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If the company doesn't necessarily liquidate, but they have permanently impaired their preferred

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holders and the common equity holders, that would be a failure mode.

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How do you manage the risk so you don't have a very large blow up, especially among the

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larger ones in the market?

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How does a Bitcoin strategy company create income, not capital gains?

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They are marketing to investors as recurring earnings that deserve a multiple.

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That is fraudulent.

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There is no hope of paying the preferred dividends without new proceeds from issuance.

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And that's a Ponzi scheme.

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Full and that's it.

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There's no way, two ways about it.

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Lynn, it is great to have you back on the show.

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This is like your hundredth appearance on What Bitcoin Did.

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The audience knows you.

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The audience loves you.

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But we're here with Andy, who this conversation is going to be interesting.

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Andy, is strategy a Ponzi scheme?

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You've not been on the show before, though.

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Do you want to start by just introducing yourself, tell everyone a bit about you and your background?

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Sure. I've been in traditional finance for 39 years, starting my career at Salomon Brothers,

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which was one of the big investment banks, where ultimately when I left, I ran a global equity

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derivatives business and have been a derivatives trader all my life. Then ran my own hedge fund

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for a number of years, then worked at Bridgewater Associates

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as a senior analyst there,

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and then as the chief of strategy of macro strategy

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for Brevin Howard for a number of years.

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And for the last five years, I've been servicing hedge funds

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with my own research product, in which I focus on macro.

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Okay, so you've had a long career in sort of traditional finance. We're obviously going to

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talk about strategy and treasury companies today, and we probably get into stable coins as well.

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But before we do all that, what is your take on Bitcoin? I think it'd be good for

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both me and the audience to know that ahead of this conversation.

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Sure. I am a strong believer that a portfolio requires diversification against debasement

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of fiat currencies. I really learned that from Bridgewater and the teachings they've had regarding

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their all-weather portfolio and more broadly, their just general concept of what money is.

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And they focused, as did I, and as I still do, in gold as that monetary asset that protects

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debasement. And so I'm totally bought in on that idea as a necessary thing for everyone who is

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saving fiat to own or whose expenses in the future, future liabilities are in fiat, needs to own.

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And so that's number one. And as it relates to Bitcoin, gosh, I've been aware of Bitcoin since

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2015, probably maybe even a little earlier, and been tracking it and watching it and finding it

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interesting. I think I first became aware that, you know, very closely aware in 2017 when it's

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peaked in the low 18s and been following it ever since. And I would own some. I don't.

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I would own some for the reasons that I own a significant amount of gold relative to my AUM, and I'd replace gold with it because I consider it to be digital gold.

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So I'm still not comfortable yet.

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And this is my own problem, but I'm still not comfortable with its correlation to risky growth assets like stocks, NASDAQ in particular, and what I consider some measure of speculative excesses.

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And so I don't own any.

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I tried to bid $84,000 for some and then passed as it came to my bid and then lowered my bid down and just haven't participated.

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But it's a completely valid idea.

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Okay, well, I think the audience will probably be glad to know that you've not completely dismissed Bitcoin as an idea.

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And the treasury companies are obviously an entire other beast on top of that.

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So, Lynn, why don't we get into the debate you two had on Twitter?

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So this all came about after your comments on an investor call with strategy.

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Do you want to kind of just lay the context out and explain what happened there?

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Sure.

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So I've been covering strategy since they started their Bitcoin accumulation treasury strategy in August 2020.

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I've also been long since then.

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It's been a small part of my analysis compared to everything else I do.

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So I focus a lot more on Bitcoin broadly than I do on strategy, micro strategy, as well as broader equities and macro.

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as many people know. And over time, the thesis has changed a little bit. I mean,

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we kind of see the evolution of it over time. So first, I was like, okay, it makes sense.

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There's finally a stock that will own some Bitcoin. So in certain types of portfolios,

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you can access that. Then they began levering it, which I found interesting.

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As they kind of did, I think they're either second or their third tranche of leverage. I was like,

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maybe it's getting a little bit too levered. I'm a pretty conservative investor.

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but then they started uh issuing equity because they had a pretty high m nav at the time

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and i was like okay this is actually de-risking it to some extent they're they're adding more on

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their equity side um and i i increasingly saw that they're navigating this way also i i think the

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executive team has been strong um and uh so my thesis throughout the 2022 bear market was that

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they would get through it um they did uh and since then we've kind of seen them shift more

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from convertibles toward preferred. I continue to be long. For people that follow my research

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service, I tend to trim the exposure when it hits kind of euphoric levels, like particularly high

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MNAVs and everyone on Twitter X talking about it. But I've still stayed with a position to let the

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house money ride. And I think broadly, treasury companies make some degree of sense because if you

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have an appreciating asset. And Pierre Richard wrote about this back in 2014, the idea of a

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speculative attack. And Bitcoin was tiny back then. And he kind of pointed that as it gets bigger,

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it's inevitable that we'll see some pools of capital find ways wherever they can to short

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fiat currency and be long Bitcoin. I think the thing about treasury companies is they can do it

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with better types of leverage than most other pools of capital have access to, which is interesting

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and gives them an edge. And I think that by the end of the cycle, we probably will see some

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treasury companies fail. I think there will be low quality ones that get over their skis.

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So anytime you link leverage with something, you're increasing the risk.

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I do think the highest quality ones are valid. And this particular discussion happened. So I went on

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a strategies earnings call as one of their analysts. And I actually asked the barest

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question of the group, which is basically asking about stress testing during the next bear market.

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Like what kind of bear market are they kind of modeling or thinking about as they design their

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capital structure? And they provided their answers. And then also, I generally agreed

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that their new preferred, which they're pretty excited about, is I think it's hitting a sweet

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spot that the market wants. So I expect it to be successful. And in one of my two threads,

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Andy and I went back a little bit and forth a little bit because I'm generally in the

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cautiously optimistic camp around these treasury strategies.

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Depends on the specific company in question and the quality of the management team and

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everything else.

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Whereas he understandably has a more critical view, which I think is healthy.

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I'm certainly critical in some aspects of some of these businesses.

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And that was kind of the genesis, I think, of this conversation.

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Okay.

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So maybe before we get into Saylor's response to the question you asked on that investor

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call in. Andy, you can just lay out your kind of overarching thesis on these.

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Yeah, I think what's important is that while I tweeted a few things back in the bear market

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in the late 2022, 2023 regarding the NAV premium, I really only became pretty active in thinking

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about Master when, uh, MicroStrategy, when it hit, when it went above 500 in late November,

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2024, uh, 24, 23, 24. Um, and at the time it was real. So I've spent my entire career doing

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arbitrage and in particular capital structure arbitrage in which I understand what the asset is

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and understand how its liabilities are pricing that asset.

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And so MNAV, which is the market value of the Bitcoin

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compared to the enterprise value of the company,

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is an important thing for arbitrage.

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We're not talking about book value like for most companies.

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We're talking about the market value of the assets

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is excessive relative to the market value.

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The market value of the liabilities is excessive relative to the market value of the assets.

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So that made me want to short.

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Now, I don't trade personally or professionally at this stage in single names.

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But the idea was the MNAV was extreme.

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And that's really been my bias ever since.

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The questions that I continue to have, well, the basic premise is that, yes, I agree with Lynn, there are some corporate advantages.

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There are also some disadvantages, particularly around tax, but significant advantages for issuance if you're a corporation to hold Bitcoin compared to an ETF.

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and an ETF should trade, does trade at zero, well, at NAV. And so I consider micro strategy to be a

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slightly advantaged capital structure with a worse tax structure that should trade potentially at a

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premium to NAV and can lever. Now you can lever your ETF as well. So that's been my big framework.

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One other important thing, though, is I think it's very clear that the idea prior to Bitcoin futures and prior to ETFs that you could buy Bitcoin in a stock was a genius idea and made complete sense that it should trade at a premium because no one, you can't buy it.

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There were people that literally couldn't buy Bitcoin.

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So the whole run-up of MicroStrategy to its $500 price peak, to me, made some sense as people didn't have other alternatives.

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Now that there's a liquid futures and ETF market, I see no value in the NAV.

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And so my big question that I hope can get answered is how does a Bitcoin strategy company create income, not capital gains, but income on their assets?

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Because income is earnings.

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Capital gain is just a change in the nav.

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And if it were to be the case that I could understand how Master can create earnings out of its Bitcoin holdings that are excessive, that are worth a premium, then I could see some sense regarding the idea of a multiple to NAV.

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Okay, well, I mean, Lynn, we should probably just throw that question straight over to you. What would you say to that?

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Well, I would say that unlike an ETF, Microstrategy and other treasury companies that are operated well tend to increase their Bitcoin per share through these strategies, through this kind of debt and equity issue and strategy.

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And so you're paying a premium over the Bitcoin they have, but then you're also expecting this per share Bitcoin to increase.

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Now, there's different ratios that analysts have come to use, basically trying to figure

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out how much of an MNAV to apply based on forward, you know, how much they expect Bitcoin increase

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per share.

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I've actually raised the concern that the problem with that is it's recursive because

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the higher their MNAV is, the more, the faster they can increase their Bitcoin per share.

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And so that flywheel is really good on the way up, but can also just unravel very quickly

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when sentiment changes.

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It's different than, say, evaluating a company based on cash flows from operating a pipeline

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business or something um and so while there's merit in that analysis it's a new form of analysis

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and it's inherently just challenging um my general view has been that i don't know what the right mnav

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is it certainly depends on the company for example metaplanet is smaller uh is in a jurisdiction

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where there's a really big tax arbitrage uh which is different than the united states um so that

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they're actually tax advantaged there uh and they started from a smaller base so they've they've had

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very high MNAV and have grown very quickly. It's come down more recently. So I think that MNAV is

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somewhat context dependent, partially based on how much you expect them to be able to kind of

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arbitrage this. Generally speaking, as they get bigger, we should expect the MNAV to gradually

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compress because trees don't grow to the sky. Now they can continue growing. It's just that after a

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while, that MNAV generally starts to compress. That's so far what we've seen in the market.

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but i do think that an m nav above one makes sense when you can attach this longer duration

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debt to bitcoin uh and and therefore get through periods of cyclicality at least if managed well

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and conservatively uh compared to the way the hedge funds lever the way that retail investors

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might lever um and so i think it's worthy of a premium um i would like to see eventually more

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cash flow generating businesses have bitcoin on the balance sheet um the the kind of history of

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this space so microstrategy did the approach they actually then ran a number of conferences

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called bitcoin for corporations trying to get other corporations to do it we saw tesla dabble in it

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block got in to some extent we didn't really see a lot of other companies with existing operations

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decide to add bitcoin instead in this cycle we've seen a number of companies that kind of spun up to

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do the strategy as well as increasingly around the margin some existing companies do it

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so i think there's a there is a bigger market for companies that just use bitcoin as a treasury

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asset while also having separate cash flows but then clearly there's there's there has been demand

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for five years now and i think ongoing for a levered kind of pure play bitcoin entity and

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then i think the main questions to ask are how do you how do you value that i generally err toward

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conservative and two how do you manage the risk so you don't have a very large blow-up especially

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among the larger ones in the market. So Lynn, you started this by saying that you're not

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necessarily bullish on all treasury companies and you think that some will fall by the wayside.

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Do you think the companies that are essentially zombie companies that are doing a Bitcoin treasury

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play are going to be unsustainable going forward? And what we need is real companies with real

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business models adopting Bitcoin. So there are somewhat different types of zombie companies.

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In some ways, the perfect candidate to do this is one that's like a value stock that's cashflow

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positive but doesn't really have any growth prospects to add Bitcoin. That's really interesting

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and we haven't really seen a lot of that. Truly zombie companies that have like no cash flows,

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that's a much harder sell. Generally speaking so far we've seen that the market certainly does not

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like unprofitable companies, companies that are losing money to adopt a strategy because they

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view that as a distraction and a risk versus their kind of Bitcoin approach. So I certainly

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think it makes sense for companies to at least have your profitability neutral. And I think there

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is a market for ones with cash flows. They don't have to necessarily have growing cash flows.

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And really at that point, Bitcoin competes with other uses of capital like buying back shares,

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paying dividends, paying down debt. They can employ that as one of their potential strategies

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for what to do with their excess earnings

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over what they require for reinvestment.

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Yeah, that makes sense.

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Okay, Andy, sorry, I interrupted that.

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Did Lin's answer clear anything up for you?

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No, not at all.

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Unfortunately, the question I asked was,

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what, why have, besides the appreciation,

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which, listen, anybody, corporate, levered, unlevered,

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anybody who wants to speculate on an appreciation of a thing

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can part with their cash and buy that thing. But assets throw off income, particularly

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corporate assets. Every company decides how to spend its cash. And Michael Saylor's, you know,

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I guess all these companies would have been better off using their cash to buy Bitcoin. Well, some

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bought their shares, and that was a pretty good return on investment for Microsoft, for instance,

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who Michael tried to convince to do a Bitcoin treasury.

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I don't get why someone would choose to use their cash to buy an asset,

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given all the assets they have in Bitcoin.

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So that's one.

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And then secondly, if they were to use it as an asset, besides its appreciation,

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I've heard no good reason for owning it.

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And one other point that I want to come back on.

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Lynn mentioned the flywheel of, hey, part of the reason why you have a NAV premium is because you can continue to harvest more Bitcoin by selling more assets.

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When you're doing ATM stock sales, listen, I think that's genius. And absolutely, you should do exactly what Michael Saylor is doing because it's genius.

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If you can buy $2 of Bitcoin for $1, or more relevantly, buy $1 of Bitcoin by selling $2 of value in your shares, you should do that all day long.

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And Michael Saylor is doing it all day long.

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He's harvesting the MNAP.

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The problem is the investors are the suckers in that case.

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And when I use that word, people say, well, I own master since 10 or 20 or 30 or 60 or whatever, and it's 400 now I win. No, you haven't performed for months since the peak. That whole MNAV expansion is by and large over.

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So I don't see anything more than new holders of the common stock generating returns for the old holders of the common stock, which is a Ponzi scheme.

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Is that not the reason that he's brought in these preferreds, though, to try and help the common stock?

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Right. And I think it's interesting, the preferreds.

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And the preferreds are legitimate investments I happen to think there some hair on them in some ways in particular the STRC in terms of its ongoing use of

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which I think everyone's very excited about.

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But the preferreds are essentially,

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the ones that are not convertible are essentially leveraged.

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And the company's not particularly leveraged.

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I don't actually have any problem

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with them levering up their Bitcoin,

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but it doesn't mean that there should be an MNav.

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It just means they're going to use dollars over here, STRC dollars, and buy Bitcoin over here.

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Their assets and liabilities are going to be identical.

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And if the market goes up, they win.

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If the market goes down, they lose.

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But you can do that with IBIT.

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One last point.

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Lynn mentioned term leverage.

