WEBVTT - Microstrategy is up 2,988%... here's what we learned from them | Dan Hillery 0:00:00.120 --> 0:00:02.160 The more capital you have in your balance sheet, the 0:00:02.240 --> 0:00:04.880 larger the percentage of your valuation is based on that 0:00:05.000 --> 0:00:08.000 actual bitcoin capital asset, the more correlated directly you'll be 0:00:08.080 --> 0:00:10.560 with bitcoin. If you only yield bitcoin by having demand 0:00:10.600 --> 0:00:12.719 for your equity, it's really tough. If you can yield 0:00:12.760 --> 0:00:16.320 bitcoin using issuing fixed income products that are overcoloralized, you 0:00:16.320 --> 0:00:19.079 can still have bitcoin yielding a bear. I think strategy 0:00:19.600 --> 0:00:23.320 transition from a meaningful software business to a meaningless software 0:00:23.320 --> 0:00:26.280 business in terms of its overall evaluation. Now they're wholly 0:00:26.320 --> 0:00:29.320 dependent on Bitcoin's content and growth rate for the success. 0:00:29.480 --> 0:00:30.920 If you want to scale the company, you want to 0:00:30.960 --> 0:00:33.199 issue the preferreds. I want to make sure I have 0:00:33.320 --> 0:00:36.320 enough Bitcoin on my books to be credit worthy, but 0:00:36.360 --> 0:00:38.919 not necessarily back those because if I back those as 0:00:38.920 --> 0:00:42.599 a collateral assets and that actually damages my credit worthiness. 0:00:42.680 --> 0:00:44.000 It has to be unsecurity. 0:00:45.760 --> 0:00:48.000 Dan, I want to start with the big picture here, 0:00:48.040 --> 0:00:51.800 because we're seeing an explosion of bitcoin treasury companies and 0:00:52.400 --> 0:00:54.080 there's a lot of different differences there, but a lot 0:00:54.120 --> 0:00:56.800 of people trying to copy the micro strategy playbook. But 0:00:56.880 --> 0:01:01.080 you've said that most people fundamentally miss understand how these 0:01:01.080 --> 0:01:04.480 companies actually work. And what makes them valuable. So what 0:01:04.560 --> 0:01:07.560 is it that you think everyone's getting wrong in this space? 0:01:08.280 --> 0:01:12.399 I think the main thing that people are misunderstanding is 0:01:12.400 --> 0:01:14.720 this idea of bitcoin is collateral. And if bitcoin is 0:01:14.720 --> 0:01:17.440 a pristine capital asset, if it's something that you can 0:01:17.480 --> 0:01:20.399 borrow against, that you can leverage, or that you can 0:01:20.400 --> 0:01:25.039 issue fixed income against, then bitcoin yield is great. But 0:01:25.480 --> 0:01:28.399 yielding bitcoin from ten bitcoin to twenty bitcoin on your 0:01:28.440 --> 0:01:31.200 balance sheet does not give you that next level unlock 0:01:31.240 --> 0:01:34.280 of using the bitcoin in productive ways as a collateral asset, 0:01:34.440 --> 0:01:37.840 whether that be in ten years, acquiring different cash flowing businesses. 0:01:38.480 --> 0:01:40.680 Whatever the landscape may look like for business, may be 0:01:40.760 --> 0:01:45.440 their bitcoin yield via productive products or issuing these fixed 0:01:45.480 --> 0:01:48.840 income giant capital market arbitrages. You need that collateral to 0:01:49.000 --> 0:01:50.040 enable those activities. 0:01:50.640 --> 0:01:52.840 So when you're saying bitcoin yield, you're meaning at the 0:01:52.920 --> 0:01:55.320 rate at which they're acquiring new bitcoin under their balance 0:01:55.360 --> 0:01:57.240 you or the rate of their bitcoin balance is growing, 0:01:57.520 --> 0:01:59.320 not earning yield on the bitcoin, but at the rate 0:01:59.320 --> 0:02:01.640 that they're growing there they're bitcoin. So you're saying that 0:02:01.840 --> 0:02:05.080 it's really irrelevant how fast you're growing it. It's really 0:02:05.120 --> 0:02:07.520 the total size of it. And so it's cool if 0:02:07.520 --> 0:02:10.320 you're growing it at fifty percent, but if you're still 0:02:10.360 --> 0:02:12.760 only fifty bitcoin, it doesn't really matter. I guess that's 0:02:12.760 --> 0:02:13.120 what you're. 0:02:13.000 --> 0:02:16.120 Saying, and I think it's not as black and white 0:02:16.160 --> 