Come on, party everybody!
We'll see you next time.
The Red.
If time is money and money is time, I have to pay for it.
Because I'm living in the red.
Yes, I'm living in the red.
Well, I'm living in the U.S.A.
And I ain't got a dime to pay.
Hey, yeah, hey.
Yes, I'm living in the red.
Yes, I'm swinging in the red.
Yes, I'm loving in the red.
All right.
Woo!
Welcome back.
True North episode 42.
One year anniversary of True North happening today.
We've got a couple people on the screen.
We've got myself.
Hello.
Soleil.
And we've got Tim Kotzman joining us for the Investment Grade Bitcoin Podcast episode 42.
We are here to talk about strategy.
We are here to talk about Bitcoin. We are here to talk about Bitcoin as capital. We're here to talk
about synthetic labor. We're here to talk about the preferred equities, leverage, capital structures,
and everything under the sun involving Bitcoin in corporate finance and securitization of Bitcoin.
So this is your first time here. Welcome. Thanks for joining. And we've done 42 episodes of this
now, and we are here to talk about everything under the sun relating to Bitcoin. We're getting
a lot of flack recently from bots and people in the community that are just not interested in this
strategy anymore. But I think something that's very important to remember is just we are incredibly
early here with the creation of companies putting Bitcoin on their balance sheet and figuring out
how to use it as collateral. And that is just an incredibly exciting place to be. And I'm just
incredibly excited to be here. Like this is capital. I used to work in the capital markets,
worked in the capital markets for 11 years. And here we are. Bitcoin is being used as capital
in capital markets. And there's no more exciting place to be in terms of creating shareholder value
and expanding store of value assets on a balance sheet. So incredibly exciting times.
We've got Tim Kotzman here. He's been running just back-to-back conferences talking about
Bitcoin treasuries and what all these other people are doing. So thanks for joining, Tim.
And then Soleil. Soleil's got 400 plus episodes of the Orange Pill Investor podcast talking about selling covered calls.
Today was episode 500, as a matter of fact.
500.
Booyah.
Well done. 500 episodes. That is commitment. That is back to back. That is showing up even when the markets are red like this.
Proof of exhaustion.
Yeah, exactly. Exactly. Obviously, strategy had a tough day trading down to 280 from 300. Pretty bad day unless you're a covered call seller. So shout out everybody selling covered calls like Saleh and Hermes Lux with his 10 Delta strategy that is getting a ton of traction.
So yeah, exciting times.
Maybe I'll start with Tim, just kick us off with some not financial advice.
And then maybe we'll talk about just an update on what you've been up to and how those things
are going before we get into the just pure numbers side of this episode today.
Yeah, ladies and gentlemen, what you're about to hear may be amazing, but it's not financial
advice.
It's for informational and educational purposes only.
NFA. That's right. You've got it down. We're going to talk about analysis, right? This is,
we call it the investment grade Bitcoin podcast because we are taking investment grade perspectives
on risk, strategy, corporate structure, thinking about the dynamics of all of these things together,
the interplay of, you know, securities in the market that haven't existed before,
these different debt structures, et cetera. So it's very complicated. And myself and Tim have a
view behind the scenes of what is actually happening here within the marketplace. So
wanted to give that unique perspective of what's going on. So Tim, let's start with you. I know
you've just interviewed like, I don't know, 20 plus people yesterday. And I mean, what are you
seeing from across the land in terms of this concept of being early, right? I know you've
made a couple of posts about this. Can you give us a sense of how early we are and what we are
seeing in the market? Yeah. I mean, today I was just walking around and the clip that went around
a little bit ago of actually the very, I think it was the very first True North episode where it's
just literally a collage of everyone saying, we're early, we're early, we're early, right?
And like very, I don't know if it's ironic, but it's some word in there where special might be a
a good word that like dylan was on that episode of true north like that's how early we were back
then we're still early the takeaways from yesterday in particular you know i don't follow
all the numbers super closely the way that some of us do but when dylan said they're at like 0.7
percent leverage right now i was like wow that's like zero zero um and the fact that you know i
mean sailor famously back in the the tech days the early 2000s you know he was down 99 or 98
or 99.8 whatever it was um and and recovered from it and some of these stocks they're levered
long amplified Bitcoin. It's going to be drastic, especially when you add the sentiment into it.
So I think that's where we are. But like the whole, they're going to explode and they're
going to, they're over leveraged. Like a lot of these don't have any leverage. And so, you know,
yeah, Bitcoin itself is trading almost where it was, you know, New Year's Eve of 2024. So
So I just think we're insanely early.
Fred Kruger brought up, you know, we're at 4% interest rates.
You know, very shortly, we could be in the threes and then the twos.
And these preferreds are going to look a lot more attractive at 2% because he made, I think, the really just realistic point that when you're getting 4%,
we you know i think ben brought this up on the hurdle rate like we're used to um zero percent
so you're getting four percent you're just like yeah that's pretty good but when it starts sliding
down to three two maybe even one ten's gonna look like incredible especially to those that
um start to really understand and appreciate bitcoin so i think you know all of the lessons
of the past five years.
And then if you just take a common stock
and a preferred stock and you crank that flywheel up,
I think it's going to be interesting to see what happens,
especially over the next year.
Yeah, 0.7% is wild because, I mean,
I thought I was being bearish
when I only borrowed half the equity against my house.
You know, like I'm trying to do the triple maxi thing.
But yeah, 0.7% is a lot of room to grow there.
yeah and there's there's been a lot of chatter and communication within the market people still
don't understand like the how under levered these bitcoin treasury companies are a lot of people are
saying oh you know these companies got to die somebody's got to die before bitcoin goes higher
somebody's got to be put on the cross as sacrifice for the bitcoin treasury companies
and honestly the interest rate environment is actually showing cracks in the traditional
financial market and you're seeing actual bankruptcies from high risk leveraged companies.
And that's where we're seeing the cracks like that. There needs to be cracks in that marketplace
before anything goes higher. There needs to be a purpose for the money printing to continue forward.
There needs to be a systemic problem. And it looks like it's in potentially the traditional
financial credit market before it's any of the Bitcoin or crypto back credit markets. Because
like you said, Tim, most of these are just equity balance sheets are very low leverage,
under leveraged balance sheets at the moment. And we're going to get into that and the type
of leverage and we'll talk about that. We'll get in deep. But a couple other pieces of information
that I think are interesting. So Asia Pacific exchanges crack down on digital asset treasury
listings. So Hong Kong has challenged or blocked at least five companies trying to pivot into
digital asset treasuries. I think that's just in the last week, leaning on rules that bar cash
companies with large liquid holdings. So no digital asset treasuries have been greenlit in
Hong Kong. India, the India, I think, exchange rejected Jet King's application to list newly
issued shares after the company disclosed 60% of the proceeds would go to Bitcoin. So again,
we're seeing like and then they fight you actions in these different exchange environments across
the globe and then uh australia the australia exchange forbids listed companies from keeping
over half of their assets in cash or cash like holdings rendering pure digital asset treasuries
virtually impossible oh damn which like how insane is that it's crazy like you can run a company but
you can't hold you can't hold cash you can't hold 50 uh you can't keep over half of your assets we're
early.
I'm just going to keep saying it.
You can't store your value.
That's like saying
you can't
have more than 50% of your
savings account in cash.
Like the value of your assets.
Take your entire investment portfolio
or your assets
and you can't have more than 50%
of that in cash. That just seems crazy.
Especially with
the vol. I mean, Bitcoin's like a stable coin.
What's wrong with that?
I mean, worst case scenario, right?
100,000, 120,000, that's pretty good.
Yeah.
Yeah, so it's just interesting.
So there's just still continuous roadblocks in different markets that are looking to start
digital asset treasuries and operate within the capital markets in different ways.
So I think it's good to keep an eye on what's happening there.
Again, there's a few other digital asset treasuries that are issuing shares at a premium, like Bitmine, I think issued shares at a $70 a share when the stock was trading at about $60 a share.
However, there were two free warrants that were included with that share issuance.
so it was like they sold it at a premium of the stock value but it was at a discount if you factor
in the warrants that were attached to it so there's just some tricky things and interesting
dynamics happening in the digital asset treasury market i think they're interesting to follow along
what's going on there but okay so that's that marketplace digital asset treasury companies
Obviously, we've seen the treasury companies in the US and other markets just get absolutely hammered on top of strategy, strategy being a leader, along with all of the other digital asset treasury companies.
