TFTC: A Bitcoin Podcast - #577: The Biggest Moment In Financial History with Jeff Walton

Episode Date: January 29, 2025

Marty sits down with Jeff Walton to discuss Microstrategy's preferred stock offering. Jeff on Twitter: https://x.com/PunterJeff MSTR True North: https://x.com/MSTRTrueNorth 0:00 - Intro 0:36 - Explaining Microstrategy's preferred stocks 7:14 - Making use of volatility 13:58 - Fold & Bitkey 15:54 - Everything changes when insurance catches on 25:34 - Real estate insurance 29:04 - Unchained 30:05 - First mover companies 33:16 - The strategy is misunderstood, but the tide is turning 38:22 - What happens to MSTR's value 44:14 - The most hated trade 48:09 - Too much bitcoin? 53:17 - Is Microstrategy going to be the only player? 56:09 - Bitcoin weaponizes greed 1:05:31 - Will the 4 year cycle be disrupted? 1:08:37 - How it’s been for Jeff 1:12:24 - Bitcoin yield 1:15:44 - Wrap Shoutout to our sponsors: Fold https://foldapp.com/marty/ Bitkey https://bitkey.world/ Unchained https://unchained.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. Sometimes the universe just works in incredible ways. This is, I believe we've had this on the schedule two previous days before we both had to move

things around because things popped up. But we meet here today, Monday, January 27th. It's because the universe was just waiting for this new MicroStrategy preferred stock offering to hit the market big big day to be speaking with you jeff absolutely i mean so many things going on this is uh it's one of the most exciting equities in all of finance and i think this is the the biggest story in all of financial history so yeah exciting day to be chatting well before i guess before we jump into the preferred stock offering um why do you why do you believe that the most exciting time most exciting equity i think it's the most exciting equity in all of

finance, uh, because there's never been a situation quite like it. I don't think there's ever been a, uh, actually there, there has never been a company that has completely shifted their treasury to a different commodity, right? Uh, you know, all of most of finance as we know it, or most of the equity market as we know it has a fiat treasury strategy. And now we have a completely new commodity, the best money the world has ever seen, the best collateral the world has ever seen uh being used as the foundational uh commodity for a treasury strategy so it's a it's a completely new paradigm shift and the world is all trying to figure out how to how to value the the company in real time and uh there's tons of arguments on both sides and uh yeah it's just

incredibly exciting it does piss off a lot of people particularly particularly the all-in podcast guys bewilderment bewilderment is the term that i use where you know folks are confused uh they haven't conceptualized bitcoin completely they don't understand the the technological value of bitcoin and uh yeah it's most of the most of the folks that don't like it are bewildered in my opinion i would agree and we can jump into the fine details of how they're bewildered later in the discussion, but I do want to focus on this preferred stock offering because it is a new sort of vehicle that MicroStrategy will be offering the public markets and investors who want to get access to the volatility trade that their debt instruments provide.

This is a bit of a twist, and I just read a post from Dylan Leclerc that he posted at the beginning of the year in anticipation for this because i think micro strategy teased it in uh one of their latest shareholder meetings and today michael saylor took to twitter and business wire to to announce that they were doing this preferred stock offering so i think starting from first principles what is this offering what is a preferred stock and how does it play into the other offerings they've done, whether that's out to market raises for equity or the convertible notes they've been issuing as well. Yeah.

And, you know, I'm still trying to digest this at the same time you are and the rest of the market is as well. So ultimately, what MicroStrategy is doing is tapping different capital pools to provide different products that have a different risk return metric with exposure to Bitcoin, right? So you've got the convertible debt market. you've got the ATM equity issuances, you've got the options market on MicroStrategy. And this preferred stock issuance has a slightly different structure and design than the convertible debt. While it may seem similar optically from the get-go, it is

effectively a perpetual call option on MicroStrategy shares with no expiration date and a dividend payment of target 8%. So it fits a different capital pool that is interested in getting this type of exposure without a definite horizon, like the convertible debt offering, and also getting that dividend component, that 8% dividend in perpetuity. So it's interesting to me that there's two separate stocks, right? I think this one is called Strike. So it's going to be a separate equity that's tradable in public markets that they also have the ability to use an atm to issue additional preferred stock whenever they want to generate more capital to buy bitcoin behind behind that strategy as well so it's almost like establishing another vehicle

where you can use the same strategy that you're already running with with micro strategy yeah with micro strategy equity and so it's a preferred stock offering and i think for people who are listening or unaware of the different sort of classifications of stock preferred uh as opposed to common which is if you're on robin hood you're buying mstr mstr you're buying common shares i guess this preferred stock offering comes with benefits the the dividend as you mentioned preferred stock buyers will get access to the dividend before common shares and if there's enough dividend to go around the common shareholders will then get it in terms of sort of it basically determines the sort of who gets what on the capital stack first

and so preferred stockholders go before common share in terms of of the benefits that you get the preferred is going to reap those benefits first before common. So that's a little cherry on top for people buying this. And then I think the other caveat here is that these preferred stockholders don't have voting rights either. So that is interesting from the micro strategy perspective where they can still control a lot of the decisions that are made for strategy moving forward. Yeah. So when you think about the convertible debt, it's senior, right? It's the it's the closest if there was bankruptcy proceedings or whatever uh the senior debt would be in line first to get any of the assets and then it would be the preferred stock and then

it would be the common equity holder uh at the end so so to your point there is like levels of who sits where and the voting rights associated with each one of those which is valuable to think about just kind of corporate business structure yeah and it's really interesting that you're doing this and this uh perpetual call option that you described too because the the whole strategy has been and it seems like they really honed in on it in the last two years and why you've been maniacally focused on micro strategy for as long as you have is the unlock of there's pools of capital out there that can't access Bitcoin directly, but they like Bitcoin's volatility. And these vehicles where it's a convertible note, now the preferred stock

offering create those avenues for these pools of capital with very strict mandates to get access to Bitcoin's volatility. I think the whole world is really starting to figure out how to trade these equities and the volatility associated with them. and one thing that's particularly interesting to me with micro strategy stock is that effectively in my opinion what sailor is doing is is making this stock incredibly hard to value on purpose by design it's making it chaotic because there are so many people that can trade this on all sides of it right you've got equity holders that are going long you've got these convertible bond buyers that are arbing the volatility in both directions you've got people