0:02:18.000 as I make it made it out to sound. But 0:02:18.360 --> 0:02:20.240 for an investor, if you're in at one bitcoin and 0:02:20.280 --> 0:02:23.560 they're bitcoin yield or the number of bitcoin you own 0:02:23.680 --> 0:02:25.880 per share, So bitcoin yield is a function of both 0:02:25.880 --> 0:02:27.359 the amount of bitcoin and the balance sheet and the 0:02:27.440 --> 0:02:31.360 number of fully diluted outstanding shares. So in that equation, 0:02:31.440 --> 0:02:33.079 as a shareholder your site, you have a lot more 0:02:33.080 --> 0:02:37.040 bitcoin per share. But from a company perspective and a strength, 0:02:37.240 --> 0:02:41.240 durability and longevity perspective, the more bitcoin they own, the 0:02:41.280 --> 0:02:44.160 more optionality they have moving into the future with these 0:02:44.160 --> 0:02:45.880 different products. So I think those are the kind of 0:02:45.880 --> 0:02:48.600 the two factors you have to weigh when looking at 0:02:48.600 --> 0:02:51.440 one of these companies. And then when you think about 0:02:51.480 --> 0:02:54.960 like reaching critical mass, issuing equity becomes less and less 0:02:55.000 --> 0:02:58.360 attractive as the size of the company grows. So I 0:02:58.360 --> 0:03:01.519 think all these bitcoin treasuries need a play to move 0:03:01.560 --> 0:03:05.400 into beyond just issuing equity and yielding bitcoin because of 0:03:05.440 --> 0:03:07.239 the nav the m nav arbitrage. 0:03:07.360 --> 0:03:10.400 Yeah, I want to dig into all the mechanics of that, 0:03:10.440 --> 0:03:13.280 but let's just zoom out a little bit before we 0:03:13.360 --> 0:03:18.639 digged super deep into this. Are you a bitcoiner, were 0:03:18.680 --> 0:03:21.240 you hold were you holding bitcoin in deep cold storage 0:03:21.280 --> 0:03:23.519 before jumping into this, or are you sort of like 0:03:23.560 --> 0:03:25.240 an equities guy that have moved into this. 0:03:27.320 --> 0:03:28.880 Prior to being a So I was a bitcoiner in 0:03:28.919 --> 0:03:31.360 twenty twenty one. I was a twenty twenty one bitcoiner, 0:03:31.760 --> 0:03:35.000 and I found my conviction during the FTX collapse just 0:03:35.040 --> 0:03:37.520 out of pure luck. I was reading all the material 0:03:37.520 --> 0:03:39.160 and it happened to be very long price at the time. 0:03:39.200 --> 0:03:41.240 So I feel very lucky because of that. But prior 0:03:41.280 --> 0:03:43.080 to that, I was an index investor. So you know, 0:03:43.120 --> 0:03:45.360 all through my younger years, I was dumping all my 0:03:45.400 --> 0:03:47.320 money in the S and P and so I've always 0:03:47.560 --> 0:03:50.480 I've always really thought the idea of just long term 0:03:50.520 --> 0:03:53.720 compound growth on your money is very, very powerful, and 0:03:53.720 --> 0:03:56.440 that's why I've kind of been attracted to bitcoin. But 0:03:56.640 --> 0:03:59.160 I found bitcoin through kind of an option's lens. I 0:03:59.160 --> 0:04:01.520 studied a lot of quanticy to finance through college and 0:04:01.560 --> 0:04:04.720 graduate school, and I've always found it really interesting that 0:04:04.760 --> 0:04:06.800 for an acid like bitcoin, if you believe it's growing 0:04:06.800 --> 0:04:08.960 out a roughly a power log growth rate or just 0:04:09.000 --> 0:04:12.040 a steady high compound growth, you can make a lot 0:04:12.080 --> 0:04:14.640 of money with long term options on an asset like that. 0:04:14.840 --> 0:04:16.560 So that's why I was really attracted to it. 0:04:16.839 --> 0:04:18.800 So you kind of were attracted, I mean obviously by 0:04:18.839 --> 0:04:21.200 the growth rate number one in gu as we call it, 0:04:21.279 --> 0:04:23.719 right number go up. And then because of your background, 0:04:23.760 --> 0:04:25.920 you saw the ability to do options against it, which 0:04:25.960 --> 0:04:29.520 then increases that. And then you saw the treasuries, and 0:04:29.560 --> 0:04:32.679 then they're even increasing the options if you will, almost 0:04:32.760 --> 0:04:34.960 on that, Yeah, exactly. 