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There's a deep market for long-term ETF calls now.

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Go and buy a 20%, an 80% in the money call for two years, and you get all the leverage that Master has without paying the MNAV premium.

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Lind, I want to get on to, or deeper into, if strategy is a Pond scheme.

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But before we do that, do you have anything to respond to there?

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Sure. I mean, there's a number of points there.

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One of the earliest ones was why Bitcoin? Why buy Bitcoin with cash?

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uh historically the answer is because it's the best performing thing you could buy with your cash

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pretty much uh and then the thesis going forward is that it's going to continue to be uh what either

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the best or one of the best things you can do with your cash especially uh that it's not a security

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uh so there's with um u.s stocks there's kind of a limit on how much securities you can have

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uh in your asset mix uh it doesn't apply to uh bitcoin which is a digital commodity

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um and so the combination of high expected returns based on those who generally speaking

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those at at strategy and those who invest in strategy uh are bullish on bitcoin so i certainly

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wouldn't recommend a bitcoin treasury strategy holding for those who just aren't particularly

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high conviction long-term bulls in the asset there's there's a valid reason to have

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high expected returns on Bitcoin based on historical returns?

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Not just on historical returns. I mean, I employ a number of analysis methods to determine what I

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expect Bitcoin to do. I still think that the total adjustable market of what Bitcoin can address

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is much larger than the current size. So in my expectation over the next five, 10 years,

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I do expect Bitcoin to still have high returns.

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Now, not the returns that when you go from a billion dollar asset to a trillion dollar

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asset.

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But I certainly think it can 5x and 10x from here and we'll see how the numbers shake out

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in the years ahead.

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And it's also the risk situation is different than before.

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So when Bitcoin was tiny, it didn't even have the liquidity for like a corporation to buy

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it.

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It didn't have the regulatory clarity in many cases either.

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And so now that the tax treatment of it has improved, regulatory clarity has improved, and it's a big and liquid enough asset, the expected forward returns are not as explosively high by most analysis methods than they used to be.

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But the probability of beating your –

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The question I have really isn't whether you're a bullish Bitcoin.

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I like Bitcoin.

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I can understand the bull case.

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I like gold.

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That's why I own it.

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The question is, you could say that about a number of things that have done very, very well in the past and have valid forward-looking returns.

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The question is, why should corporations be doing that for their shareholders?

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Under what the corporation has—by the way, you're great at it.

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Michael Saylor's great at it.

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Lots of other people are great at it.

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But what is the competitive advantage for an operating company, not an ETF, not a treasury company, but an operating company?

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Where's their competitive edge that allows them to, that their shareholders would say, yeah, I get why you are buying Bitcoin versus anybody else.

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Or for that matter, I can do it on my own.

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So why are you doing it for me?

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like where's the edge i think the main thing is that bitcoin's the first asset that can actually

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compete with equities long term in returns and so prior to this when corporations had excess capital

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they generally decapitalized themselves they would give it back to shareholders

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uh they would they would pay it in dividends they would pay it in buybacks uh they would

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sometimes make acquisitions for the sake of acquisitions because they don't know what else

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to do with the money that's often a criticism that especially some tech companies tend to do

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and you know one of the downsides is that that makes the company more vulnerable in the future

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if if they don't have something good to save with kind of like how households want to save

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for unplanned things in the future generally speaking corporations want to save for unplanned

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things in the future and there's just not been a great vehicle for that even gold because it gold

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over the long arc of time underperforms high quality equities it's hard to justify holding

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a lot of it on your balance sheet longer term if you're a company that's trying to be in the top

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third of the S&P 500 returns or something like that. But I think you're saying the same thing.

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I think you're saying that you think Bitcoin is going up. I'm saying a different thing, which is

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why should I trust a company that manufactures, creates software, does whatever it does as a

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business to have the expertise that you do? Well, I think in many cases you shouldn't.

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And when companies adopt the strategy, many of them don't get very high MNAVs because the market says, well, who are you?

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Right. So they look at strategy and they say, well, these people have been doing it for years now.

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They look at, say, MetaPlanet and they know the people running that.

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I mean, I know the people running that and they think that, OK, I'll trust those people to manage this well.

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So it's certainly a company by company basis there.

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And some of these companies have hired Bitcoin analysts, Bitcoin experts in various capacities to help them do the strategy.

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And then the market assesses, do they think they have the right people on board to help that company with the strategy?

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But basically, the answer is, one, in the near term, there's an arbitrage.

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The market likes it.

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But two, longer term, as Bitcoin kind of grows and becomes less volatile, but still has the absolute scarcity aspect to it, which is desirable.

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It's one of the few assets that I think there's a reasonable case that can be made that it

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is able to keep up with equities over a pretty long span of time, if not outperform equities.

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And therefore, if a company doesn't want to fully decapitalize itself, it doesn't want

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to say, OK, we're going to take all of our excess capital above what we need for working

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capital and give it back to shareholders.

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We want to plan for a pandemic lockdown or a big new competitor comes to our market.

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We need to make major capex to change or pivot our business.

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They want to have something that they can hold for five, 10 years as part of their asset mix.

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And I think Bitcoin brings that in a way that other assets haven't.

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I hear all that.

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And I guess I just don't understand why a shareholder would want a corporation to do that for them when they can do it for themselves.

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Well, the funny thing about this, Andy, is I think the argument you're putting forward is a very

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bitcoin or argument so like treasury companies are definitely not greatly received by everyone

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in bitcoin there's a lot of people that do say we should just buy and hold our own bitcoin because

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that's the point of this thing um like you two are definitely on the right curve of the bell curve

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and i'm on the left but like if i if you had to say why would you trust them and what's the benefit

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that you get from the treasury companies i think obviously two different questions and why would

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you trust them i think is very valid um but what they're what they're sort of the reason they can

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potentially outperform you just buying Bitcoin, I assume it's just the access to capital markets.

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Is that right, Lin? Partially it's the access to capital markets. Yeah, they can do certain

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types of leverage that others can't, especially those that don't want to make one year or 18

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month bets on the price, but just want to say, okay, this company plans on doing this for the

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foreseeable future. And they want to maintain conservative leverage ratios in debt that's

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not really callable during a bear market, as long as they don't get liquidated in some capacity,

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they're unable to make coupon payments or something. And so I'm going to let them do it,

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is how many pools of capital do. Now, I'm with you that I don't think anyone should say,

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okay, sell your Bitcoin and go buy a Bitcoin treasury company. I think that there's one,

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there's larger pools of capital that just for a variety of reasons can't own Bitcoin.

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Sometimes they can't even own the Bitcoin ETFs. And so they can go out and buy companies or either

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their equity or their bonds that give them some degree of Bitcoin price exposure. If, say, a fund

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manager happens to be bullish on Bitcoin. There's now a capacity to do that. And then two,

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if you're that company themselves and you do any other business that's not Bitcoin,

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could be software, could be a gasoline pipeline business, whatever the case may be,

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and you say, well, we're decapitalizing ourselves, we're giving back cash to shareholders,

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which makes sense. But if you want to have something that we want to hold, say, 20% of our

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retained earnings in something longer term for unexpected events or to grow over time,

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that's certainly one of the things that they can do. In MicroStrategy's case, and they've actually

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talked about this, when they were a software company, they had flattish income. They were

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no longer a growth company. It's a very competitive market. A lot of their competitors had gone out

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business. They were up against really, really big conglomerates at that point. And they gently

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found that nothing they did was enticing to the market. So buying back shares didn't excite the

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market, holding a lot of cash didn't excite the market. And they've even talked about how they

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would eventually start losing executives that go on to work at things where there's bigger and more

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scale. And so by becoming a larger company, partially through their treasury strategy,

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they were they were able to keep and retain really good executives uh so sometimes decapitalizing

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yourself is the answer um because it's kind of a decision that the investor will make better use of

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that cash than the company will uh and that's certainly better than a company holding it and

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then misusing the cash um but there's also an argument to be made for putting some of it into

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something that can appreciate long term and give the company survivability through um problematic

412
00:35:45,962 --> 00:35:52,443
events as well as to become larger over time which then potentially down the road could result

413
00:35:52,443 --> 00:35:58,183
in larger acquisitions than they could do without having done the strategy and then the come and

414
00:35:58,183 --> 00:36:03,663
then investors might say well i like the underlying business and i like the fact i'm bullish on

415
00:36:03,663 --> 00:36:06,923
bitcoin i like the fact that they're holding bitcoin i'm not going to say let them manage

416
00:36:06,923 --> 00:36:11,443
bitcoin for me i'm also going to hold bitcoin but if i'm looking at the universe of stocks i can own

417
00:36:11,443 --> 00:36:17,002
um that that's an interesting strategy because they can employ in some cases a little bit of

418
00:36:17,002 --> 00:36:22,502
leverage or not they have cash flows or not and they're doing something with their bitcoin

419
00:36:22,502 --> 00:36:29,403
that can allow that company to you know thrive through multiple cycles yeah i guess i'm wondering

420
00:36:29,403 --> 00:36:35,423
um so before bitcoin existed um i think it is pretty interesting that over the last

421
00:36:35,423 --> 00:36:43,063
set of decades, corporations have accumulated lots of cash that one could call savings,

422
00:36:43,263 --> 00:36:48,823
like rainy day savings, versus just regular operating cash that they need to manage to

423
00:36:48,823 --> 00:36:53,863
pursue their business, particularly the tech companies who've generated such cash flow.

424
00:36:53,863 --> 00:37:02,002
But in no case have any of these companies thought of their cash as an appreciating asset.

425
00:37:02,002 --> 00:37:06,282
And they've had lots of alternative assets to buy.

426
00:37:06,823 --> 00:37:13,563
I just don't, I think they think, and maybe I'm completely wrong and this world is now going to change.

427
00:37:13,823 --> 00:37:20,962
I think they think that that cash is literally a rainy day asset and shouldn't take risk.

428
00:37:21,683 --> 00:37:31,683
Because God forbid, Bitcoin falls, they take risk, they buy Bitcoin, and Bitcoin falls at the same time their business weakens.

429
00:37:32,002 --> 00:37:35,423
that's a pretty disastrous outcome for them.

430
00:37:35,802 --> 00:37:43,183
So I think they think about cash in a very different way than I think you're saying,

431
00:37:43,383 --> 00:37:46,802
which is they're not looking, they consider it a rainy day asset.

432
00:37:46,923 --> 00:37:49,323
They're not considering it an earning asset.

433
00:37:49,602 --> 00:37:50,623
And so they keep some.

434
00:37:50,623 --> 00:37:54,982
Now, most companies, most operating companies don't keep a lot of cash

435
00:37:54,982 --> 00:37:56,943
because they don't have a lot of cash.

436
00:37:57,683 --> 00:38:00,782
So I guess my question is, so let's break it down also.

437
00:38:00,782 --> 00:38:14,502
Firstly, there's the, is a Bitcoin treasury company that is 98% Bitcoin treasury an ETF that deserves a NAV?

438
00:38:14,502 --> 00:38:25,582
And secondly, is there demand for Bitcoin for companies that have nothing to do with this type of activity that are just looking at Bitcoin as a asset?

439
00:38:25,823 --> 00:38:28,023
And I just want to make sure we're talking about the same thing.

440
00:38:28,023 --> 00:38:34,243
So the first, the second thing, these companies don't invest their cash at risk.

441
00:38:34,383 --> 00:38:35,482
I'm not sure why they would.

442
00:38:35,962 --> 00:38:40,703
And more relevantly, and I've said this before, they aren't good at it.

443
00:38:41,243 --> 00:38:44,243
They aren't good at betting on Bitcoin.

444
00:38:45,143 --> 00:38:51,343
Should they hire people when you yourself as a shareholder can just buy it themselves?

445
00:38:51,343 --> 00:39:03,883
Only if it's true that you really can't, as an individual, buy Bitcoin, would you ever give company ABC money to buy Bitcoin on your behalf, even if they're able to lever it.

446
00:39:04,363 --> 00:39:12,143
Now, on the other side, you've got this treasury company that trades at a premium to NAV.

447
00:39:13,663 --> 00:39:15,302
What should that NAV be?

448
00:39:15,302 --> 00:39:20,723
Should it be two and a half X, where Michael Saylor is happy to sell as much as he wants?

449
00:39:21,343 --> 00:39:23,863
or closer to one,

450
00:39:24,563 --> 00:39:27,443
or like many closed-end equity funds,

451
00:39:27,723 --> 00:39:29,123
trades at a discount to NAV?

452
00:39:29,782 --> 00:39:35,123
I'm not sure, but I think two is high,

453
00:39:35,343 --> 00:39:37,582
and one is probably about fair.

454
00:39:38,883 --> 00:39:39,903
So a couple different questions there.

455
00:39:40,002 --> 00:39:42,423
I generally think that it depends on the company, right?

456
00:39:42,502 --> 00:39:43,863
But for a mature one,

457
00:39:44,563 --> 00:39:46,243
the scale of something like strategy,

458
00:39:46,623 --> 00:39:49,183
I generally prefer the sub-two MNAV.

459
00:39:49,183 --> 00:40:07,502
I think above one is still the right answer for these companies because I think, I guess my thesis is probably earlier than you think in terms of how much capital can access Bitcoin comfortably versus, you know, what these companies are making available.

460
00:40:08,043 --> 00:40:10,223
And so I still think that there's a runway ahead.

461
00:40:10,223 --> 00:40:23,442
You know, one of the tweets I did a while ago was I pointed out that like, even if strategies MNAV compressed all the way to one, it still would have like been a major outperformance over the past five years for those that owned it.

462
00:40:23,563 --> 00:40:30,803
Because basically they accumulated so much Bitcoin per share that even after the MNAV compresses, they've done well.

463
00:40:31,303 --> 00:40:32,602
Yeah, I think that's a great point.

464
00:40:32,602 --> 00:40:33,063
Yeah.

465
00:40:40,223 --> 00:40:43,223
Yeah, that's why I wouldn't recommend...

466
00:41:05,023 --> 00:41:06,023
Well...

467
00:41:10,223 --> 00:41:32,303
I think that's valid.

468
00:41:32,303 --> 00:41:36,723
And it's like, I'm right there with you when it's hitting like 3x nav and it's all everyone's

469
00:41:36,723 --> 00:41:37,303
talking about.

