What Bitcoin Did - WILL MICROSTRATEGY BECOME THE BIGGEST COMPANY IN THE WORLD? w/ Jeff Walton

Episode Date: January 31, 2025

Jeff Walton is a financial analyst and a former reinsurance broker with a focus on MicroStrategy. In this episode, we discuss MicroStrategy’s Bitcoin playbook, the impact of FASB fair value accounting, and how MSTR are using convertible debt and equity issuances. We also get into the risks of leverage, the potential for MicroStrategy to become the most valuable company in the world, and whether corporations will follow its Bitcoin strategy. MASSIVE THANKS TO OUR SPONSORS: IREN: https://www.iren.com/ RIVER: https://river.com/wbd CASA: https://casa.io/ LEDGER: https://www.ledger.com/

Goal number one, like we're in chapter one of this thing. And chapter one is the gold rush. And we're going to be experiencing a gold rush until 2032 in which there will be, you know, 1% of the Bitcoin remaining for the next 100 years. So I think really for the next decade, it's get as much Bitcoin as humanly possible, put it on your balance sheet and try to conceptualize potential avenues to utilize the Bitcoin as collateral in the future. What that looks like, I don't think it's important. important right now. But the fact that the design and the infrastructure exists within the traditional finance framework is important. And the other thing I was going to ask you about before we started

was whether it's worth talk, like, because you work in reinsurance, right? For two more days. For two more days? Okay. So maybe cuffs are off and you can actually say what you think here then. Like, are these insurance policies in LA going to actually be able to pay out on all this stuff? Oh, man. That's going to be, that's going to be a whole. That's a big can of worms, man. It's just incredibly complicated. The political situation is really strange down there. All the insurance companies, the insurance industry is well capitalized. So the people that have claims, they'll get paid out.

The big question is, like, what if you have a $2 million policy and it costs $4 million to rebuild your home? The policy wouldn't cover the $4 million to rebuild the home. You're out an additional $2 million out the time. top because there's like this demand surge and you know all this their shit so the real question is like does the state step in and say okay insurance company you've got to pay the replace the actual cost of replacement for all this stuff and it gets super political the reinsurance market is is going to evaporate it's going to be gone um there might be a company or two that goes out of business

um on the on the insurance side and they won't like they'll be able to pay out claims but they'll go out of business because their business model doesn't work anymore. Right? Like, uh, they just, they can't charge enough up front in order to buy enough reinsurance to reduce the volatility and protect their capital. It's like, it's a whole, like, dude, it's a whole mess. I've been working in the space for the last decade and it's just fucking crazy. Yeah. I mean, it's wild. But so when this all, like once this is all settled, will people in California even be able to get insurance anymore? I mean, or LA specifically. L.A. I mean, it's going to be, there are going to be pockets where you can. There are going to be pockets where you can't. And I think it's really going to impact house values because everybody's going to be taking this stuff net. And like, is it worth having a $20 million home in Beverly Hills when you could go have a, you know, a $10 million home somewhere else that doesn't have fire risk?

Makes no sense. Doesn't make sense anymore. And like that that all comes into play with, you know, how people hold these. assets, like what, you know, are they holding it to store value? Are they holding it because they actually like have utility from it? Um, dude, it's going to, it's going to be so weird. The next three or four years in that market is going to be so weird. Does it, is there any like systemic risk in, like the insurance market could pose on other markets from this? I don't think so. It's not, it's big, but it's not, it's not that big. And it's going to take a long time to pay out. Where would like the systemic risk, I think, comes into play if there's a fucking earth.

earthquake on top of this or like next year is also bad, you know? Where that starts to put a lot of stress on the financial system is like all the shit happens at once. Like the market can sustain this, sustain this event. But if we had a $100 billion hurricane next year or like a big earthquake tomorrow, that market is upside down. So it's like it's pretty fragile right now. interesting i mean we could do a whole podcast on that probably but um welcome for the show on that jeff great to meet you thank you i appreciate it so we were just talking a little bit beforehand and i want to kind of start this by giving some context that i'm just like a humble bitcoiner i own no micro strategy i never have i've obviously followed what michael sailor's done pretty

closely so i know some of the details but i don't know like the intricacies of everything that's happening um so we're going to get into that today you're going to explain it all to me but i kind of I thought a good place to start. I've heard you on other podcasts. I've heard you talk about coming from GameStop to Bitcoin. And I think that's kind of an interesting path. So can you get into your background and how you found like Bitcoin and Microw Strategy? Yeah, absolutely. So a little bit of background about me. You know, I've studied business and economics in college. I've been really focused in looking at financial markets for quite a long time. You know, I've been working as a reinsurance broker for the past 11 years. So involved in financial markets, you know, watching how debt

moves, watching how interest rates impact the insurance markets and, you know, thinking about how the entire world, like, works together and trying to, you know, piece it all together in my brain. And, you know, I started investing heavily, getting interested in options and options volatility in 2020 during COVID when, you know, everybody's at home trying to figure out what to do. And I became interested in options. And then I started seeing what was happening in the in the GameStop GameStop world. I was following R slash Wall Street bets, watching people just yellow entire accounts onto just random stocks and really just trying to sit back and see, you know, what's happening.

And then one of my buddies at work was telling me like, hey, GameStop's gone up like four days in a row. It's gone from like $4 to $8 and it's gone up like 300%. And it was intriguing to me. I was like, what's the story here? What's going on here? and me being the, you know, younger version of myself and much dumber version of myself, I bought put options on a Friday because the price of the stock went up, you know, 50% in a day.

And I did a ton of research over the weekend. I was like, what is actually going on here? I realized I was totally screwed, right? Like, this is a short squeeze. There's so much energy that's being shoved at this thing. Like the amount of people that are talking about this is just grown exponentially. And so that Monday morning, I sold my puts for a profit to somebody that was stupider than me. And I liquidated my entire portfolio and I bought GameStop shares on that Monday.

