TFTC: A Bitcoin Podcast - #535: The State of Bitcoin-Backed Credit with Matt Dines

Episode Date: September 11, 2024

Matt on Twitter: https://x.com/buildcio Build: https://t.co/GN8C8AhVGf 0:00 - Intro 1:28 - Is the bear over? 11:19 - Bitcoin-backed credit market 19:21 - River & Unchained 20:37 - Ukraine bonds vs Unchained loans 30:11 - Why Unchained loans work 37:45 - Gradually, Then Suddenly & Zaprite 39:22 - Predicting capital markets 54:39 - Swaying minds with a good track record 1:07:05 - Venture fund perspective, Fold IPO 1:13:13 - Bitcoin vs stablecoin strategies 1:34:36 - OpenSats and HRF 1:44:13 - Plugging the Bitcoin Lunch Shoutout to our sponsors: River https://river.com/tftc Unchained https://unchained.com/concierge/ Zaprite https://zaprite.com/tftc Gradually, Then Suddenly https://thesaifhouse.com/gradually TFTC Merch is Available Shop Now: https://merch.tftc.io Join the TFTC Movement: Main YT Channel https://www.youtube.com/c/TFTC21/videos Clips YT Channel https://www.youtube.com/channel/UCUQcW3jxfQfEUS8kqR5pJtQ Website https://tftc.io/ Twitter https://twitter.com/tftc21 Instagram https://www.instagram.com/tftc.io/ Follow Marty Bent: Twitter https://twitter.com/martybent Newsletter https://tftc.io/martys-bent/ Podcast https://tftc.io/podcasts/

September is that key bottleneck. You've got to get through that period. Now you're going to see competing tokenized money market funds going head to head with, let's say, Tether. What you're really just doing is amplifying the existing bubble. It doesn't have to look like 2008 or 2020 either. We've been trained to brace ourselves for those type of things. You're not going to hear any candidate make these points on the ballot in November, even if Donald Trump is at the Bitcoin conference. I think this IPO at full, it's going to be a huge proof point for CIOs out there. bitcoin focused funds have not returned any capital to investors and so the fact that we're getting these first companies out the door that's a big thing this rip of tftc was brought to you

by river it's the best place to buy bitcoin go to river.com slash tftc and enjoy this episode You've had a dynamic where money has become freer than free. When you talk about a Fed just gone nuts, all the central banks going nuts. So it's all acting like safe haven. I believe that in a world where central bankers are tripping over themselves to devalue their currency, Bitcoin wins. In the world of fiat currencies, Bitcoin is the victor. I mean, that's part of the bull case for Bitcoin. If you're not paying attention, you probably should be.

oh it's just going we're going matt live rip welcome back to the show thanks marty pleasure to be back with you it's been uh about 16 months since we caught up on this show as you were saying deep bear market are we still in a bear market we hit an all-time high earlier this year um i don't want to jinx anything but uh yeah typically when you start hitting all-time highs you're not in a in a bear market anymore and i think from a technical sense once you bottom uh and you're rallying back you know you go in phases right first phase of a bull market uh sentiment is so bad uh like just the masses of the public just still don't see it while you know the the long-term hodlers if you will and bitcoin they're accumulating um so they're

the first ones to see it but uh it's pretty typical in the first wave of a bull market sentiment is still really poor it's following that momentum on the downside versus well technically the bottom of the chart was ftx november 2022 so you know 400 rally since then it's kind of hard to say this is still a a bear market from a technical sense yeah we're in this range bound trading territory between 50 and 65k and i i think that's actually a really good thing right because if you just think about you know markets moving waves as uh price discovery takes place if you think about 2022 we had a lot or 2023 we had a lot of uh just uninterrupted up moves right from that 16k bottom a little bit of uh retracement here and there but this one that's lasted four

to five months i think this is healthy you know just take take some time for you know that massive upswing to cool off all of the uh short-term you know speculators uh exit out of their positions and you know once again the people who are uh highest conviction in the train get to acquire a deeper position and you know the the coins ultimately find their their uh stronger hands and then you know assuming we're in a more secular um bull wave on top of a more broader uh or a more broad you know overall bull wave talking about like the 15-year uh long-term bull market um this i i view this for four to five months kind of pause um as a very healthy um just inter intermittency we're in the we're in the coiling up face

and the longer coils the saying goes the higher it goes and i'm seeing some social sentiment indications that uh indicate that we're uh approaching the end of this coiling and maybe we get down timber and then up tober which has happened historically in in most years but the sentiment is is pretty low i've seen a lot of hard hardened hodlers that have been in bitcoin for over a decade not capitulating but saying well it seems like it seems like we can't it out of this, this morass that we find ourselves in from a price perspective. I find that pretty funny. It is, it shows you how much is really, I mean, despite like logic, the conviction you've written, uh, this position through 80, 90% drawdowns, uh, tells you how important, like just

the human psyche is, uh, to, to everything going on. That's how the, you know, the chart, the chart materializes, but, uh, you know, these are humans, uh, engaging in economic activity and, you know, you take five months off going nowhere. Um, you know, it's, it's, it's still hard for people, uh, even, uh, even with, you know, all their convictions to, to, to, I just maintain through even these four to five month, uh, lulls. Well, I think, I think this is our objective today, man. We need to shake these people up and say, Hey, slap them,

get yourself together. We've got, we've got a, we've got a big mission here this is going to be a long journey we're well along that journey but it's it's still going to be a bit longer sack up put your chin up stop getting all butt hurt because the price is range bound for five to six months coach's halftime speech get the yeah get your troops back and ready for for the next wave uh but generally when things turn it'll be on some sort of event, right? Like a headline. Like, for example, last year, you know, we saw the rates sell off in September. And this is a key time of the calendar, right? September is generally in, you know, fixed income, credit, interest rates. September is that key bottleneck.

You've got to get through that period, that quarter end, for a lot of reasons, like just structurally. Northern hemisphere is going into fall harvest. That takes a lot of capital. You got to inventory all of that. You also got Q4, which is just for retail consumption. All of your inventory stocking is taking place. And you see this in shipping containers, moving goods from the coast of China to everywhere else in the world. You see things like this year, shipping container rates are just going through another price impulse, you know, after being in a lull from that 2020, 2021, you know, massive impulse. But you see like capital, basically, like the usage or encumbrance taking place, like in Q4, it just sits there for whatever,

like just a number of structural reasons. So this September period is a key one to get to. But my point there is generally when you see the pivot or the swing, it's based on like you'll see some sort of catalyst and you'll know like a headline event, something to turn to. So last year, for example, remember, we saw a massive interest rate sell off in treasuries. You saw the high prints on like 10 year, 30 year debt. You know, TLT was in a massive drawdown, et cetera. The swing back actually came, like if you look for headline events, it actually came when you saw, it was in Congress when you saw, was it Mike Johnson implemented like just a swap and replace and these rotating heads, these figures, I'm trying to remember who was the Speaker of the House before dangling onto a very slim majority. he got booted uh and basically it was like kevin mccarthy kevin mccarthy there we go uh with a very uh tenuous coalition and you see this actually like a lot of different uh uh just governing

bodies across you know us the g7 countries europe is going through this as well you've got these very loose uh political coalitions that are hanging on uh for for for majority control um and things like that is where you where you see like that that headline print and then you see markets kind of readjust back down and try to find price. So my point there is, yes, we've been in this healthy retracement since, I would say March, April is when we hit that all-time high on Bitcoin, if you're looking at that as one of your indicators. But it'll take some sort of catalyst in the macro sense for this to change course. It could be down as well. We don't know for sure. No one has a crystal ball on these things. But this is that time frame,

september is that key bottleneck to get through uh so we're as we record this on september 10th we're gonna you know hopefully interesting times in front of us yeah i think that's a big question in many people's minds particularly those that i was mentioning earlier who are a bit not disenchanted or disenfranchised just a bit uh exhausted from from the drawn-out bear market that's one thing i would caution i bet lingers in the back of their mind like if we have a macro sort of event that that leads to some sort of broad market uh i don't want to say cataclysm but draw down it doesn't have to it doesn't have to look like 2008 or 2020 either i think everybody is kind of you know after those two we've all lived through them those massive

hits um we're all waiting you know it's just kind of like uh uh just we've been trained uh to to to brace ourselves for those type of things but it doesn't have to be you know like those types of events it could be something else and you know just the world goes on as it always does so it doesn't have to be doom and gloom we're just saying uh charts pivot things change uh on a dime but on that note everybody's been building in a bear market i think we've had two three years uh to put our work together and you know put the white pill in place here um i'm tired like everybody is i think in bitcoin who's been building but um i think we've all made like there's going to be a lot of firms who've who've spent their time wisely spent their

resources wisely uh through the bear market and uh you know this is just that opportunity to to reap the harvest if you will uh in that preparation so uh i i guess white pill uh push through the bull market and uh hopefully uh our hard work will be rewarded agreed i'm tired as well but everybody's been working or a lot of people have been working and i do think the fruits of that labor will uh will be harvested uh at some point in the short to medium term maybe more medium term but on that note i mean you are always one of the most prepared guest that sends me a list of long notes and topics to talk about the first that we're going to jump into today is the state of the bitcoin back credit market which is something