470
00:41:37,303 --> 00:41:43,123
that's literally like for for my research that's what i'm selling uh and now the funny thing though

471
00:41:43,123 --> 00:41:48,383
for context like i my first trim of micro strategy was back during the the peak in 2021

472
00:41:48,383 --> 00:41:57,002
now that was a really good uh sell for like two years um but then ironically those whoever bought

473
00:41:57,002 --> 00:42:03,303
that from me if they just held until now uh they actually did very well um the the

474
00:42:07,303 --> 00:42:33,023
but I'm saying a four so a four-year period right so for example with with MicroStrategy

475
00:42:33,023 --> 00:42:38,803
in particular i did sell it i trimmed it in 2021 added more in 2022 so that was traded well but the

476
00:42:38,803 --> 00:42:43,423
funny thing is if someone literally if someone if we were talking about protecting investors in 2021

477
00:42:43,423 --> 00:42:51,082
it seemed dumb for someone to come in and buy micro strategy at the peak m nav in 2021 and for

478
00:42:51,082 --> 00:42:57,082
like two years it did look really dumb for whoever bought that if they just held it um but ironically

479
00:42:57,082 --> 00:43:04,002
after three four years they actually are still they're they're actually doing it's a really good

480
00:43:04,002 --> 00:43:08,942
investment for them to have bought at the peak in 2021 at high mnav so my point of saying this is

481
00:43:08,942 --> 00:43:15,863
that we don't necessarily know how long this arbitrage can exist for uh for for basically

482
00:43:15,863 --> 00:43:21,803
those who bought in quote late to be bag holders because 2021 looked late for a lot of people but

483
00:43:21,803 --> 00:43:26,183
But then, as we discussed this in 2025, that was actually not late.

484
00:43:26,602 --> 00:43:27,183
So then the question is—

485
00:43:27,183 --> 00:43:49,403
What would you—if they had—well, anyway, I think what you have to do when you do that analysis, and I'm sure you have, but when you do that analysis, you have to then say that the sales were also done by—that you had to buy Bitcoin and you had to buy it on a levered basis and compare those returns.

486
00:43:49,403 --> 00:44:08,962
But listen, that's certainly a possibility. What I think the point being is that here we are, what would you say going forward? And what I'm hearing is very bullish outlook for Bitcoin, which I totally get.

487
00:44:08,962 --> 00:44:17,442
and some conservatism in terms of whether an MNAV is sustainable long term for the biggest

488
00:44:17,442 --> 00:44:25,442
investors, sorry, for the biggest companies like Master, and opportunistic when you are going to

489
00:44:25,442 --> 00:44:33,462
sell MNAV at high and assuming you're then going to buy the Bitcoin and then do that swap

490
00:44:33,462 --> 00:44:37,863
back into master when the MNAV is low.

491
00:44:38,383 --> 00:44:40,243
That's a totally sensible strategy.

492
00:44:40,403 --> 00:44:42,903
I could completely agree on all those ideas.

493
00:44:43,643 --> 00:44:45,143
So I think microstrategy is aware

494
00:44:45,143 --> 00:44:46,383
that there are different type of investors

495
00:44:46,383 --> 00:44:48,283
and that's why they're offering so many different things

496
00:44:48,283 --> 00:44:50,643
because there are those that want exposure with less risk.

497
00:44:50,982 --> 00:44:53,343
There are those who do want to make all these bets

498
00:44:53,343 --> 00:44:55,563
and they can benefit from the fact

499
00:44:55,563 --> 00:44:57,082
that microstrategy is very liquid and volatile.

500
00:44:57,743 --> 00:45:00,823
So it's a really good kind of trading vehicle for those.

501
00:45:00,823 --> 00:45:05,602
um i my answer to that is i would generally recommend caution for those buying in at high

502
00:45:05,602 --> 00:45:10,942
mnavs now what a high mnav is will depend on the company in the market so for example a high mnav

503
00:45:10,942 --> 00:45:15,823
for metaplanet is a little bit different than a high mnav for strategy uh like i tweeted out back

504
00:45:15,823 --> 00:45:21,102
when mna when metaplanet had like a six mnav i was like i like the company like people running it

505
00:45:21,102 --> 00:45:26,383
wouldn't personally buy it at like six mnav uh it's since compressed it might you know we could

506
00:45:26,383 --> 00:45:30,623
have this conversation a year from now maybe it's maybe it's high again i don't know um so for risk

507
00:45:30,623 --> 00:45:35,623
management purposes, I would generally recommend people avoid high MNAVs. I wouldn't necessarily

508
00:45:35,623 --> 00:45:41,283
claim to know what band of MNAV makes sense with the caveat that generally speaking, the bigger and

509
00:45:41,283 --> 00:45:48,123
mature and more mature that market is, you generally should expect gradually reduction in MNAV.

510
00:45:48,323 --> 00:45:52,903
I still think we're at the phase of the market where one is not the right answer either.

511
00:45:53,523 --> 00:45:58,903
I think something in the one and a half range makes sense. It could be between 1.2 and 1.8.

512
00:45:58,903 --> 00:46:13,625
I don really have a super specific view because I think there a lot of unknowns still ahead of us I generally view above two is where I increasingly disinterested at least in U treasury companies

513
00:46:13,725 --> 00:46:15,465
I think that's a totally reasonable thing.

514
00:46:15,605 --> 00:46:20,765
And for one, I don't even look at these other Bitcoin treasury companies at all.

515
00:46:21,205 --> 00:46:26,505
Though I'm starting to pay attention to the Ether one, Ethereum one, Ether.

516
00:46:26,745 --> 00:46:28,085
I don't even know the name of these things.

517
00:46:28,085 --> 00:46:33,265
but as it relates to Master, I don't know if it's 1.2.

518
00:46:33,385 --> 00:46:34,805
I don't know if it's 1.5.

519
00:46:35,385 --> 00:46:38,165
At 1.2, I think there's going to be an interesting dynamic

520
00:46:38,165 --> 00:46:40,385
on whether people think it'll go to 1 or below.

521
00:46:41,045 --> 00:46:43,625
So, you know, all that stuff is really, really hard.

522
00:46:43,765 --> 00:46:47,085
I guess what I still don't quite get,

523
00:46:47,185 --> 00:46:49,925
and this is the thing that I'm really struggling with,

524
00:46:51,365 --> 00:46:54,785
what's the endgame as it relates to making money

525
00:46:54,785 --> 00:47:06,745
on your asset. Is there a business case in which you can generate profits, not

526
00:47:06,745 --> 00:47:19,165
appreciation, profits, by having a large stake in Bitcoin that non-corporations can't do?

527
00:47:20,125 --> 00:47:20,605
Partially.

528
00:47:20,925 --> 00:47:25,505
So one of the methods, and it's not really at scale yet, and I don't think it will be

529
00:47:25,505 --> 00:47:31,665
in the next five years, but it is being done, is, for example, you can use Bitcoin on the

530
00:47:31,665 --> 00:47:35,525
Lightning Network while retaining custody of it to facilitate payments.

531
00:47:35,725 --> 00:47:37,045
Basically, you provide liquidity.

532
00:47:37,925 --> 00:47:40,765
There's a whole technical thing we can go into about how it works.

533
00:47:40,805 --> 00:47:43,665
But for example, one of the companies that's doing it is Block Inc.

534
00:47:44,225 --> 00:47:48,625
They have some Bitcoin, and they also are active in the Lightning development space.

535
00:47:48,625 --> 00:47:53,585
and they talked about this at the at the vegas uh bitcoin conference uh they're generating pretty

536
00:47:53,585 --> 00:48:01,225
high roi in bitcoin terms with bitcoin now the scale's not there yet uh because lightning as as

537
00:48:01,225 --> 00:48:05,925
a payment network is still small in the macro sense it's you know it does billions in volumes

538
00:48:05,925 --> 00:48:10,305
but it's still small in the macro sense and specifically the percentage you get from moving

539
00:48:10,305 --> 00:48:15,885
around those billions are you know small um but if we talk about a future where bitcoin is quite big

540
00:48:15,885 --> 00:48:19,145
and Lightning and similar things are quite big.

541
00:48:19,585 --> 00:48:22,305
That is a potential future income source.

542
00:48:23,325 --> 00:48:24,745
You know, right now, it's generally not,

543
00:48:24,905 --> 00:48:27,565
there's not really demand for, you know,

544
00:48:28,105 --> 00:48:29,525
borrowing Bitcoin in many cases

545
00:48:29,525 --> 00:48:31,405
other than through financial arbitrage.

546
00:48:31,965 --> 00:48:35,505
Should Bitcoin become bigger, more, you know, used as money,

547
00:48:35,745 --> 00:48:37,925
there could be lending aspects of it that get interesting.

548
00:48:38,445 --> 00:48:41,585
But right now, firmly, it's more about the appreciation,

549
00:48:41,585 --> 00:48:44,265
the idea that fiat's going to keep debasing,

550
00:48:44,805 --> 00:48:45,845
Bitcoin's going to go up,

551
00:48:45,885 --> 00:48:48,345
And that's how the companies work.

552
00:48:48,345 --> 00:48:50,585
Which is why I like Bitcoin,

553
00:48:50,725 --> 00:48:54,525
but I still can't get comfortable buying a corporation

554
00:48:54,525 --> 00:48:57,945
that's supposed to earn money with my money.

555
00:48:58,045 --> 00:49:01,465
I'd rather buy the physical Bitcoin or an ETF.

556
00:49:01,845 --> 00:49:02,485
Yeah, makes sense.

557
00:49:03,045 --> 00:49:06,945
I think the yield on Lightning is going to be an interesting one

558
00:49:06,945 --> 00:49:08,505
because like you say, Lynn, Block came out

559
00:49:08,505 --> 00:49:10,545
and I think they said they were generating about 9%.

560
00:49:10,545 --> 00:49:14,485
They're kind of in a silo where they can set the fees themselves,

561
00:49:14,485 --> 00:49:16,845
which make it hard to know what the exact figure will be.

562
00:49:16,945 --> 00:49:18,945
Because I think River have also published a report

563
00:49:18,945 --> 00:49:20,845
which said they get something like 1.5%

564
00:49:20,845 --> 00:49:22,645
and they run a very large Lightning node.

565
00:49:22,745 --> 00:49:24,585
So who knows what the actual figure will be.

566
00:49:24,665 --> 00:49:27,225
And I do think we're going to see some Bitcoin treasury companies

567
00:49:27,225 --> 00:49:29,665
come out and try and do that as a way of generating profit.

568
00:49:30,645 --> 00:49:32,505
But one thing I do want to go back to, Andy,

569
00:49:32,645 --> 00:49:34,265
because we started this conversation with

570
00:49:34,265 --> 00:49:37,305
you had claimed that strategy was a Ponzi scheme.

571
00:49:38,405 --> 00:49:40,085
Like that kind of came from Lynn's question,

572
00:49:40,125 --> 00:49:41,245
which we've not actually got into,

573
00:49:41,245 --> 00:49:44,205
which was how does strategy perform in a bear market?

574
00:49:44,485 --> 00:49:50,085
And in the investor call in, Michael said that if it dropped 80%, he thinks they're fine.

575
00:49:50,245 --> 00:49:52,705
90%, they may have to pause some dividends.

576
00:49:54,125 --> 00:49:58,405
Andy, can you just lay out what you mean precisely when it comes to it being a Ponzi scheme?

577
00:49:58,405 --> 00:50:06,745
Yeah, it's a very simple thing, which is a Ponzi scheme is a situation where

578
00:50:06,745 --> 00:50:18,025
past investors are paid money, paid return, from proceeds of new investors' money.

579
00:50:18,545 --> 00:50:28,285
And that's all it really is. And so what I'm referring to isn't the NAV. The NAV isn't a Ponzi

580
00:50:28,285 --> 00:50:36,325
scheme. A ETF isn't a Ponzi scheme. You take the money from investors, you go buy the asset,

581
00:50:37,025 --> 00:50:47,245
all good, no Ponzi. What is a Ponzi is when you have interest that you're paying and have no

582
00:50:47,245 --> 00:50:53,105
income to cover that interest. Literally no income. That's why I also asked,

583
00:50:53,105 --> 00:50:59,705
When's the income coming from? That's not appreciation. So there is no hope.

584
00:51:01,705 --> 00:51:07,785
Again, this is why I said, what's the future income of the treasury company? There is no hope

585
00:51:07,785 --> 00:51:16,865
of paying the preferred dividends without new proceeds from issuance. And that's a Ponzi scheme.

586
00:51:16,865 --> 00:51:22,845
That's it. There's no way, two ways about it. So Lynn, I'm curious on your take on this,

587
00:51:22,845 --> 00:51:25,445
because there's a, Andy, just for your context,

588
00:51:25,545 --> 00:51:27,765
there's a great Bitcoin analyst called Checkmate,

589
00:51:27,865 --> 00:51:28,365
James Check.

590
00:51:28,865 --> 00:51:29,945
He's a good friend of mine.

591
00:51:30,005 --> 00:51:32,105
I think he does really good analysis on this.

592
00:51:32,165 --> 00:51:33,705
And he calls these treasury companies

593
00:51:33,705 --> 00:51:34,805
kind of Ponzi adjacent.

594
00:51:35,985 --> 00:51:37,945
I'd like to know your take on it.

595
00:51:38,045 --> 00:51:39,205
That's exactly what I'm saying.

596
00:51:39,285 --> 00:51:43,525
There's the ETF and then there's the no income,

597
00:51:43,885 --> 00:51:46,545
paying out interest with no hope of future income.

598
00:51:47,445 --> 00:51:48,865
Yes, I think there's two levers of this.

599
00:51:48,865 --> 00:51:50,765
On that first lever,

600
00:51:50,765 --> 00:51:58,045
it is true that they're paying out existing you know coupons and dividends with the expectation

601
00:51:58,045 --> 00:52:04,325
and ongoing issuance of new capital that part is true and that if you define a Ponzi scheme as just

602
00:52:04,325 --> 00:52:10,565
that that's correct now for example if you look at the SEC's website for like red flags of a Ponzi

603
00:52:10,565 --> 00:52:15,065
scheme and I and the reason I was familiar with this resource is because when I years ago I wrote

604
00:52:15,065 --> 00:52:18,805
an article for why Bitcoin is not a Ponzi scheme which is different than a Bitcoin treasury company

605
00:52:18,805 --> 00:52:19,705
That it isn't.

606
00:52:20,245 --> 00:52:21,905
And people, but yeah, people would say it is.

607
00:52:21,985 --> 00:52:27,385
So I kind of did research and I pointed out, for example, the Ponzi scheme red flags, according

608
00:52:27,385 --> 00:52:33,625
to the SEC, are high returns with little or no risk, overly consistent returns, unregistered

609
00:52:33,625 --> 00:52:38,345
investments, unlicensed sellers, secretive complex strategies, issues with paperwork,

610
00:52:38,765 --> 00:52:40,005
difficulty receiving payments.

