Transcription
Bank list Nation. I'm here with Jeff Dorman. He is the CIO at Arca. We had Jeff, we've had Jeff on the podcast a number of times, but not recently. Jeff, welcome back to the podcast.
>> Great. Thanks for having me. And quick disclaimer, this is uh my own information and not uh investment advice.
>> We also have Matt Walsh, founding partner at Castle Island Ventures. Also, we've had Matt on the podcast plenty of times, but not recently. Matt, welcome back.
>> Good to see you, David. Good to see you, Jeff. All right. So, uh, Michael Sailor and Strategy are in a bit of a predicament. They might might have bought themselves some time, but I don't know if they're really out of the predicament, and I want to go it through with you guys exactly the nature of this predicament. Maybe just to really start this question off, I think the question that I would like to know is, will Stretch ever trade back at $100 ever again? Uh, maybe Jeeoff, I'll just throw that one to you and just see see what you think about that.
>> Uh I think it can. I mean actually I I'll caution everything I'm about to say throughout this entire uh discussion is that you can't really talk in absolutes with strategy. Everything has probabilities. So I would say the probability is very low uh probably single digits that it gets back to 100. But it can I mean you know uh ultimately there's two cohorts of people who buy something like stretch right? One is sort of uninformed retail, kind of like your mom and pops who all they care about is every month did the dividend get paid and if so they're happy uh because they're living on a fixed income and don't even look at the monthly statements or the actual uh capital. Um and two are people who are probably doing the probability math of well how many months of runway do we have and is it worth getting 12 points of interest every year relative to a chance that it might fall 40 or 50 points if they ever cut the dividend? So, I think it's going to be a a less than useful tool for strategy going forward in terms of issuance. I don't think it'll ever get above 100 in a meaningful way where they can actually sell a ton of it to buy more Bitcoin. But I wouldn't rule it out that that it gets back to the, you know, mid to high 90s eventually as as you know, the story kind of calms down and people recognize that they've got two years of of dividend coverage.
Now, I've I've watched both of your guys' takes both on uh Matt, listen to your podcast, and I read all of your guys' tweets, and so I think you guys are directionally aligned. So, if there is any dislocation in your guys' opinions, uh I I would like to have you guys flag that, but uh Matt, what do you think about the idea of stretch trading back up to $100?
>> I mean, I guess anything's possible if you look at what they announced yesterday. Um I mean, talk about complicated capital structure here. Um number one is they announced a new US dollar reserve policy. So looks like they're up to 17.4 months of coverage. Um that's to service the preferreds and the indebtedness uh across the cap table. Number two is the stretch dividend. So they increased it to 12. I clearly trying to make a play to have people stay in that product. Um the third thing they announced is a digital credit repurchase program. So they allocate up to $1 billion in repurchases across the preferred stack. So yeah, could they repurchase it? Could they drive the, you know, closer to 100? I could see that. Uh they also announced a common equity repurchase program for another billion dollars. And they announced a Bitcoin monetization plan for 1.25 billion that they could sell into US dollars. So could some combination of that push the prefers up? Sure. Now, is it going to be a useful issuance platform in the future? I highly doubt that.
>> The the thing about the what they announced uh is they announced a framework. A digital credit capital framework. It was not in plain. Can we just say in plain speak? What what was that in simple explain like I'm 5 years old terms? Like I don't want to hear digital credit capital framework. What did they announce Matt?
>> Look, so they had about what nine months of cash to service the preferreds. Market's freaking out. They need to either sell equity or they need to sell Bitcoin. Uh they sold common equity in size last week, over a billion dollars of common equity. And what they basically announced is that we're going to actively manage this balance sheet. We're going to seek to keep the preferred in the game. We're not going to sacrifice the preferred. I think Jeff's had some good takes around this trillemma here between Bitcoin, the common equity, and the preferreds. And I think it's really difficult to find an outcome that is beneficial to all three cohorts there. Um, but they basically announced, look, we're gonna try to manage these three constituents.
>> Jeff, do you think that that is even a stable equilibrium for strategy, uh, the the three different investor bases, the MSTR equity investors, the stretch preferred investors, and then Bitcoin itself? Is it possible to balance between these things?
>> No. I mean, I think that that's 100% the problem with this company. I mean it's not it there's no trigger for it to go bankrupt here, right? There's no forced liquidations of Bitcoin coming up or anything like that. The problem with this company going forward is simply that um each part of the cap structure is in a war with the other parts of the cap structure, right? Everything that is good for one part or is ne is going to be negative for other parts. like there's just there's no way short of Bitcoin just mooning to 200,000 that all parts of the capital structure and [clears throat] really there's a fourth part which Matt didn't even mention which is the debt holders right which which you know are fully covered but that's coming due at some point in the next four years as well um you know with about a billion dollars of maturities and puts coming every year so there's four parts of the cap structure and and there's just no way to satisfy all of them what what I would say in layman's term you know what what they announced yesterday in layman terms is basically we are now an actively managed hedge fund we are going to actively, you know, it used to be all we do is sell stock to buy Bitcoin, right? That was a simple story four years ago. Then it was, oh, we sell all kinds of things to buy Bitcoin. We sell preferred, we sell debt, we sell equity to buy Bitcoin. Then it was, well, sometimes we might have to sell some Bitcoin. And now it's basically everything we can sell uh or buy, right? So, it's like every single part of their cap structure, we may sell or buy. We may sell more debt. We may buy back the debt like they've already done. We may sell more equity. We might buy back the equity. We may sell the preferred. We may buy back the preferred, we may buy Bitcoin, we may sell Bitcoin. Right? They're basically saying, we are now an actively managed hedge fund. And all we're going to do is look at the fact that all four parts of this capital structure are literally at war with each other and we're going to take advantage of that and try to monetize that volatility uh that they created for no reason. [clears throat]
>> Jeeoff, you bring up the the per uh the converts and I they were silent on that front. I mean, how easy do you think it's going to be to get them to um to refinance these converts? 6.7 billion in maturities over the next couple years.