that you have um on the ground boots on the ground uh details and intimate knowledge of so jumping off with a big announcement that was made at the conference in nashville a couple months ago coming from canter fitzgerald um and their facility to support the bitcoin space two billion dollars you're saying this is not that much it's a little toe dip into to the market of bitcoin credit i don't want to you know drop the lead and say this is not that much as that the headline front and center because in truth like within the bitcoin backed bitcoin secured lending market this is a massive uh drop for us we're we're a a niche of a niche if you will within you know broader global and fiat credit markets um but two billion dollars you know just

for equity capital if you will like unencumbered unlevered etc um that's a huge um signal or huge move as well, because just speaking from, you know, a firm delivering, deploying capital into this industry, you know, the growth that can and will take place. I mean, I can't I can't really get across how many more orders of magnitude we have to go here just on the secured lending side of Bitcoin. So two billion, a massive number in the grand scheme of things in terms of where we are now, but in terms of where we need to get to, it's one small step for a man, a giant leap for mankind, that kind of thing. But it's a huge signal that we have institutional capital who is taking the Bitcoin secured lending seriously. And I believe like over the coming cycle, this is

going to be a big part of kind of the interaction and emergence of Bitcoin. You can say Trojan horse you can say you know another analogy but integration with global credit markets and uh you know resolving some of those structural problems that are uh materializing out of that uh for example you go through the public debt situation all of that um but yeah two billion is um you know in context it's it's a massive uh drop for for this industry in this space just to give a compare and contrast in the last four weeks we actually had a debt destructuring and a soft default from ukraine on their international dollar and euro debt so it was about 18 billion in face value of u.s dollar bonds and about 2 billion in euro outstanding

The first maturity due that got restructured was due September, I want to say, 1st. So it was here in the past week. So this is kind of one of your signposts of, you know, as you're looking at the big macro thing as well, the macro situation. Your financial markets are one of your strongest tells on, you know, how the geopolitics are playing out in the bigger picture. Similar to World War II, I think Luke Groverman does a great job mentioning this. From the Japanese context, you saw market signals, local industry noticing that, hey, our iron gates are being removed from parks, public facilities, et cetera, being melted down into war material. And that's kind of your signal that, hey, the top's down narrative is telling you we're winning. but uh the market is telling you maybe something else is taking place and then on the opposite

side of that on the on the victory side um you see the battle of midway you know clearly showing up as a bottom like an inflection point in the u.s equity markets um so when you look at the the financial tape you watch the financial headlines it gives you a sense of where you're actually at in real time and uh you know the key thing i'd want to mention here i know we're talking about bitcoin back secured lending but we had 18 billion uh in us dollar debt just uh soft defaults and restructure these you know you know that that you know slug took probably a 60 haircut it got rolled over into uh or termed out into let's say 2029 2033 2034 maturities at sub market interest rates So these things have a one coupon on them now. They'll step up if, you know, the Ukrainian economy is able to produce above its IMF targets, you know, through that time period.

But in a sense here, those bonds all got essentially taken to the cleaner. And you're looking at Bitcoin secured credit, you know, we're just cheering over two billion. in so it tells you how big of a gulf there is uh you know on both sides of the spectrum these ukraine bonds uh they are not investment grade anymore they're gonna have trouble tapping uh investment grade markets on the other side of this these these bitcoin backed you know whole loans that build interacts and purchases with through our partners at unchained um who are, you know, in my opinion, the gold standard, the Bitcoin standard, Bitcoin standard of dollar lending, in my opinion, in this space. You know, these Bitcoin backed loans are fighting

to be viewed as secure credit. We're trying to tap in for growing pools of dollar capital. We've got the track record, the prints that are showing that audited, etc. And then on the other side here you've got um the sovereign bonds in default um at a big turning point situation i believe in the in the fiscal sense as well as you know where this kind of conflict is going this is kind of a make or break moment uh these next six to twelve months in terms of whether we ratchet up and escalate from here in this uh conflict or you know we pull back from the edge we you know there some sort of intermittent piece you know what have you um but in terms of where these ukraine bronze price out there you know if you go on bloomberg right now they're they're trading uh anywhere

between 12 at a 12 to 16 yield um and these are much more complicated uh debt instruments than um you know the the the standard building block what the market wants from an unchained bitcoin back loans it's a 12 month 40 ltv at origination uh a monthly payer etc so they're they're these ukraine bonds are harder to to back out the yield to or more complex uh if you will there's also that weird option on gdp growth for imf um targets but those ukraine bonds are are priced within 12 to 16 percent and right now that's kind of our cost of capital if you want to structure a bitcoin back loan with uh minimize counterparty risk over collateralized like in our view of the world um the lower risk um uh structuring that's pricing out right now you can go to unchained's website

last i checked it was originating out of 14 was the cost of capital so you see those two things it's like this one piece of sovereign debt that is in a situation with a lot of hair on it you can get 12 to 16 and then over here 14 it's like wow those are apples to apples viewed as uh the same thing and the gulf couldn't be wider and in my opinion if i'm deploying our firm's balance sheet capital as well as client capital uh into dollar ious which which one actually wins out on a risk reward basis this episode was presented by river river's the best most secure place to buy bitcoin in the united states go to river.com tftc set up an account today. You'll be able to DCA into Bitcoin without paying any fees. You'll be able to give

people Bitcoin via river links. You'll be able to send and receive Bitcoin over the lightning network. And you'll be able to set limit orders. If you want to buy Bitcoin at a particular price below or above where it is now, you can set orders to buy Bitcoin when it hits that price. Go to river.com slash TFTC and set up your account today. This rep was also brought to you by our good friends at Unchained. Unchained is building a financial services platform for a Bitcoin standard. They have over 7,000 clients that are securing over 90,000 Bitcoin with 12,000 keys on their platform. Their platform leverages Bitcoin's native multi-sig properties. Their cornerstone product is their Volt product, a two or three multi-sig Volt, which allows you to hold two

of three keys in a multi-sig quorum. That gives you full control over your Bitcoin. They also have an IRA product, a lending desk, and they're rolling out a bunch of other products, including inheritance protocol and sound advisory so go to unchained.com set up a call with our concierge onboarding team today tell them that tftc sent you and use the promo code tftc at checkout unchained.com to dig into this and really articulate the point that we're trying to drive home here for anybody listening just pricing these credit products ukraine government bonds um just looking at this as soberly as possible ukraine is in the middle of a war with russia their infrastructure and population completely decimated um what is the potential of them

getting back on their feet hopefully as you mentioned we do have some peace i think depending on the presidential election here in the u.s it could go one way or the other um let's just run with the scenario that they do get to peace and they do have the ability to breathe and begin building back their economy what are the chances that they can overshoot the imf targets that have been set forth with this restructuring um uh post-war like how much shell shock is the economy going to be in what are the actual prospects of them being able to get themselves up on their feet and um rebuild their economy some people would argue like maybe um it's a good bet because they're they're building from zero and so any growth is good growth for them but still you have the um

you have the uncertainty of a war-torn country um and so if you're buying that debt product there's a lot of risk that comes with it compared to an unchained over collateralized um loan or you have bitcoin in a multi-sig escrow no nobody has uh unilateral control over the collateral uh it's not being re-hypothecated bitcoin's the most liquid asset in the world arguably you can sell it on a dime if if your counterparty um does not have enough collateral in the loan at any given point in time and lo and behold they're trading at about the same cost of capital or they had the same cost of capital and if like you said the the risk is so mispriced i mean we talk about this a lot of 1031 unchained portfolio company um company we've

backed many times and it's because i mean one of the reasons lending products just one product but it is a it shows the the sort of forethought that the team at unchained has in terms of bringing this product to market it is the most mispriced credit product on the market out of all of them i i would be confident to say like the cost of capital for these loans is very high. And when you understand the risk associated with the loan, it is way higher than arguably it should be, which presents an opportunity for funds like Build. Yeah. And there's actually a, I guess there's a lack of appreciation for the different walled gardens, if you will, or the distribution channels of where you can access dollar capital. So for example, there,

um you know we mentioned these you know ukraine sovereign bonds they're no longer investment grade right the the largest uh pool of of let's just start with dollar capital here i'm just focus everything on dollars um it it would be the the ig rated um public bond market whether whether you're on fender trace within the domestic u.s system or you know broader you get into things like swift and other um you know dollar networks if you will how banks communicate with each other um the biggest pool of capital is going to go into your public bond market um and those are what you'll see like like just a debt instrument um trades with a q-sip you're held to a very high standard on your financial statements um you know in terms of the metrics you have to hit you know

across different categories you know the ratings agencies etc have um you know rubrics this thing is kind of a known art you know we've spent centuries building this up on what your income statement needs to look like, what your balance sheet needs to look like, et cetera, of the metrics you need to hit to issue a public bond and what the market will digest. But to do that, to really tap that pool of capital, you need to meet all of those criteria as well, but you also need to have a scale. You need to be at least $300 million per bond issue to get into the public tracking indices. So like the Bloomberg U.S. Aggregate Index is the owner of the market share.