611
00:52:40,565 --> 00:52:45,445
And that's, so generally speaking, there's, when you think of the word Ponzi scheme, usually

612
00:52:45,445 --> 00:52:51,745
it comes as some degree of obfuscation, secrecy, fraudulent assumptions with it. And that's the

613
00:52:51,745 --> 00:52:56,965
part I would say, of course, there's not any of that here. So I disagree with that. I think

614
00:52:56,965 --> 00:53:04,125
you look at strategy's most recent marketing document where they talk about their PE and where

615
00:53:04,125 --> 00:53:13,165
they talk about their earnings relative to everyone else. That is deceptive, completely 100%

616
00:53:13,165 --> 00:53:24,205
fraudulent, just because it has recently become gap to consider earnings as appreciation of

617
00:53:24,205 --> 00:53:32,365
Bitcoin treasury assets as earnings doesn't mean when you say, hey, I am the biggest earner in the

618
00:53:32,365 --> 00:53:39,165
whatever, the top whatever earner in the S&P 500, that that is not a fraudulent statement.

619
00:53:39,165 --> 00:53:43,025
because if the market falls,

620
00:53:44,045 --> 00:53:48,705
they will be the biggest loser in that quarter in history.

621
00:53:48,705 --> 00:53:54,645
And they are marketing it as this one-off mark to market.

622
00:53:54,845 --> 00:53:58,925
They are marketing to investors

623
00:53:58,925 --> 00:54:03,365
as recurring earnings that deserve a multiple.

624
00:54:03,585 --> 00:54:04,885
That is fraudulent.

625
00:54:05,765 --> 00:54:06,365
Well, I would say I wouldn't,

626
00:54:06,465 --> 00:54:07,825
I'm not sure I would call it fraudulent,

627
00:54:07,825 --> 00:54:11,385
but I don't agree with the charts that show their PE comparison either.

628
00:54:11,585 --> 00:54:12,305
It's their company.

629
00:54:12,565 --> 00:54:15,405
How can you not say to them,

630
00:54:15,725 --> 00:54:20,125
hey, you're committing fraud here by marketing your shares

631
00:54:20,125 --> 00:54:22,745
as having a recurring earnings?

632
00:54:23,865 --> 00:54:26,665
Well, I think recurring, it depends on what time frame you're looking at.

633
00:54:26,785 --> 00:54:28,665
They expect probably to have a lot-

634
00:54:28,665 --> 00:54:30,405
They're comparing it to the biggest companies on earth

635
00:54:30,405 --> 00:54:33,905
that have decades of recurring earnings.

636
00:54:34,365 --> 00:54:36,525
Which is why I agree the comparison is not valid.

637
00:54:36,525 --> 00:54:43,005
i wouldn't go as far as say fraudulent how can they do it well so i'm trying to so basically

638
00:54:43,005 --> 00:54:47,545
when i look at say a highly cyclical company a company that has periods of earnings and periods

639
00:54:47,545 --> 00:54:53,205
of losses any investor would generally assign a lower pe multiple to a company like that for

640
00:54:53,205 --> 00:54:59,145
for a correct reason it's if there's a company like a mag 7 tech stock or even a really big

641
00:54:59,145 --> 00:55:03,465
mega cap like costco if you look at the pe of what people put on costco i think it's excessive but

642
00:55:03,465 --> 00:55:11,105
Like clearly there's an argument that investors use when, you know, there's a premium that investors pay for smooth growing earnings.

643
00:55:11,605 --> 00:55:13,665
They pay a much higher multiple for that correctly.

644
00:55:14,045 --> 00:55:22,065
And so when someone makes the argument that, you know, based on current gap earnings, MicroStrategy has a PE of like five or something.

645
00:55:22,165 --> 00:55:23,765
And then they say, well, our competitors have 20.

646
00:55:23,825 --> 00:55:24,845
We should also have 20.

647
00:55:25,145 --> 00:55:33,305
I generally would say right along with you that I don't view that as an accurate comparison because you're comparing a highly cyclical expectation of gap earnings and losses.

648
00:55:33,465 --> 00:55:40,185
even if Bitcoin does continue to appreciate, but at a bumpy pace versus a very smooth expectation.

649
00:55:41,605 --> 00:55:46,665
Now, fraudulent, I mean, it is gap earnings. They're following a certain accounting standard.

650
00:55:46,805 --> 00:55:51,145
So I personally wouldn't use that term, but I generally would say that I wouldn't,

651
00:55:51,145 --> 00:55:55,485
that's certainly not how I would evaluate the company. I would instead look at other metrics

652
00:55:55,485 --> 00:55:58,325
that I use to evaluate the company. Let me ask you a question on that then.

653
00:55:58,325 --> 00:56:00,805
Why is MicroStrategy doing that?

654
00:56:01,825 --> 00:56:05,565
Why is the company putting out slides like this?

655
00:56:06,165 --> 00:56:06,965
Why are they doing it?

656
00:56:07,885 --> 00:56:09,105
Well, I want to keep in mind,

657
00:56:09,185 --> 00:56:11,325
that was one slide out of over 100 slides,

658
00:56:11,385 --> 00:56:12,385
but why are they doing it?

659
00:56:12,505 --> 00:56:13,525
You'd have to ask them.

660
00:56:13,725 --> 00:56:17,785
I mean, any company is trying to put their best foot forward

661
00:56:17,785 --> 00:56:21,185
and say, you know, this is why you should own our company.

662
00:56:22,625 --> 00:56:24,525
You know, all sorts of different companies do it.

663
00:56:24,565 --> 00:56:25,325
That's their approach.

664
00:56:26,005 --> 00:56:27,385
That's not the slide I agree with.

665
00:56:27,385 --> 00:56:29,545
I think they had many good slides in their deck.

666
00:56:30,325 --> 00:56:32,565
That's, you know, maybe one of a couple slides

667
00:56:32,565 --> 00:56:33,685
I, you know, I wouldn't make,

668
00:56:33,785 --> 00:56:34,945
certainly wouldn't make the argument for.

669
00:56:36,065 --> 00:56:36,885
Okay, fair enough.

670
00:56:37,145 --> 00:56:38,325
I think it will.

671
00:56:38,965 --> 00:56:40,505
So let me just say this.

672
00:56:40,905 --> 00:56:43,185
There are no Ponzi schemes that fail.

673
00:56:43,785 --> 00:56:44,885
Sorry, that don't fail.

674
00:56:46,705 --> 00:56:48,245
Ponzi schemes fail,

675
00:56:48,465 --> 00:56:51,565
and that's when they become known as Ponzi schemes.

676
00:56:53,665 --> 00:56:56,645
Bernie Madoff was never a Ponzi scheme

677
00:56:56,645 --> 00:57:04,545
until he failed. And so it's possible that Bitcoin rallies forever. It's possible that there's never

678
00:57:04,545 --> 00:57:10,205
a down case where, and they continue to create recurring earnings. And in that case,

679
00:57:10,805 --> 00:57:15,065
microstrategy will never be declared a Ponzi scheme. Well, there certainly will be down periods

680
00:57:15,065 --> 00:57:20,445
in Bitcoin. I think even Bitcoin bulls, any rational one would say that- My point is that

681
00:57:20,445 --> 00:57:24,305
And this is why the adjacent part is the key bit.

682
00:57:26,105 --> 00:57:39,785
Bitcoin master will never be a Ponzi scheme as long as the ETF continues to appreciate, the Bitcoin underlying asset continues to appreciate, whether it's bouncy or not, sort of irrelevant.

683
00:57:39,785 --> 00:57:53,405
It'll be a Ponzi scheme when they no longer have access to financial markets to compensate their preferred shareholders, their coupon shareholders, and they must sell Bitcoin to do that.

684
00:57:53,665 --> 00:57:55,985
That will take the MNAV to negative.

685
00:57:56,985 --> 00:58:01,605
That'll create a Ponzi-like environment when they can't fund.

686
00:58:01,825 --> 00:58:06,825
They can't get that next sucker to buy the preferred because there's no income.

687
00:58:06,825 --> 00:58:15,745
or it will never be a Ponzi scheme if they find a way to actually turn this asset into an earning

688
00:58:15,745 --> 00:58:22,825
asset, which is why I keep coming back to that question. So I think it's very clear that

689
00:58:22,825 --> 00:58:29,585
in no Ponzi scheme history has anyone ever said,

690
00:58:29,585 --> 00:58:38,065
see, it's a Ponzi scheme. They suspect it might be a Ponzi scheme, but in the backward looking

691
00:58:38,065 --> 00:58:45,965
history, firstly, it has to fail. And then let me tell you something. Fraud will be the least

692
00:58:45,965 --> 00:58:52,645
of the of sailors problems. That slide will live in infamy. But it never happened.

693
00:58:54,025 --> 00:58:58,085
Andy, help me understand, because let's say in the absolute worst case scenario,

694
00:58:58,085 --> 00:59:00,365
Bitcoin drops 90%.

695
00:59:00,365 --> 00:59:03,445
Michael has to pause dividends on the preferreds.

696
00:59:03,585 --> 00:59:05,565
What makes it a Ponzi scheme at that point?

697
00:59:07,225 --> 00:59:08,285
What makes it a Ponzi scheme?

698
00:59:08,365 --> 00:59:09,825
If the equity goes to zero.

699
00:59:11,125 --> 00:59:12,125
That would be one.

700
00:59:12,345 --> 00:59:20,545
By the way, but assuming that all he has to do is pause dividends, he doesn't have to sell any Bitcoin, then the likelihood of the equity going to zero is almost zero.

701
00:59:20,765 --> 00:59:21,385
Is that not right?

702
00:59:22,225 --> 00:59:23,805
Well, I mean, unless he has fixed.

703
00:59:24,185 --> 00:59:26,865
So you can't bankrupt unless you have a fixed obligation.

704
00:59:26,865 --> 00:59:47,545
He does have some converts, but they're mostly small. That's not the downside case I'm worrying about, to be honest. I've never been worried about the downside case. I've been worried about he no longer has access to issuance at what he deems satisfactory levels of issuance, and thus he can't pay the preferred shareholders.

705
00:59:47,545 --> 00:59:51,165
they experience a significant drawdown.

706
00:59:51,545 --> 00:59:54,705
The common shareholders experience a significant drawdown

707
00:59:54,705 --> 00:59:57,205
that takes MNAV below one.

708
00:59:57,605 --> 00:59:59,665
Remember, they always have the Bitcoin.

709
01:00:00,665 --> 01:00:04,665
That's why the term adjacent, which I agree completely,

710
01:00:04,845 --> 01:00:06,445
is the essential one.

711
01:00:06,885 --> 01:00:13,385
There's the ETF, which is not a Ponzi scheme.

712
01:00:13,385 --> 01:00:29,025
There is the preferred issuance, which is creating dividend income necessary that requires further issuance. That's the Ponzi scheme bit. That's it. Only that bit.

713
01:00:29,025 --> 01:00:39,025
And when that can't work, when that issuance to pay dividends can't work, what the consequence to the various investor classes, that's hard to tell.

714
01:00:39,125 --> 01:00:58,445
But my basic assumption would be when they cannot finance any longer, they will either have to sell Bitcoin to pay their dividends or their MNAV will drop below one and their preferred shareholders will get washed out.

715
01:00:59,005 --> 01:01:04,185
meaning capital losses, not they can hold them for as long as they want. But let me tell you

716
01:01:04,185 --> 01:01:08,805
something, a preferred that's never going to pay its dividend ever again, trades very cheap,

717
01:01:09,625 --> 01:01:15,445
like practically zero. At the start of this call, Andy, you were saying you used to work in

718
01:01:15,445 --> 01:01:20,445
capital structure arbitrage. Is that where if you saw these dividends get paused, then someone like

719
01:01:20,445 --> 01:01:26,005
you would step in and short the common stock? Oh, if dividends get paused, the first thing that

720
01:01:26,005 --> 01:01:29,885
happens is the common stock goes down because there's an expectation that the common stock

721
01:01:29,885 --> 01:01:35,885
will be used to fund the dividends or much more importantly preferreds are a small class of

722
01:01:35,885 --> 01:01:42,565
investors much more importantly to fund debt payments but yes the first thing one does when

723
01:01:42,565 --> 01:01:49,485
a preferred dividend gets cut is short the stock okay lean sorry i cut you off i was gonna hop in

724
01:01:49,485 --> 01:01:54,085
to largely agree with andy with some caveats uh and so for example that's why on the earnings call

725
01:01:54,085 --> 01:01:56,225
I didn't just ask about Bitcoin falling.

726
01:01:56,685 --> 01:01:58,765
I specifically brought up the topic of capital access

727
01:01:58,765 --> 01:02:01,165
because you can have a stagnant sideways market.

728
01:02:01,845 --> 01:02:04,765
Bitcoin could fall 50% and just go sideways for three years

729
01:02:04,765 --> 01:02:06,185
and then MNAV just compresses.

730
01:02:06,265 --> 01:02:08,805
And then it's like, well, what happens there?

731
01:02:08,885 --> 01:02:10,045
And you start to run into challenges.

732
01:02:10,945 --> 01:02:13,785
Now, in the prior cycle,

733
01:02:14,165 --> 01:02:16,425
they primarily relied on converts,

734
01:02:16,865 --> 01:02:19,285
which gave them the advantage that on a quarterly basis,

735
01:02:19,285 --> 01:02:20,905
they had very little obligation

736
01:02:20,905 --> 01:02:23,065
because they were either zero or near zero coupon.

737
01:02:23,065 --> 01:02:29,445
and the view was as long as bitcoin doesn't go like five years in a bear market they're probably

738
01:02:29,445 --> 01:02:35,825
not going to have an issue converting or refinancing these now preferreds are interesting

739
01:02:35,825 --> 01:02:41,785
because it's more of a bend and not break model which is they have higher quarterly obligations

740
01:02:41,785 --> 01:02:46,925
but those obligations are less immediately catastrophic should they fail to meet those

741
01:02:46,925 --> 01:02:52,505
obligations and now what that opens them to and this is where i agree with andy the the failure

742
01:02:52,505 --> 01:02:57,785
mechanism is then pretty known which is that if mnav compresses regardless to what bitcoin price

743
01:02:57,785 --> 01:03:01,465
action is doing if it just compresses and obviously the deeper the bear market in bitcoin

744
01:03:01,465 --> 01:03:07,145
the worse this whole thing gets compared to your your dollar denominated liabilities um you start

745
01:03:07,145 --> 01:03:12,265
shutting off dividends uh it's there's one preferred where you don't even get back dividends

746
01:03:12,265 --> 01:03:17,225
uh like their junior ones the senior ones where you do get paid back dividend is still based on

747
01:03:17,225 --> 01:03:22,165
the assumption that eventually bitcoin and mnav will both recover and the company will be able to

748
01:03:22,165 --> 01:03:28,105
issue more equity to back fund those dividends. The longer that doesn't happen, equity investors

749
01:03:28,105 --> 01:03:33,285
should start pricing in a negative MNAV or below one MNAV, I should say, because they say, well,

750
01:03:33,345 --> 01:03:37,285
okay, here's how much Bitcoin they have, here's how much debt they have. But then also they have

751
01:03:37,285 --> 01:03:42,785
this accumulating liability for preferreds once any of this comes back online, if it does.

