sea, you can create more of it.

Bitcoin is the one commodity that you can buy and you can hold where it is absolutely cap 21 million.

So if the price goes up by a factor of 100, the supply is invariant. There is no other commodity where

the supply is invariant to the demand or to the price. That makes it perfect money. It makes it the

best store of value asset. Most other commodities are much worse. If a commodity has a stock to

flow ratio of one and you produce twice as much the equivalent supply every year, it's not going

to be good money. If the stock to flow is 50, it might be better money. If you only inflate the

supply by 2% a year, like gold. But it's still not great because every 30 years you cut your money

in half if you inflate 2% a year. So this leap from the idea that there should be a 2% inflation

to the idea that there should be a 0% inflation rate. That's a profound idea. Most classically trained

economist and all the Keynesians would tell you 2%, 2% is the right number. We want 2% inflation.

But 2% gives you a half life of 30 years. 1% you get to 72 years, 0% you live forever.

There's a pretty big difference between 0 and 200 basis points. One thing is you live forever,

you're immortal. And the other thing is 30 year half life. So you don't think it's a lot,

but it's profound. Do you want a building that will stand forever? Or do you want a building that

will crumble in 30 years? And once you start thinking about that, you realize if you build a

capital structure of a company or a family or a country on an asset that's crumbling every 30 years,

your civilization is going to struggle. Gold's got a half life of 30 years. The US dollar is

inflating about 7 to 8% every year. It gives you a half life of 10 years. Most currencies inflate at 14%

a year. It gives you a half life of 5 years. And in some currencies inflate and have a half life of 18

months. And so you started to ask the question, I want to build a government, I want to build a family,

I want to build a company, I want to build a nonprofit, I want to build a bank on a capital structure

that will last forever or 30 years or 10 years or two years. And so that's second idea of scarcity.

That's a very brilliant breakthrough. The third idea that's a breakthrough is transactional

scarcity, second order scarcity. The fact that there's only one block every 10 minutes.

Or the fact that there's only four megabyte blocks, or there's only 4,000 transactions,

maybe seven transactions a second. A lot of people think that's a bug, that's a feature. That's

actually how you enforce security and you create a market economy and transactions. So you won't

have first order scarcity if you don't have second order scarcity. So Satoshi was smart enough to

realize that you just can't move the Bitcoin around every second because the security will collapse

and the stability and network will collapse. And I think that that was very brilliant. And the last

brilliancy is the use of proof of work and Shaw 256 hashing and not crippling it by saying we're

not going to allow you to do ASICs because there's a point where some people said we don't want you to

do ASICs that's cheating. And there's other, but with Bitcoin they let you build an ASIC to generate 256

hashes. And the right answer is to be able to do ASICs because an ASIC is a silicon machine

with a 2001 mechanical advantage over a CPU. And that means that you can put 20 billion dollars of

capital in the Bitcoin network and defend it with a 2001 advantage against all of the Google

and the Apple and the Amazon and the Microsoft networks. So you see if you didn't have the ASIC

then you would have to spend as much on CPUs as they. And so a big company could overwhelm

the system and destabilize it. But because we have a very particular proprietary protocol,

what Shaw 256 is special protocol. And because you can create a very efficient Bitcoin minor,

it means that you can constantly upgrade the energy efficiency and the thermodynamic efficiency

of that equipment. And that means that whoever controls all the Bitcoin money equipment can defend

the network. And that is profoundly important because that opens the door to defend a hundred

trillion dollars of ASICs with only 10 or 20 billion dollars of hardware. And that's a pretty big

idea, right? A silicon machine for security. The other implication is when I spend 20 or 30 billion

on hardware, the only thing you can do is defend the network. And so if you go bankrupt and someone

ceases your equipment, they have to defend the network, right? So the only thing you're ever going

to do with Bitcoin mining is to defend the network and secure the network. And that's a very useful

feature of the network because naturally what it means is the network has a 12 year security

frequency. When it becomes non-profitable to mine Bitcoin, it'll still run for 12 more years

because the equipment is already sunk cost and you can't do anything else with it. And naturally,

what happens is once you've invested to know how to build a Bitcoin minor,

then you'll keep producing Bitcoin mining equipment even at a 5% variable margin.