But again, as you pointed out earlier, Tim, these companies aren't incredibly levered.
And the type of leverage that they have is really interesting.
And what we're here to talk about is strategies, perpetual preferred equity, and walk through some backtesting of that model.
But first, it would not be a True North episode without going over leverage metrics.
And this will get us into some of the math.
Put you guys back on the screen.
I need some water.
OK, so got a few new columns here today.
So 10-22-25, Bitcoin held, 640,418 Bitcoin.
Bitcoin price, when I put this together, was 108,410.
MSTR price, 280.
So the assets held on balance sheet, $69 billion of assets, convertible debt, $8.2 billion,
notional preferred stock, $6.6 billion.
Your net capital less the debt is $61 billion.
The annual dividend liability is roughly around $643 million.
So this is important to realize here.
Strategy based on the capital that they have on their balance sheet, they can cover 108
years of their dividend liability based on the capital that they have.
This is financial strength, right?
This is like, we can cover 108 years of our dividend liability.
Like we are not levered, right?
Like, and I think that is even, yeah, that's just taking the assets on the balance sheet.
So then when you look at the liability asset ratio, this is leverage.
This is total leverage, thinking convertible debt and notional preferred equity, which is what strategy is calling amplification now.
This is a 21%.
So this is like total liability or leverage on the balance sheet.
Their debt coverage multiple or the BTC rating of the entire balance sheet is 4.7.
So they have 4.7 times the amount of assets over and above the notional value of the liabilities on the balance sheet.
So the price of Bitcoin, we need to go down to $23,221 for the assets on the balance sheet to be worth less than the notional liabilities outstanding.
About a 79% decline.
um this column here shows what the metrics would be if the three billion dollars of the equity was
of the convertible debt that's trading as equity would be equitized and how that how those numbers
would filter through obviously the leverage ratios would come down now i created this new column here
to showcase what a percentage drop on the balance sheet would do to the balance sheet and how that
would change the metrics. And so looking at a 75% drop in the price of Bitcoin, so the price of
Bitcoin going from 108,000 down to $27,103, strategy would still have 27 years of dividend coverage
with a 75% drop in the Bitcoin price. And that is, again, financial strength. I mean,
the mstr price the equity would be completely nuked i've got the price in there is like i don't
know because the equity equity would be completely nuked but when you're thinking about the the risk
to these instruments that they hold on the balance sheet like this these these instruments can handle
significant shocks with the price of bitcoin which makes them pretty fascinating i mean even if you
just look today, right? MSTR got nuked. Bitcoin went down quite a bit. And what did STRC drop?
0.53%. That's fascinating. Just think about how long 27 years is. I don't know if Dylan
Leclerc is even 27 years old. I don't think he is. It's a long time. It's just a long time, right?
Yeah, right. It's almost three decades. And that's with a 75% drop. And look, you go 50,
and then you're looking at 54 years of coverage. You're like,
I can't even get a 50-year loan on a house. That's just...
Yet.
Yeah.
Yeah, exactly. Okay. So, oh, where'd it go? There we go.
Okay. So what else do I want to talk about here? So that puts us into looking at some of the
preferreds and Tim, we'll get into your math here because I think that's interesting as well.
And we're going to do some math on the fly as if price. Okay. So this is the current price at
close for the strategy perpetual preferreds. So you got STRF 110, STRC 98, STRK 88, STRD 79,
This is how they're stacked up in the capital stack, right?
STRF all the way down to STRD.
This is the dividend paid in dollars.
Here's the effective yield, 9.08% for STRF down to 12.6% for STRD.
And which is pretty fascinating.
The strike effective yield is higher than strife.
And there's a call option.
Yeah, that's wild.
On the underlying equity.
That's crazy.
this seems undervalued relative to some of the other ones yeah and in the heart the weird part
about having that call option is when i tried to do some analysis on what that call option should
be worth like how much should that bump the price of strk but the farthest you can go out is like a
couple of years to find that deep out of the money call and look at its value 10 to 1 conversion so
you'd like take 10% of that.
But that's misleading because this is perpetual.
So the call option is forever.
And call options get more expensive the farther out you go.
So it's kind of impossible to figure out
how much bonus premium STRK should actually be trading at.
Right.
Really tricky.
Super tricky.
Because it's infinite.
It's an infinite call option.
Yeah, what's the value of an infinite column option that never expires?
Like it can never expire worthless because it never expires.
It's weird to think about.
Yeah.
Okay, so we got some weird nuances going on with effective yield.
But let's look at spreads over the 10-year U.S. Treasury.
And this is what I wanted to do some on-the-fly math with, just based on Tim's comments.
So the spread over the U.S. 10-year Treasury.
So the 10-year US Treasury is 3.95%. So STRF is trading at a 5.14 spread. So 514 basis points
over and above. Is it 5,000 basis points? Anyway, 5.14% over and above the 10-year US Treasury.
so with it paying what is that 9.8 percent significant spread here so what i wanted to do
is i wanted to take these numbers uh paste those values and say okay well what if we kept the spread
the same right and we dropped interest rates uh 75 basis points or 100 basis points yeah yep
so we go this minus one. Oh, by the way, the fact that you're doing public math, I mean,
a lot of people have publicly said they will not do public math. So,
oh, I love this. This is, this is good stuff. Okay. So, um, what would the price be if you
kept the spread the same? And, um, if you kept the spread the same and us 10 year treasuries go
down a hundred basis points.
So how do we back into that?
So now you got to go, okay, well, the yield has got to be this plus this.
So the effective yield is going to be 8.8%.
And I've got to fix this.
Hold on.
Okay.
So that's got to be the effective yield.
So to back into that, that's...
This 8.8%.
I think we got to divide it by that.
Wait.
Go back into that.
Oh, now I'm frozen.
Okay.
8%.
$10 is 8% of what?
123.
There it is.
Boom.
10. There we go. There we go. Okay. So if the spreads stay the same,
okay. And interest rates drop a hundred basis points, the price of STRF should go from 110 to
123. So what is that on a percentage basis? That's a 12% increase. So significant upside
in the principal appreciation of these fixed income instruments, right? So this is appreciation
as if price effective yield.
Right.
So Tim, to your point earlier,
if interest rates come down 100 basis points,
that could be incredibly bullish.
If spreads stayed the same
for all of the existing strategy preferred instruments,
Their cost of capital is going to go down from an average of, what is this, about 9.6% to probably something about 8.6%, which if you're borrowing at 8% to buy Bitcoin, that looks great.
That's a great trade.
That's really great.
Oh, I think we lost him.
We lost him.
That's okay.
Anyway, I think that's really interesting.
That's a great trade.
Okay, now let's back into dividend payable.
So total dividend payable for the four instruments outstanding is $642 million a year.
So you ready to get in some math about risk?
Thinking about what is the risk of these instruments?
Oh, yes.
Okay, cool.
All right, so I created this tab, which we'll try to zoom in and make this as clear as possible.
okay so what i wanted to do here is show
this you know i came up with this concept i was thinking about this last night really um
i'd be curious to get your take on this because i got a lot of flack for it
um the perpetual preferred instruments reflect synthetic labor
okay now let me tell you how i got here so when you buy a piece of real estate
okay that real estate doesn't if you want to earn yield on it you need labor like somebody needs to
work right you need you need to pay for labor in order to make that piece of real estate a
a yield producing asset.
Okay.
Right.
Now, if you're paying and if you don't pay somebody,
it like just you doing it right If it just you you own a piece of real estate and you want to earn a yield on it it like okay well you got to take care of it You got to go find a tenant for it You got to go make a tenant you know agreement so you can get a tenant in the door and you
got to deal with it. Right. And that doesn't scale. You have to hire people if you want to
scale it up as well. That doesn't scale. Exactly. So in that scenario,
as you just owning a piece of real estate,
you get the margin of your labor
because you're the one working
and you also get the yield.
Okay, so there's two pieces.
Like you're working for your margin
and you also get the yield.
You turn that into a,
you monetize that specific asset.
Now with the strategy perpetual preferreds,
I think one thing that,
That's really interesting. And I think you can see it with the math here.
Every unit that they sell of the perpetual preferred is earning income over time.