0:04:35.040 --> 0:04:36.640 And the treasure is so interesting because there were no 0:04:36.800 --> 0:04:39.360 I that called you couldn't buy options on ib when 0:04:39.360 --> 0:04:41.280 I was buying options on mstr you know, So like 0:04:41.839 --> 0:04:44.279 I was forced into bitcoin treasuries because I was interested 0:04:44.279 --> 0:04:46.240 in options, and then I had to learn about bitcoin 0:04:46.279 --> 0:04:47.000 judges along the way. 0:04:47.080 --> 0:04:49.880 Yeah. So twenty twenty one, Class of twenty twenty one, 0:04:51.960 --> 0:04:53.720 I want to ask about our reference. But so far 0:04:53.800 --> 0:04:55.760 we've seen you know, in the last year, Meta Planet 0:04:55.839 --> 0:04:57.880 being the second company or really the first company I 0:04:57.920 --> 0:05:00.479 should say, that's actually been able to duplicate what micro 0:05:00.520 --> 0:05:03.200 strategy and now strategy has done their stocks up like 0:05:03.240 --> 0:05:06.200 seven thousand percent in like a year. And now we're 0:05:06.240 --> 0:05:09.000 seeing ones like Blockchain Group in France They're up like 0:05:09.040 --> 0:05:11.360 three thousand percent in six months. And then we see 0:05:11.360 --> 0:05:13.840 like the Smarter Web companies up like eight thousand percent 0:05:13.880 --> 0:05:16.600 in like two months. Those are insane numbers. I mean, 0:05:16.600 --> 0:05:20.360 you're an index investor, like, those are insane numbers. But 0:05:20.400 --> 0:05:23.120 it it it's very similar to what we saw back 0:05:23.120 --> 0:05:27.039 in like twenty seventeen in the cryptocurrency ico boom. So 0:05:27.080 --> 0:05:28.960 they weren't IPOs like kind of what we're seeing now. 0:05:29.000 --> 0:05:31.599 They were icos, And so you hear a lot about 0:05:31.960 --> 0:05:33.800 some of the differences there. I mean, have you gone 0:05:33.800 --> 0:05:35.920 back and sort of studied what happened there to see 0:05:35.920 --> 0:05:37.920 if there's any kind of common parallels there. 0:05:38.520 --> 0:05:42.239 Yeah, And I'm not extremely familiar with the ico boom 0:05:42.240 --> 0:05:44.599 and bus cycle. I mean I studied alt coins for 0:05:44.640 --> 0:05:48.160 a bit in twenty twenty two, just looking at different projects, 0:05:48.240 --> 0:05:51.279 understanding the tokenomics and stuff, and I mean I wasn't 0:05:51.279 --> 0:05:55.200 all that attracted to it. And I think, what's I compare? 0:05:55.240 --> 0:05:59.159 I think this bitcoin treasury craze more to the spack 0:05:59.200 --> 0:06:02.880 craze of twenty one, so in twenty twenty. So that's 0:06:02.920 --> 0:06:07.560 kind of my mental comparison. So there's people more knowledgeable 0:06:07.560 --> 0:06:09.200 about the icos and they yeah, yeah. 0:06:09.080 --> 0:06:10.800 I would, I would say that. I mean I think 0:06:10.839 --> 0:06:13.440 both of very similar. I mean a SPAC was also 0:06:13.520 --> 0:06:15.080 sort of like, hey, we're gonna raise a bunch of money. 0:06:15.080 --> 0:06:18.599 We'll tell you what we're gonna do with it afterwards, right, 0:06:18.640 --> 0:06:19.960 and then a lot of times they didn't have any 0:06:20.040 --> 0:06:22.000 value there. ICO is sort of similar, like we raise 0:06:22.000 --> 0:06:23.679 a bunch of money and then there's really just vapor 0:06:23.720 --> 0:06:26.640 where there's nothing there, whereas these these treasury companies at 0:06:26.680 --> 0:06:31.120 least they're buying bitcoin, so as there is that, yeah. 0:06:30.880 --> 0:06:34.800 And there's fear greed, like I think icos and SPACs are. 0:06:35.120 --> 0:06:37.360 You have to understand the fear greed aspect of any 0:06:37.360 --> 0:06:40.000 of this, like trading behavior. So that's where they're helpful. 0:06:40.000 --> 0:06:42.200 But ultimately, I think raising capital and putting into bitcoin 0:06:42.600 --> 0:06:45.800 is actually a good faith, good hearted move. So we're 0:06:45.800 --> 0:06:47.920 in a different sort of environment I think long term. 0:06:47.960 --> 0:06:50.400 Okay, now, as we kind of dig into this, I 0:06:50.400 --> 0:06:51.840 mean I want to get into the details, but we're 0:06:51.880 --> 0:06:54.640 just kind of warming the audience here. But so you know. 0:06:54.720 --> 0:06:56.719 I think you've said there's like two types of companies. 