shorting it you've got people buying long call options and the the fact that there is this volatility has made it incredibly appealing to a lot of different parties that are interested in speculating and movement in one specific direction or not and you even see this the how popular this is in the markets when you look at the total publicly traded volume daily, MicroStrategy for the last 51 days in a row has been a top 10 publicly traded equity by volume. And most of those days it's top five. And this company is ranked, I don't know, 130th by market cap, yet they're trading with the big boys up in the top five because of the volatility associated with it. And the result, that's the question I have too. And we get back

to the bewilderment of many people in the incumbent trad fi space and venture capitalist space but i think that was the big thing that really was a shot across the bow for people who weren't paying attention was the investor presentation that michael gave last year that had the returns of the convertible notes um on on the slide and basically said this is the best performing debt instrument in in public markets right now and i think that's the question in many people's mind is can that persist like is there enough appetite for this can you repeat what has um been executed on over the last few years moving forward where does this stop yeah yeah it's a great question i think it's just getting started uh in in my opinion i mean there are so many

things that can play out and the the macro landscape has a really big impact on what the future will look like but if you just look at microstrategy's balance sheet right they've got as of today bitcoin's at what 99 about 99 000 so the assets that microstrategy holds on their balance sheet is about 45 billion and the amount of debt that they hold on the balance sheet is about six and a half billion of that six and a half billion three billion is already in the money effectively trading as equity as long as the price of microstrategy doesn't fall below 225 So you can effectively think that the debt held on balance sheet is about $3.5 billion. So when you run that math, right, you've got $45 billion of assets, and you've got $3 billion of

liabilities. You're talking about a 7% leverage ratio with the ability to leverage up your balance sheet significantly while still being incredibly healthy and within historical kind of leverage ratios. So I wouldn't be surprised if we see $10 billion of convertible debt issued within Q1 or Q2 that leverages up the balance sheet and allows MicroStrategy to buy more Bitcoin here in the really near future. So when you look at this $42 billion capital plan split out between two pieces, $21 billion of the ATM and $21 billion of convertible debt, there's about four and a half billion left of the atm and there's about 18 billion left of the convertible debt and the in in retrospect looking back at how this has been designed and

how they've used a lot of the atm up front to me is a bit of a no-brainer because that's permanent capital that you're holding on your balance sheet that has no claim to it right there's no debt associated with it there's no liability claim on that specific capital and as you raise additional capital from the convertible bond market or the debt market or preferred share market that capital that's raised while it's unsecured it impacts the leverage of the of the company but you think about you know bringing 10 billion dollars of capital and that's going to push the bitcoin price up right like if they're buying 10 billion dollars worth of bitcoin that's going to push the price of Bitcoin up, which is going to effectively probably maintain their leverage

ratio, even though, um, they're taking on more debt because as you push the price of the Bitcoin up with the convertible debt, the, the underlying Bitcoin that you hold on your balance sheet is also going up. So your leverage ratio may, may result as unchanged, right? They may have significant future capacity to put more debt on their balance sheet. So that's one component of it. Two, the other question is, is the market there? And I think that, you know, looking at this recent political, you know, administration and the changes in the political landscape for digital assets moving forward into the next four years, I think it's incredibly likely that we see other companies, you know, 10, 15, 20, that start to run a very similar type of strategy

because of the proof of concept that MicroStrategy has put out there. So I think this market is going to expand, especially as, you know, other people that are holding these other instruments start to recognize what's going on in the landscape in the marketplace. Sup freaks, this is Natty, don't want to skip because Fold has a great offer for you. everyone knows about fold the app where you can earn the most Bitcoin rewards for everyday purchases. I did this yesterday. Me and my wife, we use Amazon to buy quite a few things. Uh, and instead of just putting our credit card into Amazon and buying there, I put my credit card into

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moved it off, tell them to pick up a BitKey. Go to bitkey.world. Use the key TFTC20 at checkout for 20 off your order that's bitkey.world code tftc20 and i mean the macro tailwind is going to be more beneficial for just bitcoin broadly micro strategy specifically i mean just the news over the last five days with deep seek sending a shot across the bow of the whole artificial intelligence complex and i think if there is validity behind what deep seek is offering and what's being marketed is true and you have the ability to get open ai anthropic like results with an llm that is 95 less than the price that they're the the capital that they're putting in to to get the same results that could be extremely disruptive for that whole complex and more importantly i

think it's really going to force people to grapple with the question like what is my hurdle rate how am i allocating capital and i think if people are doing their jobs at the the board level and in silicon valley they're really gonna have to have a come to jesus moment like we need to pair all this risk that we're taking with a hard asset like bitcoin treasuries or something that are going to be a superpower for companies that have them because if you do have this incredibly deflationary pressure of ai particularly open source ai coming to market in mass there's been a ton of capital allocated to that that could be completely wiped out and you're going to need right i think people are going to realize you need to pair this deflationary tech trend that

we're seeing with the deflationary money in bitcoin and that's just an external positive tailwind for bitcoin and micro strategy by extension right yeah and i this weekend has been just full of uh reading the news and trying to understand kind of where this where this goes it's been uh i mean just trying to put this into perspective like nvidia lost 500 billion dollars in market cap today uh so far and that's like six micro strategies when when you zoom out and you think about the the scale and i mean i i'm often thinking in my um you know in my you know existing existing career as a reinsurance broker thinking about the infrastructure of insurance companies and how they work and this kind of deflationary component and inflationary and deflationary

component and i think a lot of that a lot of that market the insurance market is is completely blind to what's going on in this kind of crypto landscape and AI landscape at the moment, just because the regulatory environment and the rating agency environment provides these road blocks. So you can't dip into these other types of assets. And I think it could be very, it will be very disruptive once those kind of roadblocks are removed. And I think we could see that from this you know administration and the macro tailwinds moving forward that's going to change how everybody thinks about capital completely it's going to it's going to completely change how everybody thinks about capital like re we're going to see different designs of insurance