And I rode GameStop, I think, from like, I know, $65 up to like $350. And then I just totally ruined a vacation with my wife. Like I couldn't think about anything else. I couldn't talk about anything else. I was on the phone talking with all my buddies that are also in this trade. And trying to figure out what's going on. And, you know, Robin Hood turns off the buy button. And that was a whole, like, that was a really big game theory moment in this entire trade,

you know, thinking about who's actually participating in this GameStop trade. Why are they doing it? What are they holding? And, you know, what's going on here? And, you know, over the weekend, I realized that, you know, retail is holding this stuff to make, you know, 10,000 percent returns and, you know, try to take down the entire hedge, like, the hedge funds that are shorting this thing. Meanwhile, there are other, you know, smart money that's kind of sitting on the sideline that has also, you know, just got four, five, six hundred percent

return and just made their entire company's returns for the next decade. And they don't need the 10,000 percent returns and they're going to dump on retail liquidity. So Monday morning, I watched the price of the stock move like 1 percent. And I liquidated my entire position and kind of moved moved on from there, just recognizing that there was manipulation that was going on behind the scenes, and I couldn't control it. And that, like, you know, as much as the diamond hand apes hate me for it, like, you can't control, you know, large-scale capital manipulation behind the scene, and you start to think about, like, what's the purpose of what you actually hold? Like, what are you holding? So at that point, I started figuring out, like, okay, well, that's 20-21,

and I'm trying to figure out where do I, where do I park my capital now? Like, what's next? And that's when the micro strategy story, like, slapped me in the face. You know, I'd been thinking about Bitcoin for quite a while. I had personally owned some Bitcoin. I had traded in 2017. Back in 2014, I heard about it for the first time in my econ thesis class. And now you've got a public corporation that's adopted their entire treasury into Bitcoin. That was really appealing to me. And And so that was when I started down the rabbit hole of, you know, this company is going to be the most valuable company ever. And this was when... And did you get that straight away?

It was like the first thing that came to my mind. It was like this, oh my God, it's limited. There's 21 million Bitcoin and they've got more Bitcoin than anybody else. And they're completely converting their corporate treasury to Bitcoin. And even if they grew it just a little bit, like that's going to be most valuable company in the world. and then I started creating a thesis like at that point the price of Bitcoin was coming down at the bare market was beginning for Bitcoin we started seeing you know FTCS collapse blockfi you know all that stuff started happening um and you know price of micro strategy was coming down I think I lost like

400 you know I think I bought it like 500 and it went back down to like a hundred and I'm sitting there just you know with this equity trying to rationalize it and put a framework around a strategy for like if I believe in Bitcoin and I believe in this bull market, bare market case, how can I leverage my portfolio to the hills to bet on this Bitcoin bull market happening again? And it became very apparent that betting long, betting call options, leap out of the money call options for 2025 expiration was the best leveraged way to get exposure to a Bitcoin long. Like, you know, if you only got so much capital, like you can only buy so much Bitcoin,

but here's another opportunity that's correlated, and I could take leverage on the correlated opportunity that I think is leveraged itself. So it's like leverage on top of leverage. And that was the framework I developed and then, you know, thinking about how to value the company and what it might be worth. So I can start to conceptualize one valuation framework and two, what are, what, what am I actually holding and do I feel comfortable holding it, knowing there's going to be a lot of noise around it and disagreement.

So that's kind of my background on how I kind of got into it. Yeah, so I think the like valuing these companies is interesting to me. So I've, the only public equity I've ever owned desire in who responds to the show. So I'm not like a finance bro. This is all like another world to me. Yeah. But like there's obviously different ways of valuing company, whether it's like P.

ratios or discount flashflow or like with micro strategy it's down to their net asset value right so how do you try and compare the value of a company where they're based off like the net asset value against something like apple which is not i think i think that really is a great question is what is valuation like how do you value how do you value any company how do you compare companies yeah exactly like that's like that's that's that's your exact question how do you compare equities and you you look at all of the data, right? Like you start to just, just looking at the top 10 publicly traded equities,

right? You've got Apple, Nvidia, Tesla, Microsoft, and you start to compare them. You look at their financials. And you start to think like, okay, well, if these are all tech companies, and they all are leveraging data and they've all got revenue,

they should be using the same framework for valuation. But then you start to realize very quickly that they're not, right? Like their P.E. ratios are all different. and they're vastly different. Their net asset values of their corporations are also vastly different. How they leverage the financial structure of their corporation is also vastly different. Like some are very leveraged on debt.

Some are not leveraged on debt. You know, some are focused on stock buybacks. You know, they're all financially structured different and utilizing different tools to power their equity. Can I ask a dumb question there just before we move on for that? Why? Why are they all done so differently? That's a great question.

I think the only true way to compare one of the top publicly traded equities is market cap. And so to me, what it comes down to for some of the particularly the largest companies, right? Like top 20 companies. what it comes down to is, is Nvidia worth more than Apple? Is artificial intelligence worth more than, you know, digital communication, like cell phones, like iPhones. Because, you know, once you get to this like three and a half trillion dollar framework, everything, everything's out the window.

Like, you're talking about trading at 30 times the earnings multiple. Like, how forward looking is the market? Is the market 10, 15 years forward looking? Nobody knows what's happening in 10. 10 to 15 years. And then you start to question like, what's the point? What's the point of holding an equity? What's the point of holding equity, any equity? And who holds the equity and why do they hold it? And then you start to think about the systemic design and the infrastructure of the equity market. Who's investing? Who's buying these equities? And you think about anybody that's

trying to beat the cost of capital, right? You've got like pension funds, banks, insurance companies, family offices, you know, like all of these other buyers, they're buying these equities and they're taking advantage of the design of the equity market. And I mentioned that because I think there's some crazy statistic. I want to say like 50% of the market volume is passive. It might even be more. It might be like 60 or 70%. So that's just like index funds in retirement accounts and stuff like that.

Index funds and retirement accounts, people buying the S&P 500, you know, QQQ, you know, what, you name it. And the reason that's pretty interesting is because the way that those funds are designed is once a company goes into the top, it gets even more powerful. And it's not even, it's not linear, it's exponential. Just because there's a bigger allocation to those bigger companies. Yeah, exactly. Exactly. And so if you know, if you know that these passive funds exist, you try to front run them. Right. Like if you know that there's stupid capital and you know exactly what's going to do every month, every week, every quarter, you try to beat them. And so if you understand like the design and the architecture of the market, you can front run them.

