TFTC: A Bitcoin Podcast - Bitcoin Alpha E003: Digging Into Microstrategy's Bitcoin Treasury

Episode Date: November 15, 2024

0:00 - Intro 1:34 - Centimillionaire bitcoin allocation 10:20 - ATH & prominent bitcoin-friendly figures 25:28 - Term sheet report 48:13 - Bitcoin Treasury strategy

The following is for informational and entertainment purposes only and should not be construed as financial advice. This discussion is a presentation by 1031, the leading institutional investor focused on the Bitcoin ecosystem. 1031 has over 10 years of experience in Bitcoin and has deployed nearly $150 million into the leading opportunities in the space. To learn more, visit 1031.vc. Now, let's find out what wealthy investors think with Barbara Goodstein, managing partner at R360, an ultra-wealthy community for centi-millionaires. Barbara, good morning. Great to have you here. So last time you were here, you wore red. You said it was by accident.

This time, you said it was on purpose. So is that a sign of what these centi-millionaires think about this election? Well, that is a sign that Trump won the election, and we think that there is a lot of big news coming. We had our market opportunities and risks meeting last week, and there's a lot of upside from this win. All right, so these investors are excited about the win, obviously what it means going forward. One thing you say they're excited about is Bitcoin. So I

mentioned to one of our earlier guests that BlackRock's Bitcoin ETF now has more assets under management than their gold ETF. Of course, we know gold is a safe haven. I know a lot of your investors, they hold gold as well. What's their sentiment when it comes to Bitcoin? And are they doing it directly or through ETF? We're very high on Bitcoin and we've been talking about Bitcoin for the past few years. We recommend doing it directly because you don't pay taxes if you're doing it directly. So that's a big difference. But we think that Bitcoin could become

the next strategic reserve asset. So the country now holds 232,000 Bitcoin. We think that Trump could bump that up to over a million. Barbara Goodstein, everybody. Giving that high quality advice to her, sent to millionaire clients. Gentlemen, looks like this is a weekly show. Every new all-time high means we've got to do another episode.

so hopefully that means we're going to be doing a lot more new episodes we'll see i don't know i don't know if we'll we'll keep up the weekly but for now let's do it well we're dumping now we're below 90 000 it's earth-shattering heartbreaking the pump's over hit 90 93 000 and that was it i hope you guys had fun just kidding john you wanted to cold open with this I think there's two points, particular one, which I'm a bit unclear of. Is it really tax beneficial to buy spot Bitcoin over the ETF? And then two, she's given out good advice saying you should own the actual asset and not some derivative exposure via an ETF. And then three, she's pretty bullish on the strategic reserve.

I said two things. There's three things, really. Let's talk tax situation first. Is it really beneficial? Yeah, I mean, I would actually say that just stepping back like to your second point, I guess, this is a managing partner at a quote unquote community for centi millionaires on CNBC making the case for what seems like a meaningful Bitcoin allocation in the portfolios of some of the wealthiest people on earth. And I think, you know, again, think back to where we were 18 months ago, 24 months ago. I don't think any of us imagined we would get to this point with big pools of capital like this so quickly. So that's it's worth noting that this clip kind of even exists in the first place.

I and I think it's also worth noting, I'll get to the tax thing in a second, but that she's making the point that they are arguing for holding it directly rather than the easier kind of wrapper of, you know, IBIT or another ETF that you can just buy in a brokerage account. And so I think that it's telling because these are people who spend a lot of time thinking about how best to preserve the wealth of large families with a lot of money, institutions in some cases. And so they're very attuned to the nuances of custody, taxation, and preventing kind of value leakage and maximizing estate planning in all the ways that they can. And so that a community like this and a group like this is that attuned to the underlying

qualities that maybe differentiate holding Bitcoin directly in some sort of self-custody or collaborative custody or institutional multisig setup, that they're even thinking about that level of nuance and have already gotten there and have been recommending that is highly notable. And I think speaks to a level of sophistication on this asset that from kind of big pools of money that we haven't really seen before in prior cycles. And of course, from where we sit as 1031, I think we all view that as hyper, hyper bullish for our portfolio of some of the companies, some of the best companies in the Bitcoin space, providing the picks and shovels, the infrastructure necessary to hold Bitcoin directly and custody

it securely over generations and to buy it directly and actually get exposure to and own the actual asset. So I would make all those points that I think this is about as bullish a clip as I could imagine for both Bitcoin and 1031 right now. To the tax point, I think what she's referring to is the, I'm not totally sure, but this is a point that we've made to various LPs, various investors and just people that we talked to in the space. I think what she's probably referring to is the potential kind of tax trap you could get into buying, say, iBit with very, very low fees or kind of near zero fees. Bitcoin runs over these next couple of years, and now you're sitting on a massive capital gain that outstrips anything in your portfolio. And if you wanted to, say,

go from there and actually take custody of the underlying asset, if you wanted to take the the coin and put it up as collateral for lending or spend it directly, do anything at all with it, getting it out of that vehicle then means that you've got a significant capital gains hit from moving it out of, you know, from selling the vehicle and then rolling the proceeds into physical Bitcoin somewhere. And so meanwhile, that also exposes you to some counterparty risk with a BlackRock or Fidelity or any institution that, you know, might potentially have no idea if They're actually going to do this, but has the ability then to run kind of the grayscale playbook of, you know, 48 years ago and take fees up much higher because investors are more willing to pay the 50 to 100 bips kind of tax to the institution that issued the ETF than they are to pay a much higher tax to the federal government. So I believe that's what she's referring to is that you have a lot more tax flexibility in just owning Bitcoin in self-custody.

And you're much more able to avoid situations like that where you end up kind of having long term value leakage to an institution that's providing an ETF. So you can avoid having the much bigger value leakage of, you know, paying a much higher tax to do anything with your Bitcoin. And so I believe that's like the tax flexibility that she's probably referring to. Yeah. And it could be, you know, it could be the case that this dynamic changes. Of course, right now, with all the Bitcoin ETFs, you cannot take distributions of the underlying Bitcoin in kind. If and when you can do that. And I mean, we've heard some rumblings that some of the ETF providers are interested in allowing that.

I mean, it will somewhat be determined on whether they're allowed to do that. But if that's the case and you can take distributions of the Bitcoin in kind, then perhaps that friction may go away. She also could be referring to the fact that unlike a security with a commodity, as Bitcoin is treated, to the extent that you have a decline in the value of those assets relative to your cost basis, you are able to take advantage of tax loss harvesting strategies, sell the Bitcoin and effectively rebuy it and lock in that loss to provide a net profit. negative taxable income event to shield positive taxable income you may have elsewhere. So that's a strategy that some people have used in the past. You certainly can't do that with securities because there's wash sale trading rules. But given the fact that there's a dozen plus Bitcoin ETFs, I think you could effectively advantage of those strategies. If you own, you know, the iShares Bitcoin ETF, you could sell

that one and buy, you know, a similar ETF that gives you the same amount of exposure if you're sitting in a position where there's some sort of loss. Yeah, very good points. We made this argument. I've made this argument since the ETFs came out, like I do think, not financial advice, but I do think it's beneficial to have access to spot Bitcoin due to the reasons that John laid out earlier. Even if you don't see the reasons for it now, I think the likelihood that you will find reasons to actually use Bitcoin, whether that's for payments or collateral for a loan at some point in the future, I think that's going to increase. And as you mentioned, if you're in the ETF, you really don't have that flexibility or ability at all. And on top of eating the cap gains tax hit that you're going to take, you also have slippage, too.

You've got to sell the Bitcoin. Who knows how many days it's going to take to get the cash back in your account to buy the spot. Price could run away. And so for holding the ETF, maybe it's a good first step, but think about holding spot as well as Barbara Goodstein recommended on CNBC earlier this week. Very bullish, very bullish week. we met last week the live rip sorry for the hot mic last week freaks luckily the uh the post show hot mic was was very pg above above board he got some business on air there but when we were recording the price of bitcoin was around 76 000 as we mentioned earlier uh at some point yesterday

The price ripped up to $93,000. We're currently sitting at $88,152. And so we've had a significant run-up in the price of Bitcoin over the last week, over the last seven days. Bitcoin is up 16.5%. And I think this is a product of the fact that we had the Trump administration coming into power. And as the week has gone on, Trump has made some cabinet picks, some nominees that he would like to put throughout the federal government. And Logan, if you pull up the tweet from Pleditor, it seems like the people that Donald Trump is surrounding himself in within his administration are very favorable for our industry, for Bitcoin. So if you look at the total nominees, Pledger ran the numbers for us out of all the nominees, 11 of them are Bitcoin allies, 7 of them are confirmed cryptocurrency holders, and 6 of them are confirmed specifically as Bitcoin holders.