>> Yeah, I actually think it's pretty easy. Um, you know, as a former debt capital markets investment banker, um, you know, the joke with all convertible bond buyers is they're not real debt investors, right? Real debt investors look at covenants, they look at the docs, they're very into the weeds in terms of what you're getting. Convertible bond investors, they don't care about the underlying company. They don't even care about the credit really. They care about the volatility and uh, you know, are they able to arbit it, right? Is the stock liquid enough that they can short it? Are there options markets that you can like basically it's just an ARV market. So a billion dollars of converts is actually very easy to roll. Um especially with a uh equity market cap this size. I mean you're talking about 6 billion of debt on a what a $50 billion um uh equity market cap. U it's it's not hard to do. Now there's always timing considerations to it. Meaning like it'll be harder to do you know this month given all of the noise that they've created and all of the negative press around MSTR. But, you know, we talk six months from now, 12 months from now, things are calming down. The preferred are back in the 90s. Nobody's really that concerned about it. Very easy to refinance these. Now, again, it's going to just continue to exacerbate the problem because the first time they did this, they could do all zero coupon converts. You know, that were, you know, up 25, up 30 type premiums. Each time they have to do this, the the terms are going to get a little more ownorous. They're either going to come at 2% coupons or 3% coupons. and you know maybe the conversion ratio is slightly less in Micro Strategy's favor and things like that but they will be able to do it. The debt really um is not a huge problem especially when you look at the way they staggered uh the maturities where it's only you know basically one bond issuance every year. So in that regard they did a pretty good job of staggering maturities and making this pretty refinancable.
>> So they they raised they had a US reserve raise in this new framework announcement they increased the reserve to 2.55 billion. I don't know how much they added but is substantial um a substantial amount of capital raised from selling the MSCR. MSCR is right now is at trading at 1.04. So it's 4% above the actual value of the Bitcoin that they hold. Not terribly long ago, just like maybe a couple months ago, it was at 1.3 and now it's down to 1.04. For a moment last week, it got below one. It was at like.99.98. Essentially, it is backed up against a wall as I see it. And I don't know if this is explicitly not allowed, but at least there's a social contract of not issuing MSTR below an MNAV of one because that invalidates the whole point of MSTR, holding MSTR as an equity investor. I I want, you know, concentrated exposure to Bitcoin, and that's why I buy MSTR. So that tool that that option that strategy has is gone so long as MSTR trades essentially at one to me. There is no other option other than to sell Bitcoin uh and that they are exercising that option or at least allowing them to exercise that option. But with with MSTR at at one that's kind of like been their main source of padding of of adding months of dividend to the stretch facility. And so with MSCR at one to me there is always a bit of a predicament that strategy is in so long MSCR trades around one. That's my analysis. Matt, what do you think about that?
>> First of all, I just I wish we had a common way to represent MNAV. It seems like every dad has a different way to calculate this. And so strategies MNAV is different. It's not a common equity market cap MNAV. It's an enterprise value MNAV. And so depending on where this is trading, you know, it's higher. If you use the another methodology here, there would actually look a lot lower on an MNAP basis. But, you know, bigger point is I think you're right. I think you're either selling common equity or you're selling Bitcoin. Now, are there out of the box ideas that they could do? Could they sell the software business? Could they explore other types of instruments to um to raise credit? Yes. I'm sure he's talking to Chat GPT about this all day long right now. give me a few more ideas and you know they're out there. I think there's some esoteric things they potentially could do and uh they are wizards from a capital markets perspective but yeah I think this boils down to are you selling Bitcoin or are you selling common equity I think it's really interesting to think about this from the a fiduciary perspective um, you know, what is the right lever to pull here um, and those have got to be some difficult conversations at the board.
>> Isn't the whole idea here that strategy they have MSTR they have their Bitcoin holdings they have their uh, you know, their stretch investors they have uh their convertible notes. You know, Jeff, you called this strategy is now just an actively managed hedge fund. Well, they they've built up all of these tools, the all these options, all these doors that they can choose to walk in. They've built up optionality for themselves. Uh is that a correct framing or or how would you how would you amend that that illustration?
