TFTC: A Bitcoin Podcast - #565: Bitcoin Credit Innovations with Andrew Hohns

Episode Date: December 16, 2024

Marty sits down at PubKey with Andrew Hohns to discuss Battery Finance. 0:00 - Intro 0:36 - Squawk Box 4:27 - Why Andrew caught onto bitcoin 10:39 - Unchained 11:29 - Saylor’s dematerialization idea 15:45 - Supercharging real estate 25:09 - Zaprite & SOTE 26:42 - Adoptions cycles for borrowers 31:31 - Duration curve 38:24 - Bitcoin will be critical as other assets demonetize 40:50 - Loans result in long term hodl 46:23 - 100k significance & price prediction 54:39 - Custody question Shoutout to our sponsors: Unchained https://unchained.com/tftc/ Zaprite https://zaprite.com/tftc Salt of the Earth https://drinksote.com/tftc 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/ Nostr https://primal.net/tftc Follow Marty Bent: Twitter https://twitter.com/martybent Nostr https://primal.net/martybent Newsletter https://tftc.io/martys-bent/ Podcast https://www.tftc.io/tag/podcasts/

you've had a dynamic where money's become freer than free if you talk about a fed just gone nuts all 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 And that's part of the bull case for Bitcoin. If you're not paying attention, you probably should be. All right, we're going to start now. We're live on Twitter, on YouTube.

Before we jump into our conversation, I'm sitting down with Andrew Hones from Battery Finance. Big shout out to Unchained, PubKey, Unchained, signature event here in New York. Honored to play a part in it. I've been around the Unchained family for seven years now. Unchained was the first company in the space to ever stick their neck out and say, Marty, you know what? We'll support what you do. We'll sponsor the newsletter, sponsor the podcast. That has evolved.

At 1031, we've invested in Unchained multiple times at this point. And personally, the relationship, Unchained is a company that's near and dear to my heart. So being able to participate in this special event, the week that Bitcoin surpasses $100,000 is incredible. So thank you all for joining us. As I mentioned, sitting down with Andrew Hones, who I would argue is the most famous man in Bitcoin this month after his appearance on the best Bitcoin podcast, Squawk Box. How was that? It was amazing. You know, I mean, I guess everybody probably has a Squawk Box routine, but I was thinking, how am I going to prepare for this? and i thought well should i listen to what is money the latest in sailor but i went for led zeppelin four on so yeah walked right in with a lot of a lot of energy well i think it's i opened

up with the squawk box segment because i do think we were just talking about it with some individuals at the event tonight before we stepped up here like like matt said on rhr i don't know whether it be like a proud son proud father but having watched you and the battery team strive to get to where uh you are now and to be able to get on the cnbc and make that announcement number one was completely fulfilling but number two i think it it will be remembered as a pivotal interview on that particular type of media because i think you're taking the conversation about bitcoin as this pristine collateral asset to the next level where historically people going on shows like Squapbox and other mainstream media financial news stations is about just Bitcoin,

the asset number is going to go up. It's like simple sort of sales pitch that we've heard. But I think what you're doing at Battery is an evolution and really highlights the power of Bitcoin as collateral. Thank you for saying that. I mean, we're just getting started. You know, we And I'm very excited about the potential of this financing product. Before Squawk Box, we had a pipeline of about a billion and a half dollars of projects that we had identified really very informally. And after the Squawk Box appearance, my phone just started ringing off the hook. And emails and, I mean, people really reaching out every avenue. And at this point, I mean, we've gotten, you know, well over 100 outreach, all different kinds of projects.

And it's people that have assets that are seeking to integrate Bitcoin into those assets. And at the same time, it's people that have Bitcoin that are looking, okay, how can we use this as a stable form of financing? because really right now, you know, so much financing is subject to the mark-to-market risk and the liquidation. And it's hard to finance a long-term project if you have, first of all, high teens' interest rates and also the risk of liquidation. And, you know, by fusing it together with real-world assets, I think that we're really transforming time preferences there. and i don't think you were able to articulate this on squawk box you had 10 minutes but i think

it's important for everybody in this room and anybody watching um via youtube or twitter and eventually the podcast feed to understand how you came to this conclusion because i think you're a unique founder in this space in the sense that you have a very successful career in structured credit and you have built a reputation of being able to do it well consistently for years. And I think you're the perfect archetype of somebody who had the humility and the ability to recognize Bitcoin as something that could revolutionize the world you were living in. So what about Bitcoin specifically really sparked your interest

and gave you the confidence to go after the strategy of battery finance? Well, it really starts with, I mean, everyone needs income. And if you're a family, you need income. If you're an individual, you need income. If you are a university endowment or a charity, you need income to support the research and the scholarships or the charitable purpose of your organization. If you're a pension, you need income for your beneficiaries. So you can't just invest in things that don't produce income. And as a result of that very basic sort of human motivation, people have tranched different kinds of capital structures and some people take a senior interest and they get paid interest.