It's the same way S&P has the S&P 500, which pretty much at this point, the entire market uses to track U.S. large cap equities. The Dow, you know, no one no one cares about that but your grandpa. And he might have already transitioned to the S&P 500. But point here, if you're going to issue a bond, you need to be at a scale. You need to be at the 300 million threshold to be ag eligible. and and so that'll that'll open you up to the investment grade capital then you've got bank loans right you can do syndication etc um uh to to fund a a bank loan which will typically be um a middle market or the low end of the large caps uh like corporates who can um they're not

large enough to issue public bonds or if they could they might have like you know only one or two and they don't have enough to build out a like an issuance curve uh if you will uh so so the market would know where to price their debt so what they do is they'll they'll maybe tap the uh the bank loan uh channel and try to syndicate something to raise the dollar capital they need um then you have what like the the direct lending in this private credit trend um and you know these are much smaller markets like we're going order of magnitude down here at each one of these we go from bank loans to uh private credit which is just like bespoke one-off agreements or sometimes these will be syndicated uh as well and you'll get banks and um kind of non-bank entities

these private credit firms pooling up to uh fund a loan uh and then you get into things like the high yield market and and then you just go you just keep going down to access funding um and it's like bitcoin is starting off from nothing right this entire thing is bootstrapped on an open protocol 21 million um economic you know agents align around uh that protocol but we have to eat our way up uh that entire stack so to access the big pools of money like we can't go from you know zero to 100 uh that fast and get into the game but we have to start at zero work our way up um and so the first step is you start with uh uh private capital the high net worth family offices etc who are uh willing to look into and explore what i'd say is like the new frontier

uh of you know credit and lending and then you work your way up off of that so you start with like who will be open to you and actually uh take these uh take this sleeve or this space seriously um and so you just work your way up the stack but as you can see like things like um cancer Fitzgerald coming in for a $2 billion injection into the space. We're adding those on, but it's going to take time and proof of work, just like Bitcoin itself is all about. But that's where it comes in. I think it's a good time for us to get together and recap after 16 months. When I first came on TFTC, we were just launching a private fund that our SEC registered investment advisor, build asset management, was going to manage that would invest specifically

a credit fund that invested as its mandate into Bitcoin secured loans. And just through all the due diligence market exploration process, as we mentioned already, Unchained was the only one at this point we felt comfortable deploying into. And I'd say after one year plus, I think we're actually on 14 months of live track record at this point. You know, the proof of work, I'd say we're stacking up really well, apples to apples against the rest of those opportunities and those credit sleeves I talked about. So some of the highlights, we've maintained zero non-performing loans, zero defaults, you know, on the funds holding itself. This is on top of Unchained's track record since it began uh lending and and underwriting bitcoin um back debt um no loan

losses no loan uh no not performing loans that you know over that time time span you know well into the nine figures of originations at some point you know over the next year that number's gonna cross over and they're gonna they're gonna hit a billion dollars um uh of loan originations with no defaults no no npls which is really unheard of um in um in the rest of the credit space like you look at uh account aging etc you can follow this across every financial company every bank they have to reserve um against their you know bad debt um you know provision for credit losses etc um so this is somewhere somewhere we that unchained really stands out bitcoin and secure lending really stands out in terms of what it can offer

and why growth is coming, in our opinion, to this area. Well, let's get back to first principles and explain why this is the case. Why has Unchained been able to issue this product going on seven years now with zero loan loss? Is it a construct of the way they've set up the collateral, the escrow, the ltv ratio uh is it that alone or is it that in a combination of unchained counterparty when you're thinking about the individuals taking out this loan what is their um situation why are they doing it in the first place and are they well positioned to take out these loans yeah this is

going to be uh kind of a checklist but i'll try to run through it holistically very quickly so it starts off with who you lend to um and and then i would say it gets into the operations and the risk management so i'll start off on who you lend to so client selection um so unchained as a business actually you know starts with a filter on the um just the adopters within the let's just start with the crypto space right if you're if you're crypto bro you're interested in lambo uh you're trading eth you're trading you know whatever all these other tokens you're not coming to unchained that's not their client um unchained attracts the uh the bitcoiner who values um collaborative custody some sort of key ownership they're probably somewhat non-technical

they need assistance but in general they're going to be you know bitcoin focused so you start from from you know that first principles and i kid you not like that matters a ton right from a credit risk i don't want to deploy dollar capital into someone's secured asset that's funding a lambo purchase like that's just a non-productive use of capital um so you start with who is the client segment that unchained begins with so um in terms of the the kind of major announcement the last december unchained um how to change a policy to only um underwrite bitcoin back loans to commercial borrowers so you start from there you you you did lose a large chunk of what i call the retail market but in terms of risk management you actually like lending to a business because what

what's the difference between a business and individual like the individual is financing their their consumption needs savings etc the business is out there actually to create goods and services in the economy and they're rewarded for doing so profitably so these borrowers now have um have an income statement and a business um they're they're they're out there building on um and delivering real cash flow and value so you start with that you check the box it's like all right these guys have um they have the asset they have bitcoin as their reserve asset on their balance sheet but then they also have a business to fall back on and these tend to be you know small or middle market kind of entrepreneurs llc's etc but as we were talking about those tiers of uh dollar capital

to go access um you know in the market they may not even be able to work up to getting a bank loan right but they might be something like a houser or a housing developer um a rancher you know we had one a dry cleaner example these these are you know entities people taking on um risk in the real economy um to you know drive profit you know manage their business etc so we like that and then they have the bitcoin secured asset uh on their balance sheet which um we want the the borrowers to maintain and grow their their bitcoin stockpile post that as collateral for an asset we don't want to see the borrower lose their bitcoin get margin called out etc we'll talk into the unchanged risk management what they've uh built around that is uh a key ingredient uh

in my opinion, to why they've had zero NPLs. But we also like the economics incentives that align all parties, because if you really think about it, this business owner does not want to lose their Bitcoin, right? They are heavily incentivized to preserve their business. Like when you get into those adverse credit situations, bottom of the bear market, they don't want to default, lose their business, et cetera. But they also don't want to lose their Bitcoin. So you have those economic incentives really working for you as the lender here, you know, and builds perspective deploying dollar capital into the space. I don't know that that exists with other assets. So if you think about like posting commercial real estate, right, we can find just like stacks of

headlines with, you know, city blocks across the major metros in the U.S. where you saw a nine figure uh cre loan where the borrowers or the capital group just kind of hand in the keys take the loss and uh you know turn it over to the bank and we've got a cre uh situation now that that needs to be digested and worked through in credit markets i think in that case if you're so under water on your loan like your value dips so much like for one you don't have some of the features of the bitcoin market to tap into so that that dollar liquidity fast settlement you know to to move a skyscraper right might take months quarters years uh to to find a bid and it may not and and they're all different as well like a skyscraper here in seattle is different from

skyscraper in austin is different from you know every other major metro they all have different uh market profiles so like it's not one-to-one bitcoin is is uh you know one bitcoin on an exchange you know whether it's in chicago on the cme or uh you know domestically coinbase etc trading for dollars is technically you know fungible you know across uh markets across locales so you have a massive liquidity pool uh to tap into the downside is the volatility of the asset and that's where you get the um uh the the risk management from unchained both with the segmentation of collateral. So you have one multi-sig ball mapping to each loan.

So they do not pool collateral. They do not re-hypothecate provably, right? You have keys spread across all agents and then you have economics and incentives aligned across all agents. And then you have a margin waterfall kind of structured in on different loan to value thresholds or the inverse of that collateral principle

That really protects the dollar capital from taking losses or absorbing losses, but it also protects the borrower, if you will, from that potential liquidation of their Bitcoin, which effectively amounts from their side to selling Bitcoin at the low points of the chart. So you put all those things together. It's the hard way to lend in this place. your cost of capital is going to be higher because you're not taking shortcuts, you know, taking on undue risk for more profit to, you know, pass down kind of lower spreads down to the borrower. But putting all those things together holistically, you know, in our research and opinion is how Unchained is able to deliver, you know, what they've done that's truly impressive over the last seven years and been the market leader. And yeah, the supply side of dollar

capital is just picking up to that. But it takes all of those things. It's not one thing. It's the completion of the entire checklist. Quick break here, freaks. This rip is brought to you by Gradually Then Suddenly, a framework for understanding Bitcoin as money by Parker Lewis. I wrote the foreword to the book. I'm honored to have done so because it's the best zero to one primer. If you're looking for a logical explanation of why Bitcoin obsoletes all other money, buy one for yourself and maybe a few for your friends. Go to the safe house.com slash gradually. That's the safe house.com safe spelled S A I F the safe house.com slash gradually use the promo code TFTC for $5 off at checkout. Buy it now freaks. The price of Bitcoin is going