companies that have never existed before we're going to see different um different products that have never existed before and they're all going to be leaning into these types of issues yeah that was uh did you read ross stevens's annual letter yes yeah oh my god talk about a uh very in-depth uh read uh i'm i'm very intrigued by ross stevens letter i've i've got a bunch of research kind of laid out um i plan on walking through a bit more in depth but um yeah it's it's dense very dense well there's so much opportunity in that space. Well, yeah, that's the reason I bring it up. It seems like he's clued in on and I dig and Stonebridge have clued on this intersection of Bitcoin and the insurance

market, which makes a lot of sense. And Bitcoin as an asset seems like it is the perfect asset to be paired with insurance. Um, yeah, a hundred percent. It needs to be paired with insurance and yet, uh, none of these insurance companies can hold it, but you know what they can hold. They can hold micro strategy equity they could hold convertible debt of any type they can hold convertible debt etfs they could hold all these other products and leverage against it but how an insurance company works is you're matching assets to your future liabilities and those liabilities have different durations right so you have properties got a short duration but then you've got casualty workers comp life insurance that all has long tail duration

And if you're thinking about, if you just reframe how you see Bitcoin and you think about it in four or eight year periods, longer term horizons, you can start to match that asset to a longer term horizon duration. And it may not be, you know, one to one, maybe it's 5% Bitcoin and, you know, 95% these other products to match that duration horizon. And I think that's exactly what Longtail Re is doing via Stone Ridge. I think they're posting collateral. I'm still trying to figure out exactly how they're doing it. I think they're posting non-crypto collateral in reinsurance transactions and holding crypto as a balance sheet asset behind the scenes. And because they're a reinsurer, not an insurance company, they have less regulatory shields or less less regular regulatory hurdles that they have to work through. So they have some flexibility in how they manage their capital from that perspective.

Yeah, I mean, speaking of insurance companies that don't have or do have those hurdles in place. that was a really interesting sort of headline when it happened when when Allianz bought what they buy 25% of that total convertible offering yeah yeah so that's a direct signal that the insurance companies are paying attention and they get it and they're going to get exposure via the avenues available to them yeah it's a complete no-brainer and in my opinion is at least adding some of this convertible debt to your balance sheet right like insurance companies subscribe to Markowitz modern portfolio theory. Markowitz modern portfolio theory being the theory, the mathematical concept of diversification, right? If, uh, if you have a portfolio of

diverse assets, if you add a new asset with different risk return metrics to that portfolio of assets, it improves the return and reduces the risk of the entire portfolio. And now, now you're, these insurance companies aren't acting on these new assets. And so they are, they're leaving risk and return on the table reduced risk and increased return on the table they're leaving it yeah it's a huge opportunity how big it will when you say huge opportunity what have you run the numbers on the amount of capital yeah slightly yeah so there's about 800 billion of reinsurance capital in the market uh in the reinsurance market and i want to say there's like seven trillion of

insurance capital in the market so seven trillion dollar marketplace or about eight eight trillion dollar marketplace um and that's capacity and i think assets held is probably something potentially larger than that you know so that's kind of a little bit of size and scale and the insurance and the reinsurance world is just a you know small portion of the total like you know financial landscape but it's a in my opinion it's a no-brainer location to add these assets to these balance sheets to think about um you know structure and future liabilities yeah one example one example i i like to think about is like workers compensation claims right uh, long-term liabilities or long tail liabilities. Let's say you have a worker that falls off a roof

and is like paralyzed. Um, you, the insurance company is going to be paying out claims for until that person dies pretty much. So you might be paying out claims for 25 years and the insurance companies have to make an assumption on that cost of that claim for the next 25 years. And they have to set up finances to finance that claim for the next 25 years. So, um, if your expectations of inflation or debasement are wrong, your entire, that, that market is eviscerated. That long tail market is just totally eviscerated because all of your understanding and your assumptions on claims size is just completely wrong.

and i think that uh if inflation comes back um stronger or we we see another inflationary period let's say 26 or 27 um some of that long tail lines casualty market i think can have a really tough time because your your ability to underwrite those claims is significantly hampered unless you have an asset that captures that the opposite side of that trade yeah and that's just one example like as you're mentioning that i'm thinking about real estate too real i mean obviously the la fires have that front in mind for everyone the last month at least but you think about underwriting real estate insurance and that is like real estate just simply due to the fact that it's an asset that people use as a store of value if people are funneling money into

real estate and the value of each property is going up over time because it's being used as a store of value it's just going to increase the potential payouts you have to make in the future if anything happens to any individual property or um properties at once due to natural disasters like a fire a hurricane whatever you can then you go to health care and you think about how woefully unhealthy american society is and the rates of juvenile diabetes and obesity hitting the rates they are and you think about the the cost of um just health insurance payouts into the future trend is not good hopefully maha can help change it but you can you can easily just sit back and run through three or four pretty massive problems the insurance

industry is going to have in the next two decades in many different areas of life. Yeah. And one thing that I've seen just in my career working in reinsurance. So when I first started working in reinsurance, the market was incredibly soft. So like 2010s, the market for reinsurance was incredibly soft because there weren't many hurricanes, right? After Katrina, arena wilma in um 0405 there was largely like no large catastrophic events and then 2017 happened and you started having large wildfires large hurricanes you got uh hurricane irma hurricane ian uh paradise wildfire large hail storms in the midwest uh and the market effectively like flipped uh really really quickly and um you know during the period of 2010s you saw the technology

start to come into the insurance landscape you started to see like progressive and all state and nationwide all using technology which was just bringing rates down and they were stealing business from these smaller entities that didn't have the access to that technology so insurance got really cheap during the 2010s like really cheap because they're because of all of the things that were going on. And that shifted in 17, 18, 19. And all of a sudden the insurance companies realized that they're underpriced pretty significantly on the insurance. And so we've seen the price of insurance increase significantly greater than CPI over the last five years because it was largely underpriced during the entire 2010s. But you also have this

like double whammy inflationary component, like you mentioned, where, you know, cost of homes is going up cost of rebuilding is going up cost of materials is up um all of this stuff is up significantly greater than cpi and it's kind of filtering its way all the way through the insurance market the reinsurance market and even the retro reinsurance market which sits above above the reinsurance market so um yeah i mean the dynamic over the last five to seven years has been incredibly interesting to watch it watch it play out And I think it's going to get a lot trickier the next couple of years. Everybody that's seen the cost of their homeowner's insurance go up, I would suspect is probably going to keep going up in the near term.

