The Complete Analysis of Microstrategy and its New Preferred Stocks - With Cern Basher and Jo Bhakdi

Hello and welcome everyone. Today we have a very exciting show because we have CERN on the famous CERN, lead one of the leading retail analysts on Tesla, but also more and more on strategy in Bitcoin.

Um, and I had a video recently up discussing Micro Strategy and what's going on there and discussing if it's a good idea to buy Micro Strategy. I discussed if it's a Ponzi scheme or an ingenious strategy to actually go into Bitcoin. It's a treasury company that accumulates Bitcoin over time and you can buy the shares publicly listed in the United States. And I came to some conclusions where I basically said it's a pretty legitimate strategy. The leverage is very limited, roughly 8 billion on a 100 billion roughly market cap. So 8% leverage, very minor. But my big question was if it has such little leverage, why is it a good investment over Bitcoin? Why would I not just buy Bitcoin and be happy?

So CERN is deeply knowledgeable about strategy, which is short for Micro Strategy, the stock, and will explain why the de facto leverage might be a little higher than it looks like on paper through a new preferred stock strategy. And we will then have a discussion if CERN thinks it's a good investment, if it's better than Bitcoin, if it's worse than Bitcoin, and we will go from there. And CERN, I know you prepared a presentation. CERN is famous, of course, for the best charts in the industry. And why don't I just pass it on to you and we can jump right into it?

>> Sounds good, Joe. Yeah, thanks very much for having me here and I think that the video that you did a week or two ago was was excellent. Um, a good sort of introduction to this topic, but like a lot of things, things tend to be a little bit more nuanced than perhaps it may first appear. So, what I'd like to do today is kind of walk you through some of the details.

>> Yes. By the way, for our viewers, you guys know I'm very focused on Tesla, but also on the age of AGI, Bitcoin, and crypto together with Ethereum. Solana is a different topic, but these two big flagship cryptos I think are main beneficiaries outside the primary AGI focus with Nvidia, semiconductor, and Tesla because of inflation and all the things that are going to happen. That's why we are discussing this. I think Bitcoin is a key component of the future, but these new treasury companies are interesting. So Cernin, take it away.

>> Yeah, in our discussion today, um, I'm not going to focus on, you know, why Bitcoin. That's a whole separate topic that we could spend hours on. So the assumption here is that people understand and appreciate Bitcoin for what it is. Uh, probably the most pristine form of money and store value that humans have ever invented. So if we accept that, then we can move on with this discussion. If you don't accept that, then none of this is going to make any sense to you. All of this is going to seem like a Ponzi, right? So, that's kind of the first, the first part of this.

Now, whether you buy Strategy versus Bitcoin, it kind of comes down to whether or not you think Strategy can accumulate and grow Bitcoin per share. Now, historically speaking, the company has done a nice job with that. This is actually showing the number of SATs per share since they started the strategy in 2020, right? So, they had started out with 56,000 SATs per share after their initial purchases through 2020. The following year it grew by 47%. The next year only 2%, 7%, 74% in 2024. And so far this year, uh, through the end of July, about 25%. Right? If you don't think the company can grow Bitcoin per share, then you wouldn't, it wouldn't make sense to invest in this company. You'd be better off just owning Bitcoin directly. But if you believe that bit, that Strategy can grow Bitcoin per share in a way that it doesn't put shareholders at risk, then it does become quite interesting. So let's just explore that a little bit more.

So this is just a snapshot from Strategy's website and they have a really nice website that gives you a ton of real-time data. Now you can see right now that the market cap of the company, enterprise value is about 108 billion. Okay, they have 639,000 Bitcoin, almost 640,000. It's more than 3% of the total, uh, Bitcoin that will ever be produced. And the total value of that Bitcoin, uh, holding right now is about 72 billion at current prices. When I ran this, it was about 113,000 per Bitcoin. And the company today then is trading at about 1 and a half times their Bitcoin holdings. And the question is, does that make sense? What is the, what should the, what should the MNAV be? The multiple to the net asset value. Okay.

Now, a couple things I just want to draw your attention to. And as, as Joe talked about in his previous video, there's debt. The company has some debt and right now that's about 11%. Their debt to their Bitcoin holdings is about 11%. It's about 8.2 billion. But they also have these preferreds, about 6.5 billion of preferreds and it's about 9%. Now, the interesting thing about this is that the debt is very low cost. Some of these converts have zero interest rates, but they have to pay the money back. On the flip side, the preferreds have much higher dividend rates ranging anywhere from 8 to to 10%. But the bonuses, it never needs to be paid back. These preferred stocks are stocks. They're equity. They ne, they're not debt and they're permanent capital on the balance sheet. So, in the evolution of strategies strategy, they really should never have done these convertible bonds, right? Because now they have to pay this money back. Now, the good news is that these convertible bonds will likely be converted to equity. So, there's not much risk in terms of having to pay the bonds back, but there could be if Bitcoin goes down far enough.

Just to drill down on this again, the, there's six convertible bonds, but four of them are in the money and there are two that are not yet in the money. Conversion price 672 and then 433. These two are actually at 0% rates. Doesn't show it here for this 2029 one, but this is a 0% rate. So the cost of this debt actually is extremely low. Okay. And then in addition to that, you can see the four preferreds. Okay.

>> And by the way, the preferreds are separately traded, right? They're tradable tickers.

>> That's correct. Yeah, they are, uh, they trade like stocks essentially on the stock exchange. And here are the symbols.

>> And they're just paying dividends, right? You're just getting stock dividends.

>> That's correct.

>> Way they're paying interest.

>> Yeah, they pay dividends quarterly for the most part, except STRC pays dividends monthly. And there's a few different wrinkles with some of these. Uh, for example, with STRD, they could elect to not pay a dividend if they felt like they needed to.

>> And cannot elect that, so they have to pay.

>> Well, they, they could in an adverse scenario, they could choose not to pay, but there's there would be some consequences obviously to that.

>> Yeah. So, these are pretty interesting things. By the way, I, I'm not too focused on that because in Pioneer Lands, we are seeking high returns, but that is kind of an interesting thing. If you're seeking returns of 10% guaranteed or more or less guaranteed as dividends there, you have a bunch of stocks and they're basically issued by Strategy, a treasury company that is backed by a lot of Bitcoins, need 9 billion Bitcoin and so if you're just seeking yield, not the worst thing probably.

>> That's right. Certainly relative to a lot of other income-producing investments out there, they actually look very attractive.