So we thought that Trump getting into becoming the president would be very beneficial for Bitcoin. And it seems like that is being confirmed as he floats new nominees for different parts of his administration. Obviously, we have J.D. Vance, Tulsi Gabbard is being floated for the head of director of national intelligence, Pete Hegseth, Secretary of Defense Mike Waltz, the National Security Advisor, Matt Gaetz, Attorney General Stephen Witkoff, the envoy to the Middle East, all confirmed to own Bitcoin or spoken positively about it in the past. And one role that has not been filled yet, but there's a lot of speculation about who will fill this role, is the secretary of the Treasury. Polymarket has had Scott Besant as the leader for some time. But in the last few days, Howard Lutnick, who was the head of Trump's transition team and also the CEO of Cantor Fitzgerald, which is very bullish on Bitcoin, has been skyrocketing on PolyMarket in terms of the probability of him taking over secretary of the Treasury. Long spiel there. What do you guys think of all this?

Well, Grant's our resident politics expert. He's our big C-SPAN guy. Grant loves politics. I'm sitting here just doing some research on when Tesla announced it. You started talking about politics, and I just started coming out. I mean, I think just, I'm not going to avoid that question, but I was just still thinking about the opening clip and, you know, more people starting to come out of the woodwork and advocate for exposure to Bitcoin.

And it's just reminding me of, you know, what we saw in the last cycle. I mean, you can remember as we started to see the price run in 2020 and into 2021, you started seeing more people come out and announce that, you know, they had been acquiring Bitcoin or they thought getting Bitcoin exposure makes sense. I mean, this is sort of we've heard some of the macro economists, you know, the well-known investors, Stanley Druckenmiller, others advocate for Bitcoin now for a while. But we really haven't seen a large number of new people or companies announce their intentions to do it. Like we've started to see some of the micro strategy playbook, some hints that others are going to look to be pursuing something like that, which I know we'll discuss later. But I think we're on the very early days of of this. And people really only start to come out once the price starts to run. You know, people don't want to go against the grain when, you know, we're in a bear market and arguing for a Bitcoin allocation, Bitcoin exposure, because they don't want to, you know, they don't they don't want to look stupid.

They want to look like geniuses and say, you know what, we've we've already been buying Bitcoin for a while and, you know, go out in the public and the press and take a victory lap for what they've been doing. And when Tesla did it, that was in February of 2021, it looks like, was trying to refresh myself on that. And the Bitcoin price was roughly $50,000. I remember when that happened. I mean, it was shocking. I think that likely as price continues to show legs here, that there's going to be more people coming out and advocating for it. And I think we're at the very beginning, the fact that someone has done that and specifically mentioning doing it in a way where you're controlling your own keys and holding holding Bitcoin directly yourself. I think, as John said earlier, that's very encouraging.

I mean, I think it's like the, you know, the classic video of the guy that's, you know, some concert. He's out on like a hillside, starts to dance, you know, wildly. There's no one around him. He looks really weird. eventually like a second person joins in then a third and then in the matter of maybe a minute like the entire crowd is you know around him dancing doing the same thing um that that's a dynamic that we see play out through you know groups and human psychology all the time and i think here's no different and it's gonna get i think that that you know that dance is gonna get

a lot easier for people uh marty's your point with just this their i guess regulatory progress you could say to the extent that a lot of these appointments um do end up kind of coming to pass And it looks increasingly like Republicans already have the Senate. They clenched the House, I think, yesterday. And so you've got a clear pathway to probably a lot of these appointments going through a clear pathway for the kind of legislative agenda that this administration probably favors and wants to see. And collectively, I think that just continues to make it easier to kind of jump on the bandwagon because you're further and further reducing that kind of left tail risk of some really, really, you know, negative regulatory overture, kind of some adversarial stance or posture by the federal government. Certainly, if you get a change in the DOJ, if you get a change in the Treasury, if you get similar things at the FDIC, OCC, et cetera, that just makes it kind of easier and easier to get your hands around underwriting the kind of the worst case outcome, at least on the regulatory side. And so, yeah, I think as that continues and picks up steam, it'll just be easier and easier for more people to come out of the woodwork like Grant's saying. Yeah. And I like to think of Bitstein's, I think it was Bitstein who originally put that meme out there. But Bitcoin is this weird game where the only winning move is to play. And, you know, we see that throughout the space, you know, you, as we interact with investors who are interested in what we're doing at 1031, and starting to become interested in Bitcoin in general, you know, you We find people from all walks of life, people from all walks of life that listen, Marty,

to your podcast. It's traditional finance people, it's entrepreneurs, it's political and policymakers. It's all kinds of groups. And that's how we see Bitcoin adoption happen, when there is someone who gets really excited and interested about bitcoin they start advocating for it in whatever you know whatever situation they're in whether it's advocating for its use as a treasury asset at the company that they're with whether it's advocating for interacting with the network in some way or starting to build bitcoin products and i think the same will be true with some of these policy makers um the the game

theory is something that people have talked about for a long time um naturally it it just makes sense that there's going to be more people who sits and sit in these positions of power that will have exposure to the asset out of their own financial interest and then that will you know naturally as i think we talked about last week it sort of it starts to reduce the career risk it starts to take off this uh left tail risk that people have been worrying about so uh i think it's um you know i think it's it's only potentially a positive thing from a momentum perspective in the space yeah i was going to mention that we talked about career risk a lot last week and i think part of what barbara's doing and many others will begin to do is signal to the

market like we did not we understood the career risk and we made sure that our clients had correct exposure to bitcoin um so that they don't look like idiots moving forward and that's what you should be doing as a fiduciary for wealthy individuals is getting them into these assets at low prices and so i think we'll begin to discover who was actually making wise allocation decisions um in 2022 2023 beginning of this year um i think they're all going to come out of the woodwork say yeah we were doing our job we got we got our clients allocated to um allocated to bitcoin when nobody was paying attention to it and like you said grant probably didn't make sense to beat the drum about bitcoin from their positions a year ago certainly 2022

2023 um so the other thing we talked about last week um was just this massive uh inflows that we were seeing on the etfs you know coming back to the etfs and just pulling up this uh this page again and you can see i think it was last week we were showing um a 1.36 billion dollar inflow on november 7th and you can just see its relentless um continuation of that trend over the you know the several days since then and so it appears to show no sign of uh stopping no i think there was 5.1 billion dollars of inflows in total last week or this week um so far it's uh there's a voracious bid for for bitcoin right now and i mean that's we were speculating last week and i think the speculation behind the scenes has certainly

picked up you've had individuals like david bailey and dylan leclerc signaling on twitter that they are pretty confident that there is a large nation state probably in the middle east that is looking to front run the strategic reserve bill if and when it materializes here in the U.S. And there's a lot of people speculating that that is a big driver of the price this week. Yeah, you know, obviously, we don't we don't have any inside info there, but I wouldn't be surprised at all. And it's I think we all would say it's only a matter of time, especially now with with the amount of stress tests that Bitcoin has been through. And the increasing kind of need for and focus on kind of geopolitical diversification, I guess, in an increasingly multipolar world after what's happened the last few years. And with Bitcoin's growing liquidity, you know, interestingly, as it gets bigger, it just gets easier and easier for, you know, a big sovereign to come in and acquire a meaningful stack without totally moving the market.