It is effectively labor. Like it is, it is a worker that is monetizing the Bitcoin.
So it's the same way, like what, when you buy a dividend producing asset,
When you hold a portfolio of dividend producing assets, you're holding the labor, like the productivity of that company.
You're holding the labor of that company and the productivity monetizing whatever they're doing.
Like when you actually hold a yield producing asset, like you're holding labor.
You're holding somebody else's labor.
Now with the strategy instruments, it's the same concept. You're holding the labor. Those assets are being produced because the company is monetizing this asset class. You take the same concept of real estate. You've got digital real estate and you're now monetizing it, monetizing a yield.
but there's actual strategy has to figure out how to do that. They got to figure out how to pay you.
That's either sell pieces of the Bitcoin or operating business or utilize ATM or something
like that. But that's labor. So you kind of think of this as like every unit that you own,
you own, uh, if you own 10 units, you're owning 10 labor units. Each one of the products
is a different form of labor, right?
STRF is like, I guess you could think of like white collar,
like low risk labor.
And you could think of STRD as like blue collar,
maybe higher risk labor.
You kind of think of that like spectrum there.
And from strategy side,
every one of these instruments that they sell
is monetizing the labor. And I'll walk you through the math here, right? Okay. So let's just,
let's do it on a single, um, a single equity sold at a hundred dollars.
Let's just say the interest rate is 10 and everything here is on like one, uh,
one unit sold. I want to focus on like the marginal unit and then we can extrapolate this
into a portfolio, right? Like I want to focus on the marginal unit sold. So you got a hundred
dollars capital raised interest rate of 10 annual interest cost is $10. We follow, right? $10 part
of a hundred. Your monthly interest cost is a dollar. It's 80 cents. So your, if you make an
assumption of annual compound, annual growth rate assumption of 21%, which we can play with this,
anything in yellow here, we can toggle and play with it. So your asset, your monthly compound
annual growth rate assumption is 1.75%. So what I built here is a little bit of a simulation model.
This is one simulation model of like eight that we're going to run through. So I hope you're,
hope you're ready. So in year one, month zero, your BTC value is a hundred. Your BTC value post
compound annual growth rate, which is 100 times 1.75 is $102. Here, Tim, we're doing math on the
fly, which is probably just giving you anxiety the whole time. Okay. So your BTC gain in this month
is $1.75. This is again, assuming everything's constant and flat. Your annual compound annual
growth rate is constant and flat. Monthly interest paid on month zero is $0. So your net Bitcoin is
$101.75. So your BTC income in that month is $1.80. Here, let's just extrapolate this too.
So in month one, where you have to pay a dividend, your BTC value is $101.75, right? You're taking
it from the prior month, the end of the prior month. The BTC value post compound annual growth
rate is $103.53. So it's $101.75 times $1.0175. BTC gain that month is $1.78. The interest paid is
$0.80. In this model, I have assumed you sell the Bitcoin to pay the interest. Okay? Very clear.
In this model, you sell the Bitcoin to pay the interest. You don't even consider ATM. You don't
even consider a operating business. You just consider it. You consider the concept of just
selling the Bitcoin to pay the interest. Now you sell the Bitcoin to pay the interest. You still
have $102 and 73 cents a Bitcoin. So the Bitcoin income you earned that month is 98 cents.
Now this compounds, right? So you take the, what you took at one note to 73, you put it back in
month too. You've got 102.73 to start. That compounds at 1.75. You get it 104.53. BTC gain
$1.80. Interest paid $0.80. You sell the Bitcoin. You end up with $103.73. Your Bitcoin income that
month is $1. And you could start to see this, right? You start to see the compounding in real
time. You can see the arbitrage of the CAGR. That's the point of showing this. You can see
the arbitrage of the CAGR. This business model works if you sold the Bitcoin, let alone having
a big capital stack and having the ability to monetize the capital stack with utilizing ATM,
taking on different debt, raising capital in different places, et cetera. This works even
if you just sold the Bitcoin. Okay. So you can see how this like rolls down through here.
And I think strategy tried to show this as BTC income. And it really, I think you can start to
think of it like that because, um, and what I did over here on the right-hand side is look at what,
so every instrument that's sold is making income every month because it's, it's income is the
arb of the CAGR. 21% over 10%. Now, what do we know about Bitcoin? Super volatile, right? I'm
sure people are in the chat just kind of roasting me on volatility because there's a lot of different
assumptions being made here. But in this scenario, which I think we've got a modest compound annual
growth rate in this scenario in year one that single instrument sold would make 15 of income
in year one if everything is constant and you just sold the bitcoin to pay the dividend obligation
but you see that that compounds over time because this these are compound annual growth rates so
that that initial CAGR like the biggest risk in selling any of these instruments is in year one
it's what is the performance when you sell the instrument because if you sell the instrument
it goes down immediately like there's more risk in the instrument but if you sell the instrument
and it's going up like it it's compounding right it like compounds on top of itself so then it's
going down. Like your risk is going down and each one of the instruments sold is earning money. So
this is why, this is why I was saying like every single one of these instruments, if you think
about it on the margin is making income for strategy. Yeah. Like this is the, this is the
cash flowing business right here. Somebody said they need to be producing income. This is like,
They just recognize 100% of the income on day one, and they earn it out over time.
Yeah, this is the almost identical calculation that you use if you want to know if you can retire on your stack.
It's just, are my expenses less than Bitcoin's CAGR?
And if it is, then you can retire, and you just keep getting richer forever.
And if it's not, then you have to keep stacking.
But let me see if I understand this correctly.
I'll try to do the ADIQ version.
So you're a business owner, and let's say you've got to hire people at $20 an hour.
If they can generate $25 an hour of income, then you hire as many as you possibly can.
And if they're not making $20 an hour, you don't hire any.
But yeah, that seems reasonable to me.
Yeah, you hit the nail on the head.
This is business 101.
Right? Like, except strategies, labor is digital. You have digital capital, you have digital labor.
Like, all they have to do is pay the dividend. They got to figure out how to do it. But they
can do it at scale. Like you're so when you own the perpetual preferred equities, you're like
you're owning a fleet of labor like digital labor yeah and this model is what what leveraged
bitcoiners have been doing for years it's you just you borrow against it and you can just literally
peel off a few sats to pay the monthly interest and then you know maybe it goes down in a bear
market but then when it goes up 5x in the bull then you know you're leveraged to the upside and
You're fine.
Bingo.
Okay.
So let's get crazy here, right?
Like let's just do 15%.
Your CAGR assumption goes to 15%.
Like this is still a great trade.
You deployed a laborer for $100.
You got $100 in the door and you make $7 in year one, $7 in year two, $8 in year three.
And like, what did you put at risk?
right like this is again assuming you just sold the bitcoin like this is this this is not even
assuming you have access to an atm this is like at the margin right if you just sold the bitcoin
to do this like this has this model works without even without an atm so like conceptually anybody
can run this you could go like any public company or actually oh anybody yeah i was trying to convince
my grandpa like hey grandpa can you give me a hundred thousand dollars and i'll go buy a bitcoin
and i'll just give you you know ten thousand dollars a year like anybody could do it it's
like all right well i as long as i feel like i can manage that risk and i'm like uh what is the
downside you know anybody can run this methodology okay you're ready to take this to level two i've
got level two and level three here. Can I jump in with a little journey about actual labor?
I mean, I'm sure we've all, or we know people who have worked lots of different labor sort of jobs.
When I started out, I was working at Kmart stocking the shelves with oil before I got into
actual oil and I was making $5.15 an hour. And I'm sure they loved that. Right. But then I went
to Ace Hardware and I made $5.25 an hour. And I was literally putting together, assembling
wheel, wheelbarrows. I still can't say that word very well, but you know, and you can hear stories
in any diner across the country, probably across the world about how hard it is to find good,
good people and things of that nature. And then, you know, I went bartending and working in
restaurants. And when you're managing a restaurant and a bunch of people call off, it's like, what
are you going to do? Go through the phone book and call random people and try to get them to come
in? Like, it doesn't actually work that way. It can be super stressful. I mean, there were times
when I was bartending seven nights a week because people were just like, oh, you can have my shift.
you can have my shift. Really good people are hard to find. So then I was like, all right,
let's do something to try to progress up the career ladder. And so I was flipping real estate.