>> Yeah, and that's not really the focus of, of this, uh, discussion today, but it, that certainly is something we're thinking about. So here's a snapshot, uh, at the end of the quarter. Uh, the value of the Bitcoin holdings back then was 74 billion. And if you back out the convertible bonds, out of the money converts, that's about 5 billion. So they have about 69 billion of sort of Bitcoin then that they can use to cover these other instruments. And at this time, they had about 120 years of preferred dividends covered by this Bitcoin, you know, holdings. Okay.

>> Only that, uh, Sailor pledged that he will never sell Bitcoin.

>> So, that's right.

>> But technically, of course, you're right from a financial perspective.

>> Yeah. Now it's about 18 years of preferred dividends if Bitcoin declined by 75%. Now, what Joe did in his his previous video was take a look at the real risk and this idea of implosion threshold and implosion risk. So let's just, uh, extend that a little bit. So Joe, the numbers that you came up with was about 13,000 per Bitcoin. Now, the one thing that you didn't factor in was the, uh, dividends on the preferred. So instead of needing about 8.2 billion, it's more like 8.8. So if I update the numbers, today's Bitcoin price of 113,000 and if you take into account the debt plus the preferred dividends, if you, if you wanted to make sure you had at least one year of preferred dividends covered, you would need at least 8.8 billion.

>> Yes. Even though that's a little less of an implosion issue because you could just opt for not paying.

>> Yeah.

>> But if you're underwater on your debt, that's really, really bad.

>> There'd be some serious repercussions, uh, from a trust side of things in terms of the company being able to raise future capital if they didn't pay the dividends. So making it this more conservative and that brings this implosion threshold to about 13,800 a coin. A little bit higher than the 13,000 that you had, but very similar. Of course, some people argued in my comments that it's not really implosion. If Bitcoin drops to 5,000, it's not that Micro Strategy is out of business, right?

>> But I would rather not hold the stock at that point.

>> Oh, it'd be, it'd be carnage for equity investors for sure. Yeah. So, the threshold here then is that Bitcoin needs to drop by about 88%. Now, this assumes a few things, right? It assumes that Bitcoin drops from today's level and stays there. And that's, that's unlikely. It's going to bounce around and maybe even recover. It assumes that Bitcoin doesn't first go up before it drops. Let's say Bitcoin went up 100% and then dropped 88%. Well, then it would be at 26,000 a coin and and Strategy would be fine.

>> Yes.

>> Right. So, we're just looking at it, you know, from today dropping 88%.

>> Um, it also assumes that Strategy doesn't do anything while this is happening. It, it assumes that they don't raise capital and put some cash on the balance sheet and just let it sit there. So, you know, that's, that's a pretty bold assumption to assume the company just sits there and does nothing. And then it also assumes that all the convertible bonds mature during this downturn period and that probably isn't, isn't likely either.

>> And the way I think about these things is more, okay, extreme case, just as a heuristic, that's what we're looking at. That's the really bad point. 87% drop in Bitcoin and then you have the path towards that down and this premium 1.5. So 50% premium, you're paying 50% more than you would pay for Bitcoin raw. That premium of course on the way down evaporates more and more very likely. So if Bitcoin gets cut in half, that premium gets cut somehow. Uh, which means you are dropping more than Bitcoin drops on the way down.

>> The clearest way to describe Strategy's, Strategy as an investment is it's leverage Bitcoin. So on the upside it'll outperform, on the downside it's likely to underperform Bitcoin. The interesting thing I think that's right, the interesting thing when you put the numbers together and think about, okay, but how, what is the actual effective beta I get, uh, that is very different from the effective leverage of course, as we see, right? Because the effective leverage right now, including the preferred, is only 20%, but the beta is 50%. It seems so that's a very complicated question because that goes into what the market believes and that's for me the big, you know, that's why for me this is pretty speculative, the whole thing because that premium, the MNAV is totally, no one knows, right? This is completely market, it's the level of belief, uh, and that is the interesting thing we have to play around, I think.

>> Yeah, so it's interesting. So in normal circumstances, Bitcoin volatility actually is an opportunity for Strategy to buy more Bitcoin at lower prices, just like for individuals to dollar cost average into stocks as they go up and down. That's a benefit. What we're worried about here is this implosion scenario, right? So, it's also important to say that Strategy recognizes that they don't want to issue convertible bonds anymore and they have a plan actually to let those run out and and equitize those converts. And something really interesting happens then when they do that, the scenario starts to look more like this where you really only have to worry about whether they have enough capital to cover the dividend payments. So, in this case, let's say there's no convertibles at some point and you've got, you've got 600 million of, um, preferred dividend payments that you want to cover. In that case, Bitcoin could drop 99.2% and you still have enough capital to pay those dividends.

>> That seems pretty, pretty crazy at this point to say that Bitcoin is going to drop 99%. Again, if you're in the camp that you think Bitcoin is a Ponzi scheme, then you believe this.

>> But then you're also not in the market of deciding between Bitcoin or Mic. You're not involved in this trade at all.

>> That's right.

>> But so, so for me, this is interesting. That's an interesting detail. After I saw, first of all, I thought when I started my video or the research on my video, I thought, I don't trust this highly financially engineered, too much leverage, very dangerous. After I did my video, I was done and saw that actual implosion risk that you need to drop 80, 90 or 87% depending on how you compute it. I was already pacified. I was like, well, it's not really going to happen. Even if it happens, it doesn't really implode the company. That just puts them into a lot of trouble. But if my Bitcoin holdings go down 90%, I also am not that happy. It's kind of okay. So, the implosion risk is one thing, and I'm sure you cover this in the following slides. For me, the question is then also the upside where I'm more skeptical, right? Am I really that much better off if Bitcoin goes to 200,000 or 300,000? How much better am I actually off and what do I have to believe? Because when I put the hard numbers in, the leverage is 20%. So I'm getting 20% kind of guaranteed by the physics of finance and plus a premium that is more, okay, that's not the physics of finance, that's the emotionality of the market. The physics of finance could tell us that Sailor has a strategy to increase these preferreds dramatically. Right? Which would be interesting for me if you want because that fuels the psychology and the physics, but I don't know anything about it. So maybe you talk about this later in the slides, but that would. So now we cover the downside a little bit and everyone who has a believer in Bitcoin says, "Okay, fine. That seems like not too bad." But do I really get.