up. You need to understand it. This is the best zero to one primer. This rip was also brought to you by good friends at ZapRite. If you're a Bitcoiner and run a business or an independent contractor, you should be accepting Bitcoin as payment. If not you, then who? If we believe that fiat is systemically fragile and is a risk, the rails that that currency runs on are risk as well. You need to begin accepting Bitcoin as soon as possible. Invest in the future of your business. Create a redundant rail by accepting Bitcoin as payment using ZapRite and reduce risk for your business. I've done this for my business. Here at TFTC, we use ZapRite. It allows you to easily create invoices, payment links, or connect e-commerce stores, connect your wallets or

custodial accounts, and be set up in minutes. We can also connect our bank accounts, our Stripe accounts, our Square accounts to accept fiat as well. The time is now, freaks. The fiat system is fragile. Invest in the infrastructure that de-risks the future. Invest in yourself. Bitcoin payments with ZapRite. Go to zaprite.com slash TFTC to get $40 off their annual subscription. zap right.com slash tftc forty dollars off i mean you're you and your team of builds are i mean that's your reason for being is going to help raise dollar capital for this particular strategy now you have a track record a relatively short track record at that but i guess let's jump into that build having deployed dollars into unchained lending desk what's that been like

for you as a credit fund so we have other lines of business we have public funds 401K funds, et cetera, CITs. But in terms of, you know, you're being a capital allocator here, where you see growth and where you see returns, the Bitcoin back lending is the highest and best use of capital allocation, if you will. So it's not the only thing we're doing, but if you see kind of where I spend my time, it is heavily tilted towards advocating for this side of the market on the Bitcoin integration into capital markets. But in terms the highlights here one year proof of work which we talked about zero non-performing loans uh we've increased aum by 75 percent year on year um average loan to value uh sub 30 percent as of the

last kind of check-in um so very very conservative you typically don't see that in uh asset-based underwriting um and then uh an 11 plus uh unlevered net return so after all fees were before taxes um these loans are generating a return on assets of 11 which if you think about like compare this to the banking system if you will uh like u.s banking system which is much more bloated much more cost you know you got to pay for buildings etc you compare that 11 to like a good bank on return on assets on the left like just looking at the left hand side of its balance sheet you know where it uh where it deploys capital has to lever up a lot to do so uh then it's got a lot of fixed costs you know tens of thousands of headcount you know hundreds of

thousands deployed in the industry you're looking at a return on assets you know probably like one and a half percent average maybe two a good bank might look like two and a half three um so you see on like highest and best use of capital here, efficiency, we're just starting to see what this kind of emerging sleeve is going to do for the entire system. I think we're still not seeing how much this is going to compound and how big of a difference this is going to make over, you know, years and decades. So 10 years out, 20 years out, et cetera. This is going to this is going to change uh in my opinion the entire you know structure and profile of of uh of capital markets on the system for the better let's dig into that a little bit like how

do you see this this playing out um yeah uh big turn um so just start with like the the yield profile on like a bitcoin back loan versus like the bread and butter of the the legacy setup the legacy framework which is more treasury debt right and the thing i don't think people realize is the system needs more treasury debt as the base layer collateral um injected into that system to keep it growing to keep it stable to keep it solvent um and that comes with downsides right You keep you know, if you just keep issuing Treasury debt, you're putting your domestic economy more and more into the hole on what it owes in the future on debt service. And the more you do that, like you keep stacking up more and more IOUs that have to go outside of your borders, you're losing control of your own nation states unit of account. and that's you know it's not even my opinion i mean this goes beyond uh you know just making

conjectures here like losing control of your own um you know sovereign uh unit of account at the end of the day these are all just ious that puts you at like a national security uh risk right so you need to bring that back in you need to solve the debt situation all of that um because like you know, looking at these charts, like we could keep doing what we're doing for another 10 years, 20 years. Um, you know, I, when you hit an accident, like a 2008, 2020, those really put you behind, uh, the eight ball and they'll set you back. But if we really wanted to, um, we could keep going like this and like weakening ourselves, uh, for years and decades longer, uh, we, we could find ways to kick the can. But in terms of eventually paying the piper, it's just going

to get worse and worse if you keep doing this. So what I put here on how this is going to change the system, you think about a T-bill. Right now they're issuing at five. Rates are going to come in. We're going to see cuts next week. As more treasury debt is termed out, they need lower rates to lower those interest payments to lower that debt service cost but if you just do the math at five right you see like the after tax return to uh to an investor right these are if you're just looking at the domestic uh lenders standpoint get five percent pre-tax let's see our high net worth individual because i'm going to go apples to apples for sources of capital into the the bitcoin back lending space and and right now it's you know we're starting from the addressable part

of the market and moving our way upwards towards institutions but right now it's a high net worth individual or a family office your marginal dollar is going to be taxed at a 37 tax rate so if you just take that five percent treasury you know let's go like hey i'm getting five percent first time in 10 15 years this is great right after tax you're going to be getting somewhere in the three percent net right and then you got to pay your cost of inflation right which i mean if you look at cpi targets like yeah we want to average two we've already been through the start since 2020 we're not anywhere near two like if you just you look at this uh uh chart of cpi sometimes i'll post this on on twitter x um and you just look at like jackson hole 2020 right the the big

announcement was we're going to do average inflation targeting now we're going to let inflation run hot from time to time but we're going to average two you're nowhere close to averaging two right we need we need to see at this point we need to see zero inflation the rest of this decade to average of two uh from point to point um so you're not going to get two right it's it's economically infeasible so even even taking a real return of one percent on your treasury allocations after tax, you know, to get to go from your after tax, you know, three and change net return, you're going to get inflated above that and you're not going to see any real return on treasuries. So you're kind of just sitting in treasuries to to trend. Well, probably. And

you're taking on all the risk, too, of this whole situation. And then on the other side of that, all you're doing from the just think of this from the U.S. Treasury's balance sheet and you know i don't view them as a bad guy i think the the u.s government the the institutions everything that um you know our society worked so hard to put in place we fought uh you know wars over to to kind of set our own course and make our own destiny um these are things that need to be saved and preserved in my opinion um i don't want to see these things go through a sovereign debt cycle collapse etc um i want these things preserved but my point there is if you're deploying your dollar capital into treasuries all you're doing is financing more um more debt service more

liabilities right that 3.75 percent net uh that the treasury has to pay out that's a liability that's a cost they're going to owe you that and in real return you know your best case scenario looks like maybe you're going to tread water and then you're down you're taking all the downside risks where they the economic pressures want to point you like they want to um you know the financial repression that's going on where you run real interest rates hot, you're taking all downside for doing that. So unless you're a bank or a financial institution or you need to tap repo markets like SOFR for overnight or short-term secured lending, it's hard to make the argument, in my opinion, if you're a non-bank institution or if you're a non-financial

institution and you can't tap those repo markets that demand the treasuries as collateral or it could be agency debt, similar, right? It's hard, you know, after you do a, you know, a stone cold review of the economics here to make that allocation in. So that's that, that's the treasury side. Now, if you go into the Bitcoin back loan side, you're up right now, let's just start from the top. You're issuing at 14%. We said we're able to deliver an 11 net after fees. That's our track record, that's what we've been delivering. You can go to buildbitcoin.com and review this, but these are monthly prints.

So you start from 11 net, you're gonna be taxed on that. Say the 37% marginal tax rate that your high net worth individual is gonna pay. No one likes paying your taxes, but it's kind of like working out or exercise. It's like, for some people it's hard to get off the couch, but while you're doing it, you feel great and afterwards you feel great.

And then you have the long-term benefits as well. But my point here is, yeah, you're gonna pay tax. There's gonna be some drag on that fixed income, but that 37%, it's gonna amount to about 4%, four points, if you will, of carry for the US treasury. That's a revenue stream. That's not debt service, that's revenue. So you're literally flipping from the treasury standpoint.

If I send you, or if I'm a lender and I deploy into treasuries, That's a negative for the treasury. They're gonna owe, you know, three to four points a year in negative carry at current prevailing market interest rates. Deploy, if that same lender deploys into the Bitcoin backed loans at this point,

the US treasury is gonna carry up at 4%, four points annually. So it's literally dollar for dollar, like a cancellation of that debt to deploy into this growth space, right? essentially you're deploying into the domestic small and middle market business who has um adopted bitcoin as their balance sheet reserve asset they're delivering real goods and services into the economy so you get all of that good externality um solving the inflation problem

also right creating more goods and services responding to incentives lowering lowering prices lowering costs delivering abundance and you also from the treasury's perspective the public purse you're swapping you know that that that income that liability stream that's a liability on your if you had to put together a sovereign balance sheet which doesn't exist uh you can't go you can't go show this anywhere but that is a that is a if you were a business that'd be an on balance sheet liability versus a four percent positive carry four points carry for no capital none of your own capital deployed this is the private sector deploying this you get four points you know and carry at current market interest rates and that cancels out dollar for dollar

every incremental kind of increase and right now we're we're we're growing you know the the public debt by what a trillion dollars every quarter yep and then on the net here if you're the dollar capital allocator you're gonna like we're delivering 11 pre-tax let's call it seven after tax, compare that seven to the 3.753. So you're getting seven to eight, let's say, to three to four. So you're literally doing two X better on dollar capital returns in an inflationary environment, right? Where inflation, the pressures are running hot, the debasement on your dollar is lower. So after tax, you're going to compound that. You got two X the shield, if you will, on real returns for your dollar capital. This one's kind of just like, it's right out there

