Transcription
So you've identified that capital is grossly mispriced and the collateral in the traditional world is really overvalued whereas Bitcoin is undervalued and so you saw this opportunity. You've released these credit instruments. You've got Strife, Strike, Stride, and now Stretch. Let's break it down a little bit further.
Can you just share um for a lot of people they don't really understand what is a preferred stock? It says stock or share, but it really acts more like a credit, like a bond. You're getting a yield. So, can you talk about what a preferred is? And these are specifically perpetual preferreds and how unique that is in the market.
Okay. A preferred stock is uh is a second class of stock other than common. Common stock is you're just uh the final owner of the company. Um and you don't really have any particular uh preferences. is you don't you don't get any particular guarantees from the company. But if you create a preferred stock, that stock can be given a dividend yield. We can say that stock's going to play pay this this dividend monthly or quarterly or it's going to pay a dividend that floats with sofur. It could pay a fixed dividend. It could pay a variable monthly dividend. It could so you can give it certain cash flows and certain yielding rights. The stock can also have conversion rights. So you can say hey this converts to onetenth of a share of my common stock or 1/5if of a share or it's fully convertible. So you can give it uh any amount of equity upside. You can give it any amount of yield. You can give it liquidation preferences. You can make it senior and you can you can give it guarantees like like uh it's a cumulative preferred uh dividend. So if we miss our dividend, we we'll accumulate it. Or you can give it penalty. You can say if we miss it, we'll pay you a penalty. You can you can pretty much write anything into the the share that you like. So there are many different types of preferred stocks. It's a generalized container.
And it's not debt where you have to pay it back, right? It's it's not like a convertible where you have to pay the principal back.
You raise the money and you don't pay it back.
Yeah. It's generally it's different than a debt instrument because a debt has to be the principal has to be repaid at some point certain. Uh you could make it more debt-like if you said hey uh the holder has a put right to put it back for cash and you should you could make it look more like a debt instrument if you wanted or if you basically give the holder the right to get all their cash and principal or to redeem it. If you gave it a redemption right at some point, that would look a lot more like debt. Or you can make it look a lot more like equity. If you said it's noncumulative, like stride is non-cumulative. So the principal never comes due and the dividend could be suspended without a penalty or without an accumulating liability over time. So So you have extremes from very very debt-like preferreds to very very equity like preferred, everything in the middle. Um and that just makes it a very flexible uh a flexible uh security for a public company to issue. Now if you happen to be a public company and if you have a lot of Bitcoin then you could you could create this security and then you could take it public. So so the first innovation is to create a preferred. The second innovation is to take it public and then you IPO it on like a four-letter ticker like STRC. And the third innovation would be uh if you do take it public, you might put a shelf registration against it. And in in that case, that means you might sell a billion dollars of it up front, but then you might sell 50 million a week or some amount of it continuously almost like an ETF gets bigger. Like IBIT got bigger because every single day capital flows into it and they increase the number of shares of of an ETF. So, when you create a preferred that's got a shelf registration that's public, you've almost created a kind of proprietary ETF.
Right? You've created a new financial creature. It's got all the benefits of an ETF, but it's got also the benefits of a proprietary asset because you're creating the credit instrument in real time as opposed to I I collect someone's money and then and I'm running a junk bond ETF and I have to go and I have to buy a bunch of junk bonds.
So, an ETF provider is got a wrapper on someone else's assets. But when you create a digital credit instrument as a preferred, you're actually creating a native in instrument back integrated all the way to the Bitcoin.
And so.
Over collateralized.