>> Well, I yeah, I mean, again, I think they have done a very good job over the years with capital markets to build up that optionality as you said, but it doesn't change the fact that most people who originally invested in this wanted to get some sort of levered Bitcoin. And that's just not exactly what they're doing anymore right now that they're talking about all these different levers they can pull and trying to be, you know, make a creative decisions here and there. Not to mention, they're not very good at it, right? They continue to top last Bitcoin at high levels and then have to be forced to sell it at lower levels. Even look at what they just did with the convert, right? They they bought back a $1.5 billion convert with the cash on their balance sheet. Uh that cost them $40 billion in enterprise value. Um I mean just a horrific unforced error, right? You know, I mean just like it made no sense why they did that with the cash while not also finding a way to replenish the cash at the same time because that's what started this whole downward spiral in the first place is, you know, they at one point had two billion of cash on the balance sheet. Referred holders felt like they were okay and then all of a sudden they removed all the cash to buy back the debt. people freaked out. People started hammering the stock and literally they lost 40 billion in enterprise value because of a terrible trading decision. So, you know, one, I don't think they're that good at it, even if they have a lot of options. And two, even if they are good at it, it's not exactly what their original investor base um signed up for. And I would go even further that, you know, we've never been uh uh bulls per se on MSTR, but I often defended it up until nine months ago because I thought that most of the takes on MSTR were outlandish and wrong. Meaning, most people were like, "Oh, they're going to get liquidated." not understanding that that isn't going to happen or you know they're going to be forced to sell the debt not understanding that there was nothing in the debt covenants that were going to force it or they're going to go bankrupt and it's like well that's not going to happen because again there was no covenants in the debt to form a so I was often defending them because it was a pretty simple story that that most people were misinterpreting. Um but once they layered on all of that uh debt and and and ultimately really just the preferred with that cash interest, that's when it just became indefensible anymore because um, you know, there's still not really a risk of bankruptcy, but there is a real risk to certain parts of their holder base and quite frankly they do a a terrible if not fraudulent job of explaining that, right? I mean marketing the preferred as a money market is, you know, ridiculous. Um, you know, for those who have invested and distressed in credit markets for for a long time, know that there's lots of companies out there that have cumulative preferred that they just shut off the dividend and they just sit there forever trading at 30 or 40 cents on the dollar with no real hopes of repayment. Like, if you own the preferreds, there's there's there's two really good outcomes, right? One is that they continue to sell a bunch of Bitcoin or stock and pay you forever. Two is that they actually go bankrupt because you'll get your money back in a bankruptcy because they're fully covered. The worst outcome is they stop paying the dividend, but there's no triggers to force them to do anything and it just languishes at 30 or 40 cents on the dollar forever. Um, which is most likely what will happen eventually, right? So, so again, it's it's
>> That's your most likely case for a stretch?
>> Not necessarily today, but eventually for sure. I mean, it's just you already have a billion7 of cash dividends that that that's probably growing over time as we said with higher interest expense on the debt that they're going to have to roll. Plus, who knows if they come up with other things, but it's just not feasible to pay that every year uh in a business that generates no cash flow. So, at some point, the most likely probability at some point is that they come out and say, "We now own all of the Bitcoin that we ever wanted to own." Let's say it's a 5% or some magic threshold, right? And they're like, "We own 5% of all outstanding Bitcoin. We never want to buy anymore ever again. We're now just going to sit there and wait for Bitcoin to go higher like it should." And therefore there makes no sense for us to pay the dividends anymore because what do we care, you know, as long as we're not accessing the capital markets anymore. We don't care about the dividends. So that has to be, you know, the endgame at some point. You're not going to just pay these dividends forever. You know, the only reason to pay them is to keep the capital markets open to you so that you can refinance and do other things um, you know, in the future.
>> I think it's a really good point on the legal exposure. I think there's three things that I would really worry about here in terms of what could go wrong. uh one is the price of Bitcoin continues to go against them. They're in trouble there. Second would be just structural flows on the common equity side that go against them and I think that would entail losing inclusion to the various indices that they're included in right now. And so if passive flows go away, I I think you'd be looking at 5 to10 billion of structural outflows in that type of situation. And the third is what Jeff mentioned around the legal exposure here. I I have never seen a company well we're in crypto so I guess I have seen a few [laughter] with this company is really pushing the edge in terms of uh marketing these products uh to retail and um, you know, as Jeff said this they are pitching this thing as a money market fund and it is just definitely not a money market fund. I mean, the when we say the the f-word, the fraud word, uh, fraudulent, the image that comes to mind is that AI babe gate drinking the margarita by the poolside saying, "How did I get this life? Oh, I just bought Stretch." And I cannot imagine that Sailor was going to tweet this out at all. Seriously, like that had to be like a joke like rage bait, which Twitter just like absolutely got rage baited. But I don't know if that matters because now here we are and like now the thing is like 30% off of the peg. It's actually only 17% off today. And I and now that that is just you could just see that as like exhibit A in a courtroom. That's what we're talking about, right?
>> Yeah. I think it's that I think it's the podcast appearances. I think it's also just the what's the bigger picture outcome here. And so Sailor talks about building this Bitcoin credit company. What does that actually mean? I mean, I'm kind of struggling to understand what does that actually mean in the future. Fast forward 10 years, you're a Bitcoin credit institution. You're just issuing more of these preferred. So, I I think it's not very clear what the actual road map is. Well, then I think you know when you constantly change the goalpost, which he's done multiple times in terms of when they're going to buy or sell the stock, what levels, uh when they constantly make up terms, which they have with, you know, their their Bitcoin per share and all those other stuff, when you constantly make uh put numbers on a website that have no real mathematical basis, like even the way he calculates sharp ratio makes no sense. Um as as Matt already mentioned, um, you know, the MNAV is inconsistent with other ways. like there's a lot of um uh not not to mention the fact that you know he's sort of operating in a gray area anyway just in the sense that he is using an instrument Bitcoin that there's not a lot of rules around right I mean you know it's not like you can create a holding company like he has done and just buy Nvidia stock in there because you'd be a Rick right a registered investment company and there's rules around that because you're buying this weird esoteric asset that doesn't really relate to any other asset in history he's getting around a lot of rules so it's like it's hard not to use the f-word in that in that sense because Um, you know, again, the courts would ultimately decide that, but I mean, there's definitely there's definitely a lot of let's put it this way. If you were a lawyer in charge of a prosecution against MSTR, you'd certainly have a lot of things to use as evidence to try to prove your case, right? So, it's it's it's bizarre um that they uh had such a golden goose and decided to, you know, continue to um fly that close to the sun on on some things that I'm sure they were given legal advice not to do.