I mean, it's as old as human society, really, right? but what dawned on me really starting in early 2020 around covid with the huge amount of liquidity that was just coming at that time liquidity supernova almost was just this feeling that we were going to have a lot of inflation and i started looking at some financial history books And there's not that much written on inflation, actually. There's some good books. One that I really like is called A History and Analysis of Inflation by Don Parleberg. And more recently, you know, there's been Lynn Alden.

I mean, Broken Money is a tremendous book. And, you know, there's, you know, a handful of other titles, but not all that much about it. But what I could read, it gave me every indication that we were going to face a lot of inflation over the coming years. And then when you say, okay, well, just how about the funded federal debt? It's already growing for the last five years at over 9% compound annual growth rate per year. And if you just say, okay, well, what if you have 7% monetary depreciation? What does that mean to credit? And in 10 years, that's a 50% reduction.

If you get your money back, you make a $100 investment, you get $100 back in 10 years at a 7% monetary depreciation rate. That's a 50% loss. And so if you're making 7% per year, let's say, over 10 years on a $100 fixed income investment, you get $7 a year income. That's $70 of income in total. and then you get $100, but you have $170 in total and without calculating it out precisely, it's worth about $85,

maybe a little bit more because you're getting some of the interest early. Bottom line is, you're taking all this credit risk and you're just treading water. So you're assuming this huge amount of risk for what? And that's what led me. And we started,

first we started looking at gold. We said, well, how about gold? You know, what if we invested with gold as the principal? But gold's returns were not really, they weren't really that great when you really look at them. I mean, gold is nice. It's shiny. You guys maybe have seen it before. It's very beautiful.

But it wasn't that dynamic. And we looked at silver. We looked at a few different things. But then Bitcoin, and of course, the more you look at it, the more interesting it becomes. Because it's not just scarce. I mean, we all know it's scarce. It's finite. But the things that it's doing are incredible as well.

Like even, you know, even today I was having a conversation about cyberdomes. And I mean, cyberdomes, you know, because we all get spam, right? You know, and what's the business model for spam? It's very cheap and no cost at all. So you can just blast it out there. You spin up 400,000 spams just like that. And if 10 people respond and you hook them for $1,000 each, it's well worth it. But if you put a cyber dome around your email server as a company or as, you know, a municipal agency or a governmental agency where you say, okay, we're only going to accept inbound emails from servers that have one Bitcoin or 10 Bitcoin verifiably on deposit on the chain.

And each email has to have a small but meaningful amount of sats attached to it, you know, 25 sats or something like that. Otherwise, it bounces right off the cyber force field. Well, now you've protected your whole organization against spam. And you have also at the same time created this really profound use case for Bitcoin that preserves the integrity of communications. And by doing that, if you imagine, well, you know, each company now that's going to participate in this has to have one Bitcoin or depending on how secure they want their messages to be, maybe more Bitcoin. They're only accepting messages from, you know, if you're the Department of Defense, maybe you say, well, unless they have 100 Bitcoin on deposit. And now you have another source of demand for the Bitcoin that isn't related to it as a store of value, but it supports its proposition as a store of value. And there's like a million

use cases like that. So for this episode of TFTC is brought to you by our good friends at Unchained. Do you have an old IRA or 401k that isn't keeping up with Bitcoin? Roll over into an Unchained Bitcoin IRA and take advantage of Bitcoin's long-term potential while enjoying tax deferred growth. With Unchain, you hold real Bitcoin and keep control of your keys, reducing counterparty risk through their collaborative custody model while Unchain handles the tax forms. It's very important they handle the tax forms. Get started now with no setup fees and no account fee for the first year. Not only is this the only standard Bitcoin IRA where you can control keys unlike other Bitcoin IRAs, you can take distributions directly in

Bitcoin avoiding exchange fees. Set up a Roth or traditional Bitcoin IRA for no charge today at unchained.com slash TFTC and experience true ownership of your retirement savings. Go to unchained.com slash TFTC. I think you're really highlighting something that has been a topic of discussion, particularly for Jason Calacanis is coming at micro strategy strategy of accumulating Bitcoin, using convertible debt market to create demand for for these credit products via micro strategy and i think the naysayers there are saying oh yeah you're accumulating bitcoins a scarce asset but like what else is it other than that i think they completely neglect these other use cases one of which you just highlighted well i mean sailor is

an absolute genius he's gonna go down in the history books with right rockefeller jobs i mean let's steal a man this why why do you say that well well i mean we can go into it but even just I'll just give you one. First of all, he's brilliant with his analogies. He's such a vivid thinker. And one of the ones that, for me, is incredible is the dematerialization of capital. And the way that he gets there is he says, remember maps. He says, you used to have Ram McNally.