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So getting back to valuing these companies. So how did you sort of build a framework to try to value micro strategy back then? Well, it kind of came down to do I think, like in its base model, like do I think micro-strategy, are companies, holding more Bitcoin than any other company, do I think that company is worth more than J.P. Morgan or Eli Lilly? Or, you know, I started going down the list of the top 20 publicly traded equities. And I looked at how much Bitcoin they held and it's zero, you know, down the list. And you start to think about financial strength. Like, what can Bitcoin be in the future

and micro strategy? If they hold more of the best asset on the planet than anybody else, they're going to be financially more powerful than any of these other companies unless they catch them. Unless any of these other companies start to adopt this and catch them, micro strategy is going to be more financially powerful than any of these other companies. So that was kind of the base framework. And then I looked at this net asset value concept. And I started to put some sort of like mania framework around it. Right.

like how does the net asset value compare for Microsoft or Tesla and tried to compare it to the GameStop trade? So GameStop, when it reached peak mania, which was a short squeeze and everybody's going to say all this stuff about it. But when it reached peak market cap valuation, it was like something like $20 billion, $25 billion, something like that. The GameStop, which is a lot. trading at 49 times its net assets that it held. So anybody that was looking at this game stop

trade, you could say, like, it's totally overvalued, right? Like, this company is dying. They're selling video games, and they own this real estate that's crumbling. And they're behind on rent on all of these mall locations, you know, like whatever it is. But that was just an example of the market's irrationality. The market can be in incredibly irrational, but it may be rational to other people. Like the retail crowd thought it was rational. And so that disagreement is really kind of what pushed this net asset value into peaks, right, like into significant peaks. So understanding that, I thought there's a possibility that micro strategy couldn't experience a mania. And I don't think we've experienced it yet. And I don't

think we're even close. Because largely most of the market doesn't, doesn't get this or understand that it exists. And I think probably the other thing the market doesn't understand is, well, they'll understand that not all assets are the same, but the difference between having like retail stores and video games compared to owning Bitcoin. Absolutely. And everybody, everybody's trying to figure it out right now at the same time. And so a lot of the narrative has been really focused on this net asset value, which has been really interesting, right? Because micro strategy is trading at a premium to the assets that it's that it holds so the traditional bitcoiner framework is why would I buy micro strategy when I could just buy bitcoin and hold and hold

bitcoin because there's this premium associated with it and my response to that is they're just fundamentally different products right like you have an a company equity and then you have bitcoin and they're just they're fundamentally different products so you kind of have to put a different lens and thinking about them differently for, you know, different types of capital. Is this where you have to look at like, um, sats per share rather than big, total Bitcoin owned? I, I think that framework is helpful. It's like to, to look at stats per share. But a lot of the, I think this narrative conversation is going to change and shift as we get into 2025 and, uh, FASB fair value accounting is adopted. So FASB fair value

accounting, basically all of the Bitcoin that Micro Strategy is held on their balance sheet for the last four or five years, the accounting rules have been dated. They're old, right? They're out of date. So anytime the price of Bitcoin goes below, it goes down during the quarter, micro strategy has to mark the Bitcoin as a loss down to the lowest price of Bitcoin during that quarter. So that's been happening for the last four years. Now, all of that changes in May of 2025 when they can mark the Bitcoin to market at the end of the quarter and any gain on the Bitcoin held during that quarter flows through to net income and to earnings on the balance sheet.

So they'll go from having negative earnings for the past four years in a row to, you know, if the price of Bitcoin is above 94,000 in Q1, at the end of Q1, they'll have positive earnings. and it'll fundamentally change the optics of the earnings of micro strategy as a company. And that would then qualify them for more index funds like the S&P 500, having positive earnings. And I think it will impact the optics of how the rest of the market may view it. Micro Strategy may come into view of, you know, 10% more of the market for the first time, in May when they do adopt this fair value accounting treatment. And I think that's really the gun going off at the starting block for these corporations

to adopt FASB fair value accounting and to begin to look at adding Bitcoin to their balance sheet because of this, it's an event. Yeah, so let's get into those because there's obviously different ways that micro strategy have done like debt and equity issuance. Can you kind of go through, explain them all, and I'm going to have questions on probably all of them? Yeah. So maybe we start with just the ATM the equity issuance. We'll start with a simple. We'll start with a simple one. Let's do it. So yeah, the at the market equity issuance is because micro strategy is trading at a premium to its net asset value, right? It's worth the market cap of the company is worth more than the Bitcoin held on balance sheet. So micro strategy has the ability to sell shares at the market and deliver. its shareholders, technically, right? Like from a traditional financial perspective,

you'd be diluting shareholders. If you sold more, if you put more shares out into the market, you'd be diluting shareholders. When they sell that equity, they're raising capital. And every time they sell that equity and raise capital, they're buying Bitcoin. Now, because the company is trading at a premium to its net asset value, every time that they buy Bitcoin,

you're a Bitcoin per share. The amount of Bitcoin per share is actually increasing over time. It's effectively capturing this spread, as Preston Pish would say, is capturing the spread of this premium to net asset value. And so that's one component of the financial instruments that they're using. And what happens when they buy this Bitcoin and they put it on their balance sheet, that's permanent capital, right? That's permanent capital that's never moving.

It's never going to be sold. It's the best collateral on the planet. And that capital is sitting there forever. And so when you have a company that has debt on their balance sheet, so let's say micro strategy has $7 billion of debt on their balance sheet, when they use the ATM to buy more Bitcoin, that increases the number of assets that they have on the balance sheet. So that actually reduces the overall leverage ratio that they have. It actually makes the company healthier and stronger because it's reducing their leverage.

So we see this tool, this ATM tool being used to effectively de-lever the balance sheet and make it a safer equity. Now, so you could think of ATM as de-leveraging. Now, the convertible debt, this new, just one question on the ATM before we move on to. So what's the limit on how much, how many shares they can issue? Yeah, that's a great question. So they do have this ability to do shelf registration. So I think they can register to issue the shares relatively quickly because they've got like a trading relationship and all the infrastructure has put in place. However, as of October 30th, they came out

with this $42 billion capital plan, $21 billion of ATM and $21 billion of convertible debt. And so they're roughly, I don't know, about 80% of the way through the ATM issuance, maybe 85% of the way through the ATM issuance. There's only about four and a half billion of the ATM left of the 21 billion initially filed for. So it will be interesting to see if they finalize and finish the $42 billion capital plan before they sign up for another ATM equity issuance to be able to run this into perpetuity. Okay. Good question.