for everyone to see they're just i think the the the missing the missing piece is actually education here um from both sides of the problem um the treasury situation the structure and incentives uh of the existing credit system and then on the other end of the spectrum there an understanding of bitcoin um from just first principles what is bitcoin what is the what is the blockchain how are how does everything work all of that and then the interaction between those two things and then how the economics play out over time. It is still very early. Like we're 15 years in on Bitcoin. Realistically, we're maybe six to eight years in, I'd say, in terms of actually educating the financial industry on what's going on. And I mean, the step with

cancer Fitzgerald is, is massive. It's, it's, it's high signal in terms of there are parties who, who get it and are, and are, uh, you know, seeing where this is going, where the hockey puck's going, if you will. But that is, that is, uh, the exception to the overwhelming rule. Like we still have, if you line up a hundred people, I bet maybe one to two in the financial industry, uh, these things, both the, the big picture it's clicking on both sides, the credit system and then Bitcoin itself and then how those two things are interacting but 99 of them are still um either ignorantly skeptical uh or asleep at the wheel or just you know not taking these things seriously um and uh you know do doing the the review and planning for for where this is

going so it is still very early uh but these economic forces these trends like the math you can't break uh you talk about bitcoin being you know mathematical cryptographic money you know that whole element but uh balance sheets income statements debt all of that it's math you know just apply it over time and eventually those forces will um just compound and that's where big big transitions uh will take place but if you just just look at the economic profile the income statement the balance sheets etc that's that's what i see you know playing out over know just we could talk about bitcoin cycles four years or you know short-term credit cycles three to five years but bigger picture i think those trends just compound upon themselves and then

you know once you once you look up after 10 to 20 years you're going to see um just massive shifts and and just structure of financial institutions yeah it's making me wonder like what is that inflection point that really has the light bulb go off in people's minds and that's one like do you because i remember when i worked at a managed futures fund we'd have all these funds come pitch us and they were upstart funds and all it was all back tested data like here is the return profile of our strategy um with the back test added but we actually don't have any um live returns we don't have any actual track record to show you and the the response that we would give all these funds is like all right come back to us when you have a track record do you think the the

fact that you guys have begun developing a track record or getting out there um really pressing this message and trying to have people reach this aha moment is is having effect you've you're one of the the the most hardened uh road warriors i've met in this industry i know you've been out pounding the pavement what is the last year yeah yeah you got to be a road warrior in this industry We can do so much from this seat and projecting out, but people really like to shake hands and look somebody else in the eye. And you've been doing a lot of that. So what has that been like? Have you seen any progress in terms of people really waking up to the strategy?

Absolutely. So, yeah, you talked about your experience with back tests in the industry. No one's ever shown anyone in a financial industry seat a bad back test. You don't show your ideas that work. you show the ones that look good it's like look i can achieve you know these results um yeah i can increase your sharp ratios etc uh paper returns like maybe good for testing ideas strategies but in terms of if you're actually going to deploy capital you have to put down real money real proof of work um and just demonstrate sound capital allocation um over time right same reason uh

Bitcoiners talk about the Lindy effect, you know, you're 15 years in, 99.99, you know, a lot of nines out there on the decimals network, uptime, et cetera. Proof of, I guess, proof of work. We keep using that term, but it's true. The, like, the performance and, you know, realized results on, that you print, those matter, both in Bitcoin, but then also in the investment management industry. So you don't actually, you know, attract outsiders to deploy capital and with a, you know, a backtest sheet, you know, you can get, hey, that's interesting or this looks promising, whatever. But the real the real trades, real capital deployed skin in the game that matters and having the real tape to point to that's a that's a necessity. You know, it's it's not an it's not an it's not a nice to have. It's a must have if you're going out and working your way up.

You know, as we talked about those those ladders in the credit markets. Right. We start with high net worth individuals, family offices. You can you can draw in capital based on, you know, say your prior reputation, your relationships, just, you know, people, you know, Bitcoin itself has a network of balance sheets and capital to tap into. but then to work your way up you know into the stack like let's say public markets the definition of public markets is you might be deploying capital to a company that you have no relationship with you know whatsoever so example like a public bond or like a public q-sip you know investment grade and you see like apple amazon so like these massive markets you might as an investor you know participating in that offering you might not have a one-to-one relationship you know with anyone

there you just have a broad relationship with you know the company as a tool and the reason that those companies are you know treasury or you know other um issuers can can issue those those bonds and tap those massive markets is because they have that you know proof of work they have you know public companies they'll have years and years and years of audited um financials you can go to sec edgar look at their financials and sometimes those are uh completely broken like in the enron situations etc but it's really that that uh you have to demonstrate that proof of work like build that trust uh within capital markets so you get in get into the point here as a as a fund manager trying to attract pooled capital in a in a kind of a one-to-many framework right that's the definition

of a um like a pooled investment fund is you can draw in capital from multiple sources and then hey we pull in pensions we pull in high net worth offices we pull in you know sovereign wealth funds what have you uh put all those things together and one vehicle regulated etc audited all of that and then deploy into bitcoin back loans um you have to have that track record to to expand your relationship beyond that uh dunbar number of uh 150. yeah so yeah the the realized tape the audited prints those those are those are uh those aren't uh an option those are a must-have Yeah. And has that helped you as you're going out there and pitching what you guys are doing, particularly with this lending product to build? I think so, because there is some element, and we talked about the education.

How do we converge the gap on where the mispricing is right now and where it needs to get? There's some level of education and understanding that needs to take place. and people like you park like all of our friends at bitcoin are doing um and have done an awesome job at we you need that to educate the capital allocators you know from first principles but what hooks them in my opinion um into taking it seriously and and uh committing to put the time in because there is a cost they have to if you're a cio of a you know a state level public pension for example um you have to educate yourself on bitcoin and you know don't forget that you know these individuals have to have some level of understanding and conviction across all asset

classes so equities you know it might be oh i have to understand you know the u.s equity market i don't have to understand emerging market i have to understand all these other um uh country level equity markets you know stuff like that where they deploy into they'll have to understand fixed income um you know you know just all these different markets and then you're asking them to spend time to educate themselves on bitcoin which i think every everybody within within the fence points uh fence posts of like bitcoin adopters who are going to be listening to this this podcast or listen to rhr every week you know consume this content um we've already put the work in because we see it but you have to have a hook to get that cio uh and the investment committee

or you know other individuals portfolio managers to take bitcoin seriously um and and identify how they can deploy you know from each of their given mandates and they all might be delete uh unique you might some might be an equity portfolio manager so to them their choice might be do i buy uh micro strategy and include it in my portfolio do i overweight uh they have to you know grapple with things like, well, microstrategy technically isn't in these large cap benchmarks. Well, what do I do there? I'm taking benchmark risk. They have to have high level conviction to make that deployment.

Same thing in fixed income. Like if you're a fixed income manager, you're like, all right, find investment grade. Right now within Bitcoin, there's no ingredients off the shelf for them to get a Bitcoin exposure into a fixed income portfolio, right? As I mentioned, there's no public QSIPs that are Bitcoin secured, you know, first lean on the Bitcoin assets. They're just not there. investment graded uh in the investment grade universe um but from let's say your uh cio uh

leading like a like you're responsible for multi-asset like allocation you know across the entire 100 of the portfolio like what are we going to deploy into equities what do we deploy into fixed income what do we deploy into private markets you've got now you've got your private market opportunities within you know i got do i invest in bitcoin itself you know own utxos how How do I custody those? Do I deploy into venture equity? You know, am I going to take the meeting with 1031? Am I going to deploy into private credit, you know, through build or a battery? You know, those companies, you've got to get the CIO to take the opportunity seriously to put in the work.