You go on a road trip. You buy the Atlas. And you're driving along, and you're looking at the map. Well, first of all, you have to know how to read a map. Okay, that's easy enough. But what if you want to go somewhere off the map? You can't even fold it back, you know. I mean, nobody's ever able to get a map to look the same way as when you bought it.

But if you want to go somewhere on the map, okay, that's good. But if you want to go somewhere off the map, that's tricky. You might have to buy another map. And even if you want to stay on the map, it doesn't give you directions from how to go from one place to another. It doesn't give you an estimate of how long it's going to take. You don't know where the Mexican restaurants are along the way or the Italian restaurants or a hotel to stay at or whether it has availability. and you don't know if there's a traffic jam and but then with the dematerialization of maps where you had google maps and trip quest and now you could zoom in pinch pan and he says look now

you can add traffic you can add suggestions you can monetize mapping because you've dematerialized the product and he helpfully points to music it's like well if you wanted to listen to music 200 years ago you had to get 40 people together who've been training for 20 years each with a different instrument and unless you were there in the salon at vienna at that time you were going to miss the concert you couldn't just like and if you were 10 minutes late you couldn't just you know rewind to the beginning of the first movement you missed it you missed it forever and then you know that was dematerialized through stages gramophone and cassette compact disc now you have streaming and streaming and it's monetized music so differently same thing with all different

kinds of content and he says bitcoin is the dematerialization of capital and when you think about what that could mean in the future i think it's very profound just like the cyber domes you could create the same construct with gold you say you know what i have a pile of gold and i'm not going to accept an email from you unless you have a pile of gold and there has to be a little shaving of gold with each email but how are you going to actually do that right i mean you can't it's impossible to verify it's a very clunky system but the fact that you have a chain it's visible it's contained on all of these nodes around the world it's fully transparent it's auditable the actual unit itself is divisible it's fungible you know all of these factors the

properties of Bitcoin create these use cases. And I think that MicroStrategy is going to be a developer of many of them over the years. I mean, that was where he started 12 months ago with this Bitcoin development company idea. And I think that the treasury use case just has become so compelling so quickly that it makes total sense to lean into that. But But over the years, I fully expect that MicroStrategy and the team there, and it's not just Michael. I mean, there's a deep team there, is going to develop a lot of different interesting applications for the Bitcoin that they've amassed. And, you know, I mean, going back to your question from a few minutes ago, what are we after? Well, as income investors, the basic realization is that with inflation being what it is, if you just make a normal fixed income or a normal credit investment and you only get your principal back, it's very destructive to the real value of the capital that you have.

And so the way that we've been looking at it is by fusing together Bitcoin with traditionally financeable assets and making a loan to the combination of the two, we can really supercharge that financing. Go ahead. Well, let's use the Bank Street Court example. For anybody who did not see you on CNBC, I think this is like a tangible example. What exactly happened there? well we supercharged the real estate with the energy of bitcoin so you know we had we had a multi-family apartment building not we there is a multi-family apartment building in old city in philadelphia it's called bank street court and um it's three different 19th century buildings urban

loft style apartments beautiful architectural windows exposed brick that kind of thing And it's been owned by the same sponsor for almost 30 years. And they had a $9 million mortgage on the property. The building was worth about $16 million. And we offered them – now, the mortgage, it had a fixed interest rate, but that expired. And so it flipped to a floating rate. And, of course, with the Fed, who wasn't even thinking about raising interest rates, It turned out that they were thinking about raising the interest rates very quickly, and that resulted in a rapid increase in the interest costs.

So the sponsor was looking for a refinancing with a stable asset. So we offered them a refinancing, and in this case it was a $12.5 million loan. and the use of proceeds was to pay off the existing $9 million to provide them with a facility of $2 million to make capital improvements to the property. Being as that it has been a residential building since the 1980s and it's already a building of a certain vintage, you have to keep on investing in it.

So they wanted to refresh some of the units as they turn over in terms of the kitchen and the bathrooms and also just spruce up the common area, new carpets in the hallways, that kind of thing. So a $2 million facility for cosmetic improvements to the property. And then with the remainder, roughly a million and a half, at the closing of the loan, we bought Bitcoin, 20 Bitcoin. And that formed the collateral package for our $12.5 million loan. So we had $20 million of day one collateral, which is the $16.5 million building plus $2 million of capitalized improvements, $18.5 million, and $1.5 million of Bitcoin. So that's $20 million, 62.5% loan to value on the property.

and um you know we get an interest rate uh mid single digits interest rate fixed for the life of the loan which is good and the building can afford it the loan covers uh rationally at a 1.3 times debt service coverage ratio based on the rent roll of the property only right there are 63 units three commercial units on the ground floor it's a normal property um But at the same time, we have introduced Bitcoin's dynamism into this asset. And that plays – it has really valuable features from different perspectives. So first of all, let's start from the lender's perspective. From a downside, I think that we're a lot better off because a traditional lender, if something goes wrong with the property, they have to recover against that specific asset.