>> Hey, Bank Nation, quick pause in the episode with Jeff and Matt. I'll get you guys right back there. But first, I got to talk to you about OKX. The Intercontinental Exchange, which is the parent company behind the New York Stock Exchange, they backed OKX at a$2 billion valuation with a plan to launch tokenized NYC stocks and derivatives later this year on OKX. That's TRDFI and DeFi all in the same app. Finally, trusted by over 120 million users globally, OKX is bringing products to the United States market that Wall Street has been talking about for decades, and OKX is delivering them in their new money app. not just a vision but a road map with institutional backing to execute upon it. So if you are not yet an OKX user, there is a link in the show notes to get a 6% deposit match on your money, not investment advice and also not available in New York or Texas. All right, let's get back to the episode with Bat and Jeff.
So with the the details of their digital credit capital framework that came out Monday, the the big takeaway that I think the discourse was growing going around on Twitter was that oh, they are they are going to try to get stretched back to 100. They're gonna try and keep the capital markets open. They're It seems far-fetched, but they're going for it. And now talking to you guys and seeing the potential legal action that they might be up against. That seems to be perhaps a motivating factor as to why they want to do their best right by Stretch and Stretch holders because the opposite of that seems to be going to the being taken to court. Is that a fair uh assessment?
>> I I think they just needed to buy some time here and that's what this announcement was this week. So, you kick the can down the road a little bit. Um, you come out with some actions that theoretically will benefit the preferred um and and it's at least a little bit more clear what they're doing than it was this time last week. Um one of the things I found very interesting was right around the time they were pivoting to being this digital credit instrument. The narrative was kind of changing. They start to issue the preferred. Pete Bger uh joined the board. That was July of last year. One of the foremost investors in the credit space, founder of Fortress Group. Uh he quietly left the board. U I think it was in June of this month, actually. June this month. June 8th I believe. Um I mean that's a tell to me. It's like you get someone like that on the board. You're making this pivot into credit and all of a sudden he's not on the board anymore. Very quietly in a proxy statement. So not a great sign. M the idea is that the guy with all the smarts and the experience who was on the board is just said I don't want to be a part of this mess.
>> That's I mean haven't talked to him but you'd have to read between the lines that director of a public company you would be considering whether or not you want to be involved in something like this.
>> Or just not having or just not having their ideas listened to right. I mean again, you know, there's not that many people in the world who are super close to Sailor. But, you know, this guy owns the whole company. He is basically what 42% of the voting rights on the board. Like, >> you know, it it is all for all intents and purposes. This is basically a monarchy, right? So, you know, you come in with thoughts and ways to help and it might just be like don't care, right? This is the way I'm doing it. So, you know, I think that's that's just as likely of a possibility um that that this is just what is the point, right? when when you have no real influence over what they're doing.
>> Jeeoff, we read your tweet on the weekly roll up me and Ryan did uh last week or maybe two weeks ago uh about your scenario, your probability for three different scenarios moving forward. And this was before the announcement. So I want to get your take on the updated scenarios, but just to just to recap said 70% chance that strategy continues just to sell MSTR. MSTR premium gets hammered, but Stretch gets some breathing room and Bitcoin is fine. You give a 25% chance that Sailor and Strategy does the right thing by just making a very large Bitcoin sale. Uh, which just clears it clears their runway for a very long time, puts a lot of cash in the balance sheet, gives up a bunch of coughs up a bunch of Bitcoin or a 5% chance that they just kill the dividends, stretch, crashes, uh, distress asset, dividends are just foregone, and things more or less abandoned. you only give a 5% chance now that we have the details of their digital credit capital framework. Has anything changed or is that still your analysis but now we just punt it down like 9 to 12 months?
>> Yeah, and again that's why it's I said earlier it's hard to talk in absolutes. Everything's probability with it. But I think that 70% scenario that I said is basically what he did, right? That which is just continue doing what we're doing, which is sacrificing MSTR at the same at the expense of everything else. Um, you know, that's essentially what they did, right? They sold an enormous amount of stock. They pushed it all the way down to that one MNAV level and now they're essentially saying they're probably not going to sell stock again anytime soon and and and they have this, you know, year and a half cash buffer. Um, I still think the right thing would have been to just rip the band-aid off and do an enormous enormous Bitcoin sale. Like even you can go back what four or five weeks ago when they sold the two and a half million dollars of Bitcoin to be cute or funny or whatever they were trying to do. Like just again, it just was nonsense, right? If you're going to do it anyway, you should have done a huge number, gotten it over with, ripped the band-aid off, and remove that overhang. Um, so you know, in terms of like crypto in general has been weak for a lot of reasons. Um, but for whatever part of the story has been directly related to Sailor and this overhang, the clearest way to have removed that overhang would have been to do a giant Bitcoin sale. The fact that they did instead a giant equity sale and then tease that they have a billion and a quarter more of Bitcoin to sell, it just keeps that overhang a little bit on top of Bitcoin that didn't need to be there. Um, so I would say, you know, in terms of probabilities right now, um, you know, I still say less than five five or less than 5% chance that they do the nuclear option of cutting the dividends, right? both for legal purposes and because they just, you know, lost $40 billion in enterprise value to to raise the couple billion to keep that alive for the time being. So, I think that's very low likelihood that they're going to do that uh in the near term. Um, you know, short term, truthfully, at this point, the right thing to do is just do nothing, right? They cleared the deck for a year and a half, they bought time. You just do nothing, right? Stop being the main attraction for a year. Stop tweeting so much. Stop doing anything. just let the market play out for a while and don't do anything. Um, I think that's the right move right now, but probably the lowest probability just because we've learned over the years that he's, you know, somewhat of a narcissist and a lunatic. Um, so, you know, even though that would be my suggestion, but I don't think they'll do that. The most likely path at this point, um, is that, uh, you know, the the the authorization to sell the billion and a quarter Bitcoin probably keeps a lid on Bitcoin until he actually sells it. at some point he has to sell that and be like now we are actually done for a while and that's when I think Bitcoin probably bottoms and and and you know MSDR probably bottoms as well uh when they actually finally stop teasing the market with sales and just do it hold the cash on the balance sheet and and do nothing. So you know my my stance is that there was all kinds of capital structure trades to do over the last few weeks. I think it's largely over right now. I think you know uh uh at least for the time being until you know another unforced error or the market forces you know force something else I think this is just sort of a boring story for the foreseeable future.