0:06:56.760 --> 0:06:58.839 There's the tesla who holds a bitcoin on the balance sheet, 0:06:58.839 --> 0:07:01.320 and then there's companies doing it as a strategy. But 0:07:01.400 --> 0:07:03.840 would you also say that maybe within that, maybe there's 0:07:03.880 --> 0:07:06.880 three companies. So there's the test let's put another balance sheet. 0:07:07.200 --> 0:07:09.840 Then there's ones that are like a hybrid company that's 0:07:09.840 --> 0:07:12.720 also running a strategy, and then there's peer play strategy companies. 0:07:14.280 --> 0:07:16.440 I think absolutely yeah. I mean it can be. It's 0:07:16.520 --> 0:07:18.800 it's kind of like a slider, right, you can adjust 0:07:19.040 --> 0:07:21.000 how aggressive if you want to be with the bitcoin 0:07:21.560 --> 0:07:25.280 capital market's arbitrage, or maybe you don't want to use 0:07:25.320 --> 0:07:27.040 the capital markets at all to raise the bitcoin. You 0:07:27.080 --> 0:07:29.840 just sweep your cash flows. And I think the most 0:07:29.880 --> 0:07:33.320 important thing is in a falling bitcoin environment, which we 0:07:33.360 --> 0:07:36.680 haven't really seen for three years, how do you navigate? 0:07:36.920 --> 0:07:39.360 And that's going to be the real question. And I 0:07:39.400 --> 0:07:43.760 actually think the strongest contenders in that environment are those 0:07:43.800 --> 0:07:45.360 who sweep their cash flows into bitcoin. 0:07:46.360 --> 0:07:48.920 So that means the strongest contenders would be ones that 0:07:49.040 --> 0:07:52.560 actually have a business model that's making cash flow outside 0:07:52.600 --> 0:07:53.120 of bitcoin. 0:07:54.160 --> 0:07:56.640 I think it's a huge leg up. I think it's 0:07:56.640 --> 0:07:58.360 a huge leg up for a bitcoin treasury, just even 0:07:58.400 --> 0:08:00.480 if it's you know, five million dollars a year of 0:08:00.480 --> 0:08:03.360 free cash flow, because you have so much optionality to 0:08:03.440 --> 0:08:07.120 issue to to secure a debt and buy bitcoin in 0:08:07.960 --> 0:08:09.640 market where the bitcoin price is suppressed. 0:08:09.720 --> 0:08:14.320 Okay, but what do you think happens when a company 0:08:14.400 --> 0:08:16.920 you have, like a similar scientific who's running like a 0:08:16.960 --> 0:08:20.360 medical company, And like, as an investor, what do I 0:08:20.400 --> 0:08:22.400 know about medical companies? And I don't know they're facing 0:08:22.440 --> 0:08:24.520 a DOJ lawsuit and what could happen with that? And 0:08:24.560 --> 0:08:26.360 oh what if they have a new patent and that's good, 0:08:26.360 --> 0:08:28.440 but I don't know about that. But then they're also 0:08:28.520 --> 0:08:30.800 running the strategy over here, so like how do I 0:08:30.920 --> 0:08:33.239 value them? And so then maybe there's like this miscommunication 0:08:33.280 --> 0:08:37.400 in the market. Whereas like Sailor he talks about I mean, 0:08:37.440 --> 0:08:39.080 he made it very clear. I got to have dinner 0:08:39.120 --> 0:08:41.800 with him in Prague and he said, if bitcoin goes up, 0:08:41.920 --> 0:08:44.240 the market wants the strategy to go up twice as much, 0:08:44.240 --> 0:08:45.800 and if bitcoin goes down, they want it to go 0:08:45.840 --> 0:08:49.120 down twice as much because they the market needs to 0:08:49.200 --> 0:08:51.400 know how to price around it. He's like, they don't 0:08:51.400 --> 0:08:53.960 want me to lower the volatility, they'll just lower their position. 0:08:55.640 --> 0:08:58.559 And so you know, he said, like he made the 0:08:58.600 --> 0:09:00.720 funny case. He said, they've got game and spoke to 0:09:00.720 --> 0:09:02.400 me tonight and told me the market was going to 0:09:02.440 --> 0:09:05.040 crash tomorrow, and I hedged my position and the market crashed, 0:09:05.280 --> 0:09:09.400 but we didn't. That's not what the market wants because 0:09:09.440 --> 0:09:12.080 then they then they don't know what to expect, right, 0:09:12.120 --> 0:09:14.480 And so then I start thinking about a similar scientific 0:09:15.000 --> 0:09:16.480 and not to throw them under the bus or whatever, 0:09:16.480 --> 0:09:18.960 but just as an example, like, how do I know 0:09:19.040 --> 0:09:22.560 what to expect from that stock based off of bitcoin? 