Well, flipping real estate sounds really fun, especially when you watch it on HGTV.
The reality is the first property I bought, I bought for $25,000. And I had friends that were
contractors. I said, great, you guys do the work and I'll pay you. And a week went by and two weeks
went by and three weeks went by and they didn't show up because they were still on some other job.
And I was in another town trying to launch another business, drove two hours back,
ripped up the carpet with my bare hands. I was so upset and just like started,
at least started the process. Ended up making money on my first flip. I was all excited that
the market was turning, the same contractors at me as the GC, I should have fired them,
hired someone else because I didn't. And I just waited a month. I lost money on a project that I
was partnered on with my uncle instead of making money. And we're talking losing 10, 20, 30, 40,
$50,000. And this is almost 20 years ago. I mean, it was a significant amount of money for someone
in their 20s. And so all of this just to illustrate like the digital version of all this,
and we've heard Sailor and everyone else, you know, tell these stories and analogies for a while
now, but I just can't, I don't think it can be overstated that physical labor is just like,
I don't know, at a certain point, you can't even feel good about it. Like you're giving someone a
job, but it's like, what if we can, the more things we can make digital, um, and the more
opportunities we can give people, I think the better. Yeah. Bitcoin doesn't take days off.
No call outs. Yeah. And you're, you're taking this proof of work and now you're, you know,
throwing synthetic labor at it to be able to monetize it into a yield, like without like
Holding MSTR doesn't give you any yield.
It's amplified Bitcoin exposure.
You get increasing Bitcoin per share, but holding MSTR doesn't give you.
So in order to turn it into a yield producing asset, there needs to be work involved.
And that work is risk taking.
Risk taking on digital assets.
All you got to do is move your mouse.
Right?
All you got to do is do some thinking and maybe some Monte Carlo simulations and feel comfortable with your capital.
And boom, you monetize that instrument into yield.
Would you rather do that?
Would you rather own those assets or would you rather own the income producing assets on real estate like Tim's talking about where people are going down on their hands and knees and ripping carpet out themselves for an asset that underperforms these by almost 3x?
you know, like, what'd you rather hold? I, I, these things are incredibly appealing.
They're so over collateralized. The risk on these is just so small. Um, and let's get into part two,
201. Uh, I think he doesn't like this because I did some back testing. Same thing. Okay. Same exact,
same exact chart. But what I did is I went back. So let's just, let's just use a million dollars
to make it, make it like more like a portfolio. Okay. Interest rate of 10% annual interest costs
of $96,000 monthly interest cost of $8,000. The annual CAGR assumption I used is the actual,
I used the actual CAGR assumption starting in November 30th of 2020, not even like the top or not even the bottom, right?
Like November 30th, I think Bitcoin price is around $20,000.
Okay.
So we're starting with the Bitcoin price around $20,000.
And I used historical CAGRs to run the same exact back test to determine how much BTC income would be made on a million dollars of capital raised over that lifespan of those instruments, assuming 100% of the dividends were paid by selling Bitcoin.
so over the life of that if you convince somebody to give you a million dollars on november 30th
2020 and all you did was go buy bitcoin and at the end of the every month you sold
eight thousand dollars worth of the bitcoin that you originally bought
at the end of the five-year period you'd be sitting on 5.5 million dollars
of income. That's income generated on top of the value of the net Bitcoin. So at the end of the
scenario, you actually have $6.5 million worth of Bitcoin held. Somebody gave you a million dollars
on November 30th and you sold the Bitcoin to pay that interest obligation over time.
what do we think about that five x in five years uh i'll take it it's pretty that's pretty great
right like this isn't even assuming like this is again a hundred percent assumption that you sell
the bitcoin to pay the dividends you don't even have access to an atm and this is just showing the
actual uh delta between the cager and what the interest rate would have been so like going back
to think about if strategy had these instruments in play in November of 2020, instead of the
convertible debt, this would be very interesting. Like they'd sell a million dollars of this and
they make $5.5 million of like BTC income. That's incredibly interesting. Now, uh, what's the next
thing? Okay. What if you did, what if you had access to an ATM, right? Instead of using a hundred
of your, instead of selling 100% of the dividend obligation with Bitcoin, what if you did 100%
with the ATM? How would that change? So instead, that BTC income number goes from 5.5 million to
6.8 million. So it increases, what is that? 30%, just about 30%. Okay. So somebody asked here,
and you know what, I'll address this. What happens when the investor wants his capital back? Guess
what? You have to sell the instrument. You don't get it back. This is an equity. When you buy the
equity, you give the money away in exchange for that liability. You get paid in the future.
You don't get your money back. Like that is a one-way transaction. You can sell the instrument
to get your principal back, but that's on the open market. Okay. Let's keep cooking here.
All right. But Jeff, this is during a zero interest rate environment and you're cherry picking dates and the CAGR is not going to be the same. And this is a skewed perspective.
People are assuming we're going to go to zero interest rates?
No, no, no. This is saying that I can't use past CAGRs for the future.
and this was during zero interest rate environment. So let's look at a tighter
capital environment. Okay. So I run another scenario. Okay. What if you assume a combat,
what if you assume a hundred percent of the dividend is paid with Bitcoin sales
and we back test this going back to January, 2024. Okay. Just, just to when the ETFs were
released. Okay. January 30, January 31st, 2024. Okay. So just for about two years.
So in this scenario, if you were to launch in January of 2024, again, a million dollar capital
raised, you paid a hundred percent of the dividends with BTC sales. You would still make
$1.3 million of BTC income. Okay. So the value of the Bitcoin at the end of the period would be
$2.3 million, you would have made $1.3 million if you had issued in January of 2024. Okay. That
looks incredibly appealing. What if you used 100% of the, you used the ATM to pay for the dividend
instead of selling the Bitcoin? Okay. In this scenario, that jumps from, what was that?
1.3 to $1.5.
$1.3 million, 1.5. Not that big of a difference, but it's great. It's a creative, right? Like any
additional income that you can keep and store in the Bitcoin is compounding consistently over time.
Okay. Now, Jeff, you're still like you're cherry picking this ETF, Bitcoin ETF came out
and it's still too good. Let's go even, let's go worse. Let's get a worse scenario.
Okay. So I wanted to start with April, 2022, where Bitcoin over three months in a row went
negative 17%, negative 16%, and negative 38%. So I wanted to start off like, let's just say you
issued it in the worst possible time, and then you just get absolutely hammered in Bitcoin price.
Right? And you have to sell the Bitcoin in order to pay your dividend obligations.
Again, we're looking at this on the margin, not assuming any of your using any of your
existing collateral stack. This is just what you have. So in this scenario, very clearly,
the first three months you get absolutely hammered, right? Your value of your Bitcoin
goes from a million down to 828,000. You lose 171,000. You're probably starting to sweat it
a little bit, right? You got to pay $8,000. You pay your $8,000. You sell the Bitcoin,
you pay your $8,000. You got 800,000 left. Then you get hammered again. Go 820 down to 691.
691 to 683 and then you get hammered like even harder just like max pain you get hit 30 like
down 38 you're sitting at 425 000 but you still have like max conviction you're max long
somebody says what if btc goes to below zero it's so funny uh btc negative you lose 258 000
in this month you pay the 8 000 and you're struggling right you're down here at 417 000
dollars, you're starting to think this is a really bad deal. And you enter a long bear market where
interest rates are ripping, risk off, FTS collapse, max pain scenario. Now, even in this environment,
just selling the Bitcoin over a four-year horizon, it's actually positive. Your BTC income is
actually positive. You make $413,000 of BTC income on this instrument just based on the CAGR over
that period of time, which is crazy, right? You look at the math and here at the end,
here to where we are today, 10, 22, 25, that Bitcoin, that million that you were given at
the very beginning would be worth 1.4. Even if you started issuing it at like max pain,
You get absolutely hammered.
FTX collapse.
All the crap happens.
You still are paying the dividend.
And you still have greater than the notional value at the end of the period here in October of 2025 Again this works because this is an ARB
This is a one-way trade.
You are ARBing the CAGR, the compound annual growth rate of Bitcoin,
which is growing drastically over time.
And you have a fixed fiat liability.
Okay, people are asking me if I can change and look at the different preferreds.
The preferred doesn't really matter here, right?
like I could change this to 12%. And what, what did that change? The BTC income?