Although perhaps they haven't moved the market in the last week or so. I guess we'll find that out. But, yeah, I mean, Grant, to your point, just back on the ETFs and kind of the relentless bid here, you know, a stat that I saw that I think is indicative is from Eric Bakunas. I hope I'm pronouncing his name correctly. If not, sorry, Eric. But a couple, I think, yesterday put out a tweet saying that iBit has hit the $40 billion asset mark two weeks after hitting the $30 billion asset mark. So already off to an insane start two weeks ago and now just adding a third to what it had already done. granted a lot of that is uh you know price action not just pure inflows but but still i think just

points to um truly incredible kind of vertical accumulation and price action here uh from all sides in the last few weeks and as it pertains to what could be driving price maybe it's sovereign nation getting in but you also have to factor in the fact that i mean we've seen this via discussions with lps over the last year a lot of people were waiting for the election to get get some clarity just more broadly about the direction, particularly of economic policy moving forward. Many people were a bit worried about the continuation of the economic policies of the Biden administration that would most likely materialize if Kamala Harris was elected president. And so I think there was a big sigh of relief when Trump got in, particularly from

wealthy individuals who now feel more comfortable to push some dollars into the system, Bitcoin being one of the assets that they're buying. Another thing I was having this discussion yesterday, I think is really not talked about enough, is that due to the risks that were taken by companies like BlockFi, Celsius, FTX, Terra Luna in 2021, 2022, there's a good argument to be made that the potential price high of bitcoin in the last cycle was was significantly reduced due to the amount of risks that these companies were taking and essentially stealing their their clients bitcoin and and gambling with it either directly or giving it to to traders who were gambling with it and so i think

potentially what we could be seeing right now is just um we've got some political we've got some clarity on the political side of things and then um allocators feeling comfortable to put money back into the system and then bitcoin maybe in the process of simply um getting back to the price that maybe it should have gotten to uh last cycle before all those companies uh really took a dump in the punch bowl and ruined the party for everybody um so who knows exactly what's happening we know that there's more clarity uh there certainly seems to be interest from sovereign nations and as barbara goodstein um is an example of there are large capital allocators and wealth managers that are thinking about bitcoin and thinking about it the right way

so things are looking pretty good right now and with that we'll transition to the next topic which uh hit the term sheet report this morning and it is uh about portal ventures which is just raised and oversubscribed 75 million dollar crypto fund backed by chris dixon and mark andreessen of a16z and we wanted to highlight this uh pull up the um pull up the highlighted picture that we have no not this one um this is interesting we want to talk about this because i think this This is a validation of what we're doing at 1031. There has been a large imbalance of capital, which we'll highlight here in a few minutes. In the broader venture space within Bitcoin and crypto, there's been a lot of money allocated towards broader crypto and very few dollars relative focused on Bitcoin and the industry that we're investing in.

And this raise by portal seems to be an indication that many people are coming to the conclusion that Bitcoin is where the signal's at. And so here's a little blurb from the term sheet report this morning. An industry that seems to shed its identity in search for a new buzzword every month or week, racing from shiny baubles like tokenization to meme coins to stable coins to RWA's real world assets. For those not in the know, at breakneck speeds, Fisher and Wong point to one trend. They predicted in 2023 and built investments around the supremacy of Bitcoin. Now, a foregone conclusion with the cryptocurrency nearing $100,000, Bitcoin was still in the doldrums at around $30,000 when Portal made bets on platforms like Arch, a Bitcoin native DeFi platform that later raised additional funding from Multicoin. John, you put this in our group chat notes this morning.

What does this raise in this positioning of Portal, say to you? Yeah. Look, I think something that we say a lot is everyone capitulates eventually, everyone eventually gravitates. If you stick around long enough and you don't blow yourself up, eventually, everyone will see what this article calls the supremacy of Bitcoin within the broader crypto ecosystem. The reasons for that are multifold. Marty, you've talked about them. many times on your podcast. We've written about them at length. But if we think that Bitcoin is the apex predator of money, then everyone is constantly going to be going through the A-B test of what token they would rather hold, Bitcoin or Ethereum, Bitcoin or Solana,

Bitcoin or the US dollar. Increasingly, the answer is going to be more and more obvious to everyone. That's where the economic mass is going to accrue and that's where the economic activity will ultimately kind of take place and be denominated and so you know we uh 1031 was founded on kind of that that that is one of the key kind of central insights that this is where the world is going um broadly moving toward bitcoin across all these different verticals and bitcoin and nothing else um and that it was going to be a uh at the very least winner take most if not winner take all race over you know over time and over the span of a given you know fund life um so we've kind of built what we've done not just in in 2003 but in 2020 and before and marty with you you and matt two

founding partners who back in 2013 you know essentially went bitcoin only and and have been so since then you know this kind of trend has been um obvious to us for a long time it's what we've been building 1031 on and so um you know it's it's interesting not necessarily like highly surprising to see it eventually start to kind of leak into kind of the broader crypto ecosystem when we talk to LPs and other funds that invest in that ecosystem broadly, we're also seeing that theme and that trend. Increasingly, I think it's tougher and tougher for people to deny that Bitcoin is the long-term top dog in the space. Maybe if they want to have a tail of investments in investments that are perceived to be higher risk, higher return in other tokens,

you know, that's fine. But increasingly, the mass of investors and capital are slowly shifting in that direction, as this article highlights. You know, I think we'll probably still have our differences on the, you know, the nature of Bitcoin native DeFi and kind of what the order of operations for kind of succeeding in this industry, you know, looks like and where the really interesting kind of monetization opportunities are in the next five to 10 years. But, yeah, it's good confirmation on the margin of what we've been talking about for many, many years that until very recently was certainly not consensus among kind of broader crypto allocators, both large and small. Greg, you want to add anything to this? Yeah, I would say, I mean, it also is just interesting that you're starting to see announcements like this, which does signal that there is somewhat of a thawing of the, you know, this freeze that we've seen in capital being allocated into the space broadly.

Right. Like you haven't for the last couple of years, you haven't really seen many new crypto funds. It's been pretty tough market out there. So the fact that there is new capital being raised, that is just a point of interest. I agree that it I think this sort of the narrative around focusing on Bitcoin is one that is not surprising to us. Um, I, there's an element of this to me that, I mean, even that blurb that we showed on the screen, I mean, it was, it was acknowledging that, um, a lot of the investors in the space effectively chase, you know, the next buzzword, the next trend. It's trend oriented investing and attracting capital to chase trends, whether it's NFTs, tokenization, meme coins, tokenizing real world assets. And now I think there's an element that the trend is basically the narrative is crypto on Bitcoin. And so I think you start to see rumblings of a lot more capital that is interested in things that are happening in Bitcoin.

But we haven't really seen it. We haven't interacted with any of these groups. It's just not what we're focused on. And to some extent, a lot of these new layer two projects that the crypto capital has gravitated towards, it's projects that require some sort of change, protocol change, soft fork to Bitcoin. And it's essentially trying to bring a lot of what we saw with crypto and DeFi and Web3 to Bitcoin, not to say that people can't make money with those because people have certainly made money in the broader crypto space, but have also lost significant amount of money. And I think some of these projects that groups like this are pursuing carry the same amount of risk. Again, not something that we particularly have looked at, but it is to me a signal sort of to reiterate, I think what John was alluding to, that these groups are they're getting closer to where we think the real signal is in Bitcoin. It's not quite there exactly, but it's an interesting trend as we see it.

Yeah, many comments on Bitcoin native DeFi, L2s and all that. Before we jump into that, let's pull up the chart and just to highlight the historical imbalance of capital that has been focused on broader crypto compared to the Bitcoin industry. This is one of the charts that we go over most often with LPs and potential LPs. It's this asymmetry of Bitcoin infrastructure. And John and Grant, since you two put your heads together to produce this slide, why don't you walk people through what has happened historically and just put some numbers behind the imbalance of capital that we've seen in the market to date? Yeah, I'm happy to start.

I mean, at its I mean, first at the highest level, I mean, what this page attempts to visualize, of course, is that Bitcoin is by far the dominant cryptocurrency out there and always has been. We've seen fluctuations over time in which other cryptocurrencies kind of sit in positions two through 10. But but in terms of just measuring the market value of the underlying protocol significantly outweighs all of the next 10 crypto currencies combined. Whereas if you look at the capital that's being allocated and deployed into projects specifically with the focus on Bitcoin relative to everything else, it effectively the capital focused on Bitcoin is effectively outnumbered 100 to 1. So there's a massive mismatch in the amount of capital that's focused on Bitcoin versus crypto, even though Bitcoin is by far the largest market out there. So that's one point. A second point I would make, you know, we tend to focus exclusively on Bitcoin. We do think that the world, as it relates to private markets investing, venture capital is moving and has been moving for quite some time into this specialist domain where you have investors who go an inch wide and a mile deep and have a specific focus and a specific vertical.