And no matter how good that asset is, no matter where it's located, you still have to recover and reposition against that idiosyncratic asset. You have to maintain it, manage it. Something could happen. The roof could leak. You have to deal with tenant issues. That's why banks have workout departments. It takes 12, 18, sometimes 24 months in workout because they're dealing with specific assets. They have to reposition them.

We have that collateral. We have all of that, but we have options. because we also have the Bitcoin and the Bitcoin is really excellent collateral. Sometimes it's pristine collateral, but what does that mean? Well, what it means to me is that it's fungible. There's no such thing. It's not Philadelphia Bitcoin that's in this project. It's not old city Bitcoin. It's just Bitcoin. It's the same Bitcoin as is here in New York, as is in Paris. It's divisible, right? We don't have to sell all of the Bitcoin. We can sell just a little of it. it is liquid it can be sold at any time of day you know 24 hours a day 365 days a year and so

it really depressurizes the downside if something goes wrong with the property and also not only is it useful in that sense but historically it's trending upwards and you know for any real estate underwriting that you're going to do we just looked at the rent roll the likelihood that there's a problem with the property a month from now is much, much lower than the likelihood that there could develop some unforeseen problem years from now. But if you're following Bitcoin's history, years from now, that 20 Bitcoin in the collateral package will have also likely appreciated enormously. So over time, our LTV should be going way down on a combined collateral basis. So I think on the downside, we're in much better shape than an old-fashioned

lender that doesn't have Bitcoin in their collateral package. And on the upside, we're also in better shape because we share in the appreciation of that. And this is the part that I didn't have a chance to express on CNBC because, you know, the format is quickly moving on broadcast television. But on the upside, we share in the appreciation of the Bitcoin with the borrower. Our interests are aligned. And in particular, the longer that the borrower keeps the loan outstanding the more and more of the bitcoin upside they vest into and so we have this strong incentive to lower time preferences the idea being that we have a constructive view on the long-term value of bitcoin and if the borrower just continues to pay

a rational interest rate right mid single digits in this case fixed which i think is a really good cost of capital, especially if you're vesting into Bitcoin year after year after year, then their value in the project is going way up. We're getting paid an interest rate on a loan where we think that the credit risk is going down, down, down, because the LTV is going down as the Bitcoin appreciates. And then when the loan is eventually retired, we share in the appreciation. And, you know, it's better for everyone. On this particular loan, I'll just give you a little tidbit you know numerically um we calculated okay what is the break-even growth rate of the bitcoin where this loan is accretive for the borrower you know because like if you think about if you have

real estate you're actually investing in the real estate and in u.s dollars and what we're saying is no this is a tool that the borrower a borrower any borrower can use to re-denominate their equity out of fiat and into bitcoin so they still have an asset that they know and like but they've introduced all of the energy of Bitcoin into the equity of that asset. And in this case, we calculated that a borrower is better off if Bitcoin produces a compound annual growth rate of at least 6%. So 10 years from now, 6% CAGR on Bitcoin, based on today's price, is about $175,000 Bitcoin. So, you know, if the Bitcoin is less than $175,000 in 10 years, Marty's going to eat his hat.

And also, the borrower would be worse off than if they had a normal loan. Not normal. I have to check my vocabulary. If they had an old-fashioned loan without Bitcoin, they'd be better off. But if they use this innovative loan, this new strategy, new structure, as long as the Bitcoin can grow at 6% per year, it's accretive. And if it grows at much more than 6% per year, and of course, recently it's been growing at, I mean, what's the CAGR since May of 2020? It's almost 70% or thereabouts. So there's a huge margin of upside there.

and it just, it completely reframes it. 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

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incredible my favorite is the orange and the pink lemonade go to drink saute.com that's drink sote.com use the code tftc when you make your purchase and you'll get 15 off i'm telling you get on it freaks you're gonna love this stuff this is not only like a new concept for a borrower but for lenders too because that's i think one of the things that i've noticed is this whole idea like particularly commercial real estate uh they'll take out loans they'll get cash and try to take cash out and you uh got the quip in on squawk box it's instead of cash out it's bitcoin in so in terms of uh changing the minds and helping people come to the conclusion that you've come to particularly in commercial real estate markets what do you think are the catalyst that are going

to be tipping points for people to have an unlock to understand that oh maybe this is more beneficial from as a borrower taking this capital out and adding bitcoin to the collateral stack well everybody in this room is early and everybody who's watching right now on the live stream is early and everybody who watches the replay is early and bitcoin is finite and so it's really advantageous to be early um because unlike other themes that have been popular over the years when you have a popular theme people just dilute it but you can't dilute the bitcoin right it's scarce and and it's finite so um i think that you know i've been really amazed at the inbounds that we've gotten in the last couple of weeks um there this is this financing product has struck

