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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. Yeah, we got to

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Speaker 1: have more fun around here.

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Speaker 2: Oh god, Okay, speaking of fun, this is the antithesis

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Speaker 2: is fun. This is the antithesis of funds. No, no, no,

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Speaker 2: you haven't heard me.

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Speaker 1: Oh okay.

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Speaker 2: So I went to write one of.

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Speaker 1: Our I did a deadlist.

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Speaker 2: I'm both the most popular trader and most successful trader

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Speaker 2: at Citadel that is going viral, barges.

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Speaker 1: This is an after school special, except.

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Speaker 2: I've decided I'm going to base my entire personality going

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Speaker 2: forward on campaigning for a strategic pork reserve in the US.

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Speaker 1: Black goals.

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Speaker 2: These are the important question. Is that robots taking over

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Speaker 2: the world.

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Speaker 1: No, I think that, like in a couple of years,

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Speaker 1: the AI will do a really good job of making

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Speaker 1: the odd Launch podcast. One day that person will have

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Speaker 1: the mandate of Heaven.

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Speaker 2: How do I get more popular and successful?

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Speaker 3: We do have.

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Speaker 2: You're listening to lots More, where we catch up with

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Speaker 2: friends about what's going on right now.

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Speaker 1: Okay, even when the Odds is over, there's always lots more.

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Speaker 2: And we really do have the perfect guest. So I

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Speaker 2: went to write one of our Odd Lots newsletters recently,

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Speaker 2: and I was going to write about micro strategy, and

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Speaker 2: I had this idea. I was going to call it

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Speaker 2: micro's Strategy's infinite money loop. And then I was researching

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Speaker 2: on the terminal and I stumbled on a bunch of

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Speaker 2: Matt Levine columns where you actually titled it crypto's perpetual

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Speaker 2: motion machine. And then I thought, well, I'm not even

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Speaker 2: going to try to compete with Matt. I'm just going

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Speaker 2: to ask him to come on the show and explaining cases.

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Speaker 1: Yeah, cases, but at least he'll come on the podcast.

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Speaker 2: So here we are with Matt Levine, who is of

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Speaker 2: course the author of the money Stuff column but also

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Speaker 2: the co host of the New money Stuff podcast.

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Speaker 3: I keep thinking it's two months old. It was the year.

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Speaker 1: I really.

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Speaker 2: Wow time.

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Speaker 1: I always think twenty twenty was two years ago.

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Speaker 3: Same time. Time.

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Speaker 2: Yeah, time is a flat circle. Matt, what is micro

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Speaker 2: Strategy's perpetual motion machine?

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Speaker 3: Micro strategy? I keep saying perpetual motion machine. I think

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Speaker 3: I'm kidding. I think I'm kidding. I keep hoping that

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Speaker 3: I'm kidding. So micro strategy is a pot of bitcoins

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Speaker 3: that issues stock, and the stock trades at call it

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Speaker 3: two times the value of the pot of bitcoins. And

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Speaker 3: so if you have that situation, you sell more stock

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Speaker 3: to buy bitcoins because like classically that's an arbitrage, and

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Speaker 3: you close the arbitrage, right, you sell stock that brings

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Speaker 3: down the price of your stock. You buy bigcoins, that

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Speaker 3: brings up the price of bitcoin. Eventually you get to

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Speaker 3: the point where you're stock and the value of the

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Speaker 3: underlying bitcoins is the same mecro strategy, Like it never

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Speaker 3: gets any closer. So that keep selling more stock and

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Speaker 3: buying more bitcoins, and that keeps driving the value of

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Speaker 3: the company up, and so they keep getting more and

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Speaker 3: more valuable.

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Speaker 1: They have an as it so to speak, it's not bitcoin,

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Speaker 1: and that asset is the ability to get like non

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Speaker 1: margin callable leverage.

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Speaker 3: Right, So I mean like like if.

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Speaker 1: I wanted to borrow bitcoin or borrow money to buy bitcoin,

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Speaker 1: I could, but there is a chance that bitcoin goes

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Speaker 1: down tomorrow, they ask for my money back, and I'm homeless.

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Speaker 3: So this is a thing that they say, and that

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Speaker 3: has some truth to it, but this is not a

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Speaker 3: leveraged way to buy bitcoin. And the way you know

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Speaker 3: that is that the market cap of the company is

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Speaker 3: two x the value of its bitcoins. Right, So it's

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Speaker 3: like a it's like an anti leveraged way to buy bitcoin, right,

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Speaker 3: Like if you put two dollars into micro strategy, you

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Speaker 3: get back one dollar of bitcoin, which is the opposite

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Speaker 3: of leverage. Now it's true that like and they did.