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are going to have a competitive advantage? That's an interesting question because you look at Allianz. Allianz is the largest insurance company in the world by assets under management. And you look at the scale of this purchase that they have relative to their entire investment portfolio, and it's like 0.000125%, right? It's incredibly small. I think that they may have a little bit of a headstart, but where I think companies can make a bigger impact is if you're a smaller entity right now and you, you make a little bit of a larger, um, you dip your toe in a little bit bigger than Allianz has, it's going to have a larger impact in your ability to, um, underwrite more deals and underwrite more business into the future and into perpetuity. So I think like any

small young tech tech enabled insurance carrier that's holding this stuff on their balance sheet is going to see much more opportunity than um you know a behemoth like allianz that makes sense yeah right like i i think um and bitcoin is like as we've seen in the public markets it's kind of like this uh jolt to your equity, right? We've seen it, we've seen it provide this, you know, volatility to your equity, which can, which can be really favorable. Um, one, if you announce that you're running a Bitcoin treasury strategy, you have people that are going to be buying your equity just because you're running a Bitcoin treasury strategy and they want to buy anything that touches it. Two, you now have ETFs

where if you hold more than a thousand Bitcoin on your balance sheet, you're automatically getting included in these ETFs. So you've got increased liquidity from that perspective. There's obviously been attention from the convertible bond market. If you want to add more Bitcoin to your balance sheet, you could go tap these convertible bond markets. We've seen equities like SMLR, similar scientific, Mara, even Core Materials, that mining company, are all tapping these debt markets to add more Bitcoin to their balance sheet. And your access to capital pools are just significantly greater and if you're a billion dollar company two three four five billion dollar company and you're just kind of struggling to get by and you need capital

this is a great this is a this has to be one of the decisions that you consider right like adopting some sort of bitcoin strategy has to be a decision that you consider because your alternative is okay well if i go raise debt uh if i if i you know go get debt from traditional capital markets i may pay i don't know 10 12 15 percent to borrow 25 million dollars and if i don't if my cash flow you know i that's it that's a much different value proposition than potentially getting this jolt from adding bitcoin to your balance sheet yeah this brings us back to micro strategy and misconceptions around the strategy the convertible note strategy particularly and so if you hear it's fascinating hearing jason calacanis

run around and saying they're levered to the hills they're bitcoin price gonna fall the stock price gonna fall they're gonna get margin called and it's like you're in silicon valley you're an investor you should understand the concept of convertible notes and convertible debt like it literally at some point converts into equity so as your stock price is going up you're essentially deleveraging at particular points on the price chart and it seems like whether it's a true misunderstanding or an intentional misconstruing of what's actually happening i think many people many detractors again either misunderstand or misconstruing how levered micro strategy actually is yeah it's really curious isn't it uh the math is the math is very simple one the debt isn't

secured so there is no margin call right there is no margin call number right if bitcoin goes down to five thousand dollars there is no there isn't a margin call like the the debt uh the debt would expire based on the the period of time and how much they owe on the on the principle and it's not it's not tied to the bitcoin at all and just just to put this in perspective i think um as of today uh with you know microstrategy having 45 billion dollars of bitcoin and just assuming they have six and a half billion dollars of debt just let's just call all of their convertible existing convertible debt debt, the price of Bitcoin would need to fall to $13,840 in order for the assets to be worth less than the debt. And that's just an interesting number to keep in mind where you can

start to think about how leveraged is this company. And it seems very under leveraged relative to many other companies in the market. I mean, obviously Bitcoin is volatile, but you can compare to um you know any other tech company that may be significantly more levered 80 90 100 120 percent levered uh based on their structure of their corporation so yeah it's uh it's interesting isn't it it it really is it's almost like they're pissed off it's like they hate the trade because yeah pissed off scared nervous uh don't want to see something blow up and take down the rest of the market or impacting their trades yeah it's it's confusing well and the other i think the other aspect of what micro strategy is doing that is underappreciated too is the duration with which

they're issuing these convertible notes like you're baking in exposure to at least a four-year cycle and if who knows uh history uh past performance is not indicative of future results But I think if you run with the assumption that Bitcoin adoption is going to continue and there will only ever be 21 million Bitcoin, and as the market becomes more convinced that Bitcoin is the thing that's here to stay, the risk adjusted potential for getting in the market at any given point in time in the future is lower than it was in the past. And it's a safe bet to make. And if you're able to issue these notes via durations that capture a full four year cycle, it seems pretty de-risked to me. Yeah. If you look at the four-year history of Bitcoin, the worst performing four-year history, if you bought at the worst possible time, it's like 22.6% compound annual growth rate for Bitcoin. And now we're seeing a new paradigm shift where you have these other corporations that are also running this strategy and they're leaning into the same exact thing. Like this is

four-year plus horizon. You look at the macro landscape, you look at government debt, you look at having a hard asset that doesn't have significant drag. This is a no-brainer, a place for where you park capital to minimize capital drag, tax implications, all of those things, you name it. Plus the technological potential of the future of leveraging this capital as collateral is astronomical right like not having to sell your bitcoin and using this using this capital as collateral in the future is a incredibly undervalued component by the market and i think you know a small number of people are waking up to that kind of every day so how undervalued do you think micro strategy is right now

and i guess the other question with this preferred stock offering too is what net effect does it have on on common shares so my assumption is that since they're able to offer this preferred stock um vehicle it'll there will be demand for that i assume i assume there will be demand for that so they'll take capital i guess people would buy common shares because they're assuming there's gonna be demand for that which would be an influx of cash that'll be used to buy more bitcoin right kind of all compounds on itself if there is demand for the preferred stock that means that there should be more demand for the common stock right uh because they're getting capital in a different vehicle and they're adding all that capital raised from