a chord uh we've had people reach out from all over the country all over the world people that own i've had people that own um many many multi-families also commercial office buildings but many operating portfolios as well uh an owner of a operating portfolio of car washes a billboard company with billboards here in Manhattan, horizontal housing developers, sort of like cottage-style living, hospitality assets, hotels, but also Bitcoiners that are looking to responsibly draw financing against their Bitcoin rather than having to take on a facility that has mark-to-market risk or high teens' interest rates. So I have one individual reached out who is really eager to purchase a single screen cinema in his hometown and turn it into a community theater, community cinema with a restaurant and a bar. And he wants to collateralize that loan with his Bitcoin and with the real estate. And so there's all of these dreams that people are having that I'm hoping that this product is going to facilitate a lot of them coming to pass. Your question was, how do we get everybody to realize it in the real estate world?

And I think that everyone is coming to Bitcoin. They're all coming, but they're going to be coming over several cycles. At least three, I think. I mean, 2024, 28, 32. I don't think that this story, I mean, 2035, 99% of all Bitcoin will have been issued. And 2047, 99.9. And I think that that's kind of the time frame where we're in a pretty mature market because if you were born in 2012, let's say, right now you're 12 years old and there's a 12-year-old in the room. But if you were born in that year and then you come to 2035, you're basically coming of age, 23 years old, you're kind of around the time to get your first job.

And now 99% of the Bitcoin is in the world. And so we're out of the phase where it's a huge land grab, I think what Saylor called the gold rush era of Bitcoin. And we're in a more maturation cycle. I think by the time we get there, everyone will have realized it in the real estate world. But where we are today, the people that are coming for this financing tool are going to supercharge their real estate and give themselves so many more options because they're adopting this kind of financing structure. And it's going to give all of those sponsors,

it's going to infuse their equity with the dynamism and the energy of Bitcoin and enable them to accomplish a lot of other things. So, I mean, I think part of our mission is to reach out to borrowers and tell them, okay, this is the value proposition. But a lot of borrowers very much realize that. I think the main thing is to help lenders consider what the impact of inflation is from a medium duration and long duration point of view on credit and really hone in on the risk factors of not addressing the risk of inflation.

Well, you're setting me up for a perfect segue of something I wanted to dive into. We were talking about earlier this topic of duration and the importance of creating this duration curve for Bitcoin. This is a bit of a preview for a panel that maybe a topic we'll cover next week in Abu Dhabi. But on the duration side, particularly using Bitcoin as collateral and credit products, what is the state of the duration curve as it exists today? And what does a product like yours do to begin to develop that duration curve and bring some maturity around that to make this more approachable for your typical lender or capital allocator? Well, I think that institutional capital, I mean, first of all, institutional capital is really unlocked if you can add some of the things that institutional capital finds very useful, like credit ratings, liquidity. uh you know those kinds of um additions and you've seen the securitization market and how powerfully that's grown over the years and a lot of that's made possible by the fact that

you tranche the credit and you create you know sort of different levels for different investors to plug into depending on their appetite um and their regulatory position and bitcoin plus credit will definitely benefit from those kinds of techniques over the coming years. But so far, the capital that's in the Bitcoin space is understandably for credit. The capital for credit that's in the Bitcoin space, like 99% of it or more demands instantaneous liquidity. And it's very short duration capital. And if you demand instant liquidity,

then you really can't like make a loan that doesn't have mark-to-market risk because otherwise how are you going to get the instant liquidity and so the nature of the lending products that have proliferated in the space over the last five years six years seven years are in large part I think driven by the availability of capital and the capital that's available or has been historically, is looking for liquidity. And so investors have created structures that are continuous mark to market, risk of liquidation, mid to high teens interest rates. And that has been useful liquidity, particularly because Bitcoin has grown so high so quickly. And so, you know, if you started off with what was a small amount in dollar terms in 2013 or 2017,

Now it's a much larger amount in dollar terms. And so even if you're only drawing 5% or 10% or 15% loan-to-value, that's still a lot in fiat, and that can be useful. And a lot of people are effectively financing their current purchasing needs with facilities like that. But if you want to talk about drawing 50% or 70% of the value of your Bitcoin in fiat, well, that is just too stressful. You can't do that. And if you're going to buy a fixed asset that you need to develop over a 5, 7, 8, 10, 12-year period of time, you definitely can't do that because there's so much volatility in the asset. And plus, if you're buying it to generate income, very few assets are going to be able to cover a high teen's cost of capital anyway. And so you're not necessarily going to be having a positive carry on that asset.

