Competition Is Beneficial To Bitcoin Ecosystem

Another success story in terms of the stock that just climbs and climbs and climbs is strategy.

The company bought recently 1445 more Bitcoin, bringing its total supply to 582,000 worth

more than $60 billion.

Bloomberg News took a look at strategy and its 70 separate Bitcoin purchases since Michael

Sailor began to invest cash from the company's balance sheet into the token in the middle of

2020 and every purchase over the last four years plus is now a profitable purchase.

Well, I'm pleased to say that joining us now is strategy executive chairman Michael Sailor,

himself, Michael.

It's great to have you with us.

We have a lot to talk about and one of those things is a recent call from Jim Chanoes.

Of course, he's a legendary short seller.

He came out recently and said basically by Bitcoin, short strategy shares.

It's just to set the scene here.

I'm curious what you make of that.

You know, I don't think he understands what our business model is.

We're actually the largest issuer of Bitcoin, back credit instruments in the world.

So last week, we just raised a billion dollars by selling a preferred stock non-cumulative

call stride.

That means we basically borrowed money that we never have to pay back, that we pay a dividend

on, but we could suspend the dividend if we needed to.

So Jim has been thinking that we somehow needed to sell the equity.

We now are in a situation where we have stride and stride.

Three publicly floating preferred stocks that are not diluted to the equity.

They all meet a different market requirement.

That $110 million of Bitcoin was bought last week.

That was acquired without issuing any common stock.

So what's going on here is that we're using our $60 billion of Bitcoin collateral to issue

credit instruments.

They never come due.

There's no liquidation risk.

There's not even an interest rate risk, right?

It's a non-cumulative preferred and we could suspend the dividends.

So at the end of the day, if he's lucky enough to short the stock below one time's nav, we're

going to issue the preferred, buy back the stock and make money for our shareholders.

If the stock trades at a weak premium, we're just going to sell the preferred.

And if the stock rallies up, he's going to go liquidated and wiped out.

Well, let's talk about that premium because that is the heart of his short call on strategy

as you point out here.

So he said recently on a podcast that shareholders are paying around $220,000 for Bitcoin that

trades at $110,000.

But the company is doing everything it can to close that spread, which is great.

There's a catalyst.

So he's referring to the fact that you are selling your own shares and buying Bitcoin.

But when it comes to the premium, that strategy shares enjoy over the price of Bitcoin itself.

Do you think that that's sustainable?

The fact that like he points out that basically the value of your company is trading at twice

that of Bitcoin itself?

What he still doesn't understand is we're not a holding company or a closed-and-trust.

We're an operating company.

So when we, trust can't leverage the Bitcoin.

They can't issue preferred shares.

They can't issue permanent shares of equity out of premium.

We can.

Our company's generated a BTC dollar gain equal to about $8.4 billion in the first two

quarters of this year.

That's the equivalent of earnings for a Bitcoin Treasury company.

Our target for the year is $15 billion.

And so he's valuing the business that's generating $8.4 billion of shareholder value at zero.

And he's hoping that somehow the equity will trade to nav.

But what he's not paying attention to is if we can issue preferred shares that yield 10%

invested in Bitcoin, which has been going up 57% for the past four and a half years,

we're capturing the 47% arbitrage effectively risk-free for our common stock shareholders.

And if you want to value the company, you have to value the company's ability to generate

Bitcoin yield or Bitcoin gains over and above the actual holdings of the Bitcoin the company

has.

So as you said, you have about $60 billion, $63, $64 billion or the Bitcoin.

Your company is worth about twice that at $106, $107 billion in market cap.

And you also have obviously an enterprise analytic software business.

How do you break down the value of the rest of your company, X Bitcoin holdings?

If the company generates $10 billion of Bitcoin gains this year, you got to put a 10 or

20 multiple on it, right?

So the Bitcoin Treasury company operation is worth a multiple of 10, 20, 30 or 40 times

the BTC yield we're generating.

That's the number one source of value for the operating business.

And then the company also has $60 billion plus worth of Bitcoin.

I would say to investors, look at it that way.

A BTC dollar gain is like our earnings equivalent.

And then the Bitcoin nav is the assets on the balance sheet.

And you should just look at the earnings equivalent and put the multiple that you think is appropriate

on it to come to an opinion about the value of the entire enterprise.

Michael, nobody has to explain the rapid rise in Bitcoin to me.

I started buying Bitcoin to $800.

I bought one as low as 600, but I spent them, unfortunately.

How do you expect the asset to continue a price increase at these levels that we've seen?

I mean, can it keep that up over the next five years, over the next 10 years?

And at what point do we see winter coming again?

Because that's been a permanent fixture of this asset class, right?

It's gone from $0,000 to $20,000 and then back down to three or four and then up to $50,000

and then back down to $15,000.

And now up to $110,000,000,000.

Like, when does it drop again?

Winner's not coming back.

We're past that phase.

If Bitcoin's not going to $0,000,000,000,

and you have all the evidence you need to determine that, right?