>> Does that resonate with you Matt?
>> Yeah I think clearly what he's going to do is just sell the $1.25 billion of Bitcoin and kind of sit tight for 6 to 12 months. Um, you know, another option here would have been to just sell a much bigger amount of Bitcoin. That's probably what I would have recommended if I was on board of a company like this is just sell a big chunk like 75,000 Bitcoin up to 10 100,000 Bitcoin, something like that. Um, give yourself a huge runway. I mean, another option would be to not sell any Bitcoin and just hope the price of Bitcoin goes up. If you think about what's weighing on Bitcoin right now, I think you have the micro strategy question. I think you have a big interest rate question and I think you have the quantum question. So, will the price of Bitcoin be up in six months? Who knows? It's anyone's guess, but I could also see Sailor just taking that bet and just hoping that the price of Bitcoin goes up in 6 months.
>> Doing something then.
>> Yeah, I I obviously I I don't know this, but it doesn't feel like that works to me. Uh like there there's something about Sailor is a large enough player. Strategy is a large enough player. He's got 850,000 bitcoins. So sell sell selling the number that you said like 70 to 100,000 bitcoins is a very meaningful chunk of their bitcoin holdings and it would have to represent sailor just eating some humble pie and to add it would also like be an admission that like he got over his ski tips he issued a little bit too much stretch he just got too bold and I think that's what the market wants but the selling the minimum amount of bitcoin to buy himself self like the minimum amount of time in the hopes that the market just goes up will actually cause the market just to not get clarity. Sailor will still be in the hole and to whatever degree that strategy is actually determining Bitcoin price. I think the market is just like I I'm not I'm calling your bluff and I'm going to make you cough up Bitcoin and I'm not going Bitcoin price is not going up until you eat some humble pie and you cough up enough Bitcoin to satisfy the market. Like that's kind of my attitude.
>> Well, and that's that's a thing that's always been true with investing in general is that the market markets can um handle bad news better than they can handle uncertainty. The faster you get bad news. It's like any new CEO that comes into a company, right? What's the first thing they do? They just have the worst earnings ever. Blame everything on the on the, you know, outgoing CEO and then get all the bad news out of the way and then start fresh, right? What what when you all you do is constantly create an overhang and uncertainty. That's what markets hate the most, right? Right. And that's what he has done um and and will likely continue to do which which like you said is weighing on um, you know, Bitcoin and probably prevents the outcome that he needs the most which is that is him getting out of the way and Bitcoin going higher. But I will say there is a there is another option for him and for strategy which we haven't discussed yet which I talked about even a year ago is that you know, the he could very easily create the Berkshire halfway of crypto and just start making acquisitions with the Bitcoin right if Bitcoin really is this scarce asset that he's telling everyone it is and that, you know, a large cohort of the world thinks it is then there would probably be scenarios where he could buy companies with the Bitcoin where the company would be willing to even take a discount to fair value in order to get the Bitcoin in which case he can actually build some cash flow generating uh uh entities under um his umbrella that not only help satisfy the dividends and the interest rate on the debt but also ultimately, you know, diversify the company a little bit more. um, you know, old school micro strategy bulls might say, "That's not why we want to own MSTR. We just want to own the Bitcoin leverage." But again, he's already ruined that uh uh narrative by turning it into a capital markets hedge fund. Anyway, so at this point, you might as well go fullon, you know, build a real company with the Bitcoin stack that you have. um, you know, you look at some of the success stories like even look at what uh Galaxy has done by buying distressed mining assets and, you know, now the Galaxy stock is probably the most undervalued stock on the planet because of the fact that they own uh this Bitcoin m this distressed Bitcoin mining facility that they turned into an HBC AI data center right? Even the Celsius did the same thing um, you know, with in bankruptcy right there's all kinds of things they can do with this Bitcoin stack now that could actually turn this into a real company. Again, I don't know. I wouldn't put a high probability on that today, but but to me, if I were an MSTR shareholder, that's what I would be ultimately looking for.
>> I think the M&A option is an interesting one. And are you suggesting you would actually pay Bitcoin or would you acquire these companies with common equity? Because I assume you'd try to buy them with common equity first if you could find a cashrich company.
>> Yeah, maybe. I I was thinking actually uh use the Bitcoin, right? that again like we're not there yet. But if Bitcoin truly becomes a scarce asset and one company owns four or 5% of it all like there is a world where people would you know companies would clamor for that Bitcoin and would might you know actually take a less than favorable deal um in Bitcoin uh with Bitcoin as the asset.
>> So you know but to your point uh you know doing a stock deal would be there as well but ultimately, you know, that you get to a point where you you just can't be the only buyer of Bitcoin in the market. you have to do something else, right? So, either go buy some other assets or do something else, right? Diversify the business in some way, shape, or form. And again, you've created this massive overhang by being the Bitcoin buyer and potentially the Bitcoin seller. Get into some other businesses. Use that massive capital structure that you have and that massive balance sheet that you have to build a real business.