752
01:03:43,705 --> 01:03:47,425
And so they can start pricing that. And if you dig yourself in deep enough of a hole,

753
01:03:47,425 --> 01:03:52,445
the probability that they're going to recover diminishes and people can bet on the probabilities

754
01:03:52,445 --> 01:03:57,425
and they will be, you know, so, but the point is I would consider a failure mode to be that if the

755
01:03:57,425 --> 01:04:02,765
company doesn't necessarily liquidate, but they have permanently impaired the preferred holders

756
01:04:02,765 --> 01:04:06,345
and the common equity holders, that that would be a failure mode.

757
01:04:07,025 --> 01:04:13,345
That 100% agree with every word Lynn just said. It can happen with, it can happen with Bitcoin at

758
01:04:13,345 --> 01:04:19,765
any price yeah and that's and and so that's an as an analyst that's something i i focus on and

759
01:04:19,765 --> 01:04:23,865
that's why i brought it up on the earnings call people are you know generally we're in a bull

760
01:04:23,865 --> 01:04:28,265
market but i'm like let's let's ask the bear market question um and i agree with you and i

761
01:04:28,265 --> 01:04:32,345
think that the main thesis here the main question this is why i'm also pretty conservative on mnavs

762
01:04:32,345 --> 01:04:37,965
i'm willing to pay for treasury companies given given any individual context is they have a

763
01:04:37,965 --> 01:04:45,145
mechanism to effectively short fiat and get more bitcoin uh the the fair mnav is debatable there's

764
01:04:45,145 --> 01:04:52,025
market participants actively debating on what that answer is um and the higher the market assigns it

765
01:04:52,025 --> 01:04:57,745
the more bitcoin yield these companies can get now i expect that over the long arc of time mnavs

766
01:04:57,745 --> 01:05:03,145
will compress close to one uh when these become if you become a trillion dollar company you know

767
01:05:03,145 --> 01:05:08,545
It compresses very significantly, I think, over the long arc of time in a cyclical sense.

768
01:05:08,745 --> 01:05:09,845
So in a bull market, it's high.

769
01:05:09,945 --> 01:05:10,905
In a bear market, it's, I mean,

770
01:05:11,025 --> 01:05:14,585
MicroTage has already gone down to a very low MNAV in the prior bear market.

771
01:05:14,685 --> 01:05:17,625
So I think we can see one and then also see high again.

772
01:05:17,745 --> 01:05:21,085
But I think the cycles will compress closer to one.

773
01:05:21,625 --> 01:05:24,225
Then the question is, is that two years from now?

774
01:05:24,485 --> 01:05:25,565
Is that five years from now?

775
01:05:25,605 --> 01:05:26,525
Is that 10 years from now?

776
01:05:26,565 --> 01:05:28,105
Is that 15 or 20 years from now?

777
01:05:28,105 --> 01:05:32,605
And how much Bitcoin yield will they have accumulated by that time?

778
01:05:32,605 --> 01:05:38,405
and what will the capital structure look like when that starts to occur in a more persistent

779
01:05:38,405 --> 01:05:38,725
sense.

780
01:05:38,885 --> 01:05:42,325
Again, not in like a one-year bear market or two-year bear market scenario that they might

781
01:05:42,325 --> 01:05:46,605
be prepared for, but just longer term when the MNAV is kind of permanently drained.

782
01:05:46,945 --> 01:05:50,305
Now, a lot of people thought that when the ETFs came out, that would permanently drain

783
01:05:50,305 --> 01:05:50,885
their MNAV.

784
01:05:51,345 --> 01:05:55,985
And this whole discussion around euphoria and high MNAVs occurred after that, ironically.

785
01:05:56,645 --> 01:06:01,985
So the market has shown so far an inability to determine when their MNAV is going to kind

786
01:06:01,985 --> 01:06:08,205
persistently go away. And so we'll see. And the answer is I don't know, but that's why I prefer

787
01:06:08,205 --> 01:06:14,065
to be conservative with where I'm willing to enter with an MNAV, where I'm willing to trim

788
01:06:14,065 --> 01:06:18,105
my existing holdings if I perceive the MNAV as getting too high.

789
01:06:18,725 --> 01:06:22,885
Okay. That makes sense. So maybe just to close out on this section, because I do want to talk

790
01:06:22,885 --> 01:06:25,845
to you about stable coins as well, because I think you've got an interesting take on those, Andy.

791
01:06:26,345 --> 01:06:30,605
But before we close out the treasury companies and strategy in particular, if you had to put

792
01:06:30,605 --> 01:06:35,465
kind of a percentage chance on them failing in the next decade. Where would you put that? Because,

793
01:06:35,465 --> 01:06:39,485
I mean, personally for me, it would seem like low single figures.

794
01:06:41,265 --> 01:06:49,565
Bitcoin, sorry, mastered failing in the way Lynn described, a washdown, a significant markdown in

795
01:06:49,565 --> 01:06:59,265
the preferred shares, and a MNAV below one. In the next 10 years, I think it's 50%.

796
01:06:59,265 --> 01:07:06,005
wow lim where would you put that i think the next 10 years there's a pretty high chance we

797
01:07:06,005 --> 01:07:11,365
enter that state in a in a bear market uh then the question is do we get out of that state

798
01:07:11,365 --> 01:07:17,525
uh i i expect that we would so i think it's a it's a in the next 10 years i would assign as

799
01:07:17,525 --> 01:07:24,405
certainly a sub 50 chance that we that that's the end discussion of where microstrategy ends up

800
01:07:24,405 --> 01:07:39,725
But much like much like they were in the 22 bear market, I think there's a chance that will be it will find them somewhat impaired at some point in 10 years. I could be wrong. I think there's a decent chance. The idea that happens permanently, I would sign probably less than a quarter.

801
01:07:39,725 --> 01:07:56,025
Yeah, I don't know about permanently. I mean, guy survived 2000. So can he survive another one? I guess. I don't think so. I don't think he'd come out of that spiral because things tend to be like that.

802
01:07:56,025 --> 01:08:02,665
You have these manias, not to say that microstrategy is a mania, and certainly not to say Bitcoin

803
01:08:02,665 --> 01:08:07,605
is a mania, but you had these strategies where a certain type of strategy works for a while,

804
01:08:07,965 --> 01:08:10,845
then it never comes back once it fails.

805
01:08:11,045 --> 01:08:15,445
And SPACs are like that, but hey, SPACs are coming back too, so maybe possibly.

806
01:08:15,925 --> 01:08:17,965
I'd love to talk a little bit about stablecoin.

807
01:08:19,425 --> 01:08:20,585
Yeah, why don't you kick us off, Andy?

808
01:08:20,665 --> 01:08:24,545
Because I've spoken to Lynn about this in the past a number of times, and we were messaging

809
01:08:24,545 --> 01:08:28,445
before we did this show. And I think you've got a really interesting take. So you start us off with

810
01:08:28,445 --> 01:08:32,085
what you think stablecoins are, what kind of addressable market there is for them.

811
01:08:32,085 --> 01:08:38,805
Right. So I want to be very limited because mostly I don't know shit. I want to be limited to

812
01:08:38,805 --> 01:08:45,565
one kind of stablecoin that I'm not even sure actually exists at this very moment, which is a

813
01:08:46,165 --> 01:08:53,885
Genius Act compliant, fully backed stablecoin. The reason why I want to keep that in the frame

814
01:08:53,885 --> 01:08:56,885
is because they can only own...

815
01:08:56,885 --> 01:09:00,385
For one, they are illegal, it's illegal for them to pay interest.

816
01:09:00,385 --> 01:09:18,227
And two they can only own what I consider money Meaning treasury bills bank reserves and repo and all government versions

817
01:09:18,227 --> 01:09:24,087
of those things. And so let's start with that. Then the way I break it down is there's three

818
01:09:24,087 --> 01:09:30,908
things I care about, which is, and again, I don't know shit, I'm just trying to figure out the world.

819
01:09:30,908 --> 01:09:37,908
One is what I think people call payment rails,

820
01:09:37,908 --> 01:09:42,148
which are, you know, how we in our lives,

821
01:09:42,148 --> 01:09:45,148
both domestically and across-border sense,

822
01:09:45,148 --> 01:09:47,667
most of us spend our lives within borders,

823
01:09:47,667 --> 01:09:50,468
buy and sell stuff.

824
01:09:50,468 --> 01:09:52,468
You know, it's not...

825
01:09:52,468 --> 01:09:56,507
Credit cards are the front of a bank account.

826
01:09:56,507 --> 01:09:59,667
Stripe.

827
01:10:00,908 --> 01:10:05,948
and PayPal are the front of a credit card.

828
01:10:06,948 --> 01:10:10,007
Checking accounts are literally bank accounts.

829
01:10:10,607 --> 01:10:13,908
ACH, bank wires, all of these things

830
01:10:13,908 --> 01:10:18,188
are ways in which we move deposits from our bank

831
01:10:18,188 --> 01:10:19,768
to somebody else's deposits.

832
01:10:20,587 --> 01:10:21,968
And those are what, and I guess,

833
01:10:22,547 --> 01:10:28,007
Venmo and Zelle are more platforms than they are,

834
01:10:29,127 --> 01:10:30,667
they do some of those things.

835
01:10:30,667 --> 01:10:35,348
It's a transfer of deposits from one person to another.

836
01:10:36,148 --> 01:10:42,107
And so I think there's, in the U.S., by and large, I think it works pretty well.

837
01:10:42,627 --> 01:10:51,087
You know, I don't hear a lot of complaints about the timing or speed or cost of transacting between bank accounts.

838
01:10:52,948 --> 01:10:58,167
Wires are anachronistic and are really the only way to do large transactions.

839
01:10:58,167 --> 01:11:02,567
and those are too damn expensive, so maybe there's something there.

840
01:11:02,948 --> 01:11:06,107
But pretty much all those other things work just fine.

841
01:11:06,648 --> 01:11:09,868
Could there be a better solution like stablecoins?

842
01:11:09,868 --> 01:11:18,567
Yes, if it eliminates the entire bank checking account part of the world.

843
01:11:18,848 --> 01:11:19,667
So that's one thing.

844
01:11:20,007 --> 01:11:26,928
The next thing is, okay, in that world where you have people transacting,

845
01:11:26,928 --> 01:11:35,348
employers paying people in a stablecoin, employed getting stablecoin and then using it to

846
01:11:35,348 --> 01:11:45,868
transact for their daily usage. Let's say that world exists. What is the balance of money that

847
01:11:45,868 --> 01:11:51,248
will be held in stablecoin just for transactions? Because I think we all probably keep a little bit

848
01:11:51,248 --> 01:11:56,627
of money in our checking account just because, even though it pays absolutely zero interest.

849
01:11:56,928 --> 01:12:04,087
So that's another thing. And then the third thing is stable coins as a long-term vehicle for saving

850
01:12:04,087 --> 01:12:10,448
U.S. dollars. And that's my framework. And so when I think about all those things, I say,

851
01:12:11,828 --> 01:12:18,968
I don't know, but it sounds like there is a very good use case, particularly outside of the U.S.,

852
01:12:18,968 --> 01:12:23,227
for a new payment rail in US dollars.

853
01:12:23,708 --> 01:12:26,127
Two, if there is a new payment rail,

854
01:12:26,227 --> 01:12:27,688
there's going to be a little bit of money

855
01:12:27,688 --> 01:12:28,987
that people keep on their phone

856
01:12:28,987 --> 01:12:31,648
instead of keeping in their checking account on their phone.

857
01:12:31,888 --> 01:12:34,067
They'll keep it in stable cones on their phone,

858
01:12:34,208 --> 01:12:35,507
and that'll pay no interest

859
01:12:35,507 --> 01:12:37,688
and create excess demand for T-bills.

860
01:12:38,067 --> 01:12:42,027
And then lastly, as a savings vehicle, I don't get it.

861
01:12:42,788 --> 01:12:45,148
I mean, as a savings vehicle within the US,

862
01:12:45,148 --> 01:12:46,148
I totally agree.

863
01:12:46,288 --> 01:12:47,107
It's the rest of the world

864
01:12:47,107 --> 01:12:48,208
where that becomes more interesting.

865
01:12:48,208 --> 01:12:49,948
But Lynn, I'll let you respond to that.

866
01:12:50,648 --> 01:12:53,468
So, I mean, Andy and I are pretty aligned, I think, on stablecoins.

867
01:12:53,788 --> 01:12:58,808
I might be a one or two degree shifted a little bit more toward maybe the bull camp of them.

868
01:13:00,047 --> 01:13:05,288
You know, I've been on record since 2021 that I think Bitcoin, stablecoin market cap is going to grow dramatically.

869
01:13:05,468 --> 01:13:06,027
It has.

870
01:13:06,188 --> 01:13:08,308
I still think it's going to grow dramatically.

871
01:13:08,948 --> 01:13:16,648
But I generally agree that a lot of the percentage of it won't be fully new demand for dollars and T-bills.

872
01:13:17,428 --> 01:13:20,708
A lot of it will come out of existing usage of dollars.

873
01:13:20,708 --> 01:13:33,627
And for example, even like the Treasury Secretary tweeted out the $3.7 trillion figure for new stablecoin and therefore T-bills expectations from some report.

874
01:13:34,227 --> 01:13:39,107
If you actually dig into that report, so that was Citibank, Citigroup, one of their research divisions.

875
01:13:39,928 --> 01:13:48,888
Their analysis was by 2030, they had a bear base and bull case for what the world of stable coins could look like.

876
01:13:49,227 --> 01:13:52,268
Their base case was $1.6 trillion in stable coins.

877
01:13:52,888 --> 01:13:54,987
Their bull case was $3.7 trillion.

878
01:13:54,987 --> 01:13:57,167
That was the one that the secretary was citing.

879
01:13:57,908 --> 01:14:05,127
But if you look at any of those cases, let's say the $1.6 trillion, their base case, they actually broke down where they expect that to come from.

880
01:14:05,607 --> 01:14:08,748
And some of it was from American bank deposits.

881
01:14:09,107 --> 01:14:12,667
Some of it was foreign, already dollar-denominated bank deposits.

882
01:14:13,047 --> 01:14:14,948
Some of it was from physical bank notes.

883
01:14:15,248 --> 01:14:16,587
Some of it was from money markets.

884
01:14:17,428 --> 01:14:22,848
There are these various kind of just pools that could move into stablecoins, with only

885
01:14:22,848 --> 01:14:30,468
some of that being fresh new demand for people that hold Egyptian pounds and want dollars

886
01:14:30,468 --> 01:14:34,587
and find this and that they might not otherwise do it physically.

887
01:14:34,768 --> 01:14:35,948
I know people actually do that.

888
01:14:35,948 --> 01:14:39,527
But let's say there's some people that because of the frictions involved, don't do that.