The President and on his state says the term, he supports Bitcoin.

The Cabinet supports Bitcoin.

Scott Pessant supports Bitcoin.

Paul Atkins has shown himself to be an enthusiastic believer of Bitcoin and digital assets.

Kent has at CFTC, feels the same way.

The banks are going to custody Bitcoin has gotten through its riskiest period.

The accounting has been corrected.

There's not only $450,000,000, a day available for sale by natural sellers.

That's the miners.

At this level, that works out to about $50,000,000, a Bitcoin available for sale every day.

If that $50,000,000 is bought, then the price has got to move up to find any natural, any

seller that's price sensitive.

Now if you do the math, you'll actually see the Bitcoin treasury companies by themselves

for buying the entire natural supply.

BlackRock and the ETFs are buying another measure of that, and we've got nation state

actors coming into the space.

I think when Bitcoin rallies, if it surges to $500,000 or $1,000,000, then maybe we could

talk about it crashing down by $200,000, a coin.

But at the current price levels, it only takes $50,000,000 to turn the entire driveshaft

to the crypto economy one turn.

You've got the Trump media organization announcing $2,000,000,000, you've got GameStop announcing

$500,000,000, you've got my company that's raising billions and billions of dollars.

The writing is on the wall.

Bitcoin's moving higher.

Okay, so there's a few things to dig into there.

One, in your words, Bitcoin winter is not coming back.

I'm rereading Game of Thrones right now, so that statement gives me the shivers.

I did want to go to the competitive landscape if you can phrase it that way, and you went

there naturally.

You think about the ETFs' suites out there.

Ibit, for example, already up to $72 billion in assets.

There's a lot of Bitcoin treasury companies that have come to the scene, as you mentioned,

21 capital comes to mind, started by Jack Mowlers, and they all have the intention of just

accumulating Bitcoin.

That would be good for the price, Michael, as you say, but do you worry about the competition

out there to buy Bitcoin?

It's going to become more and more expensive, and everyone's competing for a shrinking

pie, if you will.

I think we're in a digital gold rush, and you've got 10 years through a choir all your

Bitcoin before there's no Bitcoin left for you.

The competition is a virtuous competition.

One of the planets, the hottest companies in Japan right now, they went from $10 million

to $1 billion market cap to $5 billion market cap.

They're going to raise billions of dollars.

They're going to pull the liquidity out of the Japanese market, so they'll be raising

capital and Tokyo and the Tokyo Stock Exchange.

Obviously, none of the rest of us are trading or selling equity in the Tokyo Stock Exchange.

So it's not competitive.

It's cooperative.

There are companies coming public in Brazil right now, like Orange BTC that will come public

in some time frame and Melius.

They're actually supporting equity capital markets in Brazil.

The game stops.

They already have $6 billion in capital, and so for them to start to take some of that

capital and funnel into Bitcoin, it's good for all of us.

Nakamoto and 21, they'll bring their own particular twist.

Our company is a very particular business model.

It's to issue Bitcoin-back credit instruments, like Bitcoin-back bonds, and especially Bitcoin-back

preferred stocks.

We're the only company in the world that's ever been able to issue a preferred stock back

by Bitcoin.

We've done three of them in the past five months.

We're not competing against the Bitcoin Treasury companies.

We're competing against ETFs like PFF that have portfolios of preferred stocks or corporate

bond portfolios that are trading as ETFs in the public market.

The way we compete is we offer 400 basis points more yield on an instrument that is much

more heavily collateralized and more transparent.

We're not going to saturate that market anytime soon.

That's $100 trillion or more of capital in those markets.

It sounds like when you talk about what you're doing in terms of financial engineering,

in terms of financial markets with Bitcoin, clearly, you're doing a lot more than just holding

the Bitcoin, so it's unfair to compare you to an ETF.

It sounds like you may be inviting competition from a JP Morgan, for example, which then

makes me wonder, when does this asset start to convince the

naysayers, Jamie Diamond has famously said it's worthless.

Warren Buffett has called it probably rat poison squared.

When does it win those people over?

People called the electricity worthless and aircraft worthless too when they didn't

understand them.

So I welcome the competition from JP Morgan.

I hope to enter the space.

Our advantage is that we're 100% Bitcoin.

So whenever we create a preferred stock, it has the Bitcoin performance and it has a

measure of Bitcoin performance and a fraction of Bitcoin volatility.

That allows us to issue the most liquid preferred stocks in the world of the highest performance.

Strike was up 29% when the rest of the market of preferred was down 6%.

Strike was up 22% when the rest of the market was down 4.6%.

It's impossible to issue Bitcoin backed convertible preferred and Bitcoin backed fixed

preferred unless you're willing to make 100% of your balance sheet Bitcoin.

So I'm not really worried about competition from JP Morgan or Berkshire Hathaway.

I would love for them to enter the Bitcoin space, buy up a bunch of Bitcoin.

When they do it, they'll be paying a million dollars of Bitcoin.

The price will go to the moon.