So we tend to focus on Bitcoin. That doesn't mean that people who've given us capital have the same view as us that Bitcoin is the only protocol that matters and is the one that makes the most sense to focus on. There's people who invest with us that sort of take a wider view on interest in the broader crypto landscape. But what's really interesting is that when you talk to groups like this, what is sort of universally accepted is that none of them believe that Bitcoin is going away. So even though there's been this focus deploying capital more broadly into the crypto landscape, everyone generally agrees that Bitcoin is here to stay and likely will not be displaced by any of the other protocols. yet there is this incredible mismatch in the capital being deployed in the infrastructure, the companies that are building the underlying technology, the picks and shovels to the space, so to speak. And so that's what this slide tends to visualize. And I think it's just really interesting dynamic when you think about investing in the space and where the mismatch and

the asymmetric opportunities lie. Yeah. I mean, I'll pick up, Grant, maybe on one point that you made specifically on just the benefits of specialization. I think we would all say there's a common trope or at least there was until maybe last year among crypto investors generally that Bitcoin is boring or there's nothing happening in it. I think having worked in the space full-time for a few years and then you guys even longer than me, we'd all universally say if you are actually paying attention to it, there's so much going on under the hood that it's even if you're if it's your full-time job it's still hard to kind of hit everything and cover everything um and so i can't even imagine trying to kind of be even

a broader crypto fund um covering not just all the development in bitcoin and all the verticals it hits but also trying to chase you know uh hundreds or thousands of other tokens and projects associated with those tokens and trying to really go deeply on on any of them and you know so by itself specialization in that case is kind of a superpower but then you're not only you know as that chart shows you're not only trying to take this broad you know scattershot view of this whole kind of crypto ecosystem generally um you're doing it in a pool that is saturated with hundreds of other competitors um and so you're chasing you know kind of this much smaller prize when you look at kind of the the economic mass that has accrued to kind of the rest of like the broader

crypto universe so you've got a much smaller prize and you've got way more people trying to you know go after that same that same pie um so the you don't get to specialize and really go deep in you know one ecosystem um and you have to be kind of broad and scattershot and you have to do that alongside you know hundreds of other relatively sophisticated people trying to do the exact same thing and chasing after that one kind of what looks increasingly to be like a zero sum pie Right. Meanwhile, in focusing on Bitcoin, you not only get the benefits of the specialization, which, you know, you can't fake. We call it proof of work for a reason. And I think Marty and Matt have probably have more proof of work in the industry and ecosystem than just about anybody else having kind of been in it for 10 plus years.

And so you just have if you're focusing exclusively on Bitcoin for a good while, you build up this kind of accumulated muscle memory and knowledge of, you know, what's going on in the space and how the current cycle maps to prior cycles and how someone's, you know, company idea or proposal for one thing or another might look like something that you saw that failed five years ago that you'd have no idea about if you were spending all your time trying to cover every corner of like the broader crypto ecosystem. And so you get that specialization benefit and you get the benefit of chasing a much bigger pie that I think we all agree is going to get a whole lot bigger based on the trends we talked about earlier. And you get the benefit of not really having to, you know, fight with hundreds of other funds to do the same thing. And so I think that that kind of leads to the point that as some of these funds try to transition maybe more into the Bitcoin ecosystem over time, over this next cycle, they're going to be at the disadvantage of not having that accumulated proof of work in the industry, not having the same degree of founder relationships or the same degree of founder credibility, which is not something you can develop overnight and not having just that accumulated understanding of how the space works and kind of why it's differentiated. Um, and so I think it's, it's not necessarily going to be trivial to try to kind of recreate that overnight and not end up in, you know, projects that are kind of maybe doomed to not have a great kind of long-term long-term outcomes. Um, so I think that that page is probably one of my favorites that we've ever put together

just because it speaks in that one chart to so much about our thesis and why we're so excited about what we're doing and kind of the advantages and the asymmetries that we think we have by focusing exclusively on this much bigger pie that we think is just going to get so much bigger with really not many other people doing the same thing. Yeah, and I think another thing this slide articulates and the imbalance of capital articulates is that many people have really seen what Satoshi launched and what everybody launched after Bitcoin launched and the alternative cryptocurrencies they really misunderstand what's happening as a tech innovation which bitcoin certainly is to an extent the bitcoin the distributed system

we're using proof of work with the difficulty adjustment distributed consensus via full nodes and private public key management by individuals and companies and governments is certainly a technical innovation the combination of all those variables to create what is the bitcoin network is undeniably an innovation on par with the internet but however i think people look at that that tech innovation say oh we're we're going to do this for everything not realizing that the tech innovated in that way to produce a monetary asset that cannot be corrupted by central centralized third parties and and the monetary good is the the reason we're all we're all here you're only making this tech innovation to enable this monetary system and the imbalance of capital

i think is driven by partly by silicon valley groupthink where we need to software is eating the world we need to use this tech to build all these new products when really all we need is money and this gets to the point of i think a lot of the funds and individuals have been focused on broader crypto and are beginning to see the signal that oh bitcoin is the thing to focus our attention our capital on we're going to make that mistake too which is like all right all this tech innovation is happening on bitcoin like we need to go invest in this defy tech innovation and i i think that is another miscalculation that people are making they think that you have this distributed system which enable this incredible monetary system and you

need to go replicate that for every different application we did it for money let's go do it for file sharing let's go do it for decentralized finance whatever it may be tokenized real world assets which is simply impossible you can't a blockchain can enforce contract law in the physical world and so i think we have seen it already it's been uh come in many names many people call it bitcoin season two bitcoin defy whatever and it's people seeing the relative ephemeral success that defy tokenization projects have had in crypto and be like oh we were just doing it on the wrong blockchain so we need to come do it on bitcoin not recognizing that i don't think that the tokenization and the defy is actually

where the innovation is the money is the innovation and once you have the good money you can then go do better things throughout the economy you don't need to decentralize all the things and not everything needs to be decentralized trust in economic contracts and interactions is actually a good thing and you don't need to eliminate trust in every economic transaction that you um that you uh participate in and that's where i think our focus is really going to shine as we move forward is because i think we uh we really understand this intuitively and particularly if you agree that the world from 2024 forward for the last five decades we've moved from atoms to bits and there's a pretty a growing consensus that we're going to move back from bits

to atoms we need to get back into the physical world and actually build things that either take Take us to Mars or, oh, well, some manufactured goods here in the United States as two examples. And Bitcoin, the money is going to enable us to do that. And you don't need decentralized finance or tokenization. You just need good money to interact with the physical world to enable people to accumulate capital and then go out and build things that make society more productive and increase economic activity and productivity throughout the economy. And so that's where I think our focus is. And we've talked about this in the first three episodes. It's really, I think, particularly this cycle that we're heading into.