889
01:14:39,848 --> 01:14:41,368
And stable coins might make them easier.

890
01:14:41,587 --> 01:14:46,027
And you just apply that to any country you want to talk about, that it will create some

891
01:14:46,027 --> 01:14:46,468
new demand.

892
01:14:47,047 --> 01:14:49,788
The other caveat is that it's not the same as a dollar.

893
01:14:50,087 --> 01:14:53,368
And as Andy would agree, it's a payment mechanism as well.

894
01:14:53,888 --> 01:15:00,448
So for example, I know Egyptians that buy physical dollars purely as savings, not for

895
01:15:00,448 --> 01:15:03,167
like 10-year savings, but like one-year savings.

896
01:15:03,167 --> 01:15:09,087
for longer term savings they like gold and real estate and things like that so liquid

897
01:15:09,087 --> 01:15:13,748
intermediate term savings there's a pretty big market for that in developed countries they can

898
01:15:13,748 --> 01:15:18,567
do that with physical dollars stable coins in some capacities make it easier to get to them

899
01:15:18,567 --> 01:15:24,648
which and andy's pointed this out can lower the gray market premiums uh four dollars that you find

900
01:15:24,648 --> 01:15:29,127
in many markets i would also argue it could create new demand for dollars because part

901
01:15:29,127 --> 01:15:34,908
the demand side could be adjusted based on those frictions diminishing they say well i used to have

902
01:15:34,908 --> 01:15:40,087
to pay this much for a dollar i used to have to go uh some sketchy place and make these connections

903
01:15:40,087 --> 01:15:43,828
and now i can just do it on my phone so maybe now i actually want more dollars than i did before

904
01:15:43,828 --> 01:15:49,868
when my only option was physical uh or like a local bank i don't trust um so i i think that

905
01:15:49,868 --> 01:15:54,468
can increase demand and then also i think i think one of the things doesn't get discussed enough is

906
01:15:54,468 --> 01:16:00,688
small businesses around the world. So there are 40 plus currencies in Africa. There are 30 plus

907
01:16:00,688 --> 01:16:05,908
currencies in Latin America, some dozens in Southeast Asia. I don't know the number offhand.

908
01:16:07,027 --> 01:16:12,127
And imagine if in the United States, like every state had its own currency. So your customers

909
01:16:12,127 --> 01:16:15,868
have different currencies, your people lending you money might have different currencies.

910
01:16:16,688 --> 01:16:20,808
You're trying to figure out how to save some of your currencies. You find that, you know,

911
01:16:20,808 --> 01:16:26,487
state x has better currency than state y and you're in y but you want to hold state x currency

912
01:16:26,487 --> 01:16:31,808
for your liquid savings so it's it can be a mess that's the case in a lot of the world and so i

913
01:16:31,808 --> 01:16:36,308
think there's a business case where a lot of these businesses will want to hold some stable coin

914
01:16:36,308 --> 01:16:41,868
balance that's pretty substantial uh that that bank notes are not solving for them that local

915
01:16:41,868 --> 01:16:46,948
local banks are not solving for them uh and so i think there's a stable coin demand for that so

916
01:16:46,948 --> 01:16:50,448
the way I would kind of phrase it is that, you know, when people ask me macro questions,

917
01:16:50,848 --> 01:16:56,248
you know, will this dramatically extend dollar dominance? My view is generally no. It's not a

918
01:16:56,248 --> 01:17:01,868
non-variable, but it's not as though it structurally changes my thesis around it. It's just like a

919
01:17:01,868 --> 01:17:08,848
one variable among many that there's now certain new avenues to own dollars and therefore T-bill

920
01:17:08,848 --> 01:17:14,768
exposure in a way that wasn't before. So it's not zero, but it's not something I kind of reorient

921
01:17:14,768 --> 01:17:21,627
my world around. Now, if I put my venture cap on, you know, you would have capital, we do Bitcoin

922
01:17:21,627 --> 01:17:26,708
related venture. Some of those, especially in developed world, will also have stablecoin usage

923
01:17:26,708 --> 01:17:31,487
in their products and services that they're building. And so I think there are multiple

924
01:17:31,487 --> 01:17:36,448
billion dollar opportunities out there for companies to make use of stablecoins. I think

925
01:17:36,448 --> 01:17:41,808
the remittance market is still silly in terms of the prices and the frictions involved and the

926
01:17:41,808 --> 01:17:47,587
speed and the opaqueness of that i think that can be resolved um i don't think the u.s i even know

927
01:17:47,587 --> 01:17:52,268
we're the place of dollars i don't think we're the key market for stable coins i think the rest of

928
01:17:52,268 --> 01:17:56,947
the world is or certain parts of the world um and i think that it's just is part of the ongoing

929
01:17:56,947 --> 01:18:02,547
digitization digitization of of money so when you think of like some of the potential use cases

930
01:18:02,547 --> 01:18:09,648
stable coins um i i think thinking of them just as a dollar equivalent is maybe not quite um the

931
01:18:09,648 --> 01:18:13,627
full picture in the sense that instead of just being a physical dollar, you're actually getting

932
01:18:13,627 --> 01:18:17,527
a dollar bank account. So if you're in a country like Egypt and you want to save dollars, instead

933
01:18:17,527 --> 01:18:21,708
of putting $20 bills under the mattress, you actually can have almost like a US dollar bank

934
01:18:21,708 --> 01:18:28,188
account. And then the second point to that is, do you not see this as kind of a de facto

935
01:18:28,188 --> 01:18:32,188
dollarization for any of these countries? If you're in Egypt, why would you hold any Egyptian

936
01:18:32,188 --> 01:18:36,587
pounds if you could hold the dollar? Do you not think that could be the kind of bull case for

937
01:18:36,587 --> 01:18:42,947
stablecoins? Well, I think the, I think the, well, let me, let me explain what I think is.

938
01:18:43,708 --> 01:18:50,987
So all those things are maybe true. It's the, the issue is that it requires certain things that

939
01:18:50,987 --> 01:18:57,708
people don't understand. I think regarding the physical plumbing of how dollars circulate through

940
01:18:57,708 --> 01:19:06,987
the world. So there are two types of dollars, basically. There's coinage and bills, physical

941
01:19:06,987 --> 01:19:16,848
currency, and there's electronic dollars. And as you said, currency and bills are in mattresses,

942
01:19:16,908 --> 01:19:22,808
in wallets, in vaults, wherever they are, that's where they are. And there's 1.2 trillion of them

943
01:19:22,808 --> 01:19:25,107
floating around outside of the United States.

944
01:19:25,468 --> 01:19:27,127
So that's one thing.

945
01:19:27,527 --> 01:19:30,328
And then there's all this electronic bills, dollars.

946
01:19:30,727 --> 01:19:35,148
And electronic dollars take really only two forms.

947
01:19:38,667 --> 01:19:41,848
Bank deposits or securities.

948
01:19:43,328 --> 01:19:47,627
And bank deposit and money markets

949
01:19:47,627 --> 01:19:49,828
are really just a pass-through vehicle.

950
01:19:49,828 --> 01:20:07,167
You say, well, I have my money, my cash in a money market. No, you don't. The cash in the money market holds repo and treasury bills. It doesn't hold physical dollars. It holds repo and treasury bills.

951
01:20:07,888 --> 01:20:13,388
So when somebody wants a dollar, they can only get one in two ways.

952
01:20:13,768 --> 01:20:17,447
They can convince somebody else that, well, there's only one way they can do it.

953
01:20:17,708 --> 01:20:20,408
They can convince somebody else to sell it to them.

954
01:20:21,328 --> 01:20:29,908
And so you have to ask yourself, okay, this Egyptian wants a dollar in his stablecoin wallet.

955
01:20:30,447 --> 01:20:36,368
He's going to have to get a dollar to deposit with the minter.

956
01:20:36,368 --> 01:20:43,107
where's he going to get that dollar from? And he might get a physical dollar, physical dollar bill,

957
01:20:43,208 --> 01:20:48,748
and that'll get brought into the system. Or he might get somebody to sell their T-bill

958
01:20:48,748 --> 01:20:58,167
or monetize their money market fund. Only in that way to dollar, or he might get a bank

959
01:20:58,167 --> 01:21:02,627
to create money out of thin air by lending it to him.

960
01:21:02,627 --> 01:21:15,188
that's the only way money can can move and all of them fund what lynn was saying regarding the 1.6

961
01:21:15,188 --> 01:21:22,808
to 3.7 trillion dollars of new demand which by the way my own projection is 750 billion of which

962
01:21:22,808 --> 01:21:29,868
is a tripling of existing market um uh stable coin market so it's going to happen but the question

963
01:21:29,868 --> 01:21:37,627
is where does it come from? And does that create, and this is only macro, does that growth create

964
01:21:37,627 --> 01:21:45,868
new demand for dollars? It doesn't. It doesn't at all. It's just a transfer from people who have

965
01:21:45,868 --> 01:21:53,487
dollars to people who want dollars. And currently, it'll be made a little easier. The only place

966
01:21:53,487 --> 01:22:02,848
that new demand for bills comes from, likely demand, is from people taking physical Benjamins

967
01:22:02,848 --> 01:22:12,087
and converting them into stablecoins. That $1.2 trillion and $2.4 trillion globally is the TAM.

968
01:22:12,987 --> 01:22:17,288
I may be misunderstanding here a little bit, because let's say you are in Egypt and you have

969
01:22:17,288 --> 01:22:23,268
Egyptian pounds. I assume you don't need dollars to buy a stablecoin. You could take your Egyptian

970
01:22:23,268 --> 01:22:25,648
pounds onto an exchange and get a stable coin on an exchange?

971
01:22:26,227 --> 01:22:27,388
No, you can't.

972
01:22:27,547 --> 01:22:28,888
Let me explain why.

973
01:22:29,107 --> 01:22:30,227
Of course you can.

974
01:22:30,808 --> 01:22:35,388
If there's somebody who's willing in the secondary market, you can get anything you want.

975
01:22:36,308 --> 01:22:37,928
But that's not new demand.

976
01:22:39,968 --> 01:22:43,667
Because somebody sold you that stable coin for your Egyptian pounds.

977
01:22:44,047 --> 01:22:45,667
That's not new demand.

978
01:22:45,667 --> 01:22:54,167
But you cannot get a newly minted stablecoin created without U.S. dollars.

979
01:22:54,968 --> 01:22:58,248
This is where I think that nuance really comes into play.

980
01:22:58,308 --> 01:23:01,768
So I don't disagree with anything Andy said except for part of the conclusion.

981
01:23:02,487 --> 01:23:11,067
So what stablecoins do is they increase the surface area of where these secondary market FX trades can even happen.

982
01:23:11,067 --> 01:23:15,508
uh so there are certain markets that are that either dollars have trouble getting into or they're

983
01:23:15,508 --> 01:23:21,748
very expensive and shady to get um by making them easier to get there's more surface area where

984
01:23:21,748 --> 01:23:29,288
someone could say i have egyptian pounds or or uh you know indian rupees or argentine pesos and i i

985
01:23:29,288 --> 01:23:34,587
go to secondary market in some capacity digital physical whatever and i buy stable coins with

986
01:23:34,587 --> 01:23:39,527
them uh and some some you know uh intra entrepreneur on the street or in the digital

987
01:23:39,527 --> 01:23:44,107
world is facilitating that liquidity that connection so that increases the surface area

988
01:23:44,107 --> 01:23:50,727
of people that could demand dollars and want dollars now they don't sit there and take a

989
01:23:50,727 --> 01:23:55,947
dollar and put it into the stable coin they bid whatever other currency they have for the stable

990
01:23:55,947 --> 01:24:02,888
coin proxy of a dollar and then what that does is that's that's around the margins a new bid for

991
01:24:02,888 --> 01:24:08,428
dollars that didn't exist before uh partly that takes away from the from the gray market premium

992
01:24:08,428 --> 01:24:09,388
that already exists.

993
01:24:09,688 --> 01:24:11,928
But if that gray market premium gets small enough

994
01:24:11,928 --> 01:24:13,487
and the whole process gets easier,

995
01:24:13,888 --> 01:24:15,768
more people might want dollars.

996
01:24:15,868 --> 01:24:18,607
Kind of like how the internet existed before the browser.

997
01:24:18,987 --> 01:24:20,688
The browser made it easier to use.

998
01:24:20,828 --> 01:24:22,908
Therefore, the demand for the internet increased.

999
01:24:23,188 --> 01:24:26,308
And therefore, there's more people that wanted it.

1000
01:24:26,348 --> 01:24:27,947
So kind of like how stable coins

1001
01:24:27,947 --> 01:24:29,447
can make dollars easier to get.

1002
01:24:30,348 --> 01:24:32,308
First, it can collapse the gray market demand

1003
01:24:32,308 --> 01:24:33,428
or gray market premium.

1004
01:24:33,868 --> 01:24:38,288
Then it potentially can increase the total demand for dollars

1005
01:24:38,288 --> 01:24:39,688
because now it's an easier process.

1006
01:24:40,148 --> 01:24:41,947
And then the mechanism is then stablecoins

1007
01:24:41,947 --> 01:24:44,208
can trade at a slight premium to a dollar,

1008
01:24:44,527 --> 01:24:46,607
which is where other players come in

1009
01:24:46,607 --> 01:24:50,388
and they will do the process of giving

1010
01:24:50,388 --> 01:24:51,808
the stablecoin issuer dollars

1011
01:24:51,808 --> 01:24:53,087
and get stablecoins back.

1012
01:24:53,288 --> 01:24:55,708
And that's how that arbitrage is done.

1013
01:24:55,808 --> 01:24:57,288
That's how the peg is maintained.

1014
01:24:57,987 --> 01:25:00,527
And so it's not necessarily that the demand

1015
01:25:00,527 --> 01:25:02,527
for the number of dollars increases per se,

1016
01:25:02,888 --> 01:25:05,667
but the attractiveness of the dollar

1017
01:25:05,667 --> 01:25:08,148
to pierce into these other markets

1018
01:25:08,148 --> 01:25:13,227
and take market share from them potentially goes up in a way that I think is non-trivial.

1019
01:25:13,768 --> 01:25:18,868
And therefore, it does have some implications for dollar strength. It's not the only variable,

1020
01:25:18,868 --> 01:25:24,008
but I think it's a new variable to consider that it can take market share from some existing,

1021
01:25:24,188 --> 01:25:30,708
you know, developing market currencies more easily than it could in a purely physical form.

1022
01:25:30,708 --> 01:26:00,067
Right. I don't, listen, I don't disagree that it is, that there are a variety of potential places that stablecoin disintermediates. Number one is physical dollars, bills, literal bills. Number two is foreign currencies that are really not desired. Now, if they were really not desired, there's already a great incentive for people to get out of them.

1023
01:26:00,067 --> 01:26:02,408
With friction. With friction is the point.