0:09:22.679 --> 0:09:23.440 In that example? 0:09:25.800 --> 0:09:28.480 And I think that's a really good question and something 0:09:28.520 --> 0:09:32.280 I can't I can't answer directly because it's going to 0:09:32.320 --> 0:09:34.520 be so diversified. There's going to be companies that exist 0:09:34.520 --> 0:09:37.320 in so many different parts of the spectrum. But the 0:09:37.320 --> 0:09:39.800 more capital you have in your balance sheet, the larger 0:09:39.840 --> 0:09:42.640 the percentage of your valuation is based on that actual 0:09:42.679 --> 0:09:45.560 bitcoin capital asset, the more correlated directly you will be 0:09:45.600 --> 0:09:47.000 with bitcoin. That's all I can say. 0:09:47.080 --> 0:09:49.640 Yeah, and then and then maybe that would only matter 0:09:49.720 --> 0:09:52.360 for the common shares of the main company, But then 0:09:52.400 --> 0:09:55.640 if you wanted to tap into Preford preferred shares or something. 0:09:55.720 --> 0:09:59.200 Then that's a whole different piece, that's. 0:09:59.120 --> 0:10:01.560 A whole different ball game. I find it extremely interesting, 0:10:01.559 --> 0:10:02.960 and I think that's where all of this is going, 0:10:03.200 --> 0:10:04.840 especially for the treasuries. 0:10:04.920 --> 0:10:07.120 Yeah, for the peer play treasuries exactly. 0:10:07.559 --> 0:10:08.160 All right, So. 0:10:10.440 --> 0:10:12.760 We have we have a spectrum, and I guess probably 0:10:12.800 --> 0:10:15.840 at some point, at what point does the bitcoin strategy 0:10:16.000 --> 0:10:19.240 start to overtake the existing bitcoin So like strategy, for example, 0:10:19.440 --> 0:10:22.720 you barely hear about the software business anymore, whereas like 0:10:22.800 --> 0:10:25.360 kind of going back to a Tesla or if Apple 0:10:25.360 --> 0:10:27.280 were to buy bitcoin on their balance sheet, it wouldn't 0:10:27.280 --> 0:10:29.520 even really move the needle. But kind of going back 0:10:29.520 --> 0:10:32.079 to like I mean, index investing, traditional equity investing, and 0:10:32.120 --> 0:10:34.959 typically you don't really value companies as a multiple off 0:10:34.960 --> 0:10:39.040 their nave, right, so it's really all about those discounted cashlows. 0:10:40.440 --> 0:10:43.800 So then so I guess you have to get to 0:10:43.800 --> 0:10:47.000 a point where that bitcoin overtakes the traditional business. I 0:10:47.000 --> 0:10:48.319 guess that that's the way that you see it. And 0:10:48.400 --> 0:10:50.400 then that's just it on a spectrum. 0:10:50.800 --> 0:10:52.800 Yeah, And I actually kind of have a metric I 0:10:52.920 --> 0:10:55.360 use in my head for that, and so I think 0:10:55.520 --> 0:11:00.000 strategy transition from a meaningful software business to a meaningless 0:11:00.040 --> 0:11:03.120 offware business in terms of its overall evaluation, when the 0:11:03.160 --> 0:11:05.440 free cash flow from the operating business has ceased to 0:11:05.440 --> 0:11:09.800 be able to cover the annual liabilities of their debt. 0:11:10.000 --> 0:11:14.360 So when the preferreds became started becoming issued, they no 0:11:14.440 --> 0:11:17.440 longer can cover those preferreds by their free cash flow 0:11:17.520 --> 0:11:20.280 from their operating business. Up until the end of twenty 0:11:20.320 --> 0:11:23.240 twenty four, they were able to cover all the convertible 0:11:23.280 --> 0:11:25.960 debt coupon payments through their operating cash flow. So that 0:11:26.040 --> 0:11:28.800 was a fundamental shift in their strategy. And now they're 0:11:29.000 --> 0:11:32.319 wholly dependent on bitcoin's compound annual growth rate for their success. 