Why would they not just issue all the shares possible instantly? Why do you want to do them sort of in tandem with the convertible nose? Yeah, so that's another great question. And I think we'll shift over to the convertible debt now. So the convertible debt is a very interesting instrument. So convertible debt, you can think of it as like a hybrid debt instrument. It acts like debt to the downside and equity to the upside. So it minimizes the convertible debt when a buyer is purchasing the convertible,

debt, they are almost agnostic to the equity. They want to get exposure to Bitcoin, but they don't want the volatility. Like they want to minimize their downside. So by having this debt structure to the downside and equity structure to the upside, they're able to effectively build a product that is a reduced volatility relative to Bitcoin or the micro strategy equity. Now, where this is really valuable is this is the introduction of this debt effectively leverages, it leverages up the balance sheet, right? It increases the leverage on the balance sheet, which then creates more volatility in the potential valuation of the company. And we've seen this, we've seen this over the last six months, right? The narrative has gone from

You know, it just kind of goes back and forth. Like, this company's overvalued. They're leveraged to the tits. And when you actually zoom out and look at the leverage ratios, they're not very leveraged at all. But it introduces volatility into pricing and valuing the equity because there's people that disagree on both sides. Additionally, a lot of the convertible debt holders,

they're ARB buyers. So they're banking on the volatility of the stock, and they're selling the stock short when they first get the debt issued, and they're trying to effectively trade the volatility of the stock to R about the premium. So they're really not buying it to hold the equity. They're buying it for that directional exposure to R about the premium, and they're buying it for the volatility of the stock. So is that the reason that they can issue these bonds at 0% because there's like the potential

on the volatility side to make your money there? Yeah. So you can think about how they price the bonds in multiple different ways. So there's multiple components of the bond, right? You've got the coupon payment, 0%, as you mentioned. And you have this conversion price. So it's 55% out of the money is where it converts into equity. Now, both of those pieces can move in tandem, right?

So if you wanted a coupon payment, that conversion price may increase and vice versa. So like those two pieces are pricing mechanics of the convertible debt. So, yeah, I don't think it really matters that much. Like the buyers aren't, they aren't buying it for the coupon payment. They're buying it for the volatility to be able to ar about. are about the stock. Yeah, that makes sense. Okay.

And what, which companies are buying these? Is it like, is it people like Jane Street who are like high frequency traders or is it like insurance companies? Uh, there, there was some news.

There was some news about Allions being an insurance company purchasing the convertible debt, but that was a, that was a very small portion of one of the, one of the tranches of convertible debt. It's, I don't, it's not insurance companies,

right? Okay. I think it's mostly, um, Arb traders, there are some potential family offices that are buying it to get this potential exposure. It could be pension funds. I think it's various different groups of people, but I think for the most part, it's these convertible arb traders that are looking to arb out the premium because of the volatility of the equity.

But I think that market is going to evolve drastically over time because the debt itself is unrated it's unrated debt. Can you explain what that actually means? So there's no entity that comes in and says, you know, micro strategy is high quality credit rating. You know,

they have X, Y, Z. You have to go through a whole process to get bonds rated, like triple B or, you know, double A, whatever it may be. So there's limited pools of capital that are willing and able to purchase

you know, unrated debt and put unrated debt on their balance sheet. It's like, yeah, unrated like Bitcoin backed. Unrated Bitcoin back equity, right? Like any, most insurance companies, like if you had an insurance company and investment manager go to their boss and say, hey, I'm going to buy this unrated Bitcoin back bond, they're going to be like, you're out of your fucking mind. Yeah. You know, like, no, you're not.

So I think that that landscape will evolve over time. I don't think it happens in the short term, but if you're thinking about where this goes three, four years from now, like that we can certainly see these bonds become rated as we see other entities buying these bonds, as we see ETS continue to evolve with these bond portfolios, and the market continues to feel comfortable with the marketplace. So let me try and understand this then. So they're increasing their leverage by issuing these bonds, which increases volatility in the stock, which the company is buying the bonds want. Is that part correct?

Yeah. Okay. And so then what's the risk that that is putting on micro strategy? So one final piece that ties the ATM and the convertible debt together. The convertible debt by creating this structured product, right, by creating the structure product that reduces the downside and reduces the, upside. The equity holders get that excess. So the equity holders are the ones that are taking on the downside risk, but they're also compensated for the upside risk. Does that make sense? Compensates it because that Bitcoin per share is increasing. Because their Bitcoin share per share is increasing.

Yeah. So the bond buyers, when they're buying the bond, they'd be much better off just buying Bitcoin, but they can't, nor do they want to, right? They don't have a mandate to. Yeah, it's out of that scope. So, yeah, so it's out of their scope. And, and, like, let's just say you needed to buy $2 billion of debt, and you can minimize your downside to the principal, right? Like, if you have to buy $2 billion of debt and you minimize your downside to the principal, and you have this massive upside, that's a great deal. But if you buy $2 billion, $2 billion, billion dollars of Bitcoin, your downsides 100%. So the bond buyers are paying the equity holders significant sums of money to take on the downside risk and to, you know, take the upside risk

or the upside gain. That makes sense. Okay. So in terms of getting back to microstretching increasing their leverage, what risk does that put on the company? There's a couple, I think there's an important distinguishing factor with the convertible debt. The debt that has been issued is unsecured. So that means that it has no claim on the Bitcoin relative to the debt. So right now, Microstrategy has a leverage ratio of about 13%. So that means in order for the assets, so today, right now Bitcoin's trading at 103,000, for the assets, for Micro Strategies assets to be worth less than the debt, the price of Bitcoin needs to go down to like $13,000 and stay there for like an extended period of time. But even in that moment, even if the price

of Bitcoin did fall to $13,000 in that moment, the bondholders don't have any ability to call the Bitcoin. There's no margin call here. It's not structured like that. So the bondholders would be holding this bond into expiration, right? They just are holding it until the bond expires, and the bond can, you know, expire and pay par and not turn into equity, in which case, micro strategy may, in a down scenario, they may have to potentially sell some Bitcoin to pay the principle of the bond.