that different vehicle is going to go to you know permanent capital held on the balance sheet which just makes the ability to leverage the balance sheet even even greater so yeah I I personally think micro strategy will hit a trillion dollars in 2025 or 2026 and in total total market cap value but it's I have no idea what the price may be right because there's this dilution component of you know how many shares are trading at any one given time and this is the sailor has created a very volatile stock again by design and creating chaos in the entire system that will you know create that we're going to see amplitudes get even larger i think we'll see higher spikes and lower and

higher lows and we're going to see the amplitude just kind of get greater and greater over time that's that's kind of my thesis um in how the stock moves because as it as it thrusts up into new pricing territory as you see price discovery to to the upside you you see people completely shift their entire trading strategy and go the opposite direction almost exacerbating the volatility of of the equity itself so yeah so it's incredibly tricky to to time i i think the the one thing that i have certainty in saying is that it's going to be more volatile like we are going to see much more volatile periods uh in in 2025 both upside and downside and is that animal spirits or do you think it's arb traders coming in and recognizing that they can create

the volatility themselves and the combination of them and micro strategy that's a great question uh i mean there's so there's so many there's so many players in the game right it's not just arb traders right you've got retail you've got hedge fund longs that are never selling you've got etfs coming into play as the market cap rises they're getting included in more and more market cap weighted index etfs you've got a fasbi fair value accounting being adopted here in q1 2025 In which case, if the price of Bitcoin is above $93,000, they have positive earnings in 2025, which would make them potentially qualified for the S&P 500, which would bring even more capital into the marketplace and just continue this chaos in my mind of who's trading on the deal. and i some crazy statistics i think like 75 or 80 percent of the equity market is

um automated or algorithmic and so it's really computers that are going back and forth against each other on all of these different trades and people are setting up different algos to trade on top of microstrategy based on certain assumptions and we're going to see even more and more of that as people start to understand it and you know i'm even talking with people on how to set up algos that have a different uh different strategy based on you know certain long-term theses right so you got every you got people betting short term you got people betting medium term you got people betting long term you've got people betting indefinitely you've got there's just so many people trading the stock it's just in and there's going to be more there's

going to be more people trading the stock as we go into 2025 and 2026 just look at like even google search trends nobody really knows about micro strategy i bring up micro strategy at work and it's like people laugh at me nobody nobody knows this is going on it's like this company's holding 50 billion dollars of bitcoin like this is this is worth more than most insurance companies like in the entire insurance market like this isn't this is an interesting story you should probably know what's going on here. And, um, so many people are just kind of, kind of blind to it, um, which is totally fascinating. And I think that will change in 25. I think that will change with FASB fair value accounting, um, you know, stock screeners with positive earnings,

micro strategies are going to be included in it. Uh, algorithms that are trading based on PE ratio, that's going to start being included in those algorithms, potential inclusion in S and P 500 that will draw significant speculation in both directions and i think saylor also said it himself anybody that's short microstrategy is a future buyer of microstrategy stock tell you have to buy the stock to close the position and so um i think we see these like expansion contraction periods with shares that are available and tradable at the margin where it goes wider and narrower and wider and narrower which just draws significant amplitude and potential stock price it is it's such a fascinating story yeah it's a it's what i like about it's just

like a very it's a hated trade by the right it's hated by the right people it is it this will be the most hated rally of all time i've said that a bunch of times this will be the most hated trade of the decade yeah because people just don't understand it can't comprehend it and are under significantly undervaluing bitcoin as a as a technology it's it's almost too dumb of a strategy for people to just like you can't just buy bitcoin and and have this happen yeah exactly too dumb of a strategy yeah but like that's what that's what they'll say on the service but as we've been discussing over the better course of an hour now is they are thinking about this very strategically and that is like the yeah that has been the most impressive thing

it's almost like just watching micro strategies for a going back to 2021 when they first got in it almost is as if and probably is the case but i think it became obvious to me at some point last year that internally they had a oh my god moment like look what we can do and like just got smarter on convertible notes and how they tap uh public markets public capital markets and really backed into the weaponization of mstr to accumulate more bitcoin and create this flywheel absolutely and a lot of people are really hung up on this like bear market uh perspective like okay if bitcoin goes into a bear market microstrategy's price is going to go down more than bitcoin price and i think that might be right however um they're using past uh past performance as a future

indicator right so you're you're looking at uh the past bear market uh in 21 22 looking at how MicroStrategy was impacted. But at that point, MicroStrategy was underwater on the debt that they held and the assets that they held on their balance sheet. And now if you fast forward to a future, let's say 26 or 27, MicroStrategy could be in strength and have the ability to continue to cap to tap these capital markets and effectively buy bitcoin when it is in a bearish sentiment and i that is a managing this leverage ratio is incredibly important in my opinion to uh mitigate this kind of long-term uh this long-term long-term future and this having strength in a bear market it would be incredibly powerful well and what you just described is another case for the the

naysayers are wrong like they're like what happens when bitcoin goes in the bear markets like we literally just had an example an example of it uh in 22 and 23 they survived they survived and now now they're five times as strong right now they're now they're five times as strong and you think it's going to do worse. I think there are many use cases, I think, where microstrategy can be powerful and strong in a bear market. Again, if there's any premium in the equity of the stock as a function of the underlying Bitcoin holdings, you can utilize that premium to buy additional bitcoin in perpetuity let alone let alone tapping additional capital markets using bitcoin as collateral uh convertible debt or future debt instruments that are yet to be created preferred

stock etc etc um i think it's just gonna keep it's just gonna keep going can micro strategy accumulate too much bitcoin that's a great that's a great question that's something people worry about yeah it's a good question i mean right what they've got two and a half percent of bit of bitcoin supply and i mean my forecast of how much bitcoin they have at the end of 2025 is somewhere in the realm of uh 700 800 000 almost doubling what they've got now and that would put them around five percent six percent yeah it's it's a it's a tough it's a tough question to answer right um i don't know what are your thoughts no i don't i mean it's just the can they have too much can they have too