Yeah. And then in that particular case, you could create you could create a preferred that is 10x over collateralized that pays 10% dividend and and it pays that forever, right? That would be an instrument and just say that's what I'm going to sell. and I can sell a certain amount of that. What we uh did was we created four different instruments so far. Um the first one we created was Strike and the idea with Strike was let's give people a dividend 8% at par. Let's make it par value $100, pay an 8% dividend stream and then give people a conversion rate to a tenth of a share of MSTR. So that you know if if this the strategy stock is trading at 350 bucks you have 3 $35 worth of equity inside that instrument right so that was like have some equity upside have downside protection via the liquidation preference and then have continuing income via the dividend. So that was a very simple uh well not a simple instrument but an idea which is I want the upside with very little downside and I want yield while I'm waiting.
The second instrument we created was uh Strife STRF and that was a 10% dividend yield at par. So we're going to pay 10% interest in a way or 10% yield on a $100 instrument forever.
Mhm.
Okay. A hundred-year bond that pays 10% yield, right? You just don't see that very often. And we made that senior in the capital structure. So we we basically put as part of the security one of one of the covenants in the security is we won't sell any other preferred stock senior to Strife. So Strife will always be first in preference senior senior long duration credit. And that's very comforting to uh credit investors who are very riskaverse.
Because they would say, well, I'm going to get paid before everybody else. So that makes my principal much better protected and uh that that gives me uh in theory that's credit positive. It gives it a better credit rating in their eyes. Um so we sold that and that traded uh above par. So that traded way up. So it was yielding and the idea was as the credit improves of our company and as people get more comfortable with Bitcoin as the price of Bitcoin goes up that could go from 85 to 100 to 110 to 120 to 150 it could go to 200 so it could trade way up uh above par because it's it's totally perpetual and that sets the cost of capital for our company like that is the investment grade. Yeah. If you're saying what would be the long-term the 30-year bond rate for an investment grade Bitcoin company that's setting that rate by the market right now.
So then the third thing we did was we created stride STRD and the idea of stride is what if we just sold strife but let's just take away the penalty clause and the cumulative effect. We literally took out like two clauses and it's the same thing. It's still 10% at par. But you would say, "Well, this is junior longterm credit, not senior." So, the senior one looks more bond like, and you're you've got not a bond, but it looks it looks uh less risky.
Less risky. Higher in the capital stack.
Yeah. Higher in the capital stock. And this looks more risky, lower. It's just right above the equity, right? So we sold that and that trades with an effective yield of 12.7% whereas Strife trades with an effective yield of nine. So a 370 basis point credit spread appeared between the least risky and the most risky.
And people say and ironically um the stride deal was twice as successful as Strife. It was twice as big.
And pe and people would say well why would someone want to buy that when it doesn't have accumulative right? It doesn't have penalties and it's junior. And the answer is because they believe in Bitcoin and they trust the company.
Yep.
And they want the yield, right? What you would rather have 12.7% in your bank account than 9%.
And so the issue is do you trust your bank if you know at some point if you trust your bank and they offer you 12 instead of nine, you know, then you're going to do that. So now who else trusts the company? the equity holders.
Right? Just like who trusts Bitcoin? The Bitcoin holders. At some point, you decide what you're going to trust. And this is an instrument that uh provided two benefits. Well, many benefits. One benefit is it gives people that believe in the company and believe in Bitcoin the ability to get paid 12.7% dividends. That's great for them. The second is it gives the company the ability to build collateral that's junior to the senior instrument. So it impro it's credit positive. It's good for strife. It's good for strike.
It's good for you know the everything else. And then it also gives the company a very scalable way to generate leverage to buy Bitcoin which doesn't have credit risk. So in theory, if there's a market to buy a hundred billion dollar of Stride, we could sell a hundred billion dollars of Stride and we could leverage the company to 90% leverage and we would buy Bitcoin with it.
And that would be good for Bitcoin. That would be good for the equity. If that was good for the equity, that would be good for the equity component of Strike. You see? So it's and of course because we bought all this Bitcoin that's that means that Strife would be 50x over collateralized.
So it's actually good for the credit, good for the converts, good for the equity, good for Bitcoin, and then good for the stride holders, right? So So it's it's kind of the flywheel.
Yep.