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Speaker 3: And by the way, also like they do have the

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Speaker 3: ability to like they're right, like they've sort of touted

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Speaker 3: this as their strategy, like we are a better mouse

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Speaker 3: trap for buying bitcoin because we can get leverage. They

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Speaker 3: do a lot of convertible bonds. They don't. I don't

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Speaker 3: think I have a ton of like you know, just

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Speaker 3: sort of regular, non like non marginal leverage other than

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Speaker 3: the converts. But like, yeah, like that's a that's a

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Speaker 3: theoretical case. It's just like it's just not like true

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Speaker 3: as a matter of pricing.

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Speaker 2: Wait, the convertible bonds are actually what like initially caught

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Speaker 2: my eye because I think they issued at like one

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Speaker 2: of the recent ones zero percent with a conversion premium

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Speaker 2: of fifty five percent. And that's like already when the

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Speaker 2: stock is trading at this massive premium to the value

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Speaker 2: of its assets. And so you know, usually the higher

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Speaker 2: the conversion premium and the lower the coupon. The less

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Speaker 2: attractive that would be for investors, but clearly people are

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Speaker 2: buying this stuff because they keep doing it.

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Speaker 3: Yeah, Like a convert is just like it can convert.

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Speaker 3: You just plug into a model, right, Like, well, sorry,

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Speaker 3: I taking a step back.

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Speaker 2: I actually need you to explain convertible arbitrage.

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Speaker 3: Team. So there's there's two things there. There's convertible arbitrage.

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Speaker 3: So there's also a lot of like fundamental investors you

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Speaker 3: think about like the micro shadowy convertible never mind convertible arbitrage.

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Speaker 3: There are people in the wor world who run I

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Speaker 3: don't know, fixed income funds who run you know, like

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Speaker 3: convertible fundamental funds, who run various sorts of funds who

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Speaker 3: wake up in the morning thinking I want to buy

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Speaker 3: some bitcoin, and they can't because their mandate doesn't include bitcoin.

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Speaker 3: It might not even include micro strategy stock or micro

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Speaker 3: strategy stock might be too rich for them. But they

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Speaker 3: like they can buy a fixed income product that has

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Speaker 3: some bitcoin upside. They're like, yeah, that's great, right. So

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Speaker 3: part of the investment thesis for these bonds, and there's

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Speaker 3: like a lot of these bonds is something like that.

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Speaker 3: It's like this is a way to get bitcoin upside

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Speaker 3: with downside protection. But the convert arbitrage strategy is this

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Speaker 3: is the way to get micro strategy volatility, and micro

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Speaker 3: strategy is so volatile in part because it's crazy, but

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Speaker 3: in part because of like technical factors involving their ETPs,

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Speaker 3: and so a convert arb is just an options trading strategy,

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Speaker 3: like like you're buying call options on micro strategy, and

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Speaker 3: call options are more valuable the more volatile the company is,

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Speaker 3: more volatile the stock is. And this is a very

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Speaker 3: you know has like one hundred percent annual volatility, and

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Speaker 3: then you know what you're doing is like get you

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Speaker 3: buy a convertible, You sell some stock to hedge, and

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Speaker 3: you adjust your hedge over time as the con the

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Speaker 3: convertible gets more or less in the money. And the

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Speaker 3: way you do that is basically, every time the stock

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Speaker 3: goes up, you're selling more stock to get shorter, and

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Speaker 3: every time the stock goes down, you buy back stock

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Speaker 3: to reduce your hedge. And if the stock is constantly

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Speaker 3: bouncing around, you're constantly buying low and selling high and

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Speaker 3: making a lot of money. So it's a good volatility trade.

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Speaker 3: And those convertible terms you know, it's like zeros up

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Speaker 3: fifty five is like that sounds outrageous, but you plug

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Speaker 3: it into the model and you put in you know,

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Speaker 3: one hundred percent of volatility and that's cheap, and so

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Speaker 3: like people want to buy it.

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Speaker 2: Joe, I didn't realize this until recently, but you know,

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Speaker 2: if you go and look at some of micro Strategies

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Speaker 2: earning presentations, so they actually have slides on there that

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Speaker 2: are basically like boasting about how volatile the stock is.

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Speaker 2: Have you seen these, Matt I think so, yeah, it's

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Speaker 2: like MSTR is more volatile than any other s and

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Speaker 2: P five hundred stock there's another market.

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Speaker 3: Yeah.

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Speaker 2: Yeah, they're clearly like marketing the volatility is a selling.