>> Kind of to your point, Jeeoff, um Sailor and Strategy are good competent at building that capital structure, but the they're just dog traders or dog at just like making good execution prices for for Bitcoin. What if they just don't have the talent for that? Like they seem to be very good at this one thing and not very good at anything else.
>> Well, I you know I think I read somewhere they have a thousand employees. Like what what do those a thousand employees do? Are they just making AI?
>> Some are part of the software business, right?
>> Yeah, they still have a software business, right? So I think they have 10 to 15 employees on the Bitcoin capital market side.
>> Yeah. And and the rest of them are just making AI. social media videos like I don't know what they I don't know what they I don't know what they do. Um, but you know to your point like not having that expertise doesn't mean that you can't either develop or acquire that expertise, right? I mean, >> you know, again, this is >> you have to put your venture hat on for a second, right? Most venture capital investors will say at some point in their careers, we just bet on the founder. We just bet on the guy. Like we don't know, you know, we just think that that, you know, guy or girl is amazing. Like in some ways, shape or form, that's what MSTR shareholders or anybody who owns any part of the capital search they're doing. are betting on Sailor and they think that he's going to come up with something, but at some point his playbook runs dry and he has to be humble enough as Matt, you know, to use the word Matt said earlier to to basically say, "Okay, we're now beyond what I can do. Let me go get some real talent in here to to run other parts of the business." So, you know, again, I I'm not suggesting that that is a a high probability outcome today, but it is uh, you know, reading through crypto Twitter and watching so many people just defend MSTR with with just blatantly incorrect facts. If you're going to defend it, you know, at least be creative with why you're defending it that that there are some other things they can do uh besides just, you know, killing one part of their capital structure to save another part.
>> I think the M&A idea is a very interesting one. If you think about what he can do for Bitcoin though, specifically, he has this quantum initiative, but it seems like he's poo pooing the quantum threat in general. He was on stage at the Goldman conference today in London. Um, was somewhat dismissive of the threat. I'd actually say that might be the one thing that he could do for the macro asset is to just really lean in and fund some development there, fund some uh just a roadmap for Bitcoin core. Um, and just speak more about it. I think that being derisked could actually just help his balance sheet in a way that uh maybe the M&A wouldn't in the short term.
>> So I kind of I kind of get the sense that this matter is simultaneously resolved and unresolved in the sense that like the stretch is trading back up. It's up like 17% from the bottom. It's still about 17% off from the top. So, it's like h it's like kind it's not getting worse at the very least. MSDR is down. Uh but hey, they've got like 26 months of runway if they sell the one and a4 billion dollars of Bitcoin and so 26 months of runway is a decent amount of time. And so like h it'll it's a car crash in the future. So it's simultaneously resolved and unresolved. I I kind of did just feel very unsatisfied about any sort of like local conclusion here. So, like I don't know, maybe the story is I have you guys back on in 20 months and we have this conversation all over again and see what the hell strategy that they've done to mediate this thing. It this is the case in a lot of companies by the way though that have huge debt loads. And so if you take a look at um iHeart Media for instance, there's no way that business can be a going concern business three years in the future given their debt load. So it's just a matter of when are they going to refinance and you know the forcing function will come at some point in the future. I think the puts are really what would be the forcing function here. You know there could be other interim forcing functions around getting dropped from an ind indices uh something like that. But yeah I don't see this is this is not a company that's going bankrupt in the next six months. There's no forcing function there.
>> I'd also add that even just the way you describe that shows the brilliance and the craziness of the way micro strategy markets itself. The fact that you just included a billion and a quarter of Bitcoin sales that haven't happened yet on their balance sheet as cash to pay, you know, that's no different than him saying we have 30 years of dividend coverage. Well, yeah, if you sell a ton of Bitcoin, you know, you're just you're just automatically adding that because they said they might do it, which is what he's been doing, right? It's all sort of slight of slight of hand, you know, magician stuff that he's been doing. um, you know, just to convince the markets that that that, you know, he's covered in ways that he actually isn't until he actually does these actions. Um, but I do think too a lot of people don't um a lot of people are talking in extremes with this company like you know, it's going to go you see some equity reports like Benchmark coming out with a $500 price target and, you know, then there's someone else who says this thing's going bankrupt and going to zero. Like most likely as Matt mentioned and I said like there is no there's there's no huge bull case here and there's also no bankruptcy case here. It's most likely just going to be a slowly kind of melting ice cube for decades. um very similar to like printing companies or yellow page companies, right? If you go back like 15, 20 years when the internet first started kind of getting going, everyone started calling for the demise of the yellow pages and the phone book companies and the printing companies like R. Donnelly and all that stuff. And instead, the debt was great instruments to own because the these these companies were just cash flow machines. Like 80 year olds still get phone books, you know, and they they still go to, you know, uh uh uh the printers. Like these businesses don't just go away overnight. It's very rare to see something just go away overnight unless again there's some sort of massive trigger that forces a a bankruptcy. This is just going to be a slow bleed melting ice cube where you know you'd be hardressed to find a real bull case for the stock right now that isn't just why don't you just buy Bitcoin if you're bullish on the stock. Um outside of him doing something crazy like we mentioned which is, you know, the nuclear option of killing the dividends andor, you know, becoming pretty acquisitive uh in some M&A scenario. So, it's it's just going to be kind of dead and boring for
A while until something happens, in which case you get us back on and we talk about the new things that are going on there.