1024
01:26:02,627 --> 01:26:11,188
Right. But with friction, agreed. And that friction will be released. So maybe some of that marginal dollar demand will agree. I don't disagree with you, Len.

1025
01:26:11,188 --> 01:26:28,908
And then the third one is bank deposits. And bank deposits are vulnerable because people may want to save for whatever term. But that comes at the expense of demand for assets. It's not free.

1026
01:26:28,908 --> 01:26:47,768
So either it hurts the currency, the supply comes from either the physical dollars or the bank deposits, or possibly some foreign currency-related problems, which presumably those foreign countries are not going to be happy about.

1027
01:26:49,268 --> 01:26:50,587
I agree, they won't be.

1028
01:26:50,607 --> 01:26:52,607
And they act in some way.

1029
01:26:52,667 --> 01:26:55,288
I don't know how they act, but they may act.

1030
01:26:55,288 --> 01:27:03,888
I think there's maybe another piece of this, which is like you started this, Andy, by saying you wanted to talk about the stable coins that are regulated under the Genius Act.

1031
01:27:04,447 --> 01:27:18,727
I don't think it's out of the question to think maybe a Tether International type company spins off and does stable coins that are purely based outside of the US still back some of the dollar and does offer like a share of the yield that they're making on those treasuries.

1032
01:27:19,148 --> 01:27:21,908
Does that change the equation if we see something like that?

1033
01:27:22,328 --> 01:27:24,567
Well, I think the issue there is leverage.

1034
01:27:25,288 --> 01:27:44,667
So if people want to take on a levered trust me exposure for a stable coin, that allows money, essentially money to be created, which has risk.

1035
01:27:44,667 --> 01:27:55,648
So I don't really think of it, but I guess there's a potential for growth of non-backed interest-bearing stablecoins.

1036
01:27:56,148 --> 01:28:03,908
But I wonder how the market isn't currently being served by the existing stablecoins.

1037
01:28:04,667 --> 01:28:06,848
But again, this is outside my expertise.

1038
01:28:06,848 --> 01:28:20,087
The international ones can still exist to be fully backed. It's just that their source of dollar exposure is either foreign dollar bank accounts or foreign holdings of T-bills that don't touch the U.S. system.

1039
01:28:20,627 --> 01:28:35,968
And so the downside of them is that if you're operating in the United States, you probably can't get a recipient to send you that international stablecoin right to your bank account in a future world where your bank account can even accept Genius Act stablecoins.

1040
01:28:36,848 --> 01:28:41,148
So you're saying it's a, so again, outside-

1041
01:28:41,148 --> 01:28:41,508
It's a euro dollar.

1042
01:28:41,868 --> 01:28:43,188
But you're saying it's a euro dollar.

1043
01:28:43,248 --> 01:28:44,468
Yeah, it's digital euro dollar.

1044
01:28:44,468 --> 01:28:53,607
I believe that there is, you know, the, again, that's sourcing stablecoin demand, converting

1045
01:28:53,607 --> 01:28:58,968
euro dollar existing supply into stablecoin existing supply.

1046
01:28:59,127 --> 01:29:01,308
It doesn't change much net.

1047
01:29:01,308 --> 01:29:15,868
It just gives, as you say, more access, which I think still hits the physical dollar market more than it does and potentially causes banks to struggle because they lose the deposits.

1048
01:29:17,087 --> 01:29:17,248
Right?

1049
01:29:18,748 --> 01:29:18,808
Yeah.

1050
01:29:18,808 --> 01:29:23,727
These things have to fund some—these deposits have a purpose right now.

1051
01:29:23,727 --> 01:29:46,208
And whenever a disruptive technology like this causes bank deposits to shrink, which it will, that will have a tightening impact and less demand for dollars offset by this easier access to dollars that creates more demand.

1052
01:29:46,208 --> 01:30:04,947
It's a tricky plumbing issue. But I think you're right to think, as I said earlier, it's this intermediation and temporary, you used one year, I was using shorter term, savings is definitely a demand for dollars.

1053
01:30:04,947 --> 01:30:12,607
but absent that benjamin's getting burned and this factor i don't see it anything

1054
01:30:12,607 --> 01:30:18,908
that's going to save the u.s if they need to issue a ton of bills i agree with you there i don't

1055
01:30:18,908 --> 01:30:24,308
think it's going to quote save the u.s i think it's a marginal new variable to consider in macro

1056
01:30:24,308 --> 01:30:28,648
analysis for the dollar yeah i don't think it's the biggest variable but i think it's a new variable

1057
01:30:28,648 --> 01:30:35,508
there's open debate around the size of that variable and any sort of headline variable

1058
01:30:35,508 --> 01:30:39,527
use any sort of headline number you see around stable coin demand the thing we would agree on

1059
01:30:39,527 --> 01:30:45,328
is that not all of that and not even most of that is entirely new fresh demand for dollars

1060
01:30:45,328 --> 01:30:52,607
and t-bills from foreign currency right i think the most of it and i think the most that is what

1061
01:30:52,607 --> 01:30:58,428
whatever that is and whatever the right number is most of that excess demand which is new demand

1062
01:30:58,428 --> 01:31:02,047
is going to come from physical currency.

1063
01:31:03,388 --> 01:31:04,627
That's the part I'm not sure about

1064
01:31:04,627 --> 01:31:06,428
because I think that there is,

1065
01:31:06,828 --> 01:31:09,468
some of that will come from physical currency,

1066
01:31:09,727 --> 01:31:10,587
but then the question is

1067
01:31:10,587 --> 01:31:13,288
how much entirely new demand for dollars

1068
01:31:13,288 --> 01:31:16,148
will be generated if it's easier to do

1069
01:31:16,148 --> 01:31:17,688
and the spreads are narrower.

1070
01:31:17,768 --> 01:31:19,087
I'm just saying where does it come from?

1071
01:31:19,607 --> 01:31:21,328
I'm not saying where the demand comes from.

1072
01:31:21,447 --> 01:31:23,607
It comes from people that have...

1073
01:31:23,607 --> 01:31:24,587
Say you're right,

1074
01:31:24,688 --> 01:31:26,288
and somebody now, because it's easier,

1075
01:31:26,428 --> 01:31:27,288
wants more dollars.

1076
01:31:27,447 --> 01:31:28,067
How do they get them?

1077
01:31:28,428 --> 01:31:31,388
They bid Egyptian pounds for stable coins.

1078
01:31:31,667 --> 01:31:33,027
They get the stable coins.

1079
01:31:33,027 --> 01:31:36,968
They bring the stable coin peg to say a dollar and a cent.

1080
01:31:37,208 --> 01:31:39,328
So 1.01 dollars.

1081
01:31:39,567 --> 01:31:44,547
And then therefore someone else with access to dollars sends them to that stable coin

1082
01:31:44,547 --> 01:31:44,928
issuer.

1083
01:31:45,487 --> 01:31:46,208
Where do they get them?

1084
01:31:46,727 --> 01:31:48,768
They get them from the U.S. financial system.

1085
01:31:49,148 --> 01:31:51,688
Which comes from where?

1086
01:31:52,167 --> 01:31:53,067
Existing dollars.

1087
01:31:53,308 --> 01:31:57,428
But the point is, but it increases the total.

1088
01:31:57,428 --> 01:32:03,828
But yeah, but increases the total demand for dollars, which therefore does affect the exchange rate, potentially.

1089
01:32:04,087 --> 01:32:05,768
I agree. It affects the exchange rate.

1090
01:32:05,968 --> 01:32:06,148
Yeah.

1091
01:32:06,148 --> 01:32:12,968
I agree 100% that the biggest vulnerability to stablecoin demand from the rest of the world

1092
01:32:12,996 --> 01:32:19,036
is a depreciating force on those currencies.

1093
01:32:20,556 --> 01:32:22,216
Can I just see if I'm understanding this, Lynn?

1094
01:32:22,256 --> 01:32:24,236
Are you saying that it creates new demand for dollars

1095
01:32:24,236 --> 01:32:27,956
because someone is essentially paying a dollar and a cent for a dollar?

1096
01:32:28,676 --> 01:32:29,416
Essentially, yeah.

1097
01:32:29,576 --> 01:32:32,536
I mean, basically, it's a couple more steps in that.

1098
01:32:32,616 --> 01:32:35,436
One is, around the world, there are people that have local currencies,

1099
01:32:35,856 --> 01:32:38,756
and there's a market often in their countries to get dollars,

1100
01:32:38,956 --> 01:32:40,036
often physical dollars.

1101
01:32:40,616 --> 01:32:42,516
And they're willing to sometimes pay a premium

1102
01:32:42,516 --> 01:32:44,496
just because of the frictions of actually getting a dollar.

1103
01:32:45,496 --> 01:32:47,656
Now, stable coins can come in and say,

1104
01:32:47,776 --> 01:32:49,436
instead of literally going to a street corner

1105
01:32:49,436 --> 01:32:51,016
in the shady part of town

1106
01:32:51,016 --> 01:32:53,636
and making a physical trade with a duffel bag,

1107
01:32:54,096 --> 01:32:57,236
you can do it on your phone or things like that.

1108
01:32:57,556 --> 01:32:59,256
That can reduce the gray market premium,

1109
01:32:59,996 --> 01:33:02,036
therefore increase the overall interest

1110
01:33:02,036 --> 01:33:03,076
in people in doing this.

1111
01:33:03,116 --> 01:33:04,876
They might've said, look, I would like to get dollars,

1112
01:33:05,036 --> 01:33:06,416
but I don't wanna go through the hassle of that.

1113
01:33:06,636 --> 01:33:07,536
So I'm just not going to.

1114
01:33:07,816 --> 01:33:09,696
But if I can do it on my phone or easier

1115
01:33:09,696 --> 01:33:11,476
at a cafe and a phone or something,

1116
01:33:11,476 --> 01:33:12,416
whatever the case may be,

1117
01:33:12,516 --> 01:33:13,396
Then I'll do it.

1118
01:33:13,636 --> 01:33:15,536
So let's say there's new demand for dollars

1119
01:33:15,536 --> 01:33:17,716
for similar reasons that are already demand,

1120
01:33:17,816 --> 01:33:19,196
but it's just easier to do now.

1121
01:33:19,236 --> 01:33:19,736
There's more demand.

1122
01:33:20,256 --> 01:33:23,416
And the way it works is they go to a secondary seller,

1123
01:33:23,976 --> 01:33:25,756
someone who's entrepreneurial in these markets

1124
01:33:25,756 --> 01:33:27,676
and is acting as the facilitator.

1125
01:33:27,896 --> 01:33:29,936
And they'll say, well, I'll give you

1126
01:33:29,936 --> 01:33:31,156
this many Egyptian pounds

1127
01:33:31,156 --> 01:33:34,036
or this many Argentine bases for a stable coin.

1128
01:33:34,676 --> 01:33:36,616
And to the extent that stable coins,

1129
01:33:36,736 --> 01:33:38,716
therefore, temporarily traded a slight premium,

1130
01:33:38,716 --> 01:33:41,656
then the actual

1131
01:33:41,656 --> 01:33:44,316
entities that have an agreement with the issuer

1132
01:33:44,316 --> 01:33:46,456
to give them, wire them

1133
01:33:46,456 --> 01:33:48,296
or otherwise give them money and get

1134
01:33:48,296 --> 01:33:50,316
stablecoins will do that because now there's an

1135
01:33:50,316 --> 01:33:51,196
arbitrage to do that.

1136
01:33:51,676 --> 01:33:54,136
First you have to convert the currency.

1137
01:33:55,676 --> 01:33:56,256
The ones

1138
01:33:56,256 --> 01:33:58,256
that are doing that already have dollars

1139
01:33:58,256 --> 01:34:00,476
is my point. So someone else

1140
01:34:00,476 --> 01:34:01,936
in a market is

1141
01:34:01,936 --> 01:34:04,516
trading their fiat currency for a stablecoin.

1142
01:34:04,976 --> 01:34:06,356
And that's FX

1143
01:34:06,356 --> 01:34:07,716
markets that are happening around the world.

1144
01:34:08,716 --> 01:34:14,316
from whom are they getting the second secondary seller and what does the secondary seller get

1145
01:34:14,316 --> 01:34:21,176
have now he now has their local currency okay and has given them the stable coin okay fine

1146
01:34:21,176 --> 01:34:28,976
now what uh now that stable coin trades at a slight premium assuming this is happening at scale

1147
01:34:28,976 --> 01:34:34,936
compared to some starting baseline yep then therefore someone who has the ability and an

1148
01:34:34,936 --> 01:34:40,956
agreement with the stablecoin issuer to mint stablecoins will say, okay, I'll send you a

1149
01:34:40,956 --> 01:34:47,216
million dollars. Well, sorry, let me come back before we do that. I forgot to deal with the

1150
01:34:47,216 --> 01:34:54,676
important issue. The person who had the stablecoin before that now has Egyptian pesos, Egyptian

1151
01:34:54,676 --> 01:35:03,316
currency, they don't want that. And they have de-dollarized.

1152
01:35:03,316 --> 01:35:05,476
Sure, but they repeat it.

1153
01:35:05,716 --> 01:35:08,536
I'm wondering whether that's, where's the net demand that you're talking about?

1154
01:35:08,736 --> 01:35:10,436
Well, so the net demand is from the end user.

1155
01:35:10,776 --> 01:35:22,116
The middleman, they will, for example, buy stable coins or dollars at $48 per Egyptian pounds, and then they'll sell it at 51 per Egyptian pounds.

1156
01:35:22,256 --> 01:35:23,496
That's a great market premium.

1157
01:35:24,816 --> 01:35:42,891
And you know it transaction Guy buys a stablecoin guy sells a stablecoin and local currency Where the dollar demand The dollar demand is from the end user

1158
01:35:43,371 --> 01:35:43,791
No, no, no.

1159
01:35:43,831 --> 01:35:45,131
I'm just talking about that transaction.

1160
01:35:46,871 --> 01:35:49,571
Well, but the transaction involves the end user.

1161
01:35:49,891 --> 01:35:50,271
So someone-

1162
01:35:50,271 --> 01:35:51,131
No, no, it's just those two,

1163
01:35:51,291 --> 01:35:53,431
there are two parties that are involved.

1164
01:35:54,211 --> 01:35:57,631
Yeah, the person who's trading the fiat currency

1165
01:35:57,631 --> 01:36:00,871
for the stablecoin is where the demand is.

1166
01:36:00,871 --> 01:36:04,931
And doesn't it net at zero?

1167
01:36:04,931 --> 01:36:06,831
Assuming that it just happens once.

1168
01:36:07,311 --> 01:36:09,071
But then the broker then says,

1169
01:36:09,251 --> 01:36:11,391
okay, well, there's clearly a demand for what I'm doing.

1170
01:36:11,631 --> 01:36:13,751
I will go and get more stable coins.