Again, Bitcoin as the super collateral is this really good money that is scarce, divisible, portable, easy to verify. I think that aspect of Bitcoin is really going to shine, particularly as collateral that is used in financial products that enable you to do things in the physical world. like doing a decentralized finance in the digital world, it seems cool, but I don't think that's really what's going to ultimately lead to valuable, impactful change in our world and meet space. Yeah, well said. I mean, I think there's, we always talk, we've talked about in prior episodes too, but just about the order of operations that is kind of necessary for the space. And, you know, I think I would just pose when we think about kind of DeFi and Bitcoin or kind of the, you know, gigabrain science projects that some people can come up with, many of which, you know,

may long term, very long term have some value or some place. You know, we're currently dealing with a world where like the vast, vast majority of people like do not have Bitcoin. There's all this $500 trillion of capital siloed into traditional assets, and they still need to figure out how to even get Bitcoin and then how to secure it, um, across a bunch of different, uh, setups and, um, uh, institutional contexts. And, uh, you know, Bitcoin still has a huge role that it needs to, to, to play even further in, um, power grids and energy production. Um, so the, the Bitcoin mining angle still needs to be built out much more. Like we are at the very, very earliest stages of this network at a, um, at an infrastructure level, a physical

infrastructure level and like a social infrastructure level kind of coming into being. And so, you know, the I keep saying the term, but kind of the economic mass sitting on Bitcoin right now that is, you know, accessible by kind of some sort of decentralized finance construct is, you know, just dwarfed in comparison to the massive amount of capital that exists in all these other assets. And I think one of the interesting things that we're going to see the cycle over the couple cycles is not like the financialization of bitcoin but the bitcoinization of finance of trojan horsing bitcoin into different existing institutional pools of capital and existing kinds

of structures um that a lot of those capital providers and allocators are already familiar with um maybe this is a good transition to the next topic marty i'll let you decide i was i was going to say this was a perfect transition because our deep dive today that we wanted to go into is bitcoin treasury strategy and i think diving into the details of how we view um the way companies should approach their bitcoin treasury strategy really highlights the the thesis we just laid out in action which is you use bitcoin to go do things throughout the world in in meat space so with that let's dump into it uh grant you wrote the piece bitcoin treasury the uh what is it the fourth the fourth leg of um or a third leg fourth lever i called it the

fourth lever to equity value growth let me see if i can just uh i'll share the screen here so people see the link but yeah i mean we we put this piece out um earlier this year in january and the premise was talking about really how our thoughts evolved over time as it relates to using Bitcoin as a treasury asset. Initially, you know, we, our focus primarily is investing in Bitcoin oriented companies, companies that are building the underlying infrastructure for the space. We do believe that the mandate of what we will doing, we've talked about this for some time, will gradually expand into companies that weren't historically considered Bitcoin companies, but technology companies or other companies that start to see the value of Bitcoin, incorporating

it into their business in some way, whether that's putting it on their balance sheet and uh integrating with the network building bitcoin oriented products catering to um providing products and services to holders of bitcoin we do think that uh as the world moves more towards bitcoin it's it's not just going to be bitcoin companies and that there's a role for us to play to help companies from outside the ecosystem start to enter the ecosystem But as initially we've been focused on some of the Bitcoin companies, our thought process has evolved. You know, we we had this mindset that, well, you know, the companies that we're investing in, they already are exposed to both the upside and the downside risk operationally from the success of Bitcoin. If Bitcoin fails, their businesses are likely to fail.

If Bitcoin continues to go up, then their businesses should benefit. But they weren't necessarily completely benefiting from the potential growth that we all expected with Bitcoin. And that, you know, we were advising these companies also to hold Bitcoin on their balance sheet so that they would also benefit from the positive leverage that we expected as Bitcoin grew. So initially, that was how we approached working with these companies. And the advice was, you know, as long as you have runway cash, runway of call it a couple of years to cover your costs, because most of the companies, although we do have some that are operating profitably, most of them, at least out of the gate, don't operate profitably. They have costs that are not denominated in Bitcoin. So you need to have cash to service your business as you're trying to scale. But that was our first bit of advice.

It's like, OK, after you've got a year, two years worth of runway, consider having some Bitcoin exposure. Because as the price goes up, that will extend your runway, potentially prevent the need to dilute your equity value in the future. But then we obviously saw with the collapse of Silicon Valley Bank and some of the other institutions in early 2023 that the assumed access to your dollars and your fiat currency reserves may not actually be as ironclad as you expected. And so it actually made sense, we thought, from a near-term perspective for companies to hold some portion of their near-term liquidity needs in Bitcoin as well so that they could service. Yes, Marty. Well, I was going to say, I think it's important to highlight exactly what happened during that period of time when you had Silvergate, Signature, Silicon Valley Bank, First Republic go down. At that point, like Operation Chokepoint 2.0 was very real and the access to bank accounts for companies in the industry was was not easy to get. And as those banks that were servicing the industry began to fail, I mean, it got to the point where literally if you could get out of the bank, buying Bitcoin and holding it in like a vault with Unchain was the only way that you can move your your liquid cash.

because the banking industry was aggressively against the industry at that point in time. And so, like, Bitcoin was the only option that some companies had. But remember, it also wasn't even just, I mean, you're totally right about, you know, choke point 2.0. But at the time, it wasn't even just, you know, an issue for Bitcoin companies. There was, you know, the weekend when SVB went under, Gary Tanna, Y Combinator famously called, you know, an extinction level event for startups, you know, if there wasn't, you know, a bailout that ultimately did come. just because so many of them had the vast majority or all of their corporate treasuries at SVB or maybe First Republic. And so I imagine most of those startups that were not in the Bitcoin

industry weren't necessarily thinking about Bitcoin at that time, although hopefully some of them were. But I think it shows that that weekend was not just a Bitcoin issue. It wasn't just a problem for Bitcoin companies. It was a problem for all startups. And realistically, you know, it had the contagion kind of gone on, like all companies in and all individual depositors in the country. But it wouldn't have been a problem, or at least the problem would have been reduced if you had Bitcoin or if you were able to move some money out of a bank account and into Bitcoin. And I think it was a hugely important episode for illustrating Bitcoin's value proposition to people. And I know it woke a lot of people up, both even in the Bitcoin

industry, but outside of it as well, as to just the reality of the benefits that Bitcoin can provide. We've spent most of Bitcoin's life talking theoretically about the lack of counterparty risk and how the power of self-custody and the power of an asset that isn't the liability of a counterparty where there is fundamentally no counterparty risk if you do it correctly. And I think it's very easy when things are going fine and there's no mass bank run and no extinction level events for companies to kind of see that as like some abstract benefit that basically isn't really important anymore in our modern banking era where we have an FDIC and a Fed. But I think that weekend really highlighted the power of that and how unique and important of an innovation that is

for value storage and transfer in very adversarial and uncertain circumstances. Sorry for interrupting, Greg. Yeah, no, but all really good points. And so as our thought process evolved, like we looked at Bitcoin as both this near term buffer, you know, sort of a rainy day in case you can't access your phone. So it makes sense to have at least a couple of months of working capital needs held in Bitcoin. And then after you can satisfy some medium term requirements in your business from a cash flow perspective, holding an incremental amount in Bitcoin so that you have the positive exposure to it. And then finally, to tie it all together, you know, the latest piece of thinking that we had earlier in the year to supplement those was actually if you have the capability to hold Bitcoin as a longer term treasury asset, that actually could be a really compelling way to supplement the equity value growth in your business.

And I'll, again, pull up this piece just to maybe call out some of the points. This is a complicated formula in the piece, but to dumb it down, you know, when you think about ways that a company increases its equity value, it's pretty simple. you have growth in the business, you generate cash flow. And if you have debt, you're paying down debt, but basically growth in the business and then generating cash flow. And then you also could have increases in your equity value just based on how investors perceive the value in your business. So you could think of that as what multiple they may ascribe to your business. And if they start to desire or value your business more, then you can have an increased multiple attributed to your business and you grow that way. Traditionally, those are really,

if you want to simplify it, the three ways that you drive equity value appreciation in your business. But we were sort of calling out Bitcoin as a treasury asset as this fourth lever, because there's a lot of statistics that are thrown out about the historical performance of Bitcoin. People say over the last 10 years, it's grown 60% on an annualized basis. One of our companies, Battery, coming back to John's point on the Bitcoinization of finance, Battery is doing really interesting things there, and we'll definitely have them on a future episode to talk about what they're doing, but they've done a lot of analysis on historical four-year hold periods for Bitcoin. Even in the worst four-year hold period of Bitcoin, you've generated 25%

increase in value on an annualized basis. Holding Bitcoin as a long-term treasury asset actually has the ability to have a meaningful impact on the equity value appreciation of your business and we ran some scenarios here really just to highlight that and i think one thing since this is an interesting time capsule since we wrote it at the beginning of this year you know at the time we were just showing um some of the companies how much cash uh they held on cash and market marketable securities they held on their balance sheet relative to their market cap MicroStrategy at the time was a $10 billion market cap company, held 8 billion of Bitcoin, so it was still trading at a slight premium to the Bitcoin on its balance sheet. Today,

I think it's a $70 billion market cap business, so it's gone up 7x. Certainly, the Bitcoin hasn't gone up that much. I believe they hold something like 20, 23 million of Bitcoin, but just really interesting time capsule there. Yeah, and I mean, one company we have on this list is Microsoft. Actually, I didn't realize you were going to pull this up, but it is interesting to look at the Microsoft numbers now, considering the fact that the assessment of Bitcoin as a treasury asset on their balance sheet has been forced onto the board meeting agenda

in a few weeks here. So it'll be interesting to see how they react to that. Maybe they'll listen to this and get some get some ideas and wise up and say, hey, maybe we should assess this seriously. Other examples, I mean, Dave Portnoy, my old boss, he I've been trying to get him to understand the long term value of holding Bitcoin as an asset, both personally and for the business of Barstool Sports. And he's been very public about the fact that he has fumbled the ball time and time again. And there was a point earlier this year, the end of June, in which he was on one of his live shows saying if Bitcoin dips down to the $40,000, between $40,000 and $50,000, I'm going to buy $10 million worth for Barstool and put it on the balance sheet. And I responded to that video at the time, at the end of June, and said, Dave, don't try to time the market. Time in the market is more important.