>> Yeah, let's just finish out the downside discussion real quick. There's a couple more slides I just want to share. This is one, this shows then if they only had preferreds, right? And let's say their, their dividends on an annual basis were the 8.8 billion that we saw earlier. You're, you're replacing the converts with all preferreds and you're, you're scaling it up. In order to have 8.8 billion of dividends, you would need about 98 billion of preferred stock outstanding, assuming a 9% average dividend rate. Okay? Now, their current Bitcoin is about 72 billion. So, this would be more than doubling the Bitcoin per share. Now, I'm not suggesting that a company gets levered up to this degree, but I'm just showing here kind of an apples to apples basis. If the converts are gone, you can have a whole lot more preferred and still be in the same risk position that we're in today.

Okay, now let's just talk about Bitcoin real quick in terms of its volatility. These are the annual returns of Bitcoin per year. And if you look at this, you can see three periods where this massive, the massive downturn, down 60% in 2014, 74% in 2018, and 20, and 64% in 2022. Okay. Now, in the early years, Bitcoin was a very small and very volatile asset. There was a period here where Bitcoin did drop more than 88%. It was down actually 93% at one point in in 2011. I think it was November 2011. Okay. And you can see since then, Bitcoin's made new highs. It's come down. It's made new highs and then we've had big drops again, right? But all the, all the while Bitcoin has higher highs, right? And and higher lows, but some, these drops have still been pretty significant.

>> Yeah. In 2011, that was when the, when the pizza guy sold his Bitcoins that he just made with the pizza.

>> Yeah. And the interesting thing about that here, I'll come back to this. The interesting thing about that back then at that, that time, Bitcoin was about 110 million asset.

>> Yeah.

>> Right? It's over two trillion today. So, of course, the volatility of something that's only 110 million is going to be extreme, right? And it wasn't until about 2018 did it become a quarter of a trillion dollar or $250 billion asset. Right? So in these early years, years it was crazy volatile. Right now, the interesting thing is since 2014, if we back out those early years, the percent of time that Bitcoin was below 88% from its high is 0.1%. Okay. And I would even argue that that using the data even, you know, from 2014 on, some of this data is horribly volatile as well. But certainly there's been a big drop in recent years. So we can't ignore that. We should expect Bitcoin to be very volatile. And by the way, it was interesting. Tesla didn't buy its first Bitcoin until February of 2021. And at that time, it was about a trillion dollar asset. Okay.

>> Interesting. Yeah.

>> So this, this is an asset that has evolved quite quickly and growing quite quickly. But I do think that the volatility of Bitcoin will be a lot less going forward because it's a bigger asset and we now also have different sources of demand. It's not just individuals, it's institutions. We've got ETFs and we've got 180 other companies like Strategy that are Bitcoin treasury companies to one degree or another. So as Bitcoin goes down, they're all going to be looking to buy more, which should provide pretty good support for Bitcoin price. Okay.

Now, just to show you that the, the, the capacity that the company has on a theoretical basis for selling these preferred stocks. Right now, they've issued about $6.3 billion worth. Sounds like a big number until you realize that the total addressable market that they're going after with just these four securities is about 200 trillion. And over here on the right side, I'm showing what these comparable assets are. This, this actually comes from Strategy itself in their last quarterly earnings presentation. So their market share.

>> Yield or what are they comparing there? What are these comparable assets?

>> Well, they're just saying that for strike and the way that that's structured, that's essentially competing against stocks and commercial real estate investments, right? So they've created the security that will pay an 8% perpetual dividend plus it maintains upside to Strategy stocks. So it's a hybrid security. Uh, you can get income and and you can get appreciation over time. And so they're saying that that's positioned in a marketplace of $120 trillion assets. And right now.

>> Just, just to elaborate on that. So it seems like they're purposefully engineering these preferreds, uh, for target markets for comparables. So they're basically simulating, okay, that behaves like a stock. So you can replace certain stocks with it. That other one, T STRF, uh, behaves like a treasury. The next one like bonds, and the next one like US bank, USD bank accounts. So that's very interesting because, you know, basically in my opinion, if you buy into Micro Strategy, you're buying into Sailor's ability to be a financial engineer and be really good at that and not taking too many risks, but taking sufficient risks to leverage this thing up. And I also think when it comes to this opaque premium beyond the hard leverage, you're basically buying into an innovator. You're buying into, okay, I just don't know what's going to happen next, but I trust this guy to keep innovating. I think that's very important.

>> Yeah. No, you're hitting on a very important point, Joe. And I think the key thing here is, we'll skip this chart just for now, we'll come back to it in a second. But what, what Sailor is doing in a nutshell is he's creating a yield curve for Bitcoin. There is no yield curve for Bitcoin or there wasn't until Sailor came along. And basically now what we have is a yield at different levels of duration or different levels of interest rate risk and these different securities are positioned intentionally at different durations and we can now construct a yield curve for Bitcoin and over time.

>> Can you explain, I think the yield is self-explanatory, but can you explain the yield curve like why, why are they positioned, why is this effective duration what it is here? Is that just based on the yield, yield and the comparable bonds or is there more to it when you say effective duration?

>> Well, part of it is, you know, if you're going to create a new security and sell it to people, you've got to position it relative to something that they're familiar with. So, in the case of STRC, right? So, here we have a very short-term instrument that basically has effectively a zero duration. Okay? It's designed so that its price does not fluctuate a whole lot. What will happen here is its yield will fluctuate a lot, just like money market funds yields fluctuate or short-term treasury bonds or bank accounts. All those things that we think of as sort of cash substitutes.

>> Would just the viewers who are not totally familiar with the bond market. Basically, you buy bonds, they have a certain duration, like a week up to 30 years or bills, notes, bonds, whatever, the treasuries. And if they have a certain yield and a long run time, the yield is steady and the price adjusts with the market because you want to adjust the yield. So people kind of understand that when it comes to preferred stocks, like how would you simulate that? How, because they're stocks, right? They're just there.

>> Well, the way to think about duration is really the number of years it takes to be paid back, right? So, if you buy a 30-year bond, its duration is not 30 years. It's going to be shorter than that. Now, the problem with buying bonds is that they mature. So, let's say you're an income investor and you buy a bond and it's initially yielding 7%. And you are thrilled, you're earning 7% every quarter or 7% annualized, getting paid every quarter, but then the bond matures and you find yourself in an interest rate environment where now yields, say, are only 5%. You just took a huge cut in your income. The intentional thing about what Michael Sailor is doing with these preferreds, particularly these, the three out here, these are perpetual. They never mature. And these two, STRD, STRF, Sailor is paying 10%. Annualized dividend yield at par value. They don't mature. And again, that's very intentional so that it's superior to really long-term bonds. Not only a higher yield, but a perpetual payment and that is very, very interesting. That's a great innovation, not just because it's backed by Bitcoin and they can offer higher yields, but also a new instrument that's perpetual. It solves the one of the biggest risks that income investors have. Right? So Michael Sailor has been very intentional here about how they've designed these and I think we're going to see more over time. And actually, they flagged one here, future opportunity in the $30 trillion medium duration corporate credit market. Can you, can you explain this a little more, Cern?