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Speaker 3: Point, like they know what they're doing, like like this

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Speaker 3: is important. This is like they're they're like sort of

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Speaker 3: using every part of like this strategy to raise money,

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Speaker 3: which is like they're really like thoughtful about it and

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Speaker 3: like selling lots of volatility is very helpful to them.

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Speaker 3: And the punde that the ETF is like you know,

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Speaker 3: convert investor buys low cells high right, every time the

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Speaker 3: stock goes down, you have to buy back some stock

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Speaker 3: every time the stock goes up, you have to sell

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Speaker 3: some stock. That is, you're profiting from volatility, but you're

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Speaker 3: also damping volatility, right because like then the stock goes down,

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Speaker 3: you're buying. So if you issue a lot of convertibles,

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Speaker 3: you dampen the volatility in your stock. Micro Strategy doesn't

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Speaker 3: have this problem because they also have these LeVert ETFs

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Speaker 3: which so much increase the volatility of the stock. Because

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Speaker 3: a LEVERTYTF every time the stock goes up, they have

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Speaker 3: to buy more stock every time the thought goes down

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Speaker 3: if the sell stock, and so the Leverty TTF is

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Speaker 3: like jacking up the volatility, which is part of why

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Speaker 3: the stock is so validle.

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Speaker 1: So it does a perpetual motion machine. It's solved, No, okay.

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Speaker 3: The what the thing that I don't understand is the

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Speaker 3: premium of the stock, like the volatility Like yeah, like

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Speaker 3: that that that works, right? The volatility trade is a

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Speaker 3: good trade the stock, Like why is the stock worth

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Speaker 3: twice the value of the underlying big guys? I don't know.

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Speaker 1: Yeah, it's weird. A big crash in bigcoin would be

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Speaker 1: really bad, right, and that's very possible because it's crashed

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Speaker 1: many times in this history.

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Speaker 3: Yeah, you know, like your guess is as good as mine.

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Speaker 3: About like what that does to the premium, Like if

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Speaker 3: Bitcoin goes down by fifty percent, does this stock go

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Speaker 3: down by fifty percent because it go do go down

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Speaker 3: by ninety percent? Who knows?

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Speaker 2: Could I start my own perpetual money making machine where

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Speaker 2: I just have a pot of something and then I

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Speaker 2: try to make my stock as volatile as possible, Like

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Speaker 2: maybe I just say stuff and constantly do it.

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Speaker 3: Like everybody's are trying. No one's like at this scale,

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Speaker 3: but like a lot of companies have looked at this

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Speaker 3: and said we should do that, and so some of

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Speaker 3: them should do it. Some of them do it, like dogecoin,

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Speaker 3: you know, like you can have other there's.

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Speaker 1: Like random like kind of dt.

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Speaker 3: I wrote about the half choking crypto thing that's doing

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Speaker 3: it called you know, there's like a crypto called part coin.

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Speaker 1: There's a strategy.

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Speaker 3: Yeah it was not a company.

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Speaker 1: Yeah yeah, replicated on chain?

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Speaker 3: So yeah, yeah, well it can like the mechanics can

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Speaker 3: can the premium be replicated on chain? I don't know.

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Speaker 3: I mean you can sort of sell anything, but like

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Speaker 3: I think part of the premium here comes from it

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Speaker 3: being a real corporation, right, I mean one thing that's

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Speaker 3: like attried to put up micro strategy, Like they're trying

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Speaker 3: to get into the S and P five hundred Yeah,

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Speaker 3: which is a fascinating Like that turns on a change

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Speaker 3: in the accounting rules that allow for them to take

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Speaker 3: to account for their bitcoin gains as profits.

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Speaker 1: I didn't love it.

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Speaker 3: Yeah, So like they may not get into the SMP anyway,

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Speaker 3: but like they they have not been profitable enough to

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Speaker 3: get into the SMP, but like the bitcoin gains, they

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Speaker 3: have had biggining gains most of the time, and like

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Speaker 3: that will become accounting profit for them.

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Speaker 1: I want to ask you a question that touches in

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Speaker 1: one of Tracy's favorite topics, and it's actually a little

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Speaker 1: bit adjacent here. What would be the problem of just

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Speaker 1: having an index that's just these are the five hundred

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Speaker 1: biggest companies. Is there any like what's better about having

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Speaker 1: an S and P that sometimes has some discretion versus

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Speaker 1: just like you're the five hundred biggest companies.