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The the thing that could happen, of course, is that Bitcoin just pumps and you know, sailor sailor is saved. The reason why I have trouble seeing that is because Sailor has taken such a large amount of the oxygen out of the room when it comes to being bullish on Bitcoin. At at least just because we haven't had we don't have a larger figure than Sailor being bullish and buying Bitcoin in size. Like how do you how do you have sailor's larger than life? That's kind of half the appeal of strategy. And so anything short of like the Bitcoin strategic reserve deciding to actually take tax money and buy Bitcoin, like Sailor needs somebody bigger than him to come and buy Bitcoin or need some macro environment or some liquidity environment for other people to say Bitcoin is bullish rather than Sailor. And there's been such a limelight on Sailor and he's just like co-op is kind of a negative word, but he's just co-opted a bit of the Bitcoin narrative and now it's the Sailor narrative. Bitcoin and Sailor are kind of the same thing. And he really needs somebody else to take the the torch away from him and carry it forward and push the Bitcoin ball up the hill so he can be saved because he clearly can't do it all of himself. And so like one bare case I have for for bit B bit B bit B bit B bit B bit B bit B bit B bit B bit B bit B bit bitcoin not even strategy is just that Sailor has the narrative and Bitcoin holders and and Michael Sailor needs somebody else to kind of step in in order for Bitcoin to be bullish. So I don't really see Bitcoin just magically appreciating back to all-time highs with Sailor also being the core figure head.
Matt, what's your response to that?
>> So I agree with part of that. I mean, I agree that if you're a large buyer of Bitcoin, you probably would want to have a view on what is going to happen to Micro Strategy before you step in just from a flows perspective. So, in the near term, I completely agree with that. However, on just the macro thesis for Bitcoin, sailors kind of know part of that, right? So, what is Bitcoin? Bitcoin is competing to be a venture bet on the emergence of digital gold. It is a non-s sovereign store of value. If we have a interest rate regime uh that is favorable over the next few years, I'm sure Bitcoin will become more interesting to a lot more people and you could definitely see it going up. If quantum uh roadmap is a good road map and there's an actual plan there, then I think a lot of the questions from the bigger allocators will be addressed and I don't think Sailor will be as big of a piece of that market in terms of just the structural flows that could come into this market. I think the bigger question though is what is Sailor doing then? And so if Bitcoin is double, triple what it is right now, is he just running the same playbook again and we're having this conversation five years from now and another bare market, I mean, where does he stop? He doesn't seem to be the type of guy that's going to stop.
>> Yeah. You think he just finds himself back into just a another trap, even bigger this time later?
>> I mean, I think he has ambitions to own a lot more Bitcoin.
>> Yeah. I I think it's, you know, it's probably no similar to like a sports team where, you know, you have one player who's got all these off- the- field distractions and it's like, you know, you just want to uh you don't necessarily have to cut that player. You just need them to shut up for a while and get out of the press. Like again, I think that's the best outcome for Bitcoin right now. I'm I'm neither a Bitcoin bull nor a Bitcoin bear. I actually kind of think it's fairly boring asset now relative to a lot of things in blockchain, which I'll get into in a second. But like the, you know, just just getting out of the way, getting out of the press, getting out of the story, just letting this sort of die down. Um, you know, again, they they they they they finally did something responsible after crushing 40 billion of enterprise value, which is build up that cash uh uh uh value on the balance sheet. Like they can just get out of the way for a long time, right? A year, a year year and a half, and just sort of be quiet and let Bitcoin develop its own non-Sailor narrative for a while, which, you know, very well may, you know, develop into something that that helps him. But um, you know, to your point while he is the main story while he's the ring leader it just it's it can't be good for Bitcoin. Um, and I think on top of that and this is what I was saying about other areas like the irony of this sort of Bitcoin bare market and and the sailor bare market is that in a lot of ways blockchain is one of the hottest investment areas alongside AI and robotics right now. Like most investors will tell you they want to find a way to get long the growth of blockchain because they're seeing this everywhere. The problem is the growth of blockchain is happening in three distinct areas. It's happening in uh uh stable coins and payments. You know, even another huge announcement today about a consortium of fintech companies and banks that are getting involved in in in in in uh uh oh what is it OSAD or new stablecoin um on different rails uh alongside like you know your your western unions and PayPal and all the other companies that are doing stuff in stables and payments. So that's a huge growth area for the market. DeFi, you know, another area that's just up and to the right. and then RWA tokenization which is just every chart is up and to the right. There are three main areas of massive growth in blockchain right now that just don't happen to touch Bitcoin in any way, shape or form, right? And that's sort of the other part of it is that while Sailor, you know, Bitcoin is already struggling right now to even be part of the blockchain discussion given how much is happening outside of Bitcoin and then on top of it you've got the Sailor clown show like it's it's you know, it's it's not good, right? And I think he he has to get out of the way one way or another to give Bitcoin at least a chance to fulfill uh, you know, the role of that kind of you know non so sovereign store of value that that that people wanted to be and at one point it looked like it was headed towards.
>> I'm not bullish on Sailor being quiet and going away.
>> Some people just like to be the main character. Yeah.
>> >> It's tough.
>> Yeah, he's been our biggest and and most main character for a long time now. So, I think he holds the title for that. Yeah. Hopefully, I never have to hear the bad boys music on your podcast, Matt, when it comes to Michael Sailor.
>> I hope not, too. I [laughter] hope not, too.
>> Uh, Jeff, is there a price you would ever buy Stretch at?