More realistically, they refinance the debt. They sign up additional debt. at different terms to repay the prior debt. In which case, if you're holding significant Bitcoin on your balance sheet that's got good collateral value, it should be pretty good. This episode is brought to you by CASA. For those of you out there who want to protect your Bitcoin,

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So weirdly, like last bear market, price I think went down further than a lot of people expected it to. It was obviously the first time it went under previous all-time highs. And there was a lot of speculation about whether micro-strategy was going to be able to survive it. And weirdly, it seemed like people were almost cheerleading them getting margin called. Yeah. I think part of that is just like a Bitcoin thing where the first bear market is always going to be the hardest. And I imagine they're not going to get into a situation like that again.

But what do you think next bar bear market micro-strategy's, kind of playbook will be. Will they be able to continue to issue these bonds or do they have to do something completely new? Yeah. So they have they have ultimate flexibility at the moment. And the fact that their their balance sheet is way less leverage than it used to be. You know, like back in the the bear market was 100%. I think starting 2024, their leverage ratio was 30%. So, you know, the liability is made up 30% of the value of the assets. Now, if you forecast a situation where micro-strategy is in strength in a bare market, they could be incredibly powerful, right?

Like, if there's any premium at all relative to the net asset value, which I think, based on market pressures, I think this premium is going to exist into perpetuity. I think the times of micro strategy be even valued at less than one times net asset value are far behind us. There's opportunity to capture the spread, sell shares at the market opportunistically to continue to buy Bitcoin, which is going to effectively push the price of Bitcoin higher or provide this kind of stop, stop loss on Bitcoin as they are continuing to buy into perpetuity. And that's interesting. And that's also constantly de-leveraging them. It would de-leverage their balance sheet by utilizing an ATM in a potential bear market

if there's any premium to net asset value, which should improve the valuation and their financial strength and their ability to run those additional flexible financial options moving forward into the future. And we've hit on the ATM in the convertible debt, but we're going to find out about this preferred stock equity issuance to more. which is kind of this product that fits in between convertible debt and the equity. It's like an in-between. Okay, so that's the one I know least about.

So will you explain what that is? Yeah. I'll try to do my best. And we're going to unpack this tonight on our True North call. But so the preferred stock is effectively a less volatile version of the common equity. There are some benefits of holding preferred stock, but there are some cons to holding preferred stock. So preferred stock is preferred to common. So that means if there's any potential bankruptcy proceedings, preferred stock would get

access to the assets before common stock holders would. Okay, so that's one benefit of holding preferred stock. One con of holding preferred stock is you don't get any voting rights. So there's no voting rights. And then one additional benefit of the preferred stock is you get this interest payment that's paid to you. This interest payment that's paid to you is it's pegged it. 8% interest, but it's pegged at 8% interest relative to the effective IPO price, which is $100 per share.

So if the price of the preferred stock goes up, that yield technically goes down because it's just a fixed number, not a percentage. So you effectively, when you're buying preferred stock, you effectively get an infinite call option on the company and you get paid to hold it in the meantime if the price doesn't go up. If the price goes down, you still get paid income, but it's less volatile. It'll be less volatile than the common stock and should be more volatile than the convertible debt. Okay. So what do you think the makeup of the people buying that will be? Will it be quite significantly different? I think it's ETFs. There are ETFs that exist in the market that are literally all they do is they buy preferred equity of companies, Boeing, you know, GM, Microsoft,

like all of these companies that issue preferred stock. It's just another capital pool that has another mandate for risk return metrics, right? And if you think about preferred stock on some of these other companies like Boeing or Microsoft or they have a risk of bankruptcy. And if you want to be, you know, if you want to get assets before any of the equity holders, you buy preferred stock. It's reduced risk. It's less risky than holding common stock of any of any company. So do you see this as like quite a bullish catalyst for micro strategy price? Yes. Yes. Because because the because the preferred stock is way less dilute, like technically dilutive than the convertible debt. And additionally, I don't think you have the ARB buyers that you do with the convertible debt market.

So I don't think you have the people that are shorting the stock right away when, you know, the convertible debt buyers, when they get the convertible debt, they short the stock right away because they're effectively locking in their exposure. They're like hedging out their exposure. Whereas the preferred buyers, I think, are just a different pool of buyer that isn't, they aren't arbing the trade, really. Yeah, that makes sense. Okay, so let's get into the premium. So right now I just had a look. It's at like 2X, roughly. Yeah.

I was speaking to Lynn Olden the other day, and she was saying that sort of around, say, 3X, then that's where she would start thinking about, at least in her, like, public portfolio of, like, trimming. Do you think a lot of people are thinking that way, or how high do you think that premium can go? I think it could go much higher than people. are planning for. The beauty of it is everybody can do what they want. Right? Like if you want to trim it three, trim it at three.

Great. But you know what? There are people that are going to hold this for a decade. And they're not trimming at three. Right. So there's, I think it kind of comes down to what's your, what's your horizon on the trade? And like thinking about your personal stack of Bitcoin. Like if you're going to trim, what are you trimming for?

Where is it going to go? Like if you're doing it to add more, if you're trimming to add more to your Bitcoin stack, great. Like if you're trimming to, you know, improve your life. Great. Like that's fine. Just know you might be wrong. Right?

Like that's the market is, I think, can stay irrational for a long time. And when when we start to see, I think, think the narrative is going to flip from nav to PE and you're going to start to see some corporations being compared on an earnings basis because it begs the question, are all earnings created equal? Right. Like are the earnings of all these companies created equal? And if Bitcoin is, if Bitcoin gain is earnings and the market starts to recognize Bitcoin gain is earnings, then you start to put it up with, you know, the top 10 publicly traded equities and it can go there pretty quick. Yeah. It's like there's almost like two

sides to it. Are all earnings created equal and are all assets created equal? It almost needs like a net Bitcoin value. Yeah. I mean, and that also makes sense. Yeah, you think about this the same way I think about Bitcoin. It's like, sell it, cool, but for what? Like, what are you going to do with that money? If you're going to go and, like, improve your life by a house, all power to you, but like, you're not just going to go and put that in cash. So give me some moon math, Jeff. Like, how high do you truly think this premium can go? Yeah. Just to put it in a perspective, Micro Strategy back in 2020 when they first started their

journey into this Bitcoin Treasury strategy they were trading at a six times net asset value multiple so right now we're at two I think that they were largely trading at a six times net asset value because they were included in the S&P 600 So the S&P 600 was a they were, it's one of the small, it's like the S&P 500 light, right?