much bitcoin i don't think i think the big question is like does micro strategy having this much bitcoin create a systemic risk for the broader bitcoin market because god forbid at some point in the future they're forced to sell who knows what would lead to that would do lead to that outcome is the government going to go and say we don't like this i don't think that's going to happen under a trump administration but who knows what happens down the line um it's it's like where where else would you go where else would you park your capital would you rather have you know a company that holds this much bitcoin or would you go you know use another crypto exchange that is potentially less centralized uh because microstrategy has six percent of the of the

bitcoin holding available it's a that's a tricky question um it's sovereign power right bitcoin bitcoin is sovereign it's it's microstrategy would have this power that is kind of beyond government which which might scare some people um i guess it kind of depends on who's running the entity how the entity is run and designed what kind of products is designed yeah i mean it's a it's a trick it's a tricky question my base my base case is that if microstrategy is going to leak bitcoin from their treasury it's going to be because they take risk with it eventually and just lose it which is fine in my opinion and i think we're in chapter one of the long-term microstrategy story i think sailor has choreographed this in public uh public

statements and podcasts and presentations like they're in the accumulation phase now but at some point bitcoin adoption will will um become saturated and the the cagger of the purchasing power of bitcoin year on year will will fall to a much smaller rate at which point it would make sense to use that bitcoin to do things like go back to insurance they're gonna have a a butt ton of insurance yeah and imagine being able to offer bitcoin backed insurance one-to-one and if microstrategy wanted to increase revenues they put a pile of their bitcoin into one of these bitcoin backed insurance products and reap the premium yield yeah so that that was that was exactly what i wrote down on my page here is uh is products like insurance and banking solutions

and i think in a in a more bitcoin denominated future if microstrategy is available is able to offer products to the market that are really lucrative um whether that be insurance or banking or mortgage or whatever that may be, I don't think people are going to complain that they have a lot of Bitcoin if the products are more lucrative than what other financial institutions are able to provide in a fiat denominated ecosystem. So yeah, I mean, there's a lot of work that needs to be done in the next decade. I totally agree with you that this is chapter one of the MicroStrategy story. I think it's accumulate as much Bitcoin as humanly possible for the next eight to 10 years and develop, uh, the Bitcoin ecosystem

and the, the, the financial framework and the economy around Bitcoin over the next, the same time horizon as well, because as that, as that develops the utility value of holding the Bitcoin continues to increase as well, um, which shifts more people into the ecosystem. Yeah. It's a, it's a great question, but I think MicroStrategy's ability, to accumulate bitcoin is going to reduce over time just just because of the 21 million supply cap and their ability to accumulate more bitcoin if other companies start seeing this opportunity

and adopting the strategy their ability to accumulate as much is going to be reduced over time as well so i think there is like a terminal velocity uh potential here well that that brings up another incredible question i go back and forth like does the two and a half percent of the overall supply that micro strategy has now does that provide an economy's a scale advantage when other companies begin doing something similar like is micro strategy viewed in the realm of capital markets that are allocating to these products whether it be convertible notes or preferred stock as the lowest risk with the best risk adjusted return like is it less risky to allocate to micro strategy because they've proven they can do this successfully and they have the

most bitcoin like is there a winner takes most winner takes all of these debt markets i don't know yeah uh i that is a good question i think their financial mode is enormous right i don't think there's any part of my thesis on why i think they're going to a trillion this year is i don't think there's any company that catches them or comes even close to catching them uh in terms of total bitcoin holdings um held on balance sheet i think there's only now there's only four or five companies that have cash on hand to buy as much bitcoin as they have right now and they would have to start yesterday right in order to catch them and it's basically the mag seven and they would have to completely change their entire business model in order to do that and convince their board

and the so the only company that i think that could catch them is meta because zuckerberg has more than 50 voting rights um so he could theoretically do that and put that much bitcoin on the balance sheet but even then you'd have a social media company that holds bitcoin as opposed to just a bitcoin company but to your question on this kind of winner take all and the and the debt markets and and how um how that framework works i i actually am going to take the a little bit of the contrary position that, uh, these, uh, these capital markets are going to be looking for diversification in this Bitcoin space. And I think they're probably hungry for it. Um, so these products that are being developed and sent out to market where you're seeing these, uh, combined

convertible bond ETF products, I think those are going to start getting really popular because, the capital then has access to multiple different sectors that have Bitcoin on their balance sheet, right? So you're going to have like healthcare, mining, you know, Bitcoin and consumer products and like all of these other companies and institutions that are running the same strategy are going to have different exposures to different sectors. So it gives you kind of this even cleaner, more diversified, um, risk adjusted return, uh, on a, on a combined basis. Yeah. And as you, as you mentioned that it makes a lot of sense to me too. And going back, that's, I think a lot of people, particularly in Bitcoin really have not grasped the facts

that there are large pools of capital out there that have mandates to allocate to certain products sectors whatever it may be and whether you think it's just better to buy bitcoin spot bitcoin hold it in cold storage as opposed to any of these other things it doesn't matter like the capital has a mandate to go somewhere and it's got to go through these avenues and it's good for bitcoin at the end of the day because the money ultimately falls into bitcoin i had a conversation with nick batia at the beginning of the year they even blew my mind even more you only you for the longest time many bitcoiners myself included thought there was going to be this rotation of capital out of other assets and into bitcoin but nick being the bond trader that he is

and understanding these markets and diving into the convertible debt offerings of micro strategy had the unlock like oh wait there's capital's not rotating they're literally there's credit creation yeah it's credit that's going into bitcoin which is insane like that that just completely expands the amount of capital that can come in i was listening to that podcast and i was making dinner and i just i dropped everything i was doing and i just i sat down and my wife's like what are you doing i'm like this i need to listen to this again and i need to focus on it because yeah i mean that was a that was a fascinating uh little nugget there too yeah absolutely they're literally going to print dollars to go into these products not