0:11:32.720 --> 0:11:36.439 Okay, now we talk about the underlying business model and 0:11:36.520 --> 0:11:38.960 the point of having some sort of cash flow. Five 0:11:39.000 --> 0:11:41.000 million dollars is good enough to sort of cover that. 0:11:41.600 --> 0:11:44.280 But you've also talked about quite a bit about sort 0:11:44.320 --> 0:11:47.920 of like the convertible bond problem, and it almost seems 0:11:47.960 --> 0:11:51.400 like maybe Sailors sort of headfaked the industry almost, if 0:11:51.400 --> 0:11:54.800 you will, because micro strategy came out with the convertible bonds, 0:11:55.720 --> 0:11:58.120 and now there's strategy which is maybe like the two 0:11:58.200 --> 0:12:01.000 point zero, which is like no more vertibles and now 0:12:01.000 --> 0:12:04.959 it's like atm and preferreds. So what's this convertible bond 0:12:05.000 --> 0:12:08.000 problem that you see that seemingly sort of headfake the 0:12:08.000 --> 0:12:12.079 industry to like, now everybody's copying that part, but it 0:12:12.120 --> 0:12:14.199 seems to be a big problem. 0:12:14.360 --> 0:12:17.120 Yeah. I can only speak to the risks associated with 0:12:17.120 --> 0:12:20.559 a convert relative to it preferred, and that's when duration, 0:12:21.120 --> 0:12:25.480 so converts come do and that term debt is very 0:12:25.480 --> 0:12:29.320 problematic if Bitcoin has a sustained draw down. Two, it's 0:12:29.480 --> 0:12:32.760 the pricing of his convertible notes and the delta hedging 0:12:32.880 --> 0:12:36.960 where people will tend to short the exposure to MSTR 0:12:37.080 --> 0:12:39.439 relative to the bond. So the bonds when they get 0:12:39.480 --> 0:12:43.520 issued represent about fifty percent exposure to MSTR. And most 0:12:43.559 --> 0:12:46.600 of the large players who buy these bonds these convertible notes, 0:12:46.720 --> 0:12:49.320 they short the stock and they scalp the stock on 0:12:49.360 --> 0:12:52.280 the way down. And that's very predatory for the common shareholders. 0:12:52.320 --> 0:12:56.160 And so I don't think that's super advantageous for any 0:12:56.200 --> 0:12:58.640 company who's looking to issue debt. And that's why I 0:12:58.640 --> 0:13:01.040 think that prefers become more popular. 0:13:01.240 --> 0:13:03.600 So it's sort of like at the beginning, it was like, 0:13:03.640 --> 0:13:05.480 oh my gosh, he's raising billions of dollars at like 0:13:05.600 --> 0:13:08.240 zero point eight interest, Like that's amazing, Like why wouldn't 0:13:08.280 --> 0:13:09.800 you want to be at billions of dollars at very 0:13:09.840 --> 0:13:12.560 low rates? Which is why again sort of the headfake. 0:13:12.640 --> 0:13:15.800 Now you see, you know, Swamp sequons, you know, raised 0:13:15.800 --> 0:13:18.440 two hundred million of converts, and I think Pump's company 0:13:18.520 --> 0:13:20.360 rais two hundred fty million of converts. And you see 0:13:20.360 --> 0:13:22.960 that over and over and over. But I guess what 0:13:23.000 --> 0:13:25.200 you're saying is the sort of that predatory nature or 0:13:25.240 --> 0:13:27.520 really it's the function of that convert market is going 0:13:27.559 --> 0:13:29.920 to want to short the stock and so even though 0:13:29.920 --> 0:13:31.640 they're getting the bitcoin, then they have to face the 0:13:31.640 --> 0:13:35.120 headwinds of the of the downward pressure against the equity price. 0:13:36.360 --> 0:13:38.240 Exactly. Yeah, I mean it's a good and a bad. 0:13:38.360 --> 0:13:40.200 Like with everything, there's a negative. So it's a positive 0:13:40.200 --> 0:13:42.080 they get all the bitcoin, it's a negative there's some 0:13:42.080 --> 0:13:44.880 downre equity pressure. One point I think that's really important 0:13:44.880 --> 0:13:47.200 to understand about those converts is you can have a 0:13:47.240 --> 0:13:50.000 senior on secured convert or a senior secured convert. And 0:13:50.040 --> 0:13:52.240 something to watch out for in these capital structures are 0:13:52.320 --> 0:13:54.920 the secured nature of those converts because then there is 0:13:54.920 --> 0:13:58.160 a margin call preference in the price of bitcoint whereas 0:13:58.200 --> 0:14:01.160 with Strategy and most other bitcoin try it's unsecured, so 0:14:01.200 --> 0:14:03.920 there's no margin call risk with those convertible notes. 