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Speaker 3: In the world, in the US whatever in this immediate case,

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Speaker 3: like what is a company? Like is spy a company? Oh? Interesting,

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Speaker 3: because like this is this is an etf right, I mean, like,

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Speaker 3: arguably this is an eat, right, it's in the trappings

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Speaker 3: of a tech company. But like if you said the

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Speaker 3: biggest company as well, you know, like is it S

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Speaker 3: and P five hundred? Fun a company? But away from

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Speaker 3: that now, I mean, like people definitely have very rule

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Speaker 3: driven indices. I think part of the appeal of the

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Speaker 3: SMP is, you know, it's a product that's sold to

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Speaker 3: fund managers, right, and like if if every fund manager

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Speaker 3: says I don't want to own, you know, for a while,

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Speaker 3: the SMP was for a while a lot of indexes

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Speaker 3: were excluding dual class stocks because like fund managers would

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Speaker 3: call the index providers and say, we don't want to

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Speaker 3: own dual class stocks, were bound to buy the index,

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Speaker 3: so take them out of the index. And then like

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Speaker 3: they changed their mind because all the dual class stocks

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Speaker 3: were doing well and so they had to put them

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Speaker 3: back in the index. But it's like it's just a

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Speaker 3: market driven thing, right, Like if people want a certain index,

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Speaker 3: they get that index. Was something wrong with having the

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Speaker 3: top five hundred companies the index.

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Speaker 2: Like nowadays everyone has started custom indexing as well, right,

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Speaker 2: so like if you don't like the S and P

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Speaker 2: five hundred, you can just ask for your own index

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Speaker 2: and that's why there's a billion indexes.

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Speaker 3: Now.

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Speaker 2: The other thing I saw was there was a bitcoin

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Speaker 2: minor I think it was called Mara or something, Marara Holdings,

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Speaker 2: and they said they weren't going to issue converts basically

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Speaker 2: to do the same thing as micro strategy. So it's

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Speaker 2: almost like, is this going to be like an asset

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Speaker 2: class a thing that stays with us?

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Speaker 3: Yeah? You know, the people in the convert market talk

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Speaker 3: about being saturated with with like crypto converts. Right, Like

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Speaker 3: if you like grew up as a convert investor, you're

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Speaker 3: like you're like portfolio and crypto, right part because like

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Speaker 3: you think about like the volatility and like the technical

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Speaker 3: aspect of making money on the trading, the volatility that

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Speaker 3: depends on the credit being good, and like no one

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Speaker 3: really knows the credit here, right. If there's a big

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Speaker 3: crypto crash, all of these credits like in a very

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Speaker 3: correlated way become terrible, and so like your whole you know,

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Speaker 3: asset class falls apart.

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Speaker 1: Prior to all this, what was the canonical use case

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Speaker 1: of who and why issue converts?

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Speaker 3: Oh?

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Speaker 2: Uh, I seem to remember energy companies.

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Speaker 3: Energy did a lot. I mean, like the canonical case

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Speaker 3: is like tech biotech like but a lot of energy too.

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Speaker 3: You know, it's like it's like companies that are volatile,

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Speaker 3: companies that often don't want to get credit ratings. Companies

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Speaker 3: that you know, like what you're saying telling is in

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Speaker 3: some sense equity upside and in some other sense equity volatility,

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Speaker 3: and that's more attractive to converted Like they're companies that

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Speaker 3: have attried to equity volatility and not such attractive credit

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Speaker 3: to like traditional credit investors, and so they can do

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Speaker 3: that trade rather than a sharing bonds.

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Speaker 1: You have a deep seat, take.

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Speaker 3: Various takes. My main take was today, like your old

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Speaker 3: that you know, the way to monetize deep seek was

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Speaker 3: short video.

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Speaker 1: I was my old blog at the star war dot

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Speaker 1: com in like two thousand. This was when, you know

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Speaker 1: what I thought about this When Google introduced sheets or

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Speaker 1: when they came out with their Access competitor, I was like,

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Speaker 1: some companies should start doing this. When they short Microsoft

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Speaker 1: for some reason, Sheets never really took off and became

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Speaker 1: an Excel competitor on a real level. But back when

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Speaker 1: it was so much free web two dot software, I thought,

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Speaker 1: give up free software and short your competitor.

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Speaker 3: Anyway, Yeah, I mean there's no evidence that Deep Yeah,

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Speaker 3: it'd be cool if they did.

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Speaker 1: Lots More is produced by Carmen Rodriguez and dash Ol Bennett,

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Speaker 1: with help from Moses Onam and kil Brooks.

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Speaker 2: Our sound engineer is Blake Maples. Sage Bauman is the

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Speaker 2: head of Bloomberg Podcasts.

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Speaker 1: Please rate, review, and subscribe to Odd, Lots and Lots

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Speaker 1: More on your favorite podcast platforms.

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Speaker 2: And remember that Bloomberg subscribers can listen to all our

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Speaker 2: podcasts at free by connecting through Apple Podcasts. Thanks for listening.