So I think that the real key here is to continue to educate the medium duration and long duration providers of credit, such as insurance companies, other asset liability matchers like pensions, to a certain extent sovereign wealth funds, but they don't really have liabilities per se, but they do have a long outlook. and help to say, okay, look, here is your sort of schedule of liabilities and the time frame that you're investing over. You know, you can give yourself the luxury of expressing a four-year view on the Bitcoin. You can give yourself the luxury of expressing an eight-year or a 12-year view on some of your Bitcoin. How do you do that and still feel good about your asset allocation? you pair it with high quality credit and so you improve your credit risk as a credit investor because you don't need to reach for the yieldiest credit you don't need to maximize your fiat income

that's a very high time preference attitude how do i get the highest amount of current income let me lever into it lever it up search for crappy credit you know tell myself a story about how i'm going to do a better job of underwriting it no you don't have to you don't have to do all of that you can actually pivot away from that and turn toward where the relative value i think is actually much better which is in higher quality credit where although the returns are lower the return per unit of risk is considerably greater and if you pair that with a modest amount of bitcoin and then you underwrite the bitcoin to the lower quartiles of its historical performance, if you just look at the math, it actually dramatically outperforms much riskier

credit with no Bitcoin. So I think you get this return transformation, a quality upgrade, greater liquidity, actually, because the high quality credit has more liquidity than crappy niche credit that no one's ever heard of. And the Bitcoin is highly liquid. So you get better liquidity if you want it, but you shouldn't express that. You should give yourself the ability to take that longer term view. And you do that through duration. You have a view of where Bitcoin's headed. You situate your view based on an understanding of its historical performance. And of course, it's not going to repeat, but it's rhymed enough that I think that we can begin to discern a pattern around the four-year cycle. And we can also see how human

emotion projects onto that. And for me, it's a useful guide. And so if you can use that as a way to imagine what the right, you know, duration that you're looking to target can be, then you can express that with credit. And so I think it's telling that story. And then, you know, credit investors um they are all going to be uh looking for these kinds of solutions because otherwise it's um it's life or death right i mean it's not yeah it's life or death for them and really not for them but for their beneficiaries they've got 150 trillion of premium on top of the utility premium of real estate just because people are using as a multibattery they're in real danger if they don't get exposure to Bitcoin.

Can you expand on that for anybody who didn't hear that on the live stream? Well, from the audience, there was a comment that there's $150 trillion of monetary premium embedded in certain assets, in particular real estate. But, you know, Crease is BTC, right? Jesse has that great picture that's become so famous in the last year or so where you have all the squares and you say, OK, what's the monetary value of the world right now? Roughly one quadrillion, a little bit more. And, you know, a certain amount of it is financial assets, but then you have a lot of real estate, collectibles, wine, cars, art, gold, Bitcoin, that little small box over there in the corner. And, you know, the idea is that Bitcoin is eating the monetary premium of all of these other assets because it's the dematerialization of capital.

It's more useful. We talked about that. It can do all of these other things. It's not as shiny as gold, but it will do things like what gold will do in the future really better. and if these other assets start to see their monetary energy draining while bitcoin you know accumulates more and more of that energy it's like a pac-man and it's just um you know getting that power then you know these types of financing combinations are actually critical like they're mission critical because if investors don't lean into them and if asset sponsors don't

lean into them they're going to find that the assets that they thought were a fortress are actually just crumbling and they need but they need to they need you know adding bitcoin to a building is the easiest renovation right like i mean the the you know the bitcoin handyman is always ready you know you just buy the bitcoin and you stick it with the building and it starts to gleam it's gleaming you should look at it at night it's like orange it's got this really lovely glow and um it's very a very nice light so uh yeah and so we've been highly focused on bitcoin's effect on these particular credit part products in the market what do you think if these credit products gain market product fit and significant adoption what is the effect they'll have on

bitcoin that's the thing that fascinates me most about your strategy not not the thing that fascinates me notice but is equally as fascinating in terms of the bitcoin can help a borrower really accelerate their potential equity value of their asset at the end of the loan it helps the lender increase their return profile but then bitcoin going back to duration if you're locking the bitcoin up within these loan structures for 10 or 8 10 12 15 30 years whatever that's a potentially a lot of supply coming off the market and staying off the market for a considerable amount of time. Yeah, I mean, our hope, you know, Bitcoin is an open source protocol.

And so, you know, the best thing for me coming out of today's talk with you and anybody who's listening on the live stream would be, please do this. Like, please, let's do this all together. And everyone, this can be a pattern for real estate investment. It can be a pattern for project finance investment. a pattern for equipment finance, small business lending, to a certain extent consumer finance, and to a large extent consumer finance. I mean, we talked on your podcast some time ago about

how this could apply to residential real estate, residential mortgages. It's a better structure, but you can imagine auto loans as well. I mean, there are many, many different kinds of financing. This is a flexible model, and as it proliferates, with each loan, you're locking up Bitcoin, and then you're creating basically like a future distribution of Bitcoin on deposit as collateral for loans for the long run. So in this first financing that we did, the Bank Street Court, there's almost 20 Bitcoin that will just sit there as collateral no matter what for at least four years. And then there's a strong incentive that it'll sit there no matter what for 10 – well, it's not quite no matter what. But there's a strong incentive that it will sit there for 10 years, no matter what for four years, and then a really strong incentive for it to stay outstanding longer. And we did that loan in November. Let's say we do another one now and another one month and so on and so on and five more and eight more.