0:14:04.640 --> 0:14:07.880 So the duration of that debt instrument, as well as 0:14:07.920 --> 0:14:09.560 whether it's secured or not secure, is going to make 0:14:09.559 --> 0:14:11.520 a big difference exactly. 0:14:11.760 --> 0:14:13.439 All those terms really really matter, and we're trying to 0:14:13.520 --> 0:14:15.800 value the credit worthiness of any of these companies. 0:14:16.040 --> 0:14:21.200 Yeah, do you think there's like a ratio where, like, 0:14:21.560 --> 0:14:25.520 you know, we could probably take twenty percent in converts 0:14:26.080 --> 0:14:28.640 and that extra bitcoin will help our stock grow, but 0:14:28.680 --> 0:14:30.960 it doesn't really hold our stock down that much. Is 0:14:31.000 --> 0:14:32.760 there like some sort of a ratio that you think 0:14:32.920 --> 0:14:35.520 might work or does it really come down to those 0:14:35.600 --> 0:14:36.680 terms that you said? 0:14:37.960 --> 0:14:40.120 Yeah, I think it depends on whether or not you 0:14:40.160 --> 0:14:42.240 can cover those converts with free cash flow. If you can, 0:14:42.560 --> 0:14:44.440 I would go heavy on the converts because you have 0:14:44.520 --> 0:14:48.320 maximum leverage with the lowest amount of risk as long 0:14:48.320 --> 0:14:52.320 as it's not secured. But in terms of the short pressure, 0:14:52.360 --> 0:14:55.560 I think bitcoin's price pushes. Bitcoin's price is really the 0:14:55.600 --> 0:14:58.520 forcing function there, Like I wouldn't The shorts are predatory, 0:14:58.640 --> 0:15:01.400 but they're not. They don't cripple stock price, so I 0:15:01.400 --> 0:15:02.760 don't think they're a massive issue. 0:15:03.800 --> 0:15:06.680 So if you could get it on good terms with 0:15:07.160 --> 0:15:11.520 potentially being unsecured where you're not basically forced to sell, 0:15:12.960 --> 0:15:15.600 and bitcoin runs, we're making you all the time as 0:15:15.600 --> 0:15:16.800 the time of recording, and I think we had one 0:15:16.840 --> 0:15:19.760 thirteen today. If it runs the two hundred thousand, that 0:15:20.160 --> 0:15:21.880 headwinds of the pressure of the short selling is probably 0:15:21.920 --> 0:15:24.120 not going to matter exactly. 0:15:24.320 --> 0:15:26.280 And when those converts are really deep in the money, 0:15:26.400 --> 0:15:28.200 so there's a strike on the convert where they can 0:15:28.240 --> 0:15:31.720 convert the short delta arbing, the delta hedging that goes 0:15:31.760 --> 0:15:36.120 on is pretty much negated at stock prices well above 0:15:36.120 --> 0:15:38.200 the conversion price, So as you get higher and higher 0:15:38.200 --> 0:15:40.000 as bitcoin runs, it matters less than us. 0:15:41.320 --> 0:15:44.720 You've said that. I think you've said that their predatory 0:15:44.760 --> 0:15:47.600 towards the stock and that strategy is frustrated with them. 0:15:48.440 --> 0:15:50.000 I mean, wouldn't there be an opportunity when the price 0:15:50.040 --> 0:15:52.080 a bitcoin runs up to maybe buy those out or 0:15:52.120 --> 0:15:52.920 close those out. 0:15:55.000 --> 0:15:58.600 Yeah, strategy has the ability to convert call those for 0:15:58.640 --> 0:16:01.760 conversion early as long as there's certain terms that are met, 0:16:01.800 --> 0:16:04.760 and all of the duration terms have been met, but 0:16:04.800 --> 0:16:08.360 it's not advantageous for Strategy or any Bitcoin treasury to 0:16:08.360 --> 0:16:10.360 call them early because of the good faith with the 0:16:10.400 --> 0:16:15.480 convertible note hedgers and purchasers, and because there's provisions that 0:16:15.960 --> 0:16:19.280 make Strategy or any of these companies issue more shares 0:16:19.480 --> 0:16:22.320 in the case the company itself calls the debt early, 0:16:22.440 --> 0:16:25.080 so they're kind of just waiting until the delta hedges 0:16:25.080 --> 0:16:27.360 are done hedging and they convert. 