It's going to take a lot of effort from, you know, say the CIO himself, herself or an investment committee member. You're going to have to deploy analyst research to, you know, demonstrate reasonable basis, the soundness for your decision, you know, for this high conviction deployment. And so to be able to get them over that hump, to actually take on this decision, you don't necessarily have to have all those prints, the track record, you know, SEC registered investment advisor behind, you know, the results, etc. But when you have those things lined up, it makes the job a lot easier. And then it also forces recognition where you're compared apples to apples, let's say, on these unchained or originated Bitcoin backed loans. You know, those are credit. Now I've got to compare that apples to apples with the rest of my fixed income and credit universe, those investments. And that's where you stand out in terms of real performance. Like this isn't a back test. This isn't, you know, just some numbers and analysts made up where they're only showing you the good ones. It's like, no, this is the live thing. This is real capital at stake. and so you you give these individuals in the kind of the the seats um or with with actual decisions to be made uh with their with their hands on the wheel you give them all of these things you know the track record proof of work everything's in the box of uh uh what they can deploy into you give

them that they'll actually you know self-select and the ones who can um see a case for deploying into bitcoin specifically you got to get them actually to to be bitcoin not digital assets which is also another side of the battle i'd say we're outnumbered right now in terms of uh this kind of population of decision makers who would deploy specifically into bitcoin and you know play within those swim lanes only and take the uh the high conviction thesis thesis that everything we've seen in the last 15 years is actually a bitcoin story playing out not a blockchain story not a digital asset story i'd say we're probably on number 10 to 1 in terms of digital assets friendly versus bitcoin uh focused you know in these seats so i i think it's

you know kind of we went through in the earlier example with unchained the entire checklist you need a lot of things uh to line up you're looking at the intersection of a few different uh circles on the Venn diagram. But the proof of work, the track record, same thing for 1031. You all have financials on your funds. You have realized results. The Bitcoin tape, you have 15 years of printed track record. You have a growing CME futures product, still young, still nascent. We can get into that one if you want. But you've got to hand these people the real results to give them the incentive um at whatever point it is uh where they're having that shower thought one night how do they hit their eight percent target you know every year to keep their to keep their jobs

uh over the long run um you know you put all those things together and eventually they'll have that you know shower uh you know come come to conclusion if you will um uh eureka moment we're like oh i can do this so yeah it definitely takes the takes that proof of work yeah it's uh i mean you mentioned but we see it too at 10 31 i mean on the venture side i mean i think that uh the hurdles that we have are a condition of just the 2020 to 2022 like venture scene where interest rates went to zero cash was flush funds raised a ton of money deployed and now they're sitting there um and not returning cash to to investors and that's um like that venture more broadly not even just like bitcoin back venture is in this this situation where capital's tight

because managers sitting there having not returned cash to investors and investors saying all right like um if you raise another fund we'll think about re-upping once you deploy cash and i think we're going to be able to stand out within those vintages 1031 because um the the companies in our portfolio been building fold announced that they'll be going public later this year but to your point like um whether it's on the credit side or the venture side like these lps that will be deploying into these funds want to see some material results a track record um if you will and that's i was gonna say you just you got will on who did an awesome podcast um like exceptional entrepreneur uh fold is is uh a fantastic story i think this ipo at fold is

actually going to be very significant uh in terms of the business the presentation uh all of that for this broader allocation of the capital market or just attracting capital into the space. I think that one's huge. And, you know, 1031, you know, self-selecting and deploying capital with Will and Fold. I think that story is going to be a nice tailwind for us, one of many. But that was really good news to see. And now we have a public equity to point to. You know, I haven't seen Fold's financials, so I'm speaking to this as a bit of an outsider. But at this point now, you have a Bitcoin focused business. And just I presume they're, you know, let's say the income statement, the balance sheet, all that. It's looking good. Right. That's something we didn't have before was a core business built around Bitcoin. Now you have a public equity, you know, audit financials, quarterly refilings, all of that. It's going to be a huge proof point for the markets, for CIOs out there. i know we have micro strategy we have the bitcoin miners the miners are a different business it's

kind of it's a commodity driven game it's kind of a layer on top of uh the utilities and the energy sector and then bitcoin itself it's a hard story to get a cio um from a multi-asset standpoint to really deploy make a big bet if you will in terms of their allocation into just the bitcoin miners it's a volatile i mean we we know this in the space it's it's a highly competitive highly cyclical industry but if we show a financial services company like fold has built um with you know a sound income statement um strong business profile you've now got something that you never had before even with microstrategy microstrategy's core business is not bitcoin it's um it's it's front-end data analytics and you know reporting and and data warehousing like that type

of thing and that that core business profile is it is a different different beast all all together like what you're really deploying into with micro strategy at this point is you know a a bitcoin you know cfo driven strategy the core business isn't isn't really bitcoin yet with fold you have of both of those two things working together at a small cap level with a lot of tailwind and growth ahead of it to deploy into. So I think the fold story, we're talking about a five-month lull and just a retracement during a bull market where sentiment is kind of just waning low. It's dormant, let's say that. But just the fold IPO announcement or SPAC um, uh, announcement. Um, I think that's a huge tailwind, something we should all be

extremely excited about. Uh, that's not getting the, the, the excitement it deserves at this point in the, in the public discourse. Yeah. Yeah. I mean, we wholeheartedly believe that at 1031, we're very excited for it. And I think more broadly speaking, whether it's fold via 1031 or the track record that you're building at build, it highlights again, it's still very early 15 years in but if you think about it whether it's in the venture space and credit funds within bitcoin or even newer than the venture like we're building track records as funds um it's still the early days of track records i mean a lot of bitcoin focused funds have not returned any capital to investors and so the fact that we're getting these first companies out

the door um monetization events like that's a that's a big thing for developing the track record that will hopefully be a catalyst for the cios and different pension funds endowments whatever it may be opening their eyes saying okay we have something to look at because with a track record um if you were to just strip away all the details of a particular fund whether it's a credit fund or vc funds just put returns on a blank piece of paper and say hey if you saw these returns from a credit fund or a venture fund like would you be interested um in in looking at what the what the strategy is and like just the returns alone money talks returns talk are a wedge that opens up a conversation for these institutions that people are looking to have conversations

with and we're very early in that process which is something to be uh really excited about yeah i'm bullish bullish with that being said you mentioned it earlier um and i think it's something we should definitely dive into is again the the perception is that you need to take this broad diversified look at broader crypto bitcoin only is still contrarian within the broader digital asset landscape and there is competition at the credit product level if you will between bitcoin collateralized debt and what we're seeing begin to develop with stable coins defy staking whatever And so just laying the landscape there and highlighting the differences in the risk profiles of the two different credit products or the many different credit products that exist between Bitcoin-focused strategies and broader crypto. Yeah, they're night and day.

You just have to dive into the details. So we talked about how on-chain structures of Bitcoin back loan. um, operationally, um, you know, the risk management and then the, the asset, you know, with Bitcoin backing alone, everything is really, you know, within the Bitcoin stack itself, right? You get into a connection into the Bitcoin to call it spot us dollars. Um, to really just deposits bank deposits, um, that FX pair of Bitcoin to USD. So you have the market maker counterparty risk involved and then you have um you know the actual banking the us dollars that you know unchained deploys into that but the dollar capital coming from build and our clients

you know etc that's pooled that's those dollars are actually bank dollars they're within the domestic us banking system there there's no leverage applied it's hard money it would be the kind of the the street term for this but um you look at those three systems that the you know the the unchained model of bitcoin secure bitcoin back lending uh kind of derives from you got those three pieces bitcoin itself the bitcoin protocol the market makers spot usd and then the banking system the bank dollars but the banks themselves aren't having to take any kind of fractional reserve risk by banking you know the uh the supply side of dollar capital and which comes through like the build channel or uh the borrower side who is you know getting those bank deposits those ious

there's no leverage created within the banking system you know in this model we're just porting on to those wires like the the fedwire system the u.s the regulated u.s banking system so the And that's a sound model, if you will, you know, that's as minimized and operationally risk kind of standpoint to build that structure on, you know, in the paradigms of both systems with minimized counterparty risk. Notice I never said in there, we're taking on leverage, like the banks are creating leverage or how are you secure? U.S. trade, we're buying repo, we're repoing, we're increasing leverage in the public side of the system. We're, you know, overnight funding, all this crazy stuff, this leverage. That's not there. So you've minimized risk within the context of that system.

Now, you go into a stablecoin product or stablecoin lending, where you can talk about these tokenized MMFs that are popping up. You start with Tether. It's like, all right, what is Tether? It's an offshore domiciled entity that is issuing tokenized dollar IOUs, not interest-bearing dollar IOUs. And just map this in this Tether coin, right? It's going to operate on these altcoin rails, which are themselves, you know, don't offer the security profile that Bitcoin itself does. They're not the same thing. You know, Bitcoin, we've said, solves, like, provably solves the Byzantine generals problem, which is just the economic coordination problem.

You're going to operate on these other rails, which you don't know are, you know, check the boxes on secure. Most of them are doing proof of stake now, all these other, you know, incentives. So we know there's risk there, right? I don't have to go into that one and dive deep, but there's a centralization risk. You're also trading these dollar IOUs, which are really just levered liabilities on top of a stack of assets, if you will. like look at the quarterly attestations that Tether puts out and the reserves backing all those Tether issuances or token issuances that are outstanding in the market. And I'm not saying anything bad about Tether. It's an extremely impressive business, what they've built up. And there's clearly product market fit there. But at the end of the day, what is it? It's like,

all right, we have a pile of assets and what is like 80% of it is US treasuries. They become one of the biggest growth clients for digesting increased treasury supply. And then you just lever the treasury debt and some other reserves. There's some gold in there, there's some Bitcoin, there's some money market paper, et cetera. But at the end of the day, you're just playing within the the context of the existing legacy system like the credit bubble paradigm uh which needs these treasuries to keep financing and levering itself and then you're just distributing them on these all altcoin platforms and then those tether ious need to need to find a find a home and let's say just unregulated you know the wallets what have you uh just globally like

your market now for for deploying um those dollar ious like now you don't have to run through uh other countries central banks or down to the studs through the fed to the bis to another central bank and deploy to the banking system through to the capital mark cross-border capital markets through that channel now you've just got one to many you can launch your your stable or your um your new rails solana avalanche whatever and then just deploy these dollar tokens on it and And just what you're really just doing is amplifying the existing bubble like that already exists, this treasury problem. You're not solving any of the structural problems, is my opinion. And then on top of that, you're looking at a different kind of risk profile now where you, you know, there are all these platforms and everybody is just kind of, let's say, in the arena.