10%. What is this? 12. Oh, I gotta make that, that.
Oh, shoot. Sorry guys. Bear with me here. Boom. Okay. So from 10%,
372 000 you make that 12 you still make 170 000 again you're you're talking about issuing it the
the absolute worst possible time in history uh for issuing a perpetual preferred equity
and going through ftx collapse and all that stuff so you're still technically making money
on those instruments over that time horizon again assuming a hundred percent of your
your dividend is used by paying or selling Bitcoin.
If you change that to a hundred percent as used via ATM,
you know,
the numbers actually look really good.
10% you make $1.3 million.
12%.
Oh,
that didn't,
that didn't sum right.
Something's going on there.
Anyway,
you get the gist. Yeah. Jeff, I had someone text me and say, is this published somewhere? I said,
I don't think so. It's just Jeff's spreadsheet. And they said, brilliant. I love it.
Yeah. So, so this is, this is a backtesting, right? All right. So you think about like,
what is the risk of a perpetual preferred equity? How do you look at it? Like, how do you look at
risk? All right. Well, what would have it done? What would have it, what would it have done in
the past. This is the exact way that I would look at risk in the reinsurance world. Like if I sold
a tranche of $50 million of hurricane risk in excess of a hundred million dollars in Florida,
I need to go look at the history. Like what would history show me the loss to that specific layer
would be based on hurricanes hitting, you know, over the last 50 years. And then I'd pull out,
you know, averages and data and standard deviation and I run it through a catastrophe model and get
some Monte Carlo simulations and you look at all these different things and that all gives you a
view of risk, right? That gives you a view of like, what is the downside here? What are the,
what are the, um, spectrum of outcomes that could potentially happen here? And so this can do it,
right? Like this starts to get you there. All of these different scenarios and different back
testing tools can get you there. Like, what if I sell Bitcoin? Okay. Boom. What if I use,
what if I use ATM? What does the ARB look like? How does that, you know, change over time? What
does that look like? You know what? I got Jesse. Jesse's been a real pain in the butt.
The ARB has understood other factors are at play. Thank you, Jesse, for that incredible insight.
Let's talk about model output and Monte Carlo simulations, because I built a Monte Carlo
simulation model looking at three different probabilistic models in the perpetual pervert
equity. And assuming you did sell Bitcoin to pay the dividends into the future, and what would the
probabilistic outcomes look like based on three different views of risk? So I've got three
different lines here. I've got the log normal distribution, jump diffusion distribution,
and the GARCH model, GARCH distribution model. So I'll give you a quick run through here.
All right. So the log normal. So the reason I ran these is because while this is one view of risk.
Where you can take into consideration historical variance.
Historical variance is not predictive of future variance.
Right. So you got to think of, OK, well, what what is this math behind historical variance?
And how can I use that to try to predict what the future variance may be?
And let me run 10,000 simulations of what the future variants will be based on math.
Okay, so that's what this modeled output is.
So these three distributions here, so log normal model.
This model assumes that Bitcoin price changes smoothly over time with regular market volatility.
commonly used in finance to represent asset prices because it reflects their tendency to
compound and ensures simulated prices never go negative provides a baseline model normal risk
scenario for treasury stress testing so what i did in this model i can put oh i almost spilled
my water what i could do is i could pull it up here i got some python code backing up here
so i looked at strategies initial bitcoin holding 640 000 the bitcoin price as of today 108 500
the pref equity raised 6.6 billion dividend rate composite about 9.6 percent uh duration you
nobody can see this but uh duration average duration around 10 years monthly dividend this
all kind of factors in i'm assuming that the dividend 50 of the dividend is paid by selling
Bitcoin to pay the dividend, which again, we know that historically hasn't been the case.
I want to run 10,000 simulations. And I'm looking at these three different models and I want to get
the probabilistic outcomes of those 10,000 simulations of what is the probability of
failure? I want to get, what is the probability that strategy does not have any capital or that
does that the assets on the balance sheet are worth less than the notional value at the end
of the period. Based on these simulations of this data going into this, what is the outcome? What is
the probabilistic scenario of outcomes? And what is the value of the balance sheet at the end of
that period? Okay. So that's the output here. And again, these three models. Okay. Log normal model,
we went through that. Jump diffusion model. So this model captures both regular price movements
and rare sudden Bitcoin shocks, which we know happen, right? Like a couple weeks ago, we saw
the price of Bitcoin went from, what is it, 124,000 down to 103,000 on a Friday. So you see
these like rare shocks, large regulatory events or market panics. And so this model adds in random
jumps, like movements in Bitcoin prices that are like shocks, market shocks, and incorporates
routine fluctuations as well. So this is like a more realistic model for an asset like Bitcoin that
has typically made these huge jump models and extreme moves. And then the last one is the
GARCH model. So the GARCH model simulates volatility itself and its changes over time.
So it replicates like boom and bust dynamics and allows for like volatility cluster periods.
So like with Bitcoin, you see periods of like low volatility and then you see periods of high
volatility. And so it captures like those changing volatility periods over time rather than keeping
them constant. So you can see the output of these three different models over here on the left-hand
side. The log normal distribution has the like highest, um, I guess stability and relative mean
kind of right in the middle of that blue line jump diffusion has a little bit bigger of a downside
and a little bit lower of an upside again, because you've got these bigger shocks.
And then the Garch model has a lot bigger upside and then obviously a bigger downside because this
assumes effectively like the price of Bitcoin goes to zero in within this model. Okay. Any
questions there? Yeah. Explain this to me again, which where the, um, what would the chart look
like if it did exceed the threshold? Where, where would the lines be going? What, what would,
if what exceeded? So, um, if, if they ended up not having enough value to cover the notional,
the green goes to zero basically basically this x this x-axis is zero so any of these lines would
go to zero so it's the same garch model has a 25 chance of that happening i'll walk through the
numbers over here on the right hand side yeah so what what this what this image on the left-hand
side is showing this is called like an oep curve so occurrence exceedance probability
So at these different percentiles, it shows you what the collateral value would be at the end of the duration period in these different models.
Right. And so at the let's start with the log normal distribution.
So in the log normal distribution, the mean of this model, so the average of all of the 10,000 simulations of this outcome,
the average balance sheet of all of these simulations in 10 years is assumes 105 was this
yeah is this 105 trillion dollar balance sheet i think it's 105 trillion dollar balance sheet
no 105 billion dollar balance sheet sorry 105 billion dollar balance sheet
wait that can't be right hold on sorry real quick I gotta jump over here what is this number
one second
I had to put some commas in here
there you go millions billions trillions no okay so i guess that is an actual huh
the mean out man the numbers are so big in year in 10 years the mean and the log normal distribution
is 105 trillion dollars in the log normal bottle in the jump diffusion model they're 15 it's 15
trillion. And in the Garch model, it's in the quadrillions, like the mean of this distribution,
which is assuming that there's massive money printing. That's just kind of built into the
historical model using Bitcoin price action over time, historically taking into consideration the
actual jumps and the shocks that Bitcoin has experienced over time. So it's a big distribution
here. So yeah, what this is showing, Soleil, basically at this, within this model, the only,
the only model that shows strategy having less than, less capital on the balance sheet than they
have notional outstanding is the GARCH model. And it's below the 25% probability threshold,
but you can see how, how heavily weighted it is towards the tail on the upside too. So like,
It captures both the tail to the upside and the tail to the downside.
So these are three ways, again, to start to think about, like, what is the risk of these instruments?
And what does it look like over time if you simulate it out over into, like, a different horizon?
Is this perfect?
No.
No models are perfect.
but this is one way that I'm trying to like wrap my head around how to think about the risk and
communicate this risk externally to, um, to stakeholders, right? Like what, what would this
risk look like in the future? Like what would my balance sheet look like under different assumptions?
And this is how like actuaries can communicate. Um, if I, if I went to some of my old actuary
friends and i sent them this model they'd be able to read this right like it's it's challenging to
explain i was a broker so i like worked with the actuaries that people called me kind of like the
brokishuary i was able to like do a lot i was i was able to do a lot of the math but i was also
able to communicate it as well um but it was great like working with all the actuaries because they
did most of this math stuff but um most of my actuary friends would be able to like read this
and explain it as well. So this is bullish to me. I think this is bullish.
What I'm trying to do is think about the downside of all of these products.