And that's why we did the third. And then the last thing we did was stretch. And the idea with stretch was people said, "Yeah, I'd like to get f I'd like to get 10% bank account instead of 5%." But I don't want the volatility. I don't want to think that maybe the principal would trade up 10 $10 or trade down $10 a share. Like if I buy it and it's trading at 110 and then the interest rates change and it trades to 105, I'll have lost one year worth of interest or one year worth of dividends. So, we wanted to find uh some way to get to $100 and keep this price right around par, right around 100, low as the volatility imaginable and extract the yield. Okay. And so the idea of stretch is well we don't we don't want the duration risk. What Strife has is long duration. And that means effectively 120 months of interest duration.
That will cause the principal to move up and down below or above par a lot. In fact, 1% move in interest might cause a 20% change in principle if you have an a long duration a 20-year asset. Right?
So what we wanted to do is strip all the duration off. So not 120 months, we go to one month.
Mhm.
And we wanted to And when you strip the duration off, you strip the volatility off because, you know, the 30-year bond trades much more volatile than the one month, right.
Treasury bill.
So, we wanted to strip the volatility off. Well, when we strip the duration off and um to do that, we had to we had to create a monthly instrument, not quarterly. So, we basically took the dividend to a monthly cash pay. And then we had to create a variable dividend rate. So this is the first time in uh modern capital markets that a company created a preferred stock that has a variable monthly dividend. Right? And so we call that a treasury preferred. We invented the treasury preferred stock with AI. I used AI to do it.
Nobody else would have thought to do it because they never had an asset that would that would justify doing this. And um in essence uh stretch becomes like uh it's not quite a high yield bank account because you don't have perfect zero volatility and you can take you know if you had a $1,82.32 you would get exactly $1,82.32 cents tomorrow if you asked for it. It's not that, but it's you would be pretty close and you could put money in it that you needed to hold for a year, you know, with very low volatility. You could collect the 10% dividend and then if you needed the capital back, you could redeem it into the market and get your capital back. So, the idea is a Bitcoinbacked money market type instrument. Not again, not quite as good as a money market. they're they're less volatile, but we wanted to compete with that, you know, with Bitcoin backing it.
So, you're building out a whole yield curve backed by Bitcoin. Um, these are perpetual. Here's where I I feel like people are get confused. You promise not to sell your Bitcoin, right? So, if you aren't selling the Bitcoin, where does that yield come from from these instruments? That's the question I hear from the average person who's considering like what what are these instruments actually? So, how does that work exactly?
So, we've got about $6 billion of these uh preferreds. We uh we pay out about $600 million a year in dividends. The company enterprise values about 120 billion and we sell about $20 billion worth of equity a year. So you think about this. Uh we basically sell the first 600 million of the equity. We use it to fund the dividends. The rest of the $20 billion we just buy more Bitcoin with. So we're raising capital at a ferocious rate in the equity capital markets. And maybe 5% of the equity capital we've raised we've earmarked for dividends. The rest we just buy more Bitcoin. uh in the event that that we couldn't sell equity for some reason, we actually have the Bitcoin itself and we can sell we can sell either credit instruments against it or we can sell derivatives. So for example, we could sell Bitcoin derivatives, we can sell futures against Bitcoin or we could sell out of the money call options. And you know they call there's something called a basis trade where you can actually sell the future against the spot and you can capture a yield if you have Bitcoin as collateral to post against that trade. So the company's primary method of paying the dividends is we just sell equity. Our secondary methods would be to sell derivatives on the Bitcoin itself and then the credit markets are open to us. So we could also tap various credit markets from time to time.
And is the goal to have these instruments rated by the big credit agencies? And what would that mean?
Yeah, the company's campaign right now is to become the first investment grade Bitcoin treasury company and crypto company in general and and to get all of the instruments rated by credit rating agencies and and that's uh an elaborate process of lots and lots of meetings and lots and lots of education.
Oh, really?
But over time, I'm confident we'll get there.