out. Like we're going to find out what works, uh, where growth is, whose yield is sound, all of that. Um, and there's some awesome businesses at play. Um, and, and I'm not saying they're, they're not viable, not valid, et cetera. Um, but there's just a lot of growth out there. But my, my whole point is, um, you've added extra hops of risk into the system, right. Or into the, into the infrastructure into the structure uh of of uh this growth this uh you know these hops of credit intermediaries when you go from you know treasury to custody uh and then forming a balance sheet with tether issuing dollar ious and then now you're going to do all these other uh kind of like peer-to-peer lending markets and lever that way when you send your bitcoin into those you're

tapping into all these other different hops of risk um and i've i've seen now copying apples to apples where um you know from the borrower's perspective you know you get pushback saying well unchained is deploying at 14 right now uh why would i not deploy my my bitcoin and borrow with you know someone else for six or seven um it's like well from the supply side of capital you obviously prefer the 14 uh and i can go through you know uh all all the risk management in the in the structure here uh to get the the why you want 14 why it's actually not just a better return but also um minimize counterparty risk minimize altcoin blockchain risk all of that um so you're going to get rid of all of that and you're going to have kind of the soundness the settlement

um censorship resistance all of these things um they call it just like resistance to network attack all of those things um decentralization um you're going to have those with bitcoin and deploying through unchained and you're going to be inside the u.s economy which is like down to the studs of uh the global dollar system where the yield actually comes from the end of the day it's the it's the u.s private sector who has to keep this whole thing afloat because if the if the treasury can't service that that debt stockpiled and i mean it just turns into uh a printing exercise uh from time to time so you go down to the studs deploying into into bitcoin uh by going through unchained you're working with the banks which is just one layer above the fed the lender

of last resorts we don't need it uh because bitcoin is our uh not lender of last resort but it's like it's the bedrock of the of the loan here along with uh the commercial borrower themselves who are highly incentivized not to get liquidated and lose their bitcoin but you're going you're going really as operationally tight and robust and ironing out all those risks as you can uh with kind of the unchained model and what build is deployed into versus going offshore doing lending stablecoin tokenization all of that um you're not fixing the system from the bottoms up or you know fixing the economic problem you're really just adding another layer uh to a kind of a credit system or credit approach that is

struggling like it's buckling under the pressures and you're now you're just stacking you know like it's like having a broken foundation in your house and you're like well let's uh i'm gonna put my budget not into fixing the foundation the crack foundation um i'm gonna add on another you know story to my house um and that's the capital allocation decision you made it's like well the the decision you made you know back in the past did not fix the foundation you know your house might look good for a few years um you know by putting on that extra story might even increase the value of the house on redfin and zillow but 10 years down the line 20 years down the line if you don't fix the foundation that house is going to have a massive problem and all of that capital

you've deployed into it is going to be um you know proved to prove to have been a misallocation You should have made a different structural decision there back when you had the chance. So, you know, in my opinion, that's kind of an apt analogy. And you're also seeing this with kind of growth of not just stablecoin lending, but you're now seeing tokenized money market fund launches. So I know this sounds crazy, but there's actually, I think, I believe product market fit for this with cross-border settlement. um but if you think about you know like tether as itself i mentioned it's a dollar iou but it's non-interest bearing um to actually create like an interest bearing instrument you're looking at a different uh kind of regulatory profile that's where you get into the money market fund right you

money market funds are priced at priced at a dollar daily nab uh when uh liquidity transactions take place, those just strike at a dollar. You know, a deployed capital in, all right, your shares come in at a dollar. You want to redeem, shares come out at a dollar. And in order to do that, you have to meet certain kind of regulatory guidelines on what these money market mutual funds are allowed to hold. And there's a lot of reform that's taken place in the last 10 to 15 years. Ever since the GFC got underway, it really started not with the Lehman collapse. That was when kind of the rot was exposed to the public. You know, if Bear Stearns, you know, that prior spring wasn't the early warning that something was afoot. But it was

really the dominoes were set in motion in August of 2007 when a money market fund in France by BNP Paribas that was holding mortgage-backed securities, you know, specific, you know, AAA rated, you know, tranches of a mortgage tax security became illiquid. There was no bid under them, even though the assets may have been money good still. And then the money market funds couldn't price. So my point there is you're seeing money market fund, what would you say, like business development taking place in the stablecoin, altcoin, all of those channels, like as people try to figure out what to build what's going to work um and it's only time that's going to uh really prove out which which uh decisions or blueprints were sounded which weren't but

in the last nine months like this year you've seen tokenized money market fund launches from large asset managers who have gotten into the bitcoin game uh with the spot etf so franklin in Templeton, one of the say nine investment managers who've gotten behind an ETF. They launched a tokenized money market fund. I forget which alt chain, you know, it settles on but they've launched this token called Benji which has a U.S. domiciled money market fund.

Holds mostly, it's gonna hold treasuries and secured repo, you know, collateralized by more U.S. treasuries. And now this Benji token is gonna be, you're gonna see a cross-border settlement of money market fund shares, tokenized and issued on these all chain rails. It's gotten above 400, 500 million in assets.

So you're seeing product traction come into this emerging niche of our niche of a space. And you've seen the same thing from BlackRock. they launched one called Biddle, B-U-I-D-D-O, which is British Virgin Islands domiciled. Basically the same concept, just an offshore domicile. They're not quite as large, I don't think, as the kind of the Benji platform

and what they've gotten off the ground. But it shows you, it's an early sign of where this is going. And it's, you know, now you're gonna see competing tokenized money market funds, uh you know going head to head uh with let's say tether and all of these you know dollar ious we're going to try to figure out what works uh what's economic what works best for the uh the dollar capital that's going into supply um you know to actually own these tokens if you will um or own let's say that's the own uh be an equity uh participant or lp and like a fund like uh

uh, uh, like build manages and deploys into unchained secure loans. Um, these are all going to compete head to head and the, in the realm of dollar IOUs. Um, and I think right now we're, this is so much more complicated than, um, just what everybody in the CIO seat or similar that we talked about in the financial industry has ever had to think about, um, and wrap their heads around in money markets and dollar credit, if you will. So there's, I guess I'd say like it's an exciting time. I'm glad that we're able to compete in this space with the Bitcoin first, the Bitcoin native thesis. And as I've kind of highlighted in my comments before, I think this is actually a better way out of the existing kind of paradigm and the problems uh we've amassed with

uh you know a growing uh stack of debt ious compounding over the long cycle like building up since um 1971 but really getting underway since like the aftermath of world war ii um to take the bitcoin first approach the bitcoin native approach and that solution to the problem I think that's going to generate the best outcomes for, I'll just speak on behalf of the U.S. and the private sector, what's best for American workers, businesses, is that Bitcoin first approach to this money market problem. And it's also going to be best for the the treasury standpoint as well. Right. The more collateralization that takes place on Bitcoin and we shift over those kind of those infrastructure and rails to building on Bitcoin first and minimizing risk and building like fix the foundation and then build our house on that. i think that puts us in the best situation for um i want to say like preserving our democracy isn't the right way to put it like i don't like when when you hear those points about pro-clutching the democracy it's uh uh preserving the american experiment uh and everything that's

been built up the constitutional rule of law um the the whole infrastructure that's done so many good things for us um for you know almost 250 years now um but preserving that for for future generations i think bitcoin is is the ticket uh and building this credit system this foundation that gets us there you're not going to hear any candidate make these points on the ballot in november even if donald trump was at the bitcoin conference um i still don't think the kind of the tops down perspective gets it yet i kind of it kind of showcased itself in a sign-off comment he's like have fun playing with your your bitcoin and your cryptos and all that stuff i still don't think he and and other people around him those surrounding decision makers fully fully grasp

kind of the strategic path um and opportunities um that need to be executed on over the next 10 20 years to to you know preserve these things and continue to grow this uh this awesome kind experiment uh that that that needs to be saved that needs to be preserved through history so i'm putting all that together we're talking about big picture topics here but this stable coin tokenized money market funds that's the arena we have to compete in we have to compete and i think the the tools and resources we have um we have bitcoin itself the protocol the utxos uh we have you know a fair amount of capital between you know everybody involved in bitcoin who's advocating for it but we also have um you know the hidden resource we all forget

about we have um self-selected for um you know the best and most productive people in my opinion uh and we talked about that from unchained at the beginning who self-selects in to custody their bitcoin with unchained it's not crypto uh you know focused individual as someone with that that Bitcoin mindset. So I think maybe closing with the white pill, we've got the resources and I think we've got the economics at our back. We're going to do it. We are going to do it. And you prefaced it in your notes. It's the tortoise versus the hare just playing out in real time. These Bitcoin focused strategies, doing it the right way, making sure individual's money is secure and you have lending practices that actually makes sense for both parties versus