And like, what would happen if you had to sell your Bitcoin to pay the dividend liability?
What would that look like on a modeled scenario over time? What if you didn't? What if you had
an ATM and you were able to access that? What if you had perpetual preferred equity or different
debt facilities where you're able to access debt capital to raise that money to move forward into
the future? And what does that downside look like? And ultimately what the models are showing
from a stochastic simulation perspective, 10,000 simulations in different iterations,
like in the jump diffusion model a 50 probability shows strategy having a 663 billion dollar balance
sheet in 10 years assuming no additional bitcoin added to their balance sheet today
the value of the bitcoin growing into the future and paying the dividend obligations
by selling 50 of the dividend obligation in the bitcoin so no more orange dots and it's still
no no more orange dots and it's still 663 billion
and these other models have it in the trillions which i think is crazy
maybe i need to go back and play with the assumptions but i mean the model
the model was fit to bitcoin actual performance from 2017 forward
so like that's the underlying like mean and variance information that's going into the
underlying uh python code when does it get to a quadrillion dollar market cap
Yeah. So in the, okay, actually, no, this is good to explain. So good question, Tim. So
this distribution on the left-hand side, you can see 1%. So equals one divided by that.
Okay.
and someone in the comments is saying all of our models are going to be destroyed which i agree with
i i hope that i i hope that's the case um so what this uh
so there's two ways to view probability you have the downside scenarios which are here anything at
the 50 and above is a downside scenario anything at the 50 and above is an upside scenario so this
This is why it's called a probabilistic curve.
These are your probabilistic distributions of outcomes.
And so in the 1% probability, so you could think of it that way, Tim,
like there's a one in a hundred year chance that the strategy balance sheet
at the end of 10 years is worth a quadrillion.
So you're saying there's a chance.
Jigs.
Yeah.
Yeah, exactly.
So that's the way you can start to think about it, right?
Like there's a 50% chance that the strategy balance sheet is $10 trillion or greater.
Or, you know, there's a 1% chance that the strategy balance sheet is $71 billion or greater.
The probability, this is an interesting one as well, like the probability of deficit.
So the probability of strategy having less capital on the balance sheet than the notional
outstanding in each of these three different models.
So in this model, the log normal model, the probability of having a deficit is 0.1%.
The jump diffusion model is 3.9%.
The Garch model is 16.6%.
so you think of like probability of failure those are your probabilities of failure in those three
scenarios of like bankruptcy i guess you could start to think of it like that
now you start to compare that to other things that are happening in the
debt market like we've been doing over the last couple weeks and you've got companies that are
going bankrupt, right? Prima Lend subprime auto lender just filed bankruptcy weeks after
tricolor collapsed, months after missing debt payments during record subprime auto delinquencies.
When you see one cockroach, there are probably more. There are companies literally going bankrupt
here because they don't have money. They were leveraged to the tits on bad risk in their
portfolio. A lot of people have been really focused on these crypto companies and the
dangerous leverage that they're taking. It's like, look at the rest of the traditional financial
market, right? There's so much leverage at their places. That's probably going to blow up first.
And we're literally seeing it. Right. It's crazy.
Okay. Here we go. We've got a question. First time caller, lockdown listener. Can you explain
why Sailor hasn't been able to get several billion in loans to buy more BTC.
Okay. Well, the Preferreds, I think, in my opinion, have been a really big success. They
raised $6.6 billion so far in, what is this, 10 months on a completely new instrument that's never
before hit the market. I personally think they have raised billions of dollars of loans on these
things um and and we're just beginning to think about how to price them and like analyze the risk
of them yeah and i think my yeah i was gonna say i think he said this in btc dc but it's he said it
took like 20 years or something for him to come up with his first billion dollar idea and then
they came out with their first preferred and they gave them a billion and then that was their you
know the next billion dollar idea and then within a year there was another billion dollar idea and
another billion billion dollar idea and another billion dollar idea and i think he let it slip
because i think he said that 2025 is not even over yet which made me think there's going to
be another one but i don't know if i'm reading in between the lines too much but um yeah i mean
there's several billions every every every single uh one was oversubscribed right and
yeah so yeah and i i mean our company has announced intentions to issue a perpetual
preferred security in 2025 like there's still time left um right like i i was having a
conversation with my friend earlier i was talking to him he's like asking me like how's my new job
you know and uh we're talking about risk a little bit because he was an old insurance guy as well
and he's like man that's crazy like you there's there's no frame of reference like how do you
think about risk here like you can't read a book right like i was like yeah i know i have to make
it like we are we are literally we are making risk curves about how to quantify these risks
like they've never been done before now we've got to go communicate that to the market when the rest
of the market thinks that they need to participate on these high yield you know loan products right
like they need to wrap their head around so many things and then have them someone then have someone
tell them like the math actually looks good too right not only does this product look good
like too good to be true, like the math actually looks good too.
And you've, you've taken this like math capital and you're turning it into like a math instrument
that you're selling to the market that needs to be communicated with math and computers and
simulations and models and providing perspectives of, of risk that haven't existed before. So
anyway, I think these things are going to see a lot more appetite in the future. I mean, a couple,
for a couple of reasons. One, we do think that the likelihood that interest rates come down is
pretty high. Okay. If interest rates come down and these instruments are still trading high,
they're going to look incredibly attractive. So capital can come in the door that way.
We're right. If, if we, if our company is successful and launching a product in 2025,
now you're going to have potentially, you know, more companies out in the market with perpetual
preferred equities. Now you have something to compare against. That's helpful when you communicate
with a credit rating agency or something like that. And the credit rating agency is also trying
to figure out what is the risk of these things. And again, credit rating agencies, my experience
with them, they're some of the least impressive people I've seen in my life. And they've got to
look at these types of things, right? They've got to run Python and Monte Carlo simulations and
think about risk and like volatility and how do I price volatility? Like what is, what are the
risks? How do I put math behind it? And how do I compare it to other things in the market? Like
that's the job of these rating agencies. And once, once that happens and these instruments are rated
to some degree, that does result in a opening of the market opportunity. You can kind of think of
it is like um you ever you ever stir your coffee with one of those like little tiny red straws
you ever try to drink the coffee out of it like you barely get any coffee out of the little like
red stir straw it's like chain it's like upgrading from like a red stir straw to you know like a
milkshake straw in terms of the amount of capital that you can get in the door uh once you have
credit rating agencies to provide some perspective on these instruments yeah i don't drink hot bean
soup but i'll i'll take a milkshake um what what ben say here i believe they raised over a billion
dollars with the pref atms this year the numbers just seem small relative to the strategy scale
yeah i think that's right and that's just the atms that's not the ipos that's just the atm yeah
yeah i mean the ipos were crazy right like every single one of the ipos they're like we're going
to raise $250 million. And then they raised 2 billion. Yeah. It's like, here's a billion.
That's, that's real. That's real, real, real capital. That's working for them. That's productive,
permanent capital. And if you take the, if you subscribe to the synthetic labor idea,
like those are employees that are working like every single one of those, every single share
is an employee that's generating BTC income.
It's written on day one, but it's earned out over time.
Who did you say was the most unimpressive people?
The rating agencies?
So I was watching a pod, and let's try to one-up you on this one.
The guy said, where do the dumbest people in finance work?
And his answer was pension funds.
And he basically said that pensions are terrible they just you know they can compare to you know any of the other funds they don perform and so I think these preferreds are just kind of like a tremendous opportunity to attack the industry and provide real value
So you could kind of argue that the preferreds are a speculative attack on the dumbest people in finance.
Yes, the speculative attack on the dumbest people.
Yes, yes, absolutely.
The numbers are just staggering.
like like like i'll tell a little story when i had a acquisition firm we're buying oil and gas
rights on behalf of a family office we're in pittsburgh pennsylvania so we're buying oil and
gas rights in west virginia ohio and pennsylvania and we had an opportunity to go out and find
another capital partner potentially so i just start cold calling like private equity firms in
New York, right? I am in my 20s. I have no idea what I'm doing. We buy suits. We fly up to New
York. We meet with Apollo. And they're like, oh, it's so nice to meet you. This is great.