>> First of all, let's talk about these four different, you know, preferreds. So, basically, you buy a thousand bucks worth of STRD, for example, and it has a 12% dividend. Does it mean I just get paid 12% on this thousand bucks or what is the situation? Because the price fluctuates. So there's of course there's a phase, kind of phase value of, so what's, explain how this works and how they behave compared to each other and how the prices.

>> Sure.

>> Yeah. There, there's some complications with all this and we can go into detail a little bit about each one, but just really quickly, um, you can see here in terms of, um, both the volatility and the seniority. So again, they've been very intentional about how they've structured this. Let's start with STRF first. It's the most senior preferred. So if there is an implosion and the company's liquidating, the convertible bonds get paid off first, right? Bondholders get paid off first. In terms of equity holders, STRF is the most senior in that equity stack. So SPRF would get paid off.

>> But that only relates, the seniority only relates to the equity stack in terms of a dissolution or something horrible. It does not relate to the payments of the dividends, right?

>> Correct. Yeah. I'll get to that in just a second. I just want to give folks a flavor for the seniority here. So, STRF is first, then STRC, and you can see on, on down, common holders of the equity are last. You're taking the biggest risk for the biggest return. Now, STRF, okay, so they pay a 10% quarterly fixed dividend in perpetuity, never ends. Okay? Now, it's 10% at par value. So if the security is priced at a, a 100, then you would get a 10% yield. If the security is priced below that, then your yield actually would be higher, or if the security appreciates, then that would drive the yield down. But if you bought it today, for example, and it was trading at 100, you would get that 10% yield forever. And again, that, that is something that's not been available really in the marketplace. Um, these are very unique investments.

>> So today it's trading at 110. So you're basically getting 10% less of the 12. So you're getting.

>> 9% yield.

>> Yeah.

>> So you're getting 9.8 or something.

>> Yeah. Okay. Now STRC is is different. It's not a fixed rate. It's a variable rate. It's a monthly dividend, but it's also perpetual. Think of this as like a money market fund replacement, but only it's paying right now, it's paying 10%. Previous month it was at 9. They actually increased it. So, you know, there's very attractive rates both on the short end and also the longer end in terms of longer duration. So what's their.

>> Okay, let me understand this. So they're paying, what did you say? Monthly.

>> In the case of STRC, it's monthly. Yes.

>> Okay. They're paying monthly, but they're adjusting the rate monthly.

>> They can, if they, if they want to, they can adjust it up as much as they want. So they can increase it by as much as they want. On the downside, they can ratchet it down if, if short-term rates like the Fed cuts rates, they could in theory match that and reduce it by, you know, a 25 basis point cut. And what's the starting point here? 8%.

>> They started at nine and they recently increased it to 10. Yeah. Even though the Fed cut rates, right? They, they actually went ahead and increased it. The, this, this STRC has been trading below its par value. So even though it was a 9% dividend rate, it was trading as though it was, you know, almost 10% yield. And so they, they went ahead and and raised the yield to match that.

>> That seems like an incredible deal, especially STRC.

>> Yes. You have no interest rate risk. And what's the risk? I mean, what's the real risk that you don't get a payment?

>> Uh, the real risk, I mean, yeah, in, in the implosion scenario is that you don't get a payment. Highly unlikely in my opinion. The other risk that's more relevant is that they reduce that yield over time. Now, I think as this security becomes more widely known and demand for it goes up, people realize, oh, there's a 10% opportunity on short-term cash that's that's highly secure, then they can probably afford to bring that rate down over time.

>> And you have to hold it through that monthly dividend payout date.

>> Yeah. Just, this 30 days, you just need, well, actually no, you just need to be the holder of record when they, when they make, when they go to make that payment, just like with any dividend stock, right? You just need to be a shareholder of record on that, on the record date.

>> So there's kind of a price adjustment towards that date where the price adjusts for the.

>> There should be, yeah, one, one-tenth of the, the dividend. Yeah.

>> Interesting. Yeah.

>> So, um, what they've also done here is, and this is kind of, kind of a fun term, but they've got these these ATMs.

>> Yeah, I know. That's a very fun term.

>> Yeah. And it's not just an automatic teller machine, but in this case, it's, it's at the market securities offering. And so, with all five of these, including their stock, they can issue stock into the market on a daily basis if they want to. They have filed a prospectus that gives them the ability to sell any amount of these securities, any, any time up to these limits. So they can sell 21 billion of their stock, 21 billion of strike, 2.1 billion of STRF, and then 4.2 of STRD and STRC. Now.

>> So just for me to understand, because I'm interested in that and the mechanics, what does it actually mean? Can they actually just without any SEC approval sell into the open market at any point, whatever they want?

>> Yes. Yeah, with no, there's no formality to it. They can just.

>> Well, the formality has been taken care of. They filed these, these shelf offerings. The SEC is aware of it and they've told the SEC how much they intend to sell.

>> So, it's basically sitting with a broker custodian. They can just say, sell 100 million right now.

>> Yeah. So, let's, we should do something like that.

>> Right? It's a license to print money, isn't it?

>> Yeah. It's an ATM. So if, if people get excited, for example, about the yield on STRF and they bid that preferred stock up, they might be buying it from Strategy who's issuing more. So Strategy can kind of, you know, adjust relative to market conditions.

>> So if you're a big buyer, you could go directly to Strategy.