Why don't you just cut up your lump sum investment that you're looking to make and buy $500,000 worth of Bitcoin? Bitcoin every two weeks for the rest of the year. That's a better strategy. We found out this week he did not take my advice. He did not buy Bitcoin at all. And he's kicking himself again, saying he missed it. So I went back and I ran the numbers. I said, if you had taken my advice on June 28th, 2024, he bought $500,000 worth of Bitcoin every two weeks. They would have spent $5 million buying Bitcoin. They would have 80.35 Bitcoin on the balance sheet. And that Bitcoin would have been worth almost seven million dollars so they're up if you'd taken my advice it'd be up almost 40 percent uh on their their dca investment uh over the last uh five month period and this is

not to poke fun at dave but it is to highlight that uh if you have bitcoin on your balance sheet and most importantly if you have bitcoin on your balance sheet during these periods when it when it does gap up the amount of equity value, the value of your cash, cash equivalents goes up pretty significantly, like a 40% gain in the cash value of one of the treasury assets on your balance sheet is pretty meaningful. That could allow you to do, gives you incredible optionality as a founder, as somebody running a business. Yeah. I mean, it brings up a whole, but on both kind of the founder side, but then also especially on the larger Pubco side with your Microsoft point. And it would be interesting to see how that plays out next month. But it brings up a whole

like new vector of conversation, I think, at corporate treasuries and among, you know, in like a CFO's office, because we've spent the last 40, 50 years and especially the last 20 years in a world where like balance sheets in general has just been completely like devalued, like the strategic value and importance of balance sheet assets has kind of gone away in a world where we need to deploy capital into anything to beat inflation, where we've had rates near zero for 15 years. Your wealth is just melting if it's in cash or maybe you're treading water in the best of times with the 10-year treasuries or something. And so the balance sheet, the strength of your balance sheet has not been a focal point. You've seen, you know, over the last 20 years, a move,

especially in tech and startup world toward, you know, asset light models, but even in at larger companies too that have historically had, you know, 50 years ago, much kind of bigger balance sheets and bigger capital assets, and there are a variety of reasons for this, but people have preferred to move toward a world where you're carrying less on the balance sheet and you have, fewer assets. In a world where you can actually park capital in an asset that appreciates at the kinds of rates that Grant is talking about, the balance sheet suddenly has value again. It's not just a place where reserves go to die, where you keep the absolute minimum amount that you possibly need to run the business on a just-in-time basis because anything else is

just kind of leaking value for your shareholders. And I believe Michael Saylor, who's kind of pioneered this more than anybody else, at least publicly, has made this point too, that public markets over the last couple of decades have been very much trained to not kind of look at the balance sheet, not really value the balance sheet and the existence and emergence of Bitcoin as an asset with this kind of performance that anyone anywhere can leg into with meaningful size and meaningful liquidity and hold for a thousand years if they want to with minimal fees and value slippage, totally reintroduces that conversation and changes the way that I think companies and increasingly investors will have to assess and value a corporate balance sheet.

My hot take though on the Bitcoin treasury strategy on the Pubco side is I think you can also go too far in the other direction. And I think we'll see in this cycle, companies, especially smaller companies, you saw, what was it, Marty? Genius AI, Genius Systems, whatever. About to go bankrupt. Yeah, right. Companies that are kind of like right on the margin, right on the edge saying, well, we intend to buy some crazy amount of Bitcoin for the balance sheet. It worked out for the stock so far and we'll see how long that lasts. But I think it's very easy to look at what MicroStrategy has done and take the lesson from it that, you know, a corporation's ultimate

kind of reason for existence is just to like accumulate as much Bitcoin on the balance sheet as possible. And I think that's the wrong message to take away. You know, Saylor is getting a premium on his stock because he's doing something with that balance sheet accrual. He's turned his entire company into a mechanism for acquiring Bitcoin and adding to his Bitcoin per share faster than investors would be able to do by themselves. You can have a view on how long that lasts, but at the end of the day, that's what a corporation needs to be. It needs to be an agglomeration of assets that come together in such an arrangement that produces value over and above some cost of capital that investors could just, you know, produce themselves.

Saylor has done that by, you know, turning his company into a levered Bitcoin acquisition machine. And I think that can probably continue for a while. We'll see how long that goes. But basically, what I'm kind of getting at is, Grant, to another point that you've talked about a lot and a term that you coined, Satsflow. Ultimately, that's kind of what this needs to be, right? Whether it's through financial leverage like Michael Saylor or operating leverage like the companies that we invest in, many of which I think will ultimately go public and run similar strategies like the companies need to be focusing on how do I maximize the flow of Bitcoin that I can provide over time to my shareholders, not just kind of sit on a pot of Bitcoin and expect my stock to get a multiple for that.

Right. Because I, as an individual shareholder, like I should just have that Bitcoin. Like, I don't want you to hold it kind of behind a tax wall that I can't access if all you're going to do is kind of sit there on it at the at the very most value that kind of, you know, one X it's market value. There's no incremental value to me for you having that Bitcoin. So I think we're going to see a lot of people learning the wrong lesson from from this theme and from my strategy success. And it'll be interesting to see how how that plays out. But certainly at the very least, I think a big takeaway from the last year or two across all these points is if you've got a company at all of any size with any corporate treasury and you've decided we're going to have X reserves for the short, medium, long term, some percentage of that should be, it's probably some meaningful percentage of that should be in Bitcoin. Don't necessarily expect to get a premium multiple just for holding it, but absolutely everyone is going to need to make that kind of allocation decision. And maybe Microsoft will in a month or so.

We'll see. Well, let's dive into that more. I think I agree. And I think one of the other questions is, can there be microstrategy copy? I think the framing of the question is such many. I think the poor framing of the question is, can anybody catch microstrategy? micro strategy and i think at this point no i don't think anybody is going to have the balance sheet or the ability to go dilute shareholders or access debt markets the

extent that sailor has particularly with bitcoin at ninety thousand dollars to go acquire more than one percent of the bitcoin supply sailor has the first mover advantage and he was the first mover running by himself for for many years and was able to go out and acquire that large stack so will anybody be able to catch sailor outside of a government i find it hard to believe maybe it's possible who knows maybe apple wakes up one day and says screw it we're gonna ape in i find that hard to believe though i guess the other question is um the other part of the better framing is is micro strategies strategy replicable for others that want to acquire bitcoin on the balance sheet and maybe not catch MicroStrategy, but follow what they've done.