It's like for the same metrics for the S&P 500. It's just for small market cap companies between a billion and $5 billion market cap. So I want to say the S&P 600 held like 5 or 6% of the equity at that point. So they, we saw this, the nav dropped drastically when they got. excluded from the S&P 600 when they fell out because of negative earnings, because of this FASB fair value accounting standard. So, you know, thinking about the horizon in the future, I mean, this argument of NAV is going to be around forever, right? Like, we're never going to get around this. Like, it's going to be here. But if they start to get included in the S&P 500,

I think everybody's models are broken. Because if you look at some of the top publicly traded equities, like Apple, Amazon, the S&P 500 owns 6% of the company. And if you have now a passive investor that's looking to buy micro strategy at any price and potentially accumulate up to 6% of the company, where are those shares going to come from? And there's multiple things there, right? Like, there's likely going to be ATM issuance to capture that new capital that's coming in.

But you start to think long term about if this. if nothing stops is trained, right? Like, what's the market cap value of micro strategy go to? And in my mind, micro strategy is effectively the road and the vehicle by which the entire world transitions into a Bitcoinized future is like micro strategy is how the world gets there. It's what transitions the market into this Bitcoin future. And it's just eating itself, like it's eating the traditional financial world from the inside

out. Okay, I definitely want to get into that because that's interesting, but just quickly on the index funds. They were obviously added to the QQQQ late last year. Did you see anything happen with that? Was that a big catalyst for anything? I've said this before on Twitter. Everybody's front running everybody all the time. Right? Everybody's front running everybody all the time. Like everybody's just trying to beat everybody and get in front of everybody. And the problem is we got algorithms that are trading and that are faster than everybody else and, you know, reading sentiment and all this shit. So I do think that QQQQ had a significant impact on the price of the stock. It just happened before everybody was front running it. It was priced in.

It was I wouldn't say priced in. It was it was front ran basically. And so we did see a big pop in the price of the stock when it ran up to 540 on like November 20th or something, which was, I don't know, 15 days before they were actually added to QQQ. So how I think this happens, and I could be wrong here, this is a little bit of speculation, is that, you know, these large asset managers, when they need to buy the equities for the index funds, they buy them early. I'm pretty sure that they buy them early in their actively managed index funds and then they sell them in dark pools to their passively managed index funds.

So I think they capture, they outperform the rest of the market in their actively managed index funds where they get paid higher fees by front running themselves and selling those equities behind the scenes in dark pools to their passively managed index funds. funds. Huh. Interesting. So that's some speculation, but it makes sense to me. I mean, it's logical. Like, there's, the incentives are aligned to do that, especially if you know how all the stuff is designed. And if you, if you're, if you got a seat at the table or you know the people that make the decisions, you have every incentive to do that. Or if you're, if you're closer to it, right? I could definitely believe that. And then compared to like the QQQ, what kind of scale is if they get out of

the S&P 500. Yeah, it's like five times of scale, like maybe six times of scale. And what sort of percentage likelihood do you think that they get included in that? Is this accounting rule changed? The only thing left, really? The accounting change is the only thing left. I've been posting on this for 230 days, maybe more. They cross the market cap threshold. The market cap threshold is $14 billion. So they've crossed the market cap threshold. And they're at 20 or something now. 90. Oh, okay. Yeah, they're at 90. So they've like well exceeded the threshold, right? It's like way higher. And the last piece is positive earnings. Over the last four quarter, positive earnings of the last four quarters sum together. And so this accounting change, the price of Bitcoin only needs to move

like three or four thousand dollars in Q1 in order to erase like the past four quarters of negative earnings. So it's like minimal. And this will be the most controversial. and talked about thing in all of 2025, I think. Tell me why. Because everybody is going to have an opinion. Everybody and their mother is going to have an opinion. It's going to be super controversial, right? So we might see micro strategy trading at $100 billion or $200 billion,

and people are going to speculate whether or not they get into the S&P 500. Now, the S&P 500 has this committee component. So the committee has to approve adding any equity. And so there's this question on, you know, will the committee approve micro strategy getting out of the S&P 500 or not? And that's going to be super controversial, right? Like there are going to be so, there's going to be money and power moving in all directions behind the scenes and everybody's going to have an opinion.

And so, yeah, it will be one of the most talked about things in 2025, I think. This is like microstrategies version of like. the SEC ETS for Bitcoin. Oh, 100%. It might even be bigger. And the same thing happened with Tesla in 2020. They, it was really controversial, them getting added to the S&P 500 because they were the largest company ever to get added to the S&P 500.

Most companies, when they get added to the S&P 500, they're small, right? So like they're $14 or $15 billion and they've got positive earnings. They've been trending well. and they get added in. Well, there's, you can utilize some tricky accounting rules to, you know, invest money in R&D and make it look like you haven't made a profit until you're like ready to show that you want to make a profit and then get added to the SMP 500. So there's like a little bit of gamesmanship there.

And Tesla was added at a $300 billion market cap. They qualified at a $300 billion market cap. And then the market cap flew up to 700 billion. And then they were included and then they flew up to like 1.2 billion. It was front run and it was front run early because once they had positive earnings, once they started showing positive earnings for a couple quarters in a row, the market front ran Tesla because they knew that there was a high likelihood that they're going to get out of the S&P. So you could go back and look at the market cap data and see how it moved.

Interesting. I want to jump back in the conversation a little bit. Sorry for throwing this around. But earlier, you said that while it's like a highly unlikely scenario, there is a chance that at some point that microchiatry may have to sell some Bitcoin. Now, I remember seeing a tweet from, I think it was from Santiago Capital saying, why get into a trade you can never get out of? And I think what he was basically saying is the second that microstructly sell any Bitcoin,

the faith in the fact that they are not going to sell Bitcoin is obviously gone, So then it trades like an ETF and it falls back to its net asset value. I'm just curious what your kind of response to that would be. Yeah. So I see the world a bit differently because of my background in finance. And I see all of the Bitcoin that micro strategy is holding on their balance sheet is collateral. Right. I see it as collateral at the moment.