So you'd sell the first machine for 10,000. You'll sell the next machine for 1,500.

You'll sell the next machine for 800 plus 50 dollars. So you're going to keep shipping

security equipment even if the price collapses, even if the profitability collapses.

And that's kind of ratcheting effect that you want if you want to defend all the world's money.

Exactly. So do you agree that the scarcity in the ecosystem, and I think it's like in every ecosystem,

not only Bitcoin is like what drives the innovation in equipments or software,

in software that people are building, like my, like network, whatever,

discuss it is the main drive for the innovation. So instead of Bitcoin being like something stuck

because it has its scarcity inside it drives innovation instead of being stuck.

When the money is scarce, everything else will be abundant.

Yeah. And when the money is abundant, everything else you want will be scarce.

And Bitcoin represents first order scarcity in the monetary policy, 21 million.

Yeah. Second order scarcity in the transaction velocity, 7TPS.

Third order scarcity with the hash rate, Shaw 256 hashing, and hashing equipment.

And fourth order scarcity, only a few people know how to create and manufacture these hashing machines.

And so all of that scarcity maintains the integrity and the security of the network over time.

And because the integrity and network is secured, that means that the Bitcoin can be used as a foundation.

To build trillions and then tens and hundreds of shrines of dollars of other applications on top of it.

The, the simple metaphor I would offer is consider the shister, the granite that's underneath New York City.

That land is 200 million years old. Yeah. It hasn't moved. It hasn't moved in 200 million years.

You don't want it to move, but you can build 100 story buildings on it,

drive millions of cars on it, run electricity through it, launch hundreds of thousands of companies,

live hundreds of millions of lives, do trillions of trillions of things.

But what is the granite's role? Just don't sink. Right. Don't move, don't sink. Don't deflect.

Yeah. Bitcoin is that granite for the 21st century digital economy.

Yeah, sometimes I think like we are like in the four or five centuries ago,

when people were like moving in ships from Portugal, from Spain, from England.

And they were going forward to move and get new information.

And now get what was scarce, like going to ninja to get products that matter to them.

It seems that what drives people every time is like the scarcity of information of knowledge.

And scarcity of goods or digital goods, so they move forward to get those goods or to get that

ambition. So what drivers is like the ambition to know more and to have more.

It seems that we are somehow similar to the same environment,

the same environment that instead of people going in ships and trying to get new

stuff, new goods from India, they are now going forward, trying to get like a ambition,

an ambition in a good way, ambition in a digital way is something like that.

Do you think it makes sense? Something like that.

Well, I think the secret to success in the 17th, 18th century, as you needed to move goods,

services and capital between all the markets.

Yes. So you needed to move things via ships and you needed to move capital one direction and

products and services and people the other direction. Bitcoin is the basis of the digital capital

market. And so Bitcoin is a worldwide open capital network. It allows all 8 billion people to

trade with each other. So it allows us to move billions of dollars of capital between New York and

Tokyo or it allows hundreds of millions of companies to trust each other. How do I trade between

Africa and South America and Europe and Asia and how do I settle and move the capital and then

how do I build the applications on top of it. The 20th century was built on credit.

The 19th century is built on gold.

You used to be, you know, the story was Spanish and gold across the ocean and if your ship sunk,

you lose the capital. It's a big problem. If the ship gets washed into a shore, you lose the

capital. It's very slow. It takes six months or a year to move the capital. So eventually,

with the telegraph, we decided we were going to move the capital by a credit, a bank check

or a or some bank draft and that worked in the 20th century. But the problem with credit

is credit is very expensive, very fragile, very risky. If I wanted to move, if I wanted to move

a million dollars 40 times on a credit network, it takes about a month to settle each time

and is a 2% fee. And so if I do a credit card transaction a million times, it'll take four years

and the banks will have all the million dollars as fees. And so the money doesn't move on a credit

network very effectively. It is slow, it is expensive. What you want is a money network where you

can move the money 40 times in one minute for a penny. No settlement risk. And what Bitcoin offers

is it offers that much more industrial strength settlement network and the layers above it,

the layers two and the layer three will just allow you to move money at the speed of light,

friction free. Anybody can open a bank, anybody can start a bank or an exchange anywhere in the

world on the weekend, writing to the Bitcoin protocol without asking permission to anybody else.