>> Uh, well, I'd have to answer that in two ways. Um, well, first of all, there's a price for everything. So, the answer is yes. But, you know, there's a difference between when I put it in my personal account with my own money versus when I put it in our funds. M the you know I'll start with the funds. Probably not unless this thing gets to 30 or 40 cents in the dollar and you think that there's some sort of imminent bankruptcy. Uh it just the riskreward is just terrible when you know you literally have an instrument that at any moment they could just turn the dividend off and it just goes down 60 points. So you know even if I had a clear four-year horizon before they do that at best I'm breaking even, right? I'm getting, you know, 48 points over four years of dividends. to watch the thing fall 50 points as soon as they cut it. That's just bad riskreward for a fund. Now, in your personal account where it's your own money and you know, you take risks and whatever, maybe that's a different story, right? I I actually thought, you know, last week I was telling people internally, right? You know, in the low70s, it's actually not a bad time to add because of everything we just said, which is that given all the potential lawsuits, given all the legal risk, there's no way he's cutting the dividend anytime soon. He's going to have to kind of support this thing. So, as a trading instrument or as a, you know, four, five months, you know, I think in the, you know, 60s and 70s area or even low 70s last week was was not a terrible place to nibble. And I'd actually say the same thing for the MSTR stock. Like, if it gets to 70 or 80% of MN of NAV, that's the area you'd want to buy that stock, too. Um, you know, where there's clear value there. Mhm. We we've seen um there's also beyond strategy there's also strive and strive has has issued SATA SATA which is very similar to stretch basically a carbon copy of strategies strategy uh but as a much smaller carbon copy of of strategy and like over in my mind I'm like okay there's one thing if there's just one guy doing this thing and he's doing it all of himself but when there's a second like and the second guy is like, "Oh, yeah. This this is a real again, no pun intended, this is a real strategy, and I'm going to do this for myself, too, because anyone can do this." And I was like, "Hm, maybe Bitcoiners are just going to do it again. They're just going to meme this thing into existence, and if there's enough of them, they all make it more successful for each other." Now, in this particular moment, both Stretch is trading 17% off. Like, SATA is trading 10% off. It's not necessarily looking healthy, but I will always kind of wonder if like if there is a there there and what I mean by that is like this whole digital capital structure thing with the equity and the the preferred instrument. It's like is this thing a viable long-term business? I'm hearing from both of you guys that it's not. But I still kind of wonder if if there's a if there's just a chance out there that this is actually genius and so long as Bitcoin follows in the four-year cycles, like both of these people have bought way more Bitcoin than they could have ever bought because of their like equity preferred instrument.
Matt, what is your reaction to this?
>> I mean, I think you can extend that well beyond Bitcoin. Just look at how many DATs we have now. What do we have? 30 DATs at this point. And then Tom Lee uh he did an equity preferred instrument at 9.5% yield.
>> Yeah. And so I mean I get the reason for people launching these things. First of all, there's phenomenal incentives just from a personal perspective. You have asset management agreements on a lot of these things too. So I get why people are doing them and I I understand that it's levered exposure. But I think I think there is a question there. Are these things that interesting? these these will end up probably looking like actively managed hedge funds unless they staple on operating businesses. So absent an operating business, I just don't think these things are that interesting. I I actually don't think the prefers were the problem. I think like anything, it's not black and white. It's it's you know, it's in moderation, right? You know, gambling necessarily a bad thing. Gambling too much a very bad thing, right? Some debt not a bad thing. Too much debt very bad thing. Like having some prefers made sense. The problem was just the size and the scale because again this guy is just you know known for just flying too close to the sun. Like the size and the scale of what he did relative to the cash flows of the business were just untenable. Whereas you know you mentioned Bitmine. Bit mine just did I think a $300 million preferred of their own. Independent of whether you like ETH versus Bitcoin the asset. ETH is at least a productive asset. You can do things with ETH. You can stake it. You can lend it. There's actually some demand. Bitcoin is a pet rock. You can't do anything with it. there's no demand to borrow it. Uh even you know all these call overwriting strategies that have come about like the V has just gotten crushed like there's almost no way to generate yield with your Bitcoin with your Ether is which means that he can actually Tom can actually generate $300 million uh a year of of real cash flows to be able to satisfy a small amount of preferred on the balance sheet. So the instruments themselves, you know, again, I don't remember exactly when they started this uh uh preferred and stretch specifically, but it was somewhere in the 9 to 18 months. Like nobody was up in arms when he started this. It was the size and the scale that he got to that made this, you know, completely teeter in the wrong direction.
>> Matt, Jeff, this has been immensely helpful for me understanding exactly what's going on. So I appreciate you guys coming on the show and just providing me some clarity and and hopefully the banklist listeners some clarity. Is there any other stone that I haven't unturned turned over? any other component of this conversation that you think is worth elevating here?
>> No, I think we covered it.
>> Matt, I listen to your podcast uh every Friday. You and Nick Carter, uh listeners who have bankers probably know that by now, but uh tell people about your podcast and where can they go find it.
>> Sure. Yeah, thank you. It's on the brink with Castle Island. Uh we do an episode every Friday. Speaking of talking about strategy this week
>> and uh Jeeoff, I've been following you for forever now. I I really appreciate all of your takes. Where can people find you?
>> Yeah, on uh on Twitter RX, you can find me at Jaydorman81 or on our website ar.ca where we put out a weekly blog called That's Our Two Satoshi's that I think has been running now for eight years every week.
>> So, >> eight years, man. We are some we are some industry veterans at this point. Matt, Jeff, thank you guys for coming on the show. I really appreciate it.
>> Good to see you guys. Great. Thanks, David. Good to see you, Matt.
>> Bank Nation, you guys know the deal. Crypto is risky and so are equity preferred instruments. You can lose what you put in, but nonetheless, this is the frontier. It's not for everyone, and we are glad you were with [music] us on the bankless journey. Thanks a lot.