0:16:27.560 --> 0:16:29.320 Yeah, just kind of like write it out. 0:16:29.920 --> 0:16:31.720 I think it's their best best option. 0:16:32.040 --> 0:16:37.360 Yeah, at this point. What about something more another type 0:16:37.360 --> 0:16:39.400 of instrument, like the Blockchain Group has done where they've 0:16:39.440 --> 0:16:43.360 taken bitcoin that can convert into equity. What do you 0:16:43.400 --> 0:16:44.960 think about those types of converts? 0:16:46.040 --> 0:16:50.360 So interesting, right, And the risk for the corporation is 0:16:51.160 --> 0:16:55.800 exponentially lower when they take bitcoin downside, right because in 0:16:55.840 --> 0:16:59.400 the case of Strategy convertible notes, they have a principal 0:16:59.400 --> 0:17:01.920 payment due on a certain date in the future denominated 0:17:01.920 --> 0:17:04.560 in USD. In the case of Blockchain Group, I mean, 0:17:04.560 --> 0:17:08.359 it's denominated in bitcoin, So you're not going to face 0:17:08.640 --> 0:17:13.760 a situation where you owe more bitcoin to creditors at 0:17:13.800 --> 0:17:15.800 some point in the future, whereas if the price of 0:17:15.840 --> 0:17:19.439 bitcoin plummets over the next four years, strategy will ultimately 0:17:19.520 --> 0:17:23.520 owe those creditors more bitcoin as represented by the flat 0:17:23.600 --> 0:17:26.879 US D value, so very very much so less risky 0:17:27.280 --> 0:17:28.680 from a perspective. 0:17:28.720 --> 0:17:30.080 But you might also say that then they would have 0:17:30.119 --> 0:17:32.119 to give the bitcoin back. So to your point, you 0:17:32.119 --> 0:17:33.920 to give it back and the US dollar value would 0:17:33.920 --> 0:17:36.760 be lower. But like, if the entire kind of strategy 0:17:36.800 --> 0:17:39.520 is to kind of keep that yield growing, if they 0:17:39.520 --> 0:17:41.000 had to give back a bunch of the bitcoin that 0:17:41.000 --> 0:17:42.879 would work in reverse. Wouldn't it be catastrophic. 0:17:43.920 --> 0:17:47.960 It would be catastrophic, and I think for it would 0:17:47.960 --> 0:17:53.280 be catastrophic. But the problem I think there is that 0:17:54.600 --> 0:17:57.600 if those shares don't convert over a period of time, 0:17:57.640 --> 0:18:00.960 it means the stock underperformed Bitcoin over that duration. And 0:18:01.000 --> 0:18:03.920 so if the stock underperforms Bitcoin, that kind of it's 0:18:03.960 --> 0:18:06.320 all it's all a mess. It's all bad, right. 0:18:06.400 --> 0:18:08.680 If the stock can't overperform Bitcoin. 0:18:09.200 --> 0:18:13.080 Exactly, then bitcoin yield wasn't effective and you lost money 0:18:13.080 --> 0:18:14.000 as a convert holder. 0:18:14.560 --> 0:18:16.760 So let's talk about that for a minute. So you know, 0:18:16.880 --> 0:18:19.119 that's what we see. I see a lot in the 0:18:19.160 --> 0:18:20.879 bitcoin space. I'm sure you do as well as like 0:18:21.840 --> 0:18:24.359 will these outperform Bitcoin, otherwise why don't I just hold Bitcoin? 0:18:24.560 --> 0:18:26.840 And so you know, in the bitcoin community, we believe 0:18:26.840 --> 0:18:29.439 one bitcoin's one bitcoin, that's the hurdle rate, you know, 0:18:29.520 --> 0:18:32.400 et cetera, et cetera, And so I see that a lot. 0:18:32.440 --> 0:18:35.320 But then, like you're an index investor, you used to be, 0:18:35.560 --> 0:18:40.040 So it's like modern portfolio theory or just normal portfolio 0:18:40.080 --> 0:18:43.440 theory would be sort of a diversified portfolio, right, I mean, 0:18:43.480 --> 0:18:46.919 maybe some people might put five percent towards bitcoin or 0:18:46.920 --> 0:18:49.960 ten percent towards bitcoin, and it doesn't seem that the 0:18:50.000 --> 0:18:52.240 majority of people are on a bitcoin standard. So they're 0:18:52.280 --> 0:18:54.800 trying to beat the S and P five hundred, they're 0:18:54.840 --> 0:18:58.480 trying to beat the inflation rate, but not necessarily bitcoin's rate. 0:18:58.880 --> 0:19:00.879 So what do you think think about that? Because, like 0:19:00.920 --> 0:19:02.480