And, John, I think you just described why in the long run people will certainly try and many people benefit from it. And I think one thing we should note is that there is an immense amount of debt capital, particularly credit funds, that want access to these type of deals, these convertible notes. They've been very successful for MicroStrategy. MicroStrategy only has so much bandwidth to offer these convertible notes and do these out-to-market equity deals. And so there is certainly a strong argument to be made that there's so much money in these

credit funds that if there were MicroStrategy, pure MicroStrategy copycats, there probably would be demand from credit funds looking to reap the benefits of the returns from those convertible notes. And then number three, I think, which is what we focus on is once that strategy sort of gets diluted and played out, what is what is truly going to drive value to shareholders for companies running with a Bitcoin treasury strategy? And as you mentioned, Satsflow, like having an incredible operating business that is highly productive, highly profitable and being used widely by individuals throughout the economy. And that, I think, is the next stage, maybe not the next stage, but we will certainly see that begin to stick out as those companies that have incredible operating businesses, high cash flows that they're rolling into Bitcoin on their treasury as the companies that begin to stick out, maybe. yeah there's a there's a lot there to unpack um the first question the very first question i think was like is is what micro strategy doing is a replicable um sailor is saying it's replicable

i mean he the i mean i think the the third quarter earnings presentation and the videos on their website. You can go watch it. I mean, I think it's really fascinating. It's a really interesting presentation. And it's the first time they've really gone in detail about what they're doing. But also, I think it's really the first time they've been honing the narrative on what they are over time. And I mean, I was doing some research again on this because in that presentation, uh sailor says that microstrategy is a bitcoin treasury company right i think those were the words um he used and i'm just going to pull up again my screen and just show some of this because i thought it was fascinating um you know you can go to their website now and that's what it says

it says microstrategy is the world's first and largest bitcoin treasury company but i remember it was just a couple of months ago. I mean, I think it was at the MicroStrategy Summit. He was calling them a Bitcoin development company. And you can go, I went to the Wayback Machine and you can see here in September, that's what the website says. They were a Bitcoin development company. So I think they've been honing the narrative of what they are as of Q1, Q2. That's what they were calling themselves, Bitcoin development company. Here's the earnings presentation it was you know we build software we leverage capital markets activities to acquire bitcoin and we develop you know we're going to be developing software that's related to bitcoin too

they made some announcements around doing decentralized identity you know i don't know some of that stuff i'd be surprised if they shuttered that effort so quickly um so perhaps that's still ongoing and in the very early stages but in the q3 report um this is the q31 even though the i think their their header and titling of these pages it says q1 but this is the q3 report now they've clearly said they're a bitcoin treasury company um and what he markets them doing is being the best at offering Bitcoin-oriented bonds, right? These convertible debt instruments that effectively sell the volatility that exists

in the underlying stock in return and provide downside protection to the convertible notes investors. And they're the world's best at doing that. And they've been the largest convertible debt issuer in the U.S. this year. And so the question of is what they are doing replicable, it depends what you mean by it. Can a company go out and issue instruments like this to take advantage of the demand that public markets oriented investors have to get exposure, you know, Bitcoin oriented exposure, but also have the downside protection that Saylor's been able to offer? I think that's possible.

I mean, what we've heard is getting access to the convertible debt instruments of MicroStrategy actually is very hard. You know, there's a ton of demand for them. They've obviously performed really well. And in fact, in that presentation, he's not only making the case that MicroStrategy stock has outperformed Bitcoin over, you know, lots of different historical periods that you can look at. He's made the case that investing in the convertible debt instruments have actually outperformed Bitcoin. So there's a ton of demand for it, so much so that people, I think, are getting boxed out from participating in that. So could a company replicate the strategy issue, you know, these type of instruments as a means to acquire more Bitcoin? Yes, I think so.

But MicroStrategy definitely is unique in the sense that they have a huge stockpile of Bitcoin, over 250,000 Bitcoin today. Their stock is one of the most actively traded stocks in the public markets today. He went in the presentation to show how much volatility exists in their stock, which is the necessary component for driving some of that benefit in the options market and driving interest in their securities. And I don't think that necessarily is going to be replicable for companies. So it depends how you boil it down. But that was a mouthful. So I'll pause there and see how you guys want to react to it. Yeah, I guess the one question, I think you alluded to it at the end, I mean, is making the case for microstrategy not being replicable, like is the gravity of the flywheel that they started in 2020 so strong that it's almost like why would you do it?

why would you put capital in anything other than the micro strategy, the gravity, as you said, that's one of the most, it's got the highest, one of the highest volumes in terms of stocks being traded, uh, in the markets the last few months. Um, what does a zero to one moment look like for a company trying to replicate that? And is it even possible that they catch lightning in a bottle? Well, I think part of the, part of the issue, I would definitely take the other side of it not being replicable. No one's going to, I think we can put to rest the idea that, as you said, Martin was going to catch him.

But I definitely think there's an argument that, to Grant's point, and to bring it back to the earlier thing that I said about the Bitcoinization of finance, you know, there's $500 trillion of kind of capital locked up in different silos that needs some access to Bitcoin in some way eventually or some sort of like Bitcoin leverage. a lot of those capital pools are not going to be able to easily or quickly just liquidate or reorganize and just go entirely into Bitcoin. And so I think there's going to be a long period where there's significant demand from these different credit funds, especially to have exposure to something like a microstrategy convertible bond, which, as Grant said,

astoundingly has outperformed Bitcoin. I don't think people realize, people in broader of traditional finance fully realize just how insane it is for kind of a debt instrument that nominally has the cost of debt on those things is like 1% for that instrument to have outperformed Bitcoin. That's truly incredible. And I just think it speaks to how unique that strategy is, how interesting that's going to be to those hundreds of trillions of dollars of capital that are looking for returns and looking for Bitcoin levered returns and can't necessarily just become Bitcoin overnight. And I think something that he said in the presentation that Saylor said was this image of MicroStrategy as kind of a Bitcoin refinery, almost like an oil refinery,

where they can package volatility and return profiles in different ways to meet kind of the needs and the risk return desires of a bunch of different types of investors. And I think that's what I was referring to with the Bitcoinization of finance idea that they're the first, but I think there's going to be so much demand for that, they will certainly not be the last. And I don't know if the next version of that is even a public company acquiring Bitcoin and its treasury and issuing converts. It could look very different. We've got a company that we've alluded to before, Battery Finance in the portfolio, that you're thinking, I think, in very similar ways about how Bitcoin can be combined with, or as the founder says, alloyed with traditional products

in finance, both equity and credit to generate risk return profiles that are more or less interesting depending on what dials you want to turn and what levers you want to pull to different types of investors, different pools of capital that for one reason or another are not just going to convert to being Bitcoin tomorrow evening. So I think that that's a huge theme that we're going to see. I think there's way too much demand for it to, for, for Saylor to be the only one who does this in perpetuity. And I think that, you know, the next 10 runners up even exactly copying his strategy to say nothing of totally other structures that people have not even thought of or employed yet that we know are kind of on the back burner. Even, you know, the next 10 copycats

of MicroStrategy that have a thousand Bitcoin, 5,000 Bitcoin, 10,000 Bitcoin. Like if we think about where we're going, if you imagine MicroStrategy can one day be a trillion dollar plus market cap company, which you don't have to work that hard to get there with certain Bitcoin price projections, and you assume that they keep acquiring Bitcoin at some rate, the companies that are the next 10 best copycats of that are going to have a lot of, I think, going to see a lot of demand because there's only so much capacity that MicroStrategy has in any given quarter or year to take on incremental debt or issue incremental equity, even at crazy numbers, even as Bitcoin continues to run parabolically, they can only service so much debt at a time. There's ultimately

a limit. There's ultimately a limit to how much dilution they'll take in an even quarter. And that just means that that huge wall of demand looking for things like this is going to have to go elsewhere. And it's going to go into the next 10 copycats of MicroStrategy. It's going to go into things like what battery is doing, what other kind of innovative credit providers, et cetera, are going to be doing with Bitcoin. So I do absolutely think that some version of this is replicable in a lot of different ways and a lot of different kind of verticals may not look exactly like what MicroStrategy has done. And I think he'll be the top dog in this particular kind of version of this for a long time. But I think this is a huge theme that we'll see

in traditional finance over the next five years yeah you answered my steel man the the momentum of all the capital looking to get into these products is going to be the catalyst for the zero to one necessary for for micro strategy copycats or people that see what they're doing and go to employ a similar strategy you're pulling this up grant yeah i mean i just was there's a number of interesting slides in the deck and just to maybe elaborate more on john's point. I mean, this page is their capital structure, specifically on the convertible notes. And you can see here the five different tranches of convertible debt they have. It has cumulative annualized interest obligations of $35 million. They used to have much more

expensive debt, which they took out. But to John's point, like they will only be able to support a certain amount of debt, provided that there is some amount of cash interest expense required. You know, the interesting aspect of their business is they have this underlying business intelligence software product that that generates cash flow that allows them to service the debt but if you look at it over time i mean actually i think he was making the case that they've been seeing some pretty nice near-term growth over the last 12 months but effectively over the long term that's that's basically been a flat business for as long as you you look back so at some point i I do think they get capped out on the amount of debt that they can issue.