That will be good for the entire crypto economy and beneficial to everyone that holds any

BTC backed equity or credit-based instrument.

Well, I'm still thinking about you saying that you view yourself in competition not with

the Bitcoin treasury companies, but with some of the ETFs that hold preferred shares, that

is the strategy that they're tracking.

And when it comes to your own financing and the fact that you have been pivoting to

issued more preferred stocks to fund your purchases, why is that?

Why go towards preferred rather than convertible bonds?

Is it just a question of demand or is there something else to it?

The convertible bond market normally is a short duration investor.

They want to hold the bond three or four years.

And the calls that are embedded in the bonds are capped calls, capped at 130% of the strike

and sorry, the conversion price.

And so that's a short duration call investor and a short duration credit investor.

What we sold with strike, SDRK, was a perpetual call option, good for 100 years or forever.

And then we sold a perpetual dividend you could hold for 100 years and give to your grandkids.

So long duration credit, long duration call, and that preferred never comes due for us.

So we don't have liquidation risk, we don't have credit risk.

So it's a much better instrument if you intend to invest in a volatile asset like Bitcoin

and hold the investment forever.

Now the other point I'll make, Katie, is if you think about what we're competing against,

there's like $80 billion worth of corporate credit and preferred equity based ETFs that

we identified.

Most of them charge a fee of 50 to 80 basis points a year.

Most of them generate a yield of six or seven percent.

And most of them have very heterogeneous, opaque credit, low volatility and very low liquidity.

They're offering preferred instruments that have 8 to 10 percent dividend yields of par,

10 to 100 X higher liquidity.

They trade really, really hard, very, very liquid.

And they're homogenous credit and they're 6X over collateralized.

So it's a very compelling instrument if you believe in Bitcoin as a digital asset.

So just to finish the thought here and I'm looking at Investco's preferred ETF, the ticker

there is PGX, that charges an expense ratio of 51 basis points.

It has about $4 billion in assets.

When you say that you're in competition with funds such as this one, are you referring

to the fact that you're competing for investor attention with these ETFs?

I just want to make sure I'm understanding your point.

Yeah, what I'm saying is you go by that maybe you get 7 percent yield effectively and you

pay the 50 basis points and some of that is QDI eligible and some of that is taxable.

When you buy one of our preferred like stride as yielding like 11 percent plus right now

and strife as yielding 9, 9 and a half percent, you buy that.

It's all QDI eligible.

It's trading 10 to 50 times more liquid on a dollar for dollar basis.

It's very homogeneous credit and you get an extra 400 basis points of yield, better

tax treatment, etc.

So we're actually competing against that.

We're offering tax efficient zero fee fixed income yield to someone that wants to hold

that in their portfolio.

Michael, I would at least in the top five most important characteristics of Bitcoin is

its security, right?

I mean scarcity has to be one near the top and the ledger obviously was a genius move

by Satoshi but it seems to be uncrackable.

I'm wondering if that will hold true far into the future with the development of quantum

computing.

Do you worry about that?

I don't worry about it and I make the point.

Microsoft and Google market their quantum projects but they would never sell a quantum

computer that cracked cryptography because it would destroy their own companies and there

isn't a practical use case for those quantum projects they've been marketing.

I think at some point a decade out, maybe 10, 20 years, maybe whenever, there'll be a powerful

computer.

It may start to threaten modern cryptography.

When it does it, it'll be a threat to Microsoft, Google, JP Morgan, the US government.

It may be a threat to Bitcoin.

When it is a threat all of these organizations are going to upgrade their crypto protocols

to be quantum resistant.

You'll see it coming a mile away and every other digital entity in the world is more vulnerable

to that idea or that threat than Bitcoin and so they're all going to upgrade and we'll

be talking about it while you're reviewing Microsoft stock or Apple stock exposure.

I don't want to go too deep into this because it's only a half hour program but I feel

like AI could, you know, everyone's worried that AI may turn on us and this could be

a way in which AI has real power.

Is that not the kind of thing that keeps you up at night?

I'll make a point here.

The typical person might do 10,000 transactions in their lifetime, maybe 100,000 if they're

very busy.

The AI's are going to do 100,000 transactions a minute.

They're not going to suffer the existing credit systems in the existing banking systems

of the 20th century.

They're going to want to move digital money at high frequency at the speed of light.

That means digital assets like Bitcoin over the lightning network or via layer three protocols.

The demand for digital capital, which is what Bitcoin is and digital networks like lightning

and like all of the crypto protocols that are being worked on right now, is going to go

through the roof.

So I think AI is really a demand driver for Bitcoin.

It's going to accelerate the entire digital assets economy.

And no, I'm not worried about the threat.

The AI's can't crack public private key cryptography.

What they can do is imitate you and talk you into doing something stupid if you're listening

to them.

So there are threats to all the other systems in the world, not to Bitcoin.

All right, Michael.

We got to leave it there.

It's always great to speak with you.

Appreciate the time.

That is strategy co-founder and executive chairman, Michael Sailor.