>> Probably. Yep. That would probably make sense if you were looking to take down a billion dollars of it. Yep. Yep. And, uh, what is the, I mean, now we get to the meat, or first let's go through it because I find this super interesting. I get STRC and STF. They're very different. They make a ton of sense. One is monthly, uh, and variable rate. The other is fixed rate and it's quarterly. That makes a ton of sense. So I don't understand fully STRK and STRD. So how do they relate to STRF? Like there, in a second. Let's focus for now on the common MSTR shareholders and we'll get into the details of these four in just a second. So sorry to keep keep putting you off, but you're always one step ahead of me, Joe. So let's think about then how does leverage benefit the common shareholder. Okay, so this is if you look at the leverage ratio, okay, across the top here, going from left to right. Okay. So, if they had no leverage and Bitcoin had 0% return, then your Bitcoin per share would not increase. It would not make sense to own Strategy if Bitcoin didn't go up and they had no leverage. They would have no mechanism to increase the Bitcoin per share. Okay. Now, let's say that Bitcoin remains flat, but they have 50% leverage. Just to show you an extreme, you could actually increase your Bitcoin per share by about 30% or 1.3x. So the leverage makes a big difference. And then of course, you can see as the Bitcoin return assumption goes up. Again, just to use extremes, let's say we're now at this 50% return on Bitcoin per year. As you increase leverage, look how the Bitcoin per share just gets magnified massively. Now, these numbers in green are probably kind of crazy numbers. Maybe the numbers in blue are kind of more reasonable to look at. Okay, so let's look at Bitcoin maybe growing by 30% a year at 30% leverage. In theory, your Bitcoin per share over this is a 10-year time period would increase by 2.8 times.

>> As 10 years. I was wondering what I'm looking at.

>> It's a 10-year time period for this example. So, you could almost triple your Bitcoin holdings by buying Strategy stock if they were to use 30% leverage and you got 30% returns. So you can kind of look at this table and say, here's my assumption for Bitcoin returns. Here's what leverage I think I'm comfortable with. You know, would this make sense?

>> Well, the interesting thing is for me, the key insight here is it's actually not leverage. It's like, it's, it's trick leverage. You can leverage this thing up without the risk.

>> Yes.

>> Because the risk is extremely minor compared to a real leverage. Right? If you tell me you're 100% 2x leveraged with debt, I would get very scared.

>> That's right.

>> Very scared because that's nuts. If it's Bitcoin. But here, what's even the problem, right? You're.

>> Making a very good point because this preferred never, you showed that like you, you can basically, uh, get 87 billion or something in additional Bitcoin for getting the effectively same implosion notes because you're basically only paying 10%. So it's very different. So for the viewers, you know, that is the hack here in my opinion. Yeah. The hack here is you get all the benefits of hard leverage, right? If you have a stock portfolio, you have a million dollars, let's say, and you take on another million in debt to buy Tesla, of course, you're going to be very rich, probably. But you take a risk that I would not recommend because if that goes wrong, if Tesla drops 50%, you lost 100% of your money. It's not good. So leverage comes with enormous risks, margin. But here, Sailor found kind of a way to get the money in like leverage, but without the risk because it's not debt. He has to never pay it back. He just has to pay a 10% per year dividend. So he kind of, it's kind of leverage that, you know, leverage at 10% of the risk to make it.

>> That's right.

>> His innovation is using these preferred securities, which again, he did not invent. They've been around for decades, if not a century or more. Right. But companies in recent years haven't really made great use of them. And the companies that issue preferred, they tend to be pretty, pretty boring companies. We've got Boeing preferred, we've got PG&E preferred stocks. They're pretty, pretty boring investments, some banks. Um, so this is really taking the preferred structure and using it in a way that's really never been used before. And the reason is because if you've got Bitcoin, for example, growing at these rates, you can see what kind of magnification you can get using using leverage. Now, let's look at it this way. Let's put leverage down on this, on this vertical axis here. Okay, from 0 to 50. And here's the dividend rate. I just want to show you why they feel that they can offer such attractive dividends. And you can see that, you know, at 10%, at a leverage of 30, you can still 2.6x your Bitcoin per share, right? And if you decrease that dividend rate, yes, the Bitcoin per share does, you know, go up more, but it's not a huge difference. And right now, as they're getting these things off the ground, it makes sense to offer these attractive returns to attract capital. And over time, as they become more successful with this, they'll probably be able to issue some of these preferreds at lower and lower yields. And it's, you know, I think I don't want to jump ahead too much, but I think the big insight here is I always try to be critical when you look at this. It sounds like white magic or black magic, depending on your color scheme. Um, but why is it possible to print this amount of money out of nowhere and get leverage for 10% of the actual leverage risk and everything? I think the big secret behind all, all of this is it's a bullish Bitcoin play. It works great if Bitcoin goes up. And the magic comes from something very unmagical, from being right about Bitcoin, because that's why everything is so easy and so much money here. If you're wrong on Bitcoin and Bitcoin goes flat for 5 years, you're basically burning through 10% per year costs for this. That's kind of the big strategic, you know, bet, right? I'm willing to burn through 10% of my preferred, you know, face value or par value because I believe Bitcoin is just going to go up way more than that in average. And I think that's the bet you basically take.

>> Here's the way I think about it. Let's, let's think about the world of fiat currencies and we've got a choice between the Venezuelan Bolivar and the US dollar. Would you not, you know, borrow in Bolivars and buy dollars all day long? Right? The answer is yes. That's very clear that the US dollar is a superior currency instrument over the Venezuelan currency. For people that are Bitcoin believers, it is likely as obvious that Bitcoin is superior to the US dollar. So you, you would get as much money as you could in US dollars, whether you borrow or in this case, issue preferred stock that never needs to be paid back and you immediately turn around and buy Bitcoin that you think is going to appreciate at some higher rate. All right? And you can see here on this previous one, you know, as Bitcoin appreciates at higher rates, even if it's 20, 30, you know, percent, you can accumulate Bitcoin per share. It's using leverage to your advantage, uh, with very, very low risk.

>> I mean, technically, I don't know if I'm shortcutting something in my brain too much here, but technically, it's just a bet that Bitcoin goes up more than the payment because you're basically taking the preferred, issuing it, take that exact money, put it in Bitcoin. If Bitcoin underperforms your dividend, you lost money. If it overperforms, you make the difference. Taking out all of Micro Strategy's other assets. But on the preferred level, that's kind of a bet. So basically, the theory is, oh, I have this magic insight that I know this coin called Bitcoin, and I think it's guaranteed to go up in average over the next 10 years way more than 10% a year. And I know CERN. CERN is very rich and I, CERN wants 10% yield on a billion dollars. I go to CERN, say, "Okay, give me the billion. I pay you 10% and I just buy Bitcoin because I believe Bitcoin is going to go up more than 10%. And if that, if I'm right on this, I make insane amounts of money because I didn't even have money before. Now I have CERN's billion, pay 100 million, but if Bitcoin goes up more than 100 million, I can pocket the rest and give it to my common shareholders. Michael Sailor said this past weekend, uh, in an interview that he thinks that Strategy will will earn or enjoy 80 to 90% of the benefits of raising the money through preferred securities. So even though they're paying people 9 or 10%, they think that the equity holders essentially will accrue 80 to 90% of the total benefit over the lifetime of the security. So that's, that's pretty powerful.