And nobody anywhere in the world can open up a company that will integrate with the proprietary

systems of the 20th century. You can have 20 years and a thousand lawyers and you still wouldn't

be able to plug into one of those systems if someone doesn't like you. So the 21st century economy,

it's based on open standards and protocols and digital energy, digital property, digital money.

The 20th century was based upon credit and permission systems and closed systems.

And they can only take you so far and then you have to move to the next thing.

Great man. I know you are like a long time. I just would like you to like a lot of Brazilians are

still very skeptical on what even what is Bitcoin on even on like is this like for real or is this

another as we said, a Ponzi scheme or a scam. What would be like your one single advice for people

that still don't study or still need to learn more about it. So for those that are still skeptical.

I would say allocate a hundred hours of your life to study it. The average person works 2,000 hours a year,

40 years. Yeah. You're going to work 80,000 hours in your life to make money. You should work a

hundred hours of your life to keep it. It's really a tragedy that you would work for 40 or 50,000 hours

and then lose all your money because it's ripped off or it's debased away because you didn't know

where to store it. So I think it's a good investment to spend a hundred hours. I think the place to start

is read a book like the Bitcoin standard. Read the bullish case for Bitcoin. Go take a course

there online. If you go to hope.com, just remember Bitcoin is hope and go to HOP. You'll see a lot

of free courses on Bitcoin. You'll see a lot of books. You'll see a lot of resources. You'll see

go do your own research. Talk to your friends and know it and ask them where they got their

information. I think after you've done your research, then you'll be in a position to make a decision.

But the way I think of it is, if you had a bunch of money, if you had any amount of money, maybe

you managed to save a hundred thousand dollars over the course of your life. If I drop you in

Africa and I tell you buy anything with it, but you have to keep it for a hundred years and give

it to your grandchildren. What would you buy? And maybe nothing. There's nothing you would buy

the entire continent. Now if I said to you something more simple, what are you going to buy that you're

going to give to your granddaughter or your grandson that's going to actually keep them economically

sound 50 years from now. A car, a house, some land, some shares of stock, which company will be

around in 50 years? A bar of gold, a painting? If you think about it, I'm going to actually buy

a Bitcoin and I'm going to give it to my kids or my kids' kids. It's generational well transfer.

Why does that make sense? It makes sense because everybody in the world has the same problem you have

and when they buy it, when I buy it and I bought 214,246, when I buy the next one, it will increase

the value of your Bitcoin. Everybody in the world that's got smart money, everybody's got your

problem. They want to keep their money, they want to give it to their children. Everybody,

now every corporation, every charity, every family, there's nobody that wants to lose all their

money and they're all worried about can I trust the currency, can I trust the bank, can I trust

the company? Will I get my, will my building get taxed? Can I afford property taxes? How do I

save my money and how do I transfer it to the next generation? Bitcoin is a solution. You should

put in the work to determine whether you agree. If you don't agree, then you save your money.

If you get to the point where you become comfortable, you start to realize that

you get the same problem billions of other people have. There's one solution which is better than

every other option. So far hundreds of millions of people have chosen it. Hundreds of billions of

dollars have been invested in it. There's 1.4 trillion in the network. We think it's going to keep

growing. If you join the network, you benefit along with the rest of us. If you don't join the

network, then it grows without you and then you better pick something else that you love that

you think is better. That is up to every individual, I think. That's the last tip. 100 hours

is starting so you can decide whether it fits to you or not. I'm pretty sure that you're going

to understand and see maybe trade like a hundred, one thousand dollars and see how it goes

like in 10 years for now. Michael, thank you very much for your time. I know that you have been

like a very crazy week here in São Paulo. I hope you enjoy your weekend over here. Again,

thank you for your time. I know that it's very, very tough for you to be here with us. I'm very glad.

Thank you for the opportunity and I'm wishing everybody the best. Remember Bitcoin is hope.

It's hope, guys. Thank you.