And then you can look forward. You say, oh, wow, OK, 500 Bitcoin is coming due, you know, several years. And then you imagine several firms and many other people doing this type of thing. And if you can begin to piece that together and have visibility into that, you can actually kind of create. Because right now, a lot of people you have unchained, terrific, terrific section on the unchained website is the Hottel Cave, right? Hottel Wave. Hottel Wave. Looks like a cave.

And it does. It looks like you, like, go in and, yeah, okay. So, you know, and that shows when was the last time that the Bitcoin moved and how long has it moved and at what price. and people cite the fact they say oh well 50 of the uh supply hasn't moved in how many years five years or something or i think 70 percent more than a year more than a year but 50 is really aging and that is um extremely interesting right and it's useful history and it's very grounding and it's very insightful, but it's actually not forward looking. All we can say about that is this is the history as it stands. And it sure feels like that's going to continue because why

would these sellers sell now if they haven't sold already? But if you follow Bitcoin Twitter, if you're on Nostra or whatever, like Matt O'Dell, then, you know, you sometimes see these posts that say, oh, a wallet that hasn't been activated for 10 years just moved. And people take note of that. So even though historically a certain percentage has not moved, it is the case that sometimes it does move. And so you can only discern so much from that history before you realize there are limitations to it. But if you start to think about it from a credit point of and you say, oh, well, hold on, 500 Bitcoin was locked up in this particular collateral package over this period of time, and 1,000 Bitcoin in this deal, and 20 Bitcoin over here, and 30 over

here, and you can build a forward, like almost a maturity wall, where you have a picture of when the Bitcoin can first mature, then that gives you a forward-looking view of what right now we're just sort of trying to figure out based on historical observation and that becomes a powerful way for you to then uh take a view right take a view on the asset project it think about how you want to use it so yeah i think it's a really powerful um uh additional use case for bitcoin is its promise as collateral yeah it's wild i've got One more question before we throw it out to a couple questions to the crowd. Actually, two more questions.

One, what is the – how prolific is it that Bitcoin just crossed six figures? Is it a bigger deal from going zero to one, one to ten, ten to 100, 100 to 1,000, 10,000? What is the significance of six-figure Bitcoin specifically? and then in the spirit of the night everybody had to give their prediction at the door what is your prediction for the price of bitcoin at the end of the year well um look i would say the significance is high um my son and i were watching uh lost we just started watching lost again and maybe that's why i was thinking about that cave but it's the huddle wave But we're still in season one.

But when we finished that episode, I glanced at the phone. I was like, oh, 101. And he runs upstairs and starts shaking, his mother and my wife. And she's like, mom, it's 101. And so it was very fun. It was fun in our household. And I'm sure I understand that Thomas, he had to get out of bed and come back down to Pub Key. And a lot of people came that night.

And there was a big party here. And Twitter was blowing up. and there was all kinds of Twitter spaces. So it was a lot of fun. So clearly, it's meaningful. Now, what does it mean in real terms? Well, for that, I think it's worth a trip to pricedinbitcoin21.com

where you can look at the one day, one week, one month, three month, year to date, three year, five year performance of Bitcoin versus 140 different assets. currencies commodities precious metals real estate stocks different stock indices and if it's red it means bitcoin is winning and if it greens if it's green it means that the other asset is winning and when i last looked a couple of weeks ago on that website the only things that were green very few things it was like orange juice on the three year was green and eggs on the three year were

green but basically everything else was red and i think the orange juice and the eggs three years When was that? COVID. So that probably had a lot to do with those particularities. But basically, Bitcoin is winning. It's eating that monetary premium. It's crossed 100,000. But what is 100,000? Is 100,000 right now? 100,000 in 2020? Right? No. And in fact, as we were crossing 69 for the first time, I saw on Twitter, a lot of people say, well, it's not really the real all-time high. The real all-time high is going to be $80,000, so on an inflation-adjusted basis. And already, if you look at the U.S. dollar, since January of 2020 through September 30th, it's already lost about 19% of its purchasing power. So you have to overcome what Don, going back to Don Parleberg's

book, History and Analysis of Inflation, which he published in the, I think, 93 or something. And he, in the preface and all through the book, he talks about this idea, the money illusion, which is that, you know, you measure your relative understanding in the currency that you're familiar with. It could be dollars or obviously if you're in a different time, it could be a different currency. It could be German Deutsche Marks, right? But you have to pierce through the money illusion. And so when Bitcoin is first a million, you know, maybe next year, that would be amazing. But when it's reliably a million, like in five years, it's not going to be like a million dollars today. And when it's reliably 10 million, you know, Saylor has that prediction.