And I think that the entire world is getting redesigned. Like the entire world has been shaken out and is redesigning from the ground up on a Bitcoin standard. And I think that technology is evolving and the economy is creating new designs and new ideas using Bitcoin as collateral for a fundamentally new different economy. And we're trending in that direction. So we think about the future of where micro strategy can go and how this plays out. I think it's highly unlikely that they'll sell Bitcoin because they have access to all these different capital pools to raise capital in the event that they needed to, whether that be, you know, structure. debt, even debt that pays a coupon bond, accessing the ATM, and effectively refinancing the debt before you got into a situation where you would need to sell any Bitcoin in order to pay any debt into the future. So I think it's critically important that micro strategy is managing these leverage ratios and keeping an eye on how levered they are such that they could withstand a 40, 50% market

drawdown for an extended period of time and there's no additional development of the entire Bitcoin ecosystem. So I think it all kind of has this fundamental reliance on the Bitcoin ecosystem continuing to grow. So like if that doesn't happen, then the equation changes. Totally. And I think like you say, I think it's like beyond highly unlikely. I'm pretty sure Saylor said he wants to go to the grave with his Bitcoin.

So I don't think he intends to sell anything. But a question that I would have is, what is micro strategy now? Because the underlying sort of software company is pretty much irrelevant, isn't it? So is this now just a Bitcoin holding company? That's a good question. I think they have a lot of flexibility for their financial future and designing exactly what that looks like. I think they're an asset manager, right? They are a software company and an asset manager because you have this collaboration.

and eventually you can do stuff with it. Exactly what they do, I mean, we'll figure that out eight years from now, right? Like that goal number one, like we're in chapter one of this thing, of this, you know, 40 page book. We're literally in chapter one. And chapter one is the gold rush. And we're going to be experiencing a gold rush until 2032, in which there will be, you know, 1% of the Bitcoin remaining for the next 100 years to be mined over the next 100 years. So I think really for the next decade, it's get as much Bitcoin as humanly possible, put it on your balance sheet, and try to conceptualize potential avenues to utilize the Bitcoin as collateral in the future. What that looks like, I don't think it's important right now. But the fact that the design and the infrastructure exists within the traditional finance framework is important. And people are actively working on those.

those products and those different ways for Bitcoin to infiltrate the market. Eventually, I think we will see, you know, four to eight years from now, really good opportunities for use of this collateral, even with a hybrid fiat Bitcoin world. For example, just throwing an example out there, let's just say J.P. Morgan holds a ton of cash for a company. Let's just use a company like Meta. Let's just say they hold all of Meta's cash dollars.

And then they all, or let's use Tesla. They hold all of Tesla's cash dollars. And then they also hold Tesla's Bitcoin. They custody it now because of Sab 122, which is just repealed. Now Tesla, previously they're only able to get a line of credit on the cash that they held. So they're only able to get a loan relative to the cash that they held. Now, if the bank allows them to get a line of credit on the cash that they held plus, their Bitcoin, their ability to lend and build a future business increased drastically. And they

don't have to do anything, right? Like, it's just the bank now holds the, now holds the Bitcoin and provides them more lending opportunities and collateral usage opportunities. I think we're to see that grow. Yeah, I think I'm sure you're right on that one. Is that almost them turning into just a Bitcoin bank? I think a Bitcoin bank is probably an inevitable future. Yeah, offering these types of lending products or insurance companies. I mean, they have so much Bitcoin. It's going to be funny to see like 10 years from now the stuff that they do with it. They're going to be able to allocate 2% of their Bitcoin and go create the largest

insurance company that's ever existed. It's like, okay, well, that's 2%. What do we do with the other 98? And I think that's where the story's going to go, you know, depending, no way. Black Swan, but I think it's going to trend that way. It's like towards a, towards a financialized future. It's pretty wild to think about really, isn't it? Like if sailors got this right and it seems like he has, he's going to be more wealthy, or like micro-stratory are going to be more wealthy than most nation-states. Yeah, it's like when you look at the most wealthiest countries and you see like,

you know, US and China and Germany and then it's like California. And it's going to be like, and then there's going to be micro-strategy. You know, they're going to be up there with the most wealthy countries and states. Yeah, I think so. Wild world. Okay, to close out, you throw around some pretty crazy valuations that you think about Microstrategy who gets you in the future. Give me like your base case and your moon math case of what you think micro strategy will do over the next, say, 10 years. 10 years.

Then I'll start with the next 10 years because I think it becomes the most valuable company in the entire stock market. The question is, once it becomes the most valuable company, it's going to be compared against all of the other companies. So let's just say, like, a micro strategy in the future. Let's just say Nvidia is at, let's say Nvidia and Tesla are at $10 trillion. And let's say micro strategy goes to $10 trillion. Then the question becomes, like the market will say, is micro strategy worth more than Tesla? are they worth more like a trillion dollars more? And that's where a lot of this like narrative building and narrative creation is going to come

into play. And I think there's going to be a lot of just continued disagreement. What I can promise you is that there's going to be continued volatility in both directions. And I think primarily because of Bitcoin and just the financial structure and the design of the equity itself. I think we're going to see it once it gets up to a trillion, it'll go from a trillion to three trillion and then back down to 750 billion and then up to five trillion and then back down to you know, 1.2 trillion. I think it's going to be a very volatile asset in perpetuity to the likes

that we've never seen before. Like many people when they buy Apple, they think of it as a savings account and they're buying it because it's like pretty stable and, you know, it's just, it's going to do what it's going to do. And people are going to be buying micro strategy for different reasons and different speculations. So, I mean, long term, I think it goes to the number one spot and I think it holds the number one spot in perpetuity, unless any company gets even remotely close to catching them, just because it is financial power, right? Like, what is money? Like, money is power. Why does the U.S. hold more gold than any other countries? Like, because of power. Wars were fought because of the gold and that's why we hold it. So I think they're going to be the most

powerful equity in the market. Now in this like shorter term, it's really hard to say, but I know it's going to be volatile. And I think we're going to see Wix that go up and bring micro strategy potentially in a mania scenario up to a trillion or even potentially higher in 25 or 26. Again, depending on macro environment and, you know, all these other things that come into play. But yeah, I think somewhere somewhere in a trillion dollars. But then you think about like what is the price?

of the stock at a trillion dollars and it's hard to tell because you don't know how many shares are issued at the market and you know convertible debt and all these other things but it's easier for me to think in in the market cap market cap sense that makes sense you said there like assuming no other company can manage to get as much as much bitcoin as micro strategy there's very few companies that could even do that now i guess like apple would be one because a sat on bucket loads of cash there's like there's like five yeah and and realistically they're not not going to turn around tomorrow and start doing this. No.