the banks will issue credit to essentially i mean that's that's that's exactly how it would work in insurance as well because if you add bitcoin on your balance sheet or bitcoin correlated products your ability to lever increases so it is um it's kind of a similar similar design and situation in the insurance marketplace as well it's just a little different um because as the value of the underlying product it increases your ability to lever against it also increases so it's bitcoin's effectively eating trad five from the inside out and nobody nobody really knows about it it's just like it's just starting from the inside and it's going to eat its way out

and it's i mean it's another thing bitcoin has been saying for a while it's like bitcoin just incentivizes greed in the best way possible because it's net positive for anybody that holds bitcoin and even if you don't hold bitcoin it's going to be good for society because we have better money but that's what the incentives of bitcoin have been weaponized and recognized by tradfi and there's the results speak for themselves like to think that this is going to stop is insane because all these traders all these funds all these capital allocators have benchmarks to hit and hopefully surpass and the dynamics that are played if you tap into these markets you're almost guaranteed to outperform the benchmark and that's just gonna feed on itself

yeah i mean think about everybody that bought these convertible bots from microstrategy and they just outperformed the entire market by 10x and then they outperformed bitcoin and all this other stuff that that money is not going to leave this trade right like when when the debt is converted to equity they're going to sign up for the next one they're right back at the table like let's do it again um and i don't think people really recognize that right like as soon as this is converted they're going to sign up and want to do that exact same trade and let's let's run it back, right? We're going to do this again. Additionally, I think some of the convertible debt that they've issued so far has been private, unrated convertible debt on a company with

negative earnings, technical negative earnings. And now fast forward to a future where you've got FASB Fair Value Accounting and they could mark their Bitcoin to market. They've got positive earnings, potential to get the debt that they're providing rated, and they go tap public and private markets, I think their ability to raise capital in that debt market is going to increase substantially. And I think the market is under-appreciating how deep those pools of capital may be. And you think about, well, MicroStrategy is a large portion of the existing convertible debt market.

Yes, but we're going to see, like as you mentioned, kind of this credit creation and expansion of this convertible debt market. And we might even see folks roll out of traditional existing debt into this convertible debt because it is more lucrative. Just kind of depends on the mandates on people's equity or the asset portfolios and what they're holding. yeah it feels like we've crossed the event horizon and only a few of us recognize it it's gonna keep going it's gonna keep going um yeah and when you when you think about corporate debt like what are your other options like the options are dog shit the corporate debt market literally needed a bailout during 2020 yeah who's providing better options these days outside of blue chips and even those as we've seen today are not not as ironclad as as uh many people thought

just 12 hours ago and man we're gonna we're going to see just new new products galore out of this out of this stuff too like this i mean the preferred stock is a great example of it but i can almost guarantee we're going to see you know three four five different ways to also begin to monetize this and in different uh in different capital environments from different companies right like micro strategy is definitely innovating they're innovating right now but so are other corporations and other corporations are going to rethink exactly how to tap these capital pools and structure and design different products for them um in different ways and they're all they're all going to be lucrative in just different functions and formats i mean look at

meta planet and the the vehicles that they were tapping into last year which in japanese equity markets many of them were typically like desperation sort of um vehicles that you would tap into if if you're like on the verge of bankruptcy but they simply just weaponized those offerings to raise cash to buy more bitcoin and they were the best performing stock i think globally last year yeah yeah yeah just i think it's the future for bitcoin as capital is incredibly exciting and there's there's so much opportunity for all companies of all shapes and sizes to start running their own innovative innovative strategy to tap these different capital pools access different capital and that's another thing i think people are really

under appreciating right now is that as these new products come to market as you have people public equities markets particularly copying micro strategy innovating on the strategy i don't think we've ever seen demand of this magnitude with the intent purpose of buying bitcoin and keeping it off the market for decades arguably yeah forever yeah right right yeah it's permanent capital yeah and then permanent capital then on the private side we're seeing the duration curve get built out we were off air mentioning battery i mean like what they're doing with the structure credit pairing bitcoin with traditionally financeable assets like commercial real estate assets and taking that off the market for 10 years, 30 years, whatever it may be,

like you're beginning to see this duration curve build out for Bitcoin. And as that Bitcoin comes off the market and stays off the market, I mean, the float of what is actually tradable beyond that is going to get smaller and smaller, especially if this accelerates. Right. And that's, I mean, the future of digital capital is being built on Bitcoin. It's not being built on these other coins. I mean, the other cryptocurrencies that exist in the market, I think we'll see some of these other cryptos exist for a long time. But if you're thinking about traditional financial ecosystems and how to infiltrate traditional financial ecosystems, it's institutional grade capital that's adopted by BlackRock and other large

institutions. And you start thinking about repeal of SAB 121, banks potentially holding this as custody on uh banks being able to custody bitcoin and the future of creating new products like mortgage-backed products or heloc products or bitcoin line of credit products on on this ecosystem is is going to expand just super rapidly do you think this throws a wrench in four-year cycle of bitcoin uh yeah i do i really do uh my only caveat to that is if we see uh just a huge mania um and like a massive massive blow off top which is which is possible i mean the human it's hard for humans to conceptualize some of this stuff and i think we could see significant you know blow off top uh and a regression to the mean but um i don't think

it's going to i don't think we're going to see the drawdowns that we've seen historically because there are going to be companies that are going to be in strength uh in a potential bear market yeah and i think it goes back to managing that leverage ratio and issuing these products at the right time and really managing your risk and i think that's the other thing um the quality of people really understand these markets and these products is unlike anything that's ever existed within bitcoin as well yeah these aren't stupid people No, let's take a company example. And I'm just throwing this out there. Let's say Nike adopts a Bitcoin treasury strategy, but they only adopt 5% of their treasury, corporate treasury to Bitcoin because they're like, you know, we think we want to do this into the future. they put five percent of their balance sheet into bitcoin and their you know any excess profits that

they've got over the next couple years they add five percent into bitcoin and now you see a significant blow off top where you know let's say it goes up to a million drops to five hundred thousand they could have the ability to turn that lever turn the dial up a little bit more and go from five percent to ten percent ten percent to twenty percent and all of a sudden you have you may have a dozen, 10, 20, 50 companies that are interested in buying Bitcoin for the long-term horizon that are in strength because they're operating in different sectors. They're not just 100% Bitcoin, but they're interested in adding Bitcoin to the balance sheet. And you're going to see capital strength buying Bitcoin in a potential bear market if there is a blow off top in, you