Now, this chart, Joe, is looking at it from the perspective of the investor in the converts and the investor in the preferreds. And this is assuming this is a Bitcoin price of 118,000 at the time they did this, certain volatility for Bitcoin, 35%, and that Bitcoin does not go up. Okay. So if you're an investor in this instrument and you think Bitcoin is going to be flat, does it still make sense to invest in these securities? And you can see on the convertible bond side, they're so well collateralized. This BTC rating is basically this convertible here is 73 and a half times collateralized. The converts in total are nine times collateralized and the preferreds are 5.1 at at current Bitcoin prices here. Okay.

>> Yeah. This BTC risk. What is the probability that at some point over the life of the security that this BTC rating is one or less? Meaning that you've got less collateral than the value of the security.

>> This is based historic on historic Bitcoin volatility or.

>> It's assuming 35% BTC volatility. Yeah. So you can see here, 12 to 25% chance. Okay. But now if you advance this and you reduce the volatility, and I think Bitcoin volatility is coming down, you can see that these numbers now are lower, okay? And we're still at 0% Bitcoin growth. If you believe that Bitcoin will actually grow, and actually I've got the volatility back up again, that that BTC risk is the single digits for all these securities. Okay? And if you got Bitcoin growing at 20% a year and 40% volatility, the BTC risk is like 1% max. So these securities are very well capitalized. Contrast that with like a mortgage back bond, which doesn't have anything like 5x collateral, right? It's a fraction, or any other bond investment out there. The, the, the degree to which these investments are collateralized are off the charts relative to other, you know, fixed income investments.

>> But of course, it's a little bit of a function of volatility. So mortgages don't have a 40% volatility.

>> Not until you hit the financial crisis.

>> That's true.

>> And that was the issue with those. That's true. And, um, uh, um, so let's just talk about the preferred for a second. As an investor in the preferred, what is actually the worst case? Like, just on a pragmatic level, what is the worst case that actually happens? So I take 100,000 bucks, I buy the week, the monthly, and hope to get my one, like, whatever the monthly return is, 1% or something. Uh, so I hope to get 1,800 bucks in dividend, right? So what's the worst case? So worst case is there is a, basically the market loses faith, number one, that they can pay this dividend and raise more money. So that would, number one, mean I don't get my dividend, but number two, I also get, don't get my money out because the price would drop dramatically, potentially because now there is no dividend, but it doesn't drop. Yeah. Yeah. How much does it drop? Hard to tell. So if people, people believe there will never be a dividend again, it goes to zero.

>> Right. So this is a key point. Strategy's entire business now is essentially an issuer of securities. They issue securities. They take that money, they buy Bitcoin. This is their business. Forget the software business.

>> And pay dividends, right? So here are the yields right now over time of the four preferred stocks that they've issued so far. So STRK was the first one. It initially yielded about 10%. And you can see it went down, it went up, went down, it's recovered a bit. Then they came out with SDRF, then STRD, and then STRC. So, these are all fairly new. Came out this year. The first one is in February. Okay, let's take a look at each one real quick. STRK, it pays a dividend, but it also has a conversion rate to common stock. For every 10 shares of STRK, you can have one share of Strategy. So, basically, it's a call option on Strategy stock, but you get paid 8% in the meantime. So, this is a nice investment for somebody who wants some income, but also wants some upside growth.

>> So, how, explain the conversion. How does it work? So let's assume, yeah, when can I trigger that? Who can trigger that? How does it work?

>> Yeah, I mean, it's, you can see here, um, you know, you get the 8% dividends and you can convert your, your every 10 shares you have, you can convert to Strategy stock.

>> Anytime.

>> Uh, in terms of the time, I'm not sure when that first starts. Um, it's a good question, Joe. Not entirely sure of when you can first trigger that.

>> But the idea is there is some point in the future after that I'm allowed to trigger it and then I decide based on economics if I want to trigger it.

>> That's right. And they're showing here the conversion value at different prices and so on.

>> Um, so again, the important point to to mention.

Right now, with this one, is that, you know, right now the yield is 8 and a half percent because it's trading below par. Par is 100 in all these instruments. So it's got an 8% dividend at par, but because it's below 100, you're getting an effective rate of eight and a half percent.

And one, and like, it's interesting because this is not a far-out theory, right? So if Bitcoin goes to, let's say, 200,000, 220,000, we are already in the green here because MicroStrategy has 350 or something. So if this thing triples, we are already in a 1 to 10 situation. So then it makes economic sense, and even if you can't convert because of some timing, that would massively drive up that price potentially because now you're talking something different than dividends.

This is a very interesting security. Right now, the equity component of is about a third. So it's like 2/3 bond, 1/3 equity, and of course, as Strategy stock goes up, that equity component will grow and grow and grow. Okay. But in the meantime, you get this 8% dividend for as long as you hold it. So that one's interesting.

The this other one, STRF, 10% perpetual cash dividend. Okay. If they miss a payment, that cash dividend goes up by 1% per missed payment, up to a 18% cap. This is very punitive for Strategy if they miss dividends. They want this to be the most senior protected investment. So, if you're going to buy, you know, a preferred stock from Strategy and you're worried about the risk, this is the safest one from that from that standpoint. Okay, this is going to have the highest credit quality, so to speak. Okay, so this one's interesting.

Now, what they did was issue another one that is essentially the same, but without the protections of dividend continuity. 10% cash dividend, but they can, if they want to, not pay in any given quarter. Now, think about the implications of that for a second. If they decide not to pay, it's going to affect their ability to issue securities from there on out. Officially structured as a higher yielding, higher risk investment, but the reputational risk that they would have of not paying or skipping a quarterly dividend could be catastrophic for the company, right?

Maybe, well, maybe it would be isolated to this preferred because, you know, the others wouldn't, but they definitely take a risk. Yes, I think all the other preferred would come down because it's like, oh my gosh, they didn't pay on STRD. How might that affect mine? Now, the difference in the pricing between STRD and STRF right now. STRF, sorry, STR, yeah, STRF right now has an effective yield of 9%. Okay. STRD has an effective yield of 12.6%.

Wow. When you run the math and look at the implied number of dividend payments that this implies that they will miss in the next four years, it's one. The market right now is assuming that they're going to miss one dividend payment between now and four years from now. I think that's too much again because I think the Bitcoin volatility is not likely to cause them to miss any payments. So I think there's actually a mispricing opportunity here with STRD.