But in sort of 2020, 2020, 2021, it was kind of the narrative that once Saylor had started this kind of like playbook that he's been on, there'd be a ton of companies like racing to compete and that's not happened at all. Like a few companies have bought small and like insurance companies are bought in small amounts of Bitcoin, but no one's done the micro strategy playbook apart from obviously now Metaplanet, but on a way smaller scale. Yeah. Do you think this year that will change?

Absolutely. Absolutely. I think we see 20 plus companies. And maybe it's not, I don't think they're going to adopt the full Bitcoin treasury strategy like micro strategy is done. I don't think there's another company that's really going to do it like them unless they're really small, kind of like Metaplanet or a billion dollar company. And they're going to do it because they have to do it or else they die. What I think is more likely is we see 20 plus companies add Bitcoin to their balance. sheet, 5%, 10%, 2%, 1%, and they do it as a hedge, right? It's an inflation hedge. And I mean, we just had the Fed meeting today. Jerome Powell came out. He's a little bit hawkish on inflation. And I think there's a high likelihood that we do see more inflation into the future in 25 and 26, more likely 27.

And if there's fear in the markets at any point, the fear is going to look forward. store of value, which is a, which is kind of a hard concept to think about when you see, when you watch these Fed meetings, because in either way, either direction the Fed potentially goes, you think it's bullish for Bitcoin, right? Like if interest rates come down, you think it's bullish risk assets, which Bitcoin is kind of a risk asset. And then if it's, the Fed is hawkish and thinks inflation's here, well, that's, that's bullish store of value, which Bitcoin is also a store of value. So it's like, okay, either way this goes, like, nothing stops this train. Like, it's going to keep... Everything's good for Bitcoin. Everything's good for Bitcoin. It's like hard,

hard to, you know, comprehend. But either, either way it goes, I think the technology is going to continue to evolve. And we're seeing it now, right? We've got, I saw your sticker on your water ball. You've got an anchor watch sticker on there. And like, we're going to see more companies that are building on Bitcoin and building on capital. You know, there's a lot of noise with these shitcoins and alt coins around there, but shitcoins and altcoins aren't going to be held as capital on balance sheets. Like, Bitcoin is the institutional grade capital, and Bitcoin will be held on balance sheets by large systemic institutions.

It's going to be held by banks. It's going to be held by, you know, custody companies. It's going to be insured. And that's going to evolve. And it's happening right now. I'm excited about it. Yeah, it's one of those things that I'm both bullish and bearish on in of companies copying the micro strategy playbook because I think initially it's going to be

a huge catalyst for Bitcoin. But I do think it's also going to mark the top when when companies that can't sustain like micro strategy start trying to do the micro strategy playbook and price draws down. I think there's going to be a lot of people that either get like liquidated or just pay behind the trade. I don't think people are quite as tough as Saylor in that regard. Yeah. I think that's where this trade is really interesting, honestly, because in that scenario, right, like if there's a potential drawdown, you have other companies that are going to be seeing it as an opportunity, right? So especially if they believe in it.

I like micro strategy and any of the other, you know, 60 companies that already hold Bitcoin. They may be seeing that as an opportunity. Again, kind of depends on political environment. It kind of depends on, you know, like if we see a strategic Bitcoin reserve, if that's a thing, if other countries start buying it and they start marketing it and saying that they're buying it, the game theory becomes really interesting in those scenarios. And if they're not doing it on leverage, right? Like if insurance companies add 1% of their... Yeah, that's different. If you're not doing it on leverage, then it's like, okay, well, now I can see this as an opportunity.

Yeah, I don't know. It'll be really interesting to see how the future bull bear markets, what the drawdowns look like. I think it's a little bit different today than it was in years past because of the ETFs and the access to Bitcoin, banks potentially accustoming it, and then corporations buying it as a speculative asset that captures the inflation hedge. Yeah, I completely agree. I'm not there on the idea of like going into a supercycling, we won't have bare markets in a very similar way to the past. But I think it has definitely shifted. I think the dynamics in the market have changed and it'll be really interested to see what happens next bear market. This has been fascinating. I really like I definitely know more about my

strategy than I did at the start of this call. So I appreciate it. But is there anything like any big part of this that I've missed that you would like to talk about? No, I I think you I think we had all of the really you know basic components and and I think we could. covered him relatively simply. So there's going to be so much noise about the stock. This is going to be the most hated rally of all time because people aren't going to understand it. It's incredibly complicated. To understand the complexity and the depth of this trade, you have to conceptualize capital markets, the depth of capital markets, who buys products, why they buy products. You need to understand like risk return landscapes. You need to understand like pension funds and how insurance

companies work. And you just need to have a vast knowledge on, you know, many different things to conceptualize it. And that's not for everybody. And people are going to hate it, right? Because they're not going to get it and they're just going to say just buy Bitcoin like Jim Kramer on, you know, mad money. And that's okay. But it's just going to cause this continued volatility because people are going to disagree and, you know, we'll see how it goes. Yeah, it's funny because it's like, it's almost a hybrid. So if you're in Bitcoin, you might not understand the trade because you don't understand traditional markets. And if you're in traditional finance, you don't understand it because you don't understand Bitcoin. So it kind of sits in the middle.

And like, that's why to me, like, I've always kept my eye on it, but I've never gone deep into it because it's like, I just do my Bitcoin thing. But it's super interesting. Yeah. Yeah. And I mean, if you're a Bitcoin holder, you want micro strategy to do well. Totally. Right? Because they are effectively proof of concept. And if micro strategy fails, like, the value of Bitcoin is going down. Right. Like the value of the Bitcoin that you hold is going down. So any Bitcoiners that are like want micro strategy to fail just because they miss the trade are totally missing the point. Right? Like they are just total. Micro Strategy fails. It's going to be catastrophic. It's probably like Bitcoin won't be dead, but I mean, there will just be another company right behind it that's going to be ready to do the same exact thing. Right. So yeah, it's interesting. Well, this has been great, Jeff. Thank you. I think maybe we should do a follow up when it gets added to the S&P. Yeah, absolutely. Yeah,

give me around. All right, cool. Thank you. Appreciate the time. Speak to soon.