What is his 13 million bear case? And, you know, like I think his stated bull case is like, what, 86 quintillion or something. I don't know. He's very bullish. But when it reaches that level, it's not going to be like what 86 quintillion dollars would be worth today because they don't even exist yet today, right? They have to be printed. And that's the inflation factor that's coming through. So, you know, I think that my – look, my prediction for Bitcoin's price this year – and this is a really serious – I'm not dodging your question.

I'm going to answer it. my prediction is that by the end of this year one bitcoin is going to equal one bitcoin and you know that's my prediction a decade from now as well and it's really profound um i'm not saying like what i said is profound i'm saying it's a profound thing that humans can etch their capital and their labor into a digital ledger that cannot be debased and because if I gave you an ounce of gold 35 years ago that was one ounce of the total amount of gold which was about 80,000 metric tons and now it's like 160,000 metric tons and so in gold terms you've lost half of your gold purchasing power in 35 years if I give you you know if I

give you a sats card with a million sats on it today and you put it in your desk drawer and you pull it out 35 years from now you still have one percent of one bitcoin so i think that when you can start to adopt that mindset it it's it's grounding it's helpful um it's a great savings tool you know and the longer that you can sit with it and save it the more detached you become from price um my price prediction i'm look i'm bullish about next year you know i mean you've got the strategic bitcoin end of this year next 26 days or 24 days oh 24 days um well i'm bullish about next year because you have the strategic bitcoin reserve you've got say a number um i don't know in the spirit of night you don't have to do it i'll throw out a number that you threw out to

me this summer i don't know if you remember all right with 24 days remaining what number did i give you this 150 yeah i think we get to 150 i mean um but it doesn't really matter but i think we do i think we should and if you look at the um if you look at the last cycle right you know it's just a guide because the last cycle you remember christmas 2020 it was 25 000 the halving was in may it was 8 500 so it's already 3x and then december 26 it was 26 000 december 27 27,000 by the new year it was like 31,000 so you know 150 I mean yeah I think everyone here if we all smash by right after this don't typically presentation terribly for live tftc and we might get there but um I mean overall I think we have every reason to be optimistic because you got

Poland you know the Polish presidential candidate Brazil has announced that it wants to do 18 billion that's a lot of money um you know you have senator lummis and her extraordinary extraordinary leadership uh but then states you know you've got pennsylvania to pennsylvania shout out to pennsylvania but there are 10 states that are talking about it right now and more to follow and um dom bay and the work that he's doing with the unions and the santa monica firefighters and the houston firefighters and pension starting to come online with michigan and wisconsin and and more to come so yeah i mean and like the best case scenario about all of this yeah number go up the best case scenario though and i mean you guys have said it tons of times on rhrs freedom

go up and um you know i think that it has it just has such positive incentives uh that spread through the system when people begin to embrace and and imagine what they can do with bitcoin so i'm i'm bullish i think we all are all right we've got time for one question then we got to get back and you'll you'll learn the more the more you talk to let andrew you can go on this i think my job is easiest when i'm sitting next to andrew because i i let him go for hours and he's incredibly eloquent and gets you bulled up i i think they figured it out Can you talk about the custody of the Bitcoin as part of the loan? Is it single-sig, is it multi-sig?

Who has legal title to the Bitcoin while the loan is performing and also if the borrower defaults? Yeah, there are a few different questions there. The title to the Bitcoin is held in an individual corporate entity that's created for the loan. And so each loan has its own Bitcoin holding entity, and that entity is jointly owned by the borrower and the lender, just to simplify it. And the lender's share is the appreciation interest, the borrower's share is the residual, and the borrower pledges the residual as security under the loan. So if there's a default, the lender controls that entity. As far as the custody is concerned, the custody for this first loan is with NYDIG, and we benefit from the structure that they have, which is a multi-sig structure, but it's one corporate entity, right? So although there are multiple signatures on the Bitcoin segregated addresses that they have, it's still one corporate entity that administers that.

Over the course of 2025, my hope is that some companies are going to come to market with multi-institution, multi-sig custody solutions that are also satisfying the SEC qualified custodian considerations. I think that there are definitely some in the works. I can't go into specific detail about that, but there are some solutions that are being worked out right now in that regard. And from my point of view, I would definitely like to be in a position to take advantage of the robust security setup and custody setup that Bitcoin offers. And not just in respect of that solution, which might be state of the art today, but where are we headed? know, with other kinds of collaborative structures, whether it be like Fetamin and, you know, other kinds of structures that people will build on over time in order to create more dynamic ways to verify and move Bitcoin as you have more and more participants in a federation.

So I think that we'll see the custody evolve over the years. Where we are right now is with an excellent company, Nydig's great, and they're a great part of the community um but yeah that's an answer to your question there i said we get back to mingling having fun thank you all for joining us let's give it up for andrew thank you guys very much thank you thank you