And then we're like, okay, we have a follow-up meeting. We fly back to New York. We meet with
Apollo again. And they're like, yeah, you're just like a little too early stage for us. We do
mezzanine financing we're like oh okay that makes sense that's good to know um what'd you think about
our our deck our presentation what'd you think about our pro forma oh the numbers look great
right so it's just like finding the right capital and even meetings where they said hey we'd love to
sponsor you and you know give you hundreds of millions of dollars in capital right but
we have to do this exit first and then we can and then it's like this whole process of a lot
of what we've talked about to date but it's like finding the capital but then finding the right
capital and having enough people on the team to actually make that happen it's like um you know
you can run around and try and do so much but but you kind of need a team of people you kind
of need a team of people that know what they're doing in order to accomplish any of this like
imagine being an executive and just being over, I would assume sometimes overwhelmed with the amount
of things that you need to get done. You know, having some of these conversations and being
advisors to some of these companies, like I see it right where it's like, okay, how can I be
helpful? And it's like, well, just, you know, doing things that are not necessarily hard to do,
But, you know, people only have so much bandwidth and I'm sure you've experienced some of that as well.
Right. Yeah. Yeah. Oh, my God.
I mean, I've sold I've sold probably.
I don't know. Four billion dollars of reinsurance in my life.
OK, so and that's over. I don't know, like 500 different layers over the last 11 years.
um i and i've done a lot of this math and stuff previously so like when you when as a reinsurance
broker like you design these instruments like you look at an insurance company's balance sheet and
you say all right what's the profile of this balance sheet i designed an instrument okay it's
like almost exactly what strategy is doing and i say okay i want to structure the tranche here
and then i gotta go take that tranche and then i gotta go sell it externally
when i go sell it externally you take some of this math and like i remember this vividly
there are some reinsurance underwriters that are just idiots like and then they just don't get it
like they just i don't know how they have a job they're just super simple they like plug a couple
numbers into their model like online and they get their paycheck and they just take any risk on uh
on their balance sheet that they want like as long as it fits into the box after they press press run
on their computer. And then there were other people that I would be able to communicate with
and I would be able to give them like a tranche of risk and say like, here's the story. Like,
here's my back testing. Here's my model. Here's what it looks like. And then you're able to
communicate and negotiate. And when you're able to communicate that risk model, I was able to,
you know, work on pricing. Like, okay, how are you going to price this? And we start to get to
a different price. But, but to your point, like some of the, that tactic did not work with everybody.
And as, as a broker, you work with like, I mean, I had 30 or 40 reinsurers that I would work with
on any one given deal. So I would have to know like the behavior behind every single one of the
reinsurance underwriters and like what they were interested in and how they thought, because I would
have to sell to them in that way you know like okay this person's not very sophisticated i just
given them a model and like go this person over here is super sophisticated it's going to question
literally every single number in my spreadsheet i got to make sure they're right and then we're
going to have like a really heated negotiation about what this deal should be priced at
and they're not going to do the deal anyway right it's probably a waste of time but you know and
then there's like everything in between and it's so true like so many people just don't have to
have bandwidth. And like, you think about these capital providers and they got all these deals,
right? Like think about how many like public traded equities there are on the market,
everybody that's in the market for capital, how many people are just lying out of their ass
and how many people actually have like value and numbers and math and quantification. And
it's, it's probably very, very far in between. Like a lot of people are selling a dream. Like
you go watch the movie or the TV show, Silicon Valley, there's that famous scene where they say
like, you don't want revenue. You want to be pre-revenue, like the valuation of your company
will be higher, you know? And then you've got other people that actually are trying to build
value creating businesses and they may not get the same attention because it may be less sexy.
And it's a little bit harder to communicate a more sophisticated story to capital providers that
but maybe think a little bit more simply.
Yeah.
It's crazy.
I mean, the capital markets are just so varied.
Yeah.
And you can see who is entrepreneurial.
You can see who iterates over time.
You can see who is actually developing as markets develop.
For example, the family office I was buying minerals for from 2015 to 2019,
their largest LP is the third largest coal company in the Eastern United States.
So they're doing their coal operation. Well, then they were the largest LP in this mineral fund.
Well, then the exit for that mineral fund is they just bought out the whole fund. They bought out
the whole thing. That was the exit. So it's like, all right, coal, oil and gas rights. Well,
then a few years ago, I saw them pop up on an article on Twitter before it was X,
because they were mining Bitcoin as part of their coal operation.
So it's like, all right, coal, oil and gas, Bitcoin.
I mean, you can see the companies that are iterating.
And whether you love Elon or not, right?
I mean, how many years ago now did he put Bitcoin on the balance sheets of his companies?
So I don't know.
Just seeing guys like Jack Dorsey and Elon and Saylor, it's like,
I don't want to bet against these guys.
that doesn't seem like a great idea yeah right yeah so i think going back to where where we
started with this conversation was like how long is it going to take well it's like this is a
complicated story and the story is just being built we're just now beginning to understand
what this can do right you're take like think about how long it took bitcoin to get to where
Bitcoin is today. Okay. So that's, what is that? Almost 15 years. And now we're five years into
like using Bitcoin as capital. And I would say we're really in year one of like the acceleration
of Bitcoin as capital on a treasury balance sheet, right? We've gone from two companies to over 150.
That's going to go from 150 to over a thousand. And that number is going to go up. And now what
can you do with it? Right? That's the big question. Like, what can you do with it?
And I think the market just significantly overlooks that as they're going to chase
other shiny objects in the market, these pre-revenue or like no revenue companies.
And when the actual capital is collateral, it sits on the balance sheet that you can do things with.
Now, the things that you could do with them are unique and a little abstract and they're hard to wrap your head around.
But that's what we're here to do. Unpack it.
So, all right, that's all I got. Do you want to talk innovation, Soleil?
Hell yeah. I've been listening to some history podcasts lately and I can basically just turn everything into a Bitcoin conversation.
So I just kind of can't help myself. But so I was watching this this history pod and the the guy was talking about why China invented gunpowder, but they didn't innovate it beyond being able to, you know, kind of just throw bombs and make fire fireworks.
And instead, it was Europe that innovated with it and basically took over the world.
And the professor said that it was because China had a closed society, and he claimed that innovation thrives in open, competitive competition.
Those were the three words that he highlighted.
And if you look back at that time, actually probably ever since, Europe cultures traded.
They mixed with each other.
They fought wars.
They made alliances.
And so the only cultures that innovated, only the cultures that innovated, excuse me, could dominate. And then another power would have to innovate so that they could disrupt and take over.
And so, of course, that immediately reminded me of the Bitcoin treasury company space where
Saylor, you know, openly shared the playbook.
And then, you know, CEOs are tweeting each other's Bitcoin purchases.
And they're in a competition and it's a race to the most Bitcoin, but it's more of a sport
than a cutthroat activity.
And because that competition is fought with digital power instead of gunpowder, the world
can now innovate without going to war with each other.
and strategies innovated several times.
They had the convertible bonds,
they've had the ATMs,
stretches their iPhone,
but after they've extracted maximum value
from the preferreds,
they'll just innovate to something else.
So I say all that to say this,
the 1x MNAV bears are wrong
because Bitcoin treasury companies will innovate
while the TradFi companies will be left behind
and forgotten by history.
I don't need to, I don't know if I need to say anymore. I agree.
Yeah. What's I think about this often, like what's the point of holding an equity? Okay.
To store value like that to me, that's the point of holding an equity. Like I want to store value
and like grow value. Okay. What's more valuable than the company that holds more store of value
than any other company. And they're working actively to increase the amount of store of
value that they have on their balance sheet. Like what, that's the Bitcoin treasury landscape.
If you truly believe that Bitcoin is the apex asset and should be the unit of account
and is the hurdle rate and we're just early, then I think being along any of these companies
is really appealing. Yeah. And you can already see the innovation in the different markets,
right? Because metaplanets in their own position. So they've got the moving strike warrants.
And I think they probably want to move into the preferred space as well. But, you know, if it's not going to be the preferreds, it'll be something else. But not only that, the companies that are actually innovative are also moving into the Bitcoin space.
So, you know, like you mentioned, Tim, Tesla, they're probably the most innovative.
They were probably the most innovative non-Bitcoin company until they bought Bitcoin.
And so now it's like only Bitcoin treasury companies are going to survive.
Now that Bitcoin exists, it's the only way.
Yeah.