And so then the question is, what happens to the premium that they're getting on the stock, particularly as more companies try to replicate this strategy, or at least offer alternatives for investors to get exposure to? Because we were showing on the Bitcoin treasury piece we wrote earlier in the year. At the time, MicroStrategy was a $10 billion market cap business. They had $8 billion of Bitcoin on the balance sheet. They were trading at a premium, but it was at a 1.25x premium to the underlying Bitcoin. You can argue that they should have some premium because they have the cash flows from the

underlying operating business. Then as Saylor argues, they should be given a premium just based on their ability to continue to deliver Bitcoin-oriented leverage. They like to coin this metric on Bitcoin yield and how much Bitcoin per share growth they're delivering to their investors. Today, it's a $70 billion business and $23 billion of Bitcoin treasury position. The premium is a 3x. Where does that go over time? Is it merited for there to be a 3x premium? I would guess, if I had to speculate, I think that premium comes down over time and even I mean, you could even argue that Saylor is sort of acknowledging that that would go down.

Let me see if I can pull up another slide here. I mean, this was a pretty interesting slide as well that sort of outlines one of the points John was making, is that there's different ways to slice and dice getting Bitcoin-oriented exposure and taking on either enhanced leverage to Bitcoin or less leverage to Bitcoin. And in here, what he's basically saying is by issuing convertible notes that have some downside protection, don't share completely in the upside to Bitcoin because it's convertible debt that converts at a premium to the MicroStrategy stock price. you're sort of trading off some of the Bitcoin upside in exchange for some downside protection. And so he's showing the convert should be 0.75x leverage to Bitcoin. In fact, over the last several years, he's shown that the converts have outperformed Bitcoin. And I think

that's mainly because the equity premium relative to the underlying Bitcoin to the net asset value has gone from this 1.2 times to three times and so the fact that the equity is traded up so significantly that's what's allowed the converts to outperform bitcoin but in i think in a more steady state environment they wouldn't outperform bitcoin the converts would be slightly less than bitcoin and then if this is sort of the the steady state view of what each of these different instruments could look like i mean i don't know does is the equity micro strategy equity at one and a half times premium is that more realistic and rational as compared to three times premium i think that's just going to be an interesting dynamic to see play out it's it's an interesting

corporate finance question because and he makes i think he made this point in the um the earnings call and i'm not necessarily taking a view one way or the other but you know essentially what we're basically talking about is like you know more or less a price to book multiple and essentially no company other than outside of you know banks really trades on price to book right they trade on um earnings or free cash flow or ebitda or something else you know no one really knows off the top of their head or cares what nvidia's price to book is or what google's price to book is or you know meta apple etc um because they're they're trading on a metric of of what they can deliver on a flow basis year on year with their P&L and their cash flow to

shareholders. And so on one hand, I could say like, well, yeah, like why is the equity trading at kind of a 3x premium to the underlying Bitcoin? But if I believed, if I could get myself to believe that they have a durable, credible case for over the next 10 plus years, they're going to have a differentiated access to via what they've set up, via this flywheel they put in place to durably grow their Bitcoin per share by, you know, some amount, you know, why wouldn't I put some premium on today's underlying Bitcoin? Because, you know, markets are forward-looking and I want, you know, I'll take the, you know, a 10-year view and my, you know, market cap, my valuation will be based on that, not just based on what the today's, you know, kind of

root market value of that asset is, you know, less the debt, obviously. So, I think it's, Yeah, you pulled up the Bitcoin yield construct. And this is kind of what I was alluding to earlier, right? Like just holding the Bitcoin on the balance sheet, you know, that's great. You should do that to every company should do that to at least some extent. But that is, you know, fundamentally not the same value proposition to shareholders as kind of doing something with it and being able to provide them a Bitcoin denominated return over time, provide them effectively some sort of stats flow over time. And that's what at least they're targeting. And so if I were, you know, a MicroStrategy bull, that's probably what I would be arguing, right? That like, why shouldn't they receive some kind of premium just on the basic NAV? Because here's what I believe they're going to do. Yeah. Yeah, those are good points. And like if today they're at three to one market cap relative to the underlying value of the Bitcoin, And they're saying that each year they should be able to deliver 6% to 10% more Bitcoin per share, basically.

Then over time, that denominator, the underlying Bitcoin, say over five years it grows 10%, then that would be effectively just put aside price appreciation. Market cap of 3 to 1 relative to the underlying assets. In five years, it could be 3 to 1.5. And then all of a sudden, you know, that that value starts to compress. So I think one way to interpret it is that the investors are giving credit to the expected appreciation of Bitcoin on on the balance sheet that they expect micro strategy to have over time. I mean, this is the way I think about it is it is a financial engineering play. They can support a certain amount of debt on their balance sheet based on the underlying cash flows in the software business. And it's more or less financially engineering the outcome to drive incremental Bitcoin per share, incremental Bitcoin to the balance sheet.

But you can think about getting leverage to Bitcoin. So MicroStrategy does that and they give you, according to Saylor, one and a half times leverage to the underlying Bitcoin performance. The other way to get leverage to Bitcoin is to have operating businesses that are tied to the performance of Bitcoin. You know, when Bitcoin price and adoption increases over time, that doesn't actually benefit MicroStrategy's underlying business. Whereas for the companies, such as the ones that we're investing in, they ultimately benefit from increased adoption. So their leverage comes from an operational perspective and they're able to deliver increasing Bitcoin, effectively Bitcoin per share through the generation of SaaS flows like what we're talking about. You only have to generate positive Bitcoin sats flows to have a greater percentage supply relative to the total market. And that's another way that we think about investing in the space is what we're doing effectively is getting equity exposure to the companies in the space.

And that should, you know, I don't know what the what what the apples to apples comparison is relative to what Saylor saying is one and a half times leverage to Bitcoin. But if you have operational leverage like the companies that we do, you know, I think you're going to be looking at a similar dynamic. Yeah. No, and I think, last note on this, because I know we've got to wrap up soon, but people really focus on the debt servicing that MicroStrategy is accruing, but these are convertible notes, right? Like you get the cash, you buy the Bitcoin, Bitcoin price goes up, stock price goes up, you convert the debt into equity,

and so it gets rid of that service. You go rinse and repeat. And it is like when you just put it in those simple terms, So you're getting cash in the form of debt. You take that cash, you buy Bitcoin. Your Bitcoin does well. Your stock does well. It floats up, converts to equity.

You dilute shareholders at a, or ideally at a price above where you bought the Bitcoin. So it is pretty simple financial engineering too, to a degree. And critically, he's termed it out so that he gives himself the room for a Bitcoin cycle to play out for more than that. I think all the notes that are outstanding now are at least, you know, when they were issued five years and 10 or if not longer, I think there's some that even go out like eight years. So, you know, it's not just like issuing the convert and, you know, it's due next year and hopefully Bitcoin rips in the interim. It's, you know, giving, you know, the company significant time to kind of let Bitcoin do what it has historically done.

And Grant, I, you know, I love to just bring it back to that point, the point that you made about ultimately, like what we're saying here is everyone in the next 10 years is going to be looking for Bitcoin exposure, but also leverage to Bitcoin in some way. And you can get that financially, you can do a micro strategy play. Some will do that, you know, better than others, or you can have operational exposure, operational leverage to Bitcoin. And that's, you know, what we have in the portfolio. And we see a ton of companies that we, you know, that we have in the portfolio that are showing that operating leverage today. And, you know, it's why we're, especially in this environment, just very, very excited to be doing what we're doing and, um, in the position we're

in. That was your Bitcoin alpha for the week. It seems like we're going to be giving out this alpha every week. So see you next week, maybe with a guest.