defy and the continuation of the u.s sovereign debt situation um and we've seen plenty of times for the first 15 years of bitcoin and broader cryptos history like those hair strategies typically do um blow up at some point or another um and selfishly i mean this is our perspective at 1031 too and you talk about um capital allocators and their focus on digital assets versus bitcoin specifically 10 to 1 from just a social signaling perspective and then you look at capital it's even more than that like capital deployed toward broader crypto vc is probably 100 to 1 um crypto vc to bitcoin focus vc and while can be frustrating um to many that are particularly looking to raise funds for their business that they want to build out um selfishly 1031 maybe

that is a massive asymmetric opportunity that exists while everybody's focused in defy and web 3 and nfts whatever it may be we've got the ability to pick and choose from what we believe are going to be generational businesses and i think that same mindset um correct me if i'm wrong probably applies to what you're doing a build with this focused bitcoin lending strategy that i think is going to be here for generations to come as we transition to a bitcoin standard as well absolutely yeah and we didn't mention it we had a list i skipped it because i felt like it flowed better to to go in the direction that we did but the partnership with open sats i think we should touch on that to wrap up as well yep uh open sats and uh human right rights foundations bitcoin

development fund so um two organizations um where the mission is aligned uh just from a uh a non-profit based uh supporter of uh free and open source software development and um financial sovereignty you know from the bottoms up empowering uh millions and billions of people you know around the around the globe my thought was um you know granted we're not at the scale that uh like a black rock or nowhere near it uh could deploy but in terms of the let's say the carry uh when you deploy into when you deploy your dollars into the bitcoin back loans right as opposed to making the decision to buy treasuries or something else um i already talked about all the other you know apples to apples on the income statement how everything

lines up but um you know what we committed to was a uh it's a 10 of uh uh rev share commitment on the management fees associated with uh fee paying clients deployed into um uh our bit of the bitcoin back loans right so our fix our our management fees you know you you've heard 2 and 20 and private equity venture capital private credit like typically in private markets this is not a uh um a well-kept secret at all you can look at it on the public financials but the actual fees that the manager charges against aum are are pretty high like it amounts to like 20 percent uh or higher like like in net after the fact of the 10-year fund if you're doing 10 percent or two percent excuse me you add that up it's like 20 of the aum it's a massive amount

And it's how these businesses, you know, you look at the public businesses like Blackstone, Aries, like you can back it out. It's very high with Bill. Like we're a credit fund. And so your return profile is different. Like your target return isn't the, you know, the high double digits, you know, almost triple digits kegger of, say, Bitcoin or what a venture equity firm deploying into venture venture might be competing with on the risk return profile profile. We're extreme. I would consider us the most conservative capital, if you will, in the space. We talked about the the the net returns we were able to deliver. But, you know, with that mindset, kind of my approach to just pricing fees, this isn't this isn't a product that gears itself to two and 20.

It's it's a fixed rate, you know, value oriented, you know, one percent management fee. That's all we're going to charge. So principal deployed into the end of the Bitcoin back loans just for managing a fund, doing all the work, which is there's real work involved. it's one percent is all that build makes so we made a commitment and that's just top line we got to cover the cost after that um but we made that the commitment to uh open sats and uh hrs bitcoin development fund um to to make them a partner if you will uh on 10 of that rev share so of our 100 bps um that bill carries that has to cover our our expenses keep the lights on 10% of that is going to go towards funding free and open source software development and these tools that are really enabling the economics, you know, from the, you know, the foundation level

that we talked about of all of this economic growth and good things that are coming out of Bitcoin and its innovation. So just put that in perspective for every million dollars deployed through Build and to Bitcoin-backed loans. That's going to result in an annual drip of $1,000 just split between OpenSats General Fund and the Bitcoin Development Fund from Human Rights Foundation. And you don't need me to shill it. The great work that Matt O'Dell, Gigi,

all of those people are doing at OpenSats, the projects they fund with no strings attached. Same thing with Bitcoin Development Fund and CK at HRF, Alex Gladstein. Everybody knows what they're doing, all the great things. It is an extremely positive story. And I think it puts Bitcoin in perspective on big picture, you know, what we're doing this for and, you know, over the long and medium term, what the world and the landscape is going to look like, you know, and what we're building, what we're, you know, all

of us are building towards and what we want to see. But that decision to commit to an annual donation was something that we wanted to get behind. So now you see a flywheel developing, if you will. And this is what I've thought about for the last two years. What do you want to see take into effect and materialize when you're deploying your dollar capital through the credit system? So if you're just deploying into treasuries, what do you see from that? You see an increasing public debt, you know, it's trillion dollars a quarter. If you keep doing this, it's just going to keep going up over time.

And you see all of the different problems developing within a credit bubble, you know, that that entire landscape. Ultimately, right now, we're at a we're at an inflection point to bring it home to what we talked about at the beginning with the situation in Ukraine, you know, the the the hot border that's developing, you know, all these all these lines of conflict. israel gaza uh southeast asia philippines taiwan china all of those things if we keep doing that like keep going down that route eventually you just keep forcing those you also see uh kind of

the body bottom dropping off the lower middle class globally uh struggling so you keep doing this route on the existing legacy system what is the world you see you know if you just think about how things play out if you keep deploying capital that way versus what if you deploy uh the the existing dollar capital into bitcoin as the core of your um your your system your foundation what do you want to see in the world well we're we're deploying uh capital into small and middle market businesses within the us um who are delivering you know goods and services into the economy small businesses thriving communities um helping the treasury's public debt situation which uh you know that just sending them checks isn't enough i think we do need true reform and uh

people with the right perspective and in those seats and taking taking office in these institutions that uh you know we put so much time and effort over you know two centuries now plus uh to put in place and defend um but then now you're also you know baking in you're connecting the flywheel of these bottoms up tools of free and open source technology. So you see all these things playing together. It's taking us towards that bigger picture. Where do we want to be in 50 years when we hand off the reins to our children and grandchildren? I think just putting in place all of these things and connecting those dots and where the capital is going, I think it puts us on track for that. So I know it's, you know, a 10% of 1% doesn't sound like a

big number. And the scale we're at right now with Build, Unchained, et cetera, just Bitcoin secured lending itself, where the niche within a niche of global credit markets to the point where a $2 billion injection from Cantor Fitzgerald is a massive headline. But you see the, you know, the tortoise approach, um, these things will compound over time as, as, uh, my hope and vision. I think everybody else's who's putting their, uh, their time and energy and resources into the space. Um, and it's ultimately like, what is, what is the world you want to see in 50 years to hand off? And I think all like that decision with open sats and HRF are, uh, the exact partners, uh, we want to deploy to, to make that happen.

yeah it's uh an incredible trend to see and the fact that you guys are doing this so early on is highly encouraging hopefully it is yet another signal that sends that's sent out to the rest of the market like hey if you're building a business on this open source protocol maybe you should support the people that are making sure that it's up and operational and once you've officially replaced black stone as the largest credit fund in the world that would be some material flows going towards these open source developers. We have a long hill to climb before we get there, but it's great to have goals.

Big goals. We're going to win. Matt, we can't wait 15 months before we catch up next. I'm sure we'll have a lot to talk about after this election and we get into the new year and things begin to inflect and track records get longer and attention begins to pour into the space. So thank you for joining us. give us an update and keep crushing it man but can i give a sign off i want to direct some people somewhere yes so this saturday i know marty parker um robin becker from anchor watch um

natalie brunel sam callahan did uh me and bill the massive favor we put on a a bitcoin conference in in missouri in the state capital um bitcoin focused uh education full day I think we did a great job, but we couldn't have done it without you all. So I wanted to give a public thanks for that. It's been a year. So to follow on that, bring in new people, new education, new blood, et cetera, into the space, specifically to build out Bitcoin adoption into the Midwest, into the breadbasket region. And Sam and Natalie are hosting an event this Saturday, September 14th in St. Louis, the Bitcoin lunch.

You can go to Bitcoin-lunch.com, buy your ticket, but it's, you know, low, low price. You're going to be into this for less than $100. Full day of Bitcoin education. uh bring your friend bring your mom bring your dad bring your relatives bring you know bring your financial advisor uh to learn about um uh bitcoin um itself and the capital deployment uh opportunities and approach uh i'll be presenting um at the lunch but it's something build has uh sponsored and is proud to support um natalie and sam as they um you know raise their profile um within st louis um and uh do that do the hard work you know on the ground so september

13th um build bitcoin or sorry build bitcoin.com to learn about you know the private credit fund and all of that but bitcoin dash lunch uh to get your ticket uh meet natalie and sam first party meet me i mean i'm the i'm the low billing on that one um but you know come ask your questions think about what to do in the cycle ahead and how to entrench Bitcoin in the Missouri and surrounding states, local economies. You can use, I think there's a promo code bill to get 21% off,

but I would much rather see you there as opposed to just getting me credit for attribution money at that. So come in and support us. we'd love to see you there get there if you're in the missouri area freaks if you're in st lois don't tell yourself short matt uh you're a top billing attraction that's all we got today freaks peace and love