And Saylor actually talked about this recently on the podcast he did with Mark Moss.
and really it was a call to action of like hey just figure out how to create digital credit in
whatever way that you want to do and do it like there there's going to be to your point so there's
going to be thousands of ways companies are going to do this like and he even brought up insurance
he even said the word reinsurance which was a little light bulb going off maybe i've said it
enough that's uh like become something on his radar he said the word reinsurance but he also
like thought of the idea of a bond. Like what if you just, what if you had, um,
what if you issued a 10 year bond? Okay. Like forget the perpetual preferred equity.
What if you just issued a 10 year bond and you refinanced 10% of it every year
and you just kept rolling it and rolling it and rolling it and rolling it and rolling it.
and like the capital you brought in the door you used like you you sell the 10 10 year bond you get
all the capital up front you buy bitcoin with it and you refinance it you know every year that's a
business model somebody could go do that the what i outlined with the perpetual preferred securities
here earlier where you just sell the bitcoin like to all the people that have given everybody so
much like that i've given sailor so much shit for not selling the bitcoin like go create your
own business and sell the Bitcoin to do it. Right. Like nobody's stopping you. Like it works.
Like the math still works. If you want to go do it, go do it. But like, you know, if you don't
have to do it, like as I showed earlier, the math looks better. Right. So like anybody can go do it.
Like you could still go issue these instruments and go operate in the capital market. Just like
there's so much opportunity. Like people are so quick to shit on all of these things
as opposed to identifying the enormous opportunity here to issue Bitcoin back credit in all of these
different marketplaces in different ways. Like you just got to innovate, which is hard and it's
abstract. People are going to yell at you. People are going to call you stupid. 75% of people are
going to yell at you and call you stupid. But like sticking to that, like your vision, right?
Like when the electricity was created, everybody said it was stupid. When the light bulb was
created everybody said it was stupid when like rockefeller was um you know refining oil everybody
thought it was like so stupid he was refining the oil that people were throwing away gasoline used
to be thrown away and rockefeller was like what are you guys doing you guys are idiots like put
that in a car and throw a combustion combustion engine like everybody thought he was stupid for
collecting all this gasoline he's like you're an idiot but guess what like who who is the stupid
one person that was throwing away the gasoline yeah i think the you're an idiot days are are
are very limited very numbered because i had drinks recently with someone here in new york and
they're like hey i might start a digital asset treasury company i spent at least 10 maybe closer
to 20 minutes making a very common sense case for why maybe you just start with bitcoin and
to be thoughtful before you do anything that's not Bitcoin. I received a slide deck today from
someone else that's trying to raise money to do a treasury company. So yes, the markets are
sometimes closed and sometimes more closed, sometimes more open, but like Lynn Alden,
nothing stops his train. When it goes, it's going to go and people are going to be shocked,
I think at like, oh, well, there's just like one company and then MetaPlanet. And now there's a
couple dozen, but things aren't looking so hot. And then it's just going to be like, it's going
to be slow and slow and slow. And then all of a sudden, like everything in life. But for a lot
of people that are only paying attention to the headlines, right? Three, six, nine months from
now, I'd be like, what? It'll be like, some people made it happen. Some people watched it happen.
And some people said, what just happened?
What happened?
And you can write that book if you want to.
Of like, what happened?
And someone will write the book.
But some people are just like literally creating the playbook.
And that's what's super exciting right now.
Yeah, you've got to do it.
And like this concept of like synthetic labor that I brought up yesterday.
It was so funny.
It was like 75% of the people hated it.
I'm like, I kind of like that.
that's how I know I'm like I'm probably on the right page I'm probably thinking about something
very makes you want to double down yeah it's like oh cool I'm long this I'm long this idea
um oh I had an I had another idea last night that I really liked um strategy said that uh
stretch was their iPhone moment and I I really like that concept but I think they're wrong
and because really the prefs are strategies robo-taxing moment
like this is this is like this is like systemically larger than the iphone this is like
going to totally revamp how society interacts and works and it's like digitizing so much
like it's big i think the robo taxi moment it was like enormous i think we'll see that play out over
the next decade it's gonna be really big but this is this thing i think it's a little bit more
comparable because when the iphone come out in like 2007 and what's the robo taxi came out like
a year ago and like that that thing's going to take over that's going to take over like
a complete wildfire it's going to totally transform how people move this is going to
totally transform how people use capital. And, um, I think it's probably a better,
more modern digital reflection of what's the, the, the size and scope of the innovation,
but also with like a mag seven comp. Yeah. Well, you were showing the spreadsheets. I,
I just can't stop thinking about, um, this sailor quote. He said that the, the war for
the future of money will be one with money. But then he's also talked about the triple maxi plan.
Basically, you know, you mortgage everything you own to buy Bitcoin. And if we merge those
two concepts, that means that the war for the future of money will be one with credit.
And that's everything that you talked about today.
So say that one more time. Sorry.
Yeah. So he said that the war for the future of money will be will be one with money. And
the triple maxi plan is to mortgage everything you own to buy Bitcoin.
And if you merge those two ideas,
that means that the war for the future of money will be won with credit.
This is true.
Clip that up.
Yeah.
He's got to clip that up.
The war for money will be won with credit.
I think that's right.
Honestly,
we should end it right there because I think that's good.
That's where we should end it.
Unless anybody has anything else.
Um, yeah, I'll do my final thought.
Yeah, let's go final thought.
Alchemy is real, right?
So you can turn lead into gold.
And by that, I mean you can take fiat and buy Bitcoin with it.
And so with credit, you can take the first pound of lead,
borrow another pound, and get two pounds of gold for the price of one.
So the preferreds are financial alchemy.
That's my final thoughts.
Financial alchemy.
Bingo. Borrow lead and turn it into gold.
I like it. Borrow lead and turn it into gold. Yeah, I dig it.
My final thought or takeaway is that we're at the very beginning stages. Risk is mispriced globally.
a lot of people have not quantified or been able to even have the headspace to think about
quantifying the risk of any of these instruments. And we're so early days that I think there's a lot
of alpha to be gained by paying attention to some of these things because the relative risk
of these instruments is very low. My perspective of that is that the relative risk of these
instruments is very low relative to everything else in the market. So I'm very bullish on Bitcoin
backed digital credit. And I think the, from every, like I've tried to surround it, right? Like
with looking at risk from all perspectives, like what's, what's it look like over here? What's it
look like over here? What's it look like over here? And every way I look at it, it looks good
with math right with rationality and with math and that is really exciting i look forward to like
you know telling that story more i think it's just gonna get better yep we did math we did history
we got it all covered math history yeah and modern times with tim modern times
modern times you're just modern like you're you're at the cutting edge yeah i i mean my final thoughts
study bitcoin because it's a savings technology where you can just save your money because when
you look at the labor back to that part of life there'll be a lot of great work for everyone to do
but it's cycling and accelerating at such a pace.
I mean, Adrian Pruitt walked me through mid journey.
I maxed out my first month plan of 10 bucks in less than an hour and came up
with like three or four AI images that were decent.
I was proud of them, but it's like, I'm like,
it just wasn't that hard, right?
It's like 15 minute tutorial. And then I'm just clicking away.
So, you know, that's the labor side. And a lot of people, I've heard a lot of people say,
like, business is hard. Like, if you just go talk to people that have started a business,
and then look at the successful ones. I mean, the one hot tip I've gotten this year is,
I should probably buy a Tesla at some point, because then whether I'm driving to Long Island,
or I'm driving to Pennsylvania or I'm driving wherever,
like it's just easier, right?
The Tesla kind of drives itself
if you just kind of look straight ahead and do this.
And then the robo taxis, yeah,
when I was out in San Francisco, right?
I'm like in a car and there's no driver.
It's like, that's nuts,
but that's already the world we live in.
Most people probably haven't had that experience.
But yeah, Santa Monica,
I guess it was a Tesla showroom.
they had one of the robots there um i don't know if it you know if they were demoing it but like i
was like there's a robot in the storefront that's nuts so like we're we're living in the future and
like anyone that is studying and and allocating any amount to bitcoin is so far ahead it's just
kind of wild to think about yeah it's digital labor tesla's got digital labor too
that's what i think about all right well uh thank you everybody for joining uh we're hour 40 in a
small panel tonight i appreciate you taking the time and uh sitting through my excel analysis
and the way i think about things so appreciate the time everybody have a good night catch you later