But it's now I understand more the yield curve. So basically, they designed these instruments with very different risk profiles. One has an one behaves like a stock because it reflects stock upside, the convertible. Uh, one is low-quality debt, right? Basically, this one. And one is very high quality.

This one. And one is very short-term.

Yeah. And that's this uh fourth one here, STRC. They call it Stretch. It's designed for price stability, whereas the other ones are all designed for income stability. So, here they've flipped it on its head. They've said, "Okay, we'll let the income fluctuate, but people want price stability. If you're going to invest in a money market fund or a short-term bond, you don't want crazy fluctuations. You want price stability." So, they've designed for that, right? And so, they're able to change the yield each month. Again, there's limits that any monthly step down is kept at 25 basis points plus the maximum decline, if any, in one month so far from the first any business day during the month. So, so in other words, if the Fed cuts rates by 25 basis points, they could cut this by 50 if they wanted to.

Are these, by the way, sir, are these your charts or are they from Strategy?

These are from Strategy.

From the website or?

From their second quarter earnings uh presentation. Yeah. Yeah. Um, and this is from the website. This screenshot here is from their website in real time.

So, I think this is all pretty genius. When I put my real hat on, my money hat, my money is like, okay, would I just dump a 100,000 into any of these? First of all, my personal preference would be because I'm bullish on Bitcoin. I'm not yet sold on the common. This is something we can discuss because they the most iffy. I'm actually on the common. Like, is that really better than Bitcoin? But the preferred that is a convertible, that sounds like a very good deal because if the common really goes through the roof, I get them in a very advantageous way, and I get the 8% yield and all kinds of stuff. So what is the actual risk? Let's say I dump a 100,000 into that thing. What actually can happen that is bad? Of course, defaulting on the dividend payments needs to happen first before anything bad happens, right? They need to default even on the weakest one first, not even on mine.

Right?

Um, and then what happens next? And the market gets nervous and says, well, now this whole story with dividends goes out of the window because they just randomly don't pay. Uh, that drops the price. So, it's a very, it if something bad happens, it spirals out of control very quickly because the whole thing is based on their ability to issue into the market. So they would have to issue it massive discounts, which then makes it all very bad, the whole thing, right? So it's kind of a little bit binary. Once it starts going bad, it goes bad very quickly, potentially.

Potentially, although the threshold for it, quote unquote, going bad is a Bitcoin price that's absolutely collapsed, right? You're talking about a probably 90% decline in Bitcoin price. I'm not sure about that because going bad effectively means they cannot issue more preferred or only at a massive discount that drags down my price if I own them.

So, yeah. Independent of Bitcoin, that's kind of a market confidence question, right? So because they would immediately have huge problems paying the dividend if they can't issue. So that's kind of a self-fulfilling prophecy situation unless they would be willing to sell Bitcoin, which they really don't want to.

Well, they've got they've got multiple levers, right? They can sell any one of these preferred. And let's let's say the market for STRC is strong, but the market for all the others is is non-existent. No one wants to buy them for some reason, right? You know, at that point in time, they can take the proceeds from STRC and use that to pay the dividends on all four of them. They're not just limited by raising money in STRD to pay STRD dividends. They can use it from anything. They can also sell their common stock and use that pro those proceeds to pay the dividends on these preferred. So they've got multiple avenues to raise capital.

Preferred all start to suck for whatever reason, they could still sell the common and the common is directly tied into the Bitcoin situation. So if Bitcoin is kind of stable, but even if Bitcoin goes down 50%.

They can just sell their commons to pay the dividends.

They could if as long as the MNAV is above one, it would make sense to sell common. Uh, if the MNAV is below one, then you're then you effectively would be diluting shareholders because the Bitcoin per share would come down. But if it was a choice between that and, you know, saving the company, then obviously you take that choice and and sell a common even if it's below an MNEV of one. Um, you know, I think there's probably a lot of other levers that they can pull as well. And I think also we were going to see we're going to see some additional preferreds come to the market that meet different needs of different investors. So I don't think we've seen this yet. The other thing that's really interesting too is the idea of doing this in different currencies. Right? Japanese investors probably don't need a 10% yield. If you offer them six, they're probably thrilled.

What is their cash strategy? The dividend treasury cash strategy. Like how much dividends do they want to be have in the bank? Like nothing. And they just do it?

Very low. It's very low. They're counting on the fact that they're issuing these every every single week.

Yeah, that's that makes me a little nervous. Of course, having cash in the bank is always like an expensive exercise, but?

Yeah. You would get a lot of if they if people knew they had two quarters of dividends always stashed up. I mean, it becomes super safe, the whole thing. So, it's like?

Well, the other also a volatility buffer because then Bitcoin can drop and you say, who cares? We have the cash in the bank and it's not insane amounts. If we saw for a hundred billion dollar company to have two quarters or something of dividend payments, I think it could that could smoothen out the risk dramatically because then everyone knows Bitcoin is very volatile. So even if it drops 50%, if you have 6 months time or something, it's already creates peace of mind. So I don't know what because this is a confidence game, the whole thing, right? Can I keep everyone confident?

Well, the one mitigating factor with that is that a lot of the dividends they pay is reinvested. So the money goes out the door one day. 600 million goes out the door and then 500 million might come back in. Right? So that's an interesting thing too. It's not like this money that they're paying out, you know, disappears forever. It a lot of it comes back. And again, I just made up those numbers. I don't know what the percentages the company?

Also confidence game. That is true as long as everyone is confident, right? If they're not confident, it's not. So I mean, we in a bull market, everyone is super bull. So I'm just trying to put my risk hat on like I I don't think so. I would push back on the thesis that Bitcoin has to drop dramatically to destroy this. That has nothing to do with Bitcoin. It has to do with investor confidence. If investors get scared or you know, shaken and they don't believe in these dividend payments anymore, then the price starts dropping, which is pretty bad for the preferred.

And then you have a problem, right? So yeah, so I think, you know, the question is what can they do to address that? And of course, no one feels like they have to address anything right now because it's bullish, but, you know, how it is. The the nice thing, you know, about the situation they have here is they they don't have to issue securities every week. They do because they can. So, in the last Bitcoin decline, you know, that we had, you know, in 2022 when the Bitcoin dropped, you know, 75%. They weren't that active in issuing new securities. So, they they don't have to do anything if they don't want to or need to. If the market is not open, it's not open. They just need to make sure they can make meet the payments, right? At these dividends.

But it's like the question is for me a little bit. I this is just speculation but if they have 8 billion, whatever, how much preferred do they have out? 8 billion?

Uh, about 6.3.