1171
01:36:14,091 --> 01:36:18,691
Okay, so they pass on the demand to somebody else.

1172
01:36:18,751 --> 01:36:19,611
They're the middle man, yes.

1173
01:36:19,611 --> 01:36:19,811
First they have to do.

1174
01:36:19,811 --> 01:36:28,111
First they, so initial buyer comes with an Egyptian pound,

1175
01:36:28,111 --> 01:36:35,531
gives it to, gets a stablecoin from a seller of a stablecoin who now has Egyptian pounds.

1176
01:36:35,531 --> 01:36:39,951
So far, I haven't seen any net demand for U.S. dollars.

1177
01:36:41,131 --> 01:36:44,431
All I've seen, the fact that it was a stablecoin is irrelevant.

1178
01:36:45,191 --> 01:36:46,611
It could have been a chicken.

1179
01:36:46,611 --> 01:36:49,111
Sure. Let's start with paper dollars and then move to stablecoins.

1180
01:36:49,231 --> 01:36:52,571
So right now, physical dollars get into Egypt in some way.

1181
01:36:52,711 --> 01:36:54,531
People literally bring them on a plane.

1182
01:36:54,611 --> 01:36:55,491
In suitcases, yeah.

1183
01:36:55,491 --> 01:36:59,631
Now, if there was no demand for dollars in Egypt, nobody would bother doing that.

1184
01:36:59,711 --> 01:37:02,011
But there is demand for dollars in Egypt.

1185
01:37:02,551 --> 01:37:05,851
And there's a certain premium even people are willing to play to get dollars because

1186
01:37:05,851 --> 01:37:06,951
it's not trivial to do so.

1187
01:37:07,691 --> 01:37:13,151
And so someone comes in with a duffel bag of $10,000, let's say, whatever the legal limit

1188
01:37:13,151 --> 01:37:15,771
is, or sometimes illegal, whatever.

1189
01:37:16,151 --> 01:37:17,351
They come in with a duffel bag.

1190
01:37:18,031 --> 01:37:25,291
They then make a market of being say, I will give you, if you want dollars.

1191
01:37:25,491 --> 01:37:27,431
and the official exchange rate is, let's say, 50,

1192
01:37:28,091 --> 01:37:29,431
I'll give them to you for 52.

1193
01:37:29,951 --> 01:37:30,271
Yep.

1194
01:37:30,711 --> 01:37:33,891
Should you want to give your dollars back,

1195
01:37:33,911 --> 01:37:36,271
because maybe an Egyptian is holding dollars

1196
01:37:36,271 --> 01:37:39,511
for a six-month period to save up for a car, right?

1197
01:37:39,811 --> 01:37:41,351
Maybe now they finally want to buy the car.

1198
01:37:41,471 --> 01:37:43,331
They actually want to sell their dollars back to the market.

1199
01:37:43,931 --> 01:37:46,191
The same broker or a friend of the broker might say,

1200
01:37:46,191 --> 01:37:48,511
okay, I'll buy them from you for 48 dollars,

1201
01:37:49,031 --> 01:37:49,991
48 Egyptian pounds.

1202
01:37:50,591 --> 01:37:53,111
So there's a market for that person making a spread.

1203
01:37:53,111 --> 01:37:59,731
Now, if they, if, if, let's say currently there's a billion dollar stock of physical

1204
01:37:59,731 --> 01:38:02,411
U.S. currency in Egypt, that's arbitrary number.

1205
01:38:03,031 --> 01:38:10,651
Now, if, if next year, because of some policy or whatever, that there's now 1.2 billion in

1206
01:38:10,651 --> 01:38:15,031
demand and there's a shortage, they start bidding up that gray market premium because

1207
01:38:15,031 --> 01:38:17,531
it's harder to find people to say, yes, I will make this trade.

1208
01:38:17,651 --> 01:38:21,071
So then someone will fly another duffel bag over there.

1209
01:38:21,071 --> 01:38:23,731
they'll find a way to get dollars in the U.S. or elsewhere,

1210
01:38:24,311 --> 01:38:25,451
fly it into Egypt,

1211
01:38:25,931 --> 01:38:28,311
and therefore more dollars are in there.

1212
01:38:28,531 --> 01:38:29,651
They're scarce somewhere else.

1213
01:38:29,651 --> 01:38:30,691
Okay, so now we're flying it back.

1214
01:38:31,091 --> 01:38:32,531
That comes from where?

1215
01:38:33,351 --> 01:38:36,271
That comes from in...

1216
01:38:36,271 --> 01:38:37,431
Initially from the Treasury,

1217
01:38:37,611 --> 01:38:40,751
from the Treasury and issued through the banking system.

1218
01:38:40,751 --> 01:38:41,751
And so...

1219
01:38:41,751 --> 01:38:44,011
Okay.

1220
01:38:45,331 --> 01:38:45,751
So the...

1221
01:38:45,751 --> 01:39:04,546
dollars in this case their financial system dollars We can keep let keep using the currency So a physical bag of dollars goes out Where did that dollar come from Those dollars come from

1222
01:39:04,546 --> 01:39:06,546
Those dollars came from the Treasury

1223
01:39:06,546 --> 01:39:07,546
and the U.S. banking system.

1224
01:39:07,546 --> 01:39:12,546
Right. And so they were supporting existing banking.

1225
01:39:12,546 --> 01:39:13,546
Yes.

1226
01:39:13,546 --> 01:39:14,546
Right?

1227
01:39:14,546 --> 01:39:16,546
Yeah. And so if you do that enough,

1228
01:39:16,546 --> 01:39:20,546
you start to get a shortage in the U.S. of physical currency.

1229
01:39:20,546 --> 01:39:21,546
Yup.

1230
01:39:21,546 --> 01:39:25,726
And there is a degree of fungibility between bank reserves and currency.

1231
01:39:26,026 --> 01:39:27,186
A bank can do it.

1232
01:39:27,226 --> 01:39:28,066
A person can't.

1233
01:39:28,126 --> 01:39:30,926
But if enough people go to the bank and say, I want currency, and the bank keeps finding

1234
01:39:30,926 --> 01:39:35,206
themselves not enough currency, then they go to their Fed and say, we need to make this

1235
01:39:35,206 --> 01:39:35,826
trade.

1236
01:39:36,606 --> 01:39:38,946
So then there's more domain for currency.

1237
01:39:38,946 --> 01:39:39,766
It gets out there.

1238
01:39:39,846 --> 01:39:43,266
And then some of it finds its way in the duffel bags around the world.

1239
01:39:43,266 --> 01:39:44,826
That's exactly the way.

1240
01:39:44,826 --> 01:39:55,946
So what I think is happening with physical dollars in Egypt, physical bills, is you're going to see the duffel bags going in the other direction.

1241
01:39:57,326 --> 01:40:01,626
And what you're going to see coming in this direction is stable coins.

1242
01:40:03,266 --> 01:40:11,166
So partially, but I think the additional part of that is, let's say currently there's a billion dollar stock of dollars in Egypt.

1243
01:40:11,166 --> 01:40:18,946
and if you say okay we made the process way easier because it's digital i think there are some there

1244
01:40:18,946 --> 01:40:23,106
are non-zero number of egyptians that say i didn't bother to get dollars before even i would

1245
01:40:23,106 --> 01:40:28,006
have liked them i just didn't bother now i will we agree now there's one point let's say there's

1246
01:40:28,006 --> 01:40:36,206
1.5 billion in uh active demand for dollars in egypt and uh and that you know stable coins can

1247
01:40:36,206 --> 01:40:38,226
fill that gap because that's what's...

1248
01:40:38,226 --> 01:40:48,126
And I think where it happens is it, and that whole process just is a currency market event.

1249
01:40:48,906 --> 01:40:50,326
Yeah, it's currency market.

1250
01:40:50,546 --> 01:40:56,806
Now, but the final thing is where it can actually somewhat affect the supply is the Fed and

1251
01:40:56,806 --> 01:41:00,446
to some extent the, you know, the Congress and the Treasury, when they're determining

1252
01:41:00,446 --> 01:41:05,666
policies, either fiscal monetary policies that either expand or contract the money supply,

1253
01:41:05,666 --> 01:41:09,346
they're partially looking at inflation when they do this at least especially the fed

1254
01:41:09,346 --> 01:41:16,806
um if around the margins the stronger the dollar is the more leeway they have to enact policies

1255
01:41:16,806 --> 01:41:24,126
that are growth growth of credit either base money or broad money or both um and so to the extent

1256
01:41:24,126 --> 01:41:27,706
around the margins that the dollar is strong it can actually increase the number of dollars that

1257
01:41:27,706 --> 01:41:31,466
are out there because the entities that are capable of doing that are more likely to allow

1258
01:41:31,466 --> 01:41:37,486
that to happen. There might be less demand among voters for the Congress to reduce physical

1259
01:41:37,486 --> 01:41:40,406
deficits if the dollar is strong enough. The dollar is stronger, yeah.

1260
01:41:40,406 --> 01:41:44,326
There might be less, you know, the Fed is more conducive to doing things that either

1261
01:41:44,326 --> 01:41:48,986
QE or lower rates to encourage banks to lend more, whatever the case may be.

1262
01:41:49,426 --> 01:42:00,546
Right. So I agree. So I think I'm reaching the point where I see the foreign demand creating

1263
01:42:00,546 --> 01:42:05,486
currency pressures, debanking pressures,

1264
01:42:06,206 --> 01:42:11,646
and possibly that which leading to

1265
01:42:11,646 --> 01:42:16,966
easier monetary policy and thus more dollars.

1266
01:42:16,966 --> 01:42:33,241
Yes Yes I see Yeah that makes sense to me Yeah And then the question is what the magnitude That the question Right and the magnitude to me depends on back to the beginning which is you got 1 trillion of bills I mean currency and circulation

1267
01:42:33,821 --> 01:42:38,401
I think that's a real TAM. I think we're going to see a lot of that turn into stable coins.

1268
01:42:38,401 --> 01:42:45,641
You've got the ease demand, which we kicked around some numbers.

1269
01:42:45,641 --> 01:42:54,781
Like, how many people have savings that they can't save in dollars right now?

1270
01:42:55,781 --> 01:42:58,501
And, you know, we know there are billions of people.

1271
01:42:58,621 --> 01:43:03,161
So is it a billion people have $1,000 of savings they want to do?

1272
01:43:03,301 --> 01:43:07,681
Or is it 100 million people that have 10,000 savings?

1273
01:43:08,401 --> 01:43:15,921
it's not $3 billion with $1,000 around that they want to convert into dollars.

1274
01:43:16,121 --> 01:43:17,321
So it ain't $3 trillion.

1275
01:43:18,501 --> 01:43:22,601
But it's probably something more than a couple of hundred billion.

1276
01:43:23,761 --> 01:43:28,161
I think when you add small businesses, I think you can add another trillion.

1277
01:43:28,161 --> 01:43:30,081
You think they're going to want to...

1278
01:43:30,081 --> 01:43:34,481
Small businesses are really good at sweeping things to things that pay interest.

1279
01:43:35,261 --> 01:43:38,261
Well, again, in, let's say, Africa, small businesses throughout Africa,

1280
01:43:38,401 --> 01:43:40,881
small businesses throughout Latin America, small businesses throughout.

1281
01:43:40,881 --> 01:43:41,101
It's big?

1282
01:43:41,901 --> 01:43:50,021
No, but I think that collectively, in the U.S., the value of small businesses collectively is big.

1283
01:43:50,521 --> 01:43:52,741
And that's generally true for other places as well.

1284
01:43:53,081 --> 01:43:58,001
And so I think the combination of consumer demand and small business demand,

1285
01:43:58,321 --> 01:44:02,761
not just for dollars, but for basically a dollar bank account, effectively, cross-border.

1286
01:44:02,881 --> 01:44:03,401
I think that's interesting.

1287
01:44:03,561 --> 01:44:05,401
I think I haven't done the numbers.

1288
01:44:05,541 --> 01:44:06,741
I'd be interested in the numbers.

1289
01:44:06,741 --> 01:44:11,021
and I'd be irresponsible to just sort of rough it out,

1290
01:44:11,201 --> 01:44:15,501
but we are a significant portion of the global economy.

1291
01:44:15,501 --> 01:44:19,441
The global economy is a collection of big and small businesses.

1292
01:44:20,741 --> 01:44:23,821
It seems large to be anywhere in the trillions

1293
01:44:23,821 --> 01:44:25,921
with this type of excess demand.

1294
01:44:26,601 --> 01:44:27,461
I think we could hit a trillion.

1295
01:44:27,741 --> 01:44:29,641
Yeah, okay. I'm at $7.50.

1296
01:44:29,641 --> 01:44:31,441
We'll see what the market looks like then,

1297
01:44:31,681 --> 01:44:33,721
but I'm mindful of time.

1298
01:44:33,721 --> 01:44:43,581
I think the key takeaway here, Andy, is that your bearish treasury companies, your neutral stable coins, I think the hardcore Bitcoiners are going to love you.

1299
01:44:45,161 --> 01:44:46,041
I doubt it.

1300
01:44:46,181 --> 01:44:48,441
I really doubt it.

1301
01:44:48,681 --> 01:44:51,401
Well, you're a relatively bullish Bitcoin, so there you go.

1302
01:44:52,101 --> 01:44:53,761
But thank you guys so much for the time.

1303
01:44:53,821 --> 01:44:54,681
I really appreciate it.

1304
01:44:54,861 --> 01:44:56,981
Andy, where do you want to send anyone that wants to check out your work?

1305
01:44:57,061 --> 01:45:00,101
Dampspring.com or at Dampspring on Twitter.

1306
01:45:00,841 --> 01:45:03,041
And I really appreciate it from both of you.

1307
01:45:03,041 --> 01:45:07,961
This was a pleasure, and I really appreciate the debate.

1308
01:45:08,461 --> 01:45:09,781
Yeah, enjoy the conversation.

1309
01:45:10,101 --> 01:45:10,601
It's been a lot of fun.

1310
01:45:11,761 --> 01:45:12,541
Lynn, you close that.

1311
01:45:12,621 --> 01:45:13,461
Where can people follow you?

1312
01:45:13,541 --> 01:45:16,741
I mean, I assume everyone already follows you, but Sheila anyway.

1313
01:45:16,881 --> 01:45:21,181
People can check out lynnaldon.com or my book, Broken Money, and I appreciate the conversation,

1314
01:45:21,301 --> 01:45:24,981
both you for hosting it and Andy for bringing up all these interesting points.

1315
01:45:26,681 --> 01:45:27,081
Perfect.

1316
01:45:27,161 --> 01:45:27,721
That was a lot of fun.

1317
01:45:27,801 --> 01:45:28,321
Thank you, guys.

1318
01:45:33,041 --> 01:46:03,021
Thank you.