know 25 26 or 27 and that's that's where i think there's there's going to be a cycle change it's i i don't think microstrategy is going to be able to hold this thing up itself you know going from like a i don't know say a million down to 500 000 but other corporations that are adopting this and taking a little bit of a um you know uh it's kind of a measured a measured approach yeah not like a you know, all in day one, but a measured approach into the future, I think will be the ones that will that hold it up in a potential bear market. Yeah. That's very exciting. How's all this been for you? I imagine it's been a crazy couple of years for you just looking at micro strategy and putting your thoughts out there and then watching it evolve. Yeah. Thanks for asking. Uh, it has

been totally insane. My wife is like, what is going on? Uh, no, it's really cool putting out a thesis and seeing it come to fruition. And the thesis that I had back in 2022, 2023 is even evolved significantly. I mean, I couldn't fathom or imagine that they were tapping these different capital markets or that these capital markets really existed and that this, that micro strategy could accumulate bitcoin at this fast of a pace and that um their ability to use these capital markets has made me rethink and reframe my last decade of working in in reinsurance and those capital markets to think about okay well how can i how can i do this in this space you know how can i do this in this capital market and how would that work what would that look like and start to

rethink the structure of just corporate finance completely with a bitcoin balance sheet and you start once you once you kind of grasp it it changes how you see the entire in the entire economy um how you see banks using interest rates how you see line of credit how you see how equity moves how you see um like the interplay between insurance and debt markets and um political political power and you know regulatory and rating agency frameworks and all of this stuff um all of which the bitcoin the future bitcoin economy and ecosystem needs uh there's there's a lot of work to be done and i'm i'm excited about that yeah well it's been fun to watch from the sidelines at least because i remember your your lion avi coming out with the thesis

i was like this is pretty interesting and then watching it all play out as yeah as uh time has progressed it's honestly insane the the micro strategy success i was the first outside of matt walsh from cash online ventures sent a tweet out the day uh the motley fool um basically released a little headline that MicroStrategy was accumulating Bitcoin. I was the first one I've ever been about it that day. And to see where it's come since then is insane. Yeah. It's all financial strength. It's all a balance sheet strength and leveraging a balance sheet. And Saylor is 10 steps ahead and has asymmetric information, which just makes this incredibly exciting to think about, like, what's the next move? And the entire market's trying to

what's the next move and how big is the next move how big is the atm how much bitcoin have they bought how do you value the company um i mean this this whole thing is going to change how the entire equity market works because even microstrategy when they adopt fasbi fair value accounting they're going to be the only company in the qqq where you know what earnings is 24 7 365. it should reduce earnings volatility. If there's any corporation that adopts a Bitcoin treasury strategy and is telling the market how much Bitcoin they have on their balance sheet every week, your earnings volatility of your corporation is totally eradicated. And your ability to tap capital markets should improve significantly because of that. But it may cause more volatility

just in day-to-day movements. So yeah, I'm incredibly excited about the future. as well thank you for coming on and again the timing was perfect so yeah this has been great what uh i mean i've got so much more to digest right i've uh i mean just reading about the preferred stock this morning yeah i've got a i've got a i've got to work through this a bit it just takes time yeah the way i've read dylan's thread from earlier this year right before he came on the way like just like a perpetual call option it can be incredibly far out of the money and it seems to be like a like a nice little carrot to put in front of these types of capital yeah and more more accretive and less dilutive than the bond market yeah yeah we didn't even touch on

bitcoin yield but that that's another that's that's i guess we can end on this is the concept of bitcoin yield and is that an indicator you follow closely because that's in my mind like the strategy is working as long as the bitcoin per share is going up if we're ever to fall that's when you should start asking serious questions be like is this broken in any way or did they just make a bad strategic capital raise um yeah when the stock was at a certain point that's what was at another point that's a great question i my brain is kind of split i like i live in i straddle this like bitcoin world and traditional finance world and it's like for my personal balance sheet I think in Bitcoin per share, but for how I analyze the equity, I know that, you know,

99, 95% of the market doesn't care about that. You know, they're thinking in the traditional finance world. So I got to think about what does the traditional finance world think about? What are they looking at? How are they looking at things? Um, I think it'll be a valuable and important metric for Bitcoiners and especially moving into a potential Bitcoin denominated future five seven ten twelve years from now but uh i mean number go up is incredibly important too so you know there yeah it's it's an exciting measure to watch personally because your your opportunity cost of capital is i can hold this in this traditional financial um i can hold microstrategy in this traditional financial wrapper via equity that's accreting bitcoin

or i could you know use this capital to buy bitcoin over here where it's just not not moving those both have different risk return metrics different tax implications that like um yeah different different reasons for holding these different things in different vehicles so it all kind of comes down to in my opinion like efficiency of the vehicles that you hold those products in um how how much utility each one of those products has and um you know what that may look like into the future right because it's it's difficult to it's difficult to earn a yield on cold storage bitcoin at the moment but you can earn a yield on holding micro strategy equity via running covered call options right you can you can earn

additional income off of holding micro strategy equity beyond uh accreting additional bitcoin so there's different utility amongst the different products as well so i kind of view all of those different things in conjunction yeah that's a good way to look at it fascinating time and hopefully we can do this many more times in the future as the market evolves new products come and copycats enter the market and bitcoin goes crazy jeff uh i'm excited for you thank you thank you for taking time it's been it's been fun to watch and i only imagine it's going to get crazier more chaotic more volatile which should be uh should be good for all of us yeah should should be good for everybody appreciate it thanks for the time uh you can find me on twitter at punter jeff we

also run a weekly podcast every wednesday we call it mstr true north it's a group of people that have been involved in the micro strategy trade for a really long time have a vested interest at being at the front end of what's going on with equity and uh yeah it's an it's an exciting podcast and we chat for a couple hours every week so we will link to all that in the show notes until next time peace and love freaks appreciate Thank you.