6.3 million a year of dividends?

Right. So if they would have 600 million in cash somewhere stacked up, it would guarantee a year of dividend payments. I think that would make I don't know if that's like too expensive for them to have that cash lying around.

Well, I mean, to put that in perspective, um, you know, there were weekly activities here. I'll just pull up my spreadsheet here. I've got all the weekly uh issuances. Um, the the investment that they're making uh on average so far this year, if I just look at this year, the average raise um has been about 600 million every time they go to the market. That right there is a year's worth of preferred dividends that they're raising on average every single week.

Self-referential, right, arguments because yeah, if things are great, it's all easy, but if things get bad, that's exactly not possible anymore. Then it would exactly be super powerful to have that 600 million stacked away somewhere because I say we don't even care if it's bad or not. We have the money to pay for a year. So, it's like, you know, I think that's super important for the viewers also to understand like we are always we are always sucked into the moment into the sentiments like, oh bull, what could possibly go wrong? And then we have a giant crash or correction, everyone says, "Oh, the world is ending." That's always the wrong mindset, but it's also true for the bull market. Like, sure, they can issue that and raise 600 million right now. That's why they think they don't need it, but if they need it, they cannot do that. So, it's kind of a, you know?

Yeah, it's it's a bit like saying what happens if the Venezuelan Bolivar appreciates against the dollar and I suppose it could, right? But the fundamental reasoning is that it's such an inferior currency. And the same again is true for Bitcoin relative to the US dollar. The US dollar could appreciate relative to Bitcoin. Bitcoin could go down relative to the dollar, but it's such an inferior form of a store value and and money that that's not really a long-term risk.

It's only over very short term.

On a long-term level. But given the fact that they have to pay these quarterly, it's not about long term. If they get knocked out for one quarter, and of course, Bitcoin can drop for one quarter. And you know, so that's I would feel much more comfortable and it doesn't seem like a crazy amount of loss for them to have that stacked away like 6 months, 9 months or something. It would just take out tremendous amounts of risk because I agree with you, if you're bullish on Bitcoin, I don't believe there's any scenario in the future where it's not true the long-term thesis. But not being able to pay one dividend is really bad for the preferred.

Yes. If you look at it through the perspective of like a credit market, fixed income investor, right? They're they're used to looking at spreads. So, for example, this STRF, right, trades at a spread relative to, you know, relative investments that are similar or, you know, uh, similar credit quality, etc. of 430 basis points. So, that is trading at quite a, you know, spread premium here. They're saying 423 is the spread premium. Again, this is no Bitcoin price appreciation. Apples to apples against other fixed income investments. These things are trading at very attractive premiums.

Of course, I I want to be too too much of a skeptic, but of course, it's all about I think it's true. It sounds like a good deal. I think it actually is a good deal. But as a credit specialist, I'm not a credit, but a credit specialist would say, "Well, is it apples to apples?" Like, that's the question. Like these are new things. We don't know the risk. No one knows the risk.

We don't have an history. So there might be a reason for the spread. My intuition tells me it's still even if you factor in some reason in here, it's still a very attractive spread what's ever left after. But we have to recognize of course sailor says look compared to the same type of thing there's this giant spread. Of course the push back would be well it's not the same thing because if I buy any kind of corporate bond I know the risk. It's it's like GE. I know what happened in the past. That is much more rationally priced here. We don't just don't know too much.

So, yeah, and and it's interesting too though, right? Because again, depending on your view of of Bitcoin's return. So here here is where it's zero. Here's the analysis where it's, you know, 10%. Okay, in that case, you know, basically the whole thing's a spread. These things shouldn't be trading at any kind of a spread. Um, they're so superior to anything else that's out there. But again, it it all depends on on your view of Bitcoin as a risk asset. Bitcoiners view Bitcoin as no risk. But if you are traditional fiat world investor, you look at Bitcoin, you say, "Oh my gosh, it's the riskiest thing I've ever seen." It just kind of depends on where you sit.

Yeah. For me, as a pretty bullish Bitcoin bull, I I see the main risk here, not because I fully understand it, but for me, it's a little opaque. It's all in the short term. Is there some short-term risk on a quarterly payment or six months where things can go wrong? And that's why I'm not not totally I don't fully understand it sufficiently these markets for the preferred like when would they freak out and that would mean they can't pay the dividend, right? If they freak out. So, you know, and that's a little bit there's some emotional dynamic there potentially that for a very panicky period of a quarter just does not allow them to issue these things or no one wants to buy them or they have to drop the prices dramatically, which also tears down my prices, right? If they start issuing that at 50% par, then I get killed too if I hold 100,000 of that stuff. So, it might then rebound.

So maybe you just hold through it.

Interesting.

Right? If you look at the way that bonds traded before the financial crisis, right? All of a sudden you see like the the spreads widen. And so we actually have an opportunity here. This chart shows the absolute rates. But this one back here, sorry to flip through this. This shows the difference between STRF and STRD. Again, they're the same security except for the fact that STRF is more secure than STRD. Here they can skip the dividends without consequence. Here, if they skip a dividend, there's consequences. So we can track the spread between the two. So the market is telling us right now that there's there's more risk. There's a greater likelihood that STRD is harmed. Now this spread, you know, it's widened, but it hasn't like shot straight up. So this actually would be a good measure to kind of keep an eye on what the market is telling us with respect to the risk of non-payment. I also would have to understand or think through what actually because I believe there is no real long-term risk. There's also very very mitigated medium-term risk, but there is some opaque short-term risk. If there's a shock of some sort to the market, to Bitcoin, everything drops.

Yeah. And they just get into trouble. What would actually happen? So basically, you know, they can't raise the money anymore because no one can raise money for example, right? Typical market crash situ. It doesn't even matter what Strategy does. The whole market says no one gets my money. Boom. End of story. Then they're sitting there. They need the money to pay the dividends. Okay? Then they have to issue these preferreds at a much cheaper price or the commons at a lower price. Uh, if that happens, right, my preferred that I'm holding drop potentially dramatically at say 50% because everyone's like running for the exits. Maybe it doesn't even matter if they pay or not, but maybe they decide we have to pay. Uh, then they pay, but the price is down. If I just keep holding them, it recovers. I'm fine again. So I mean, that's kind of the question, right? What leads to a non-recoverable thing versus a recoverable thing. I think if they manage to keep paying and just choose dilution and pain in the short term, that would be a huge vote of confidence because then they just bounce back after this crash thing.

Yeah. And? If they fail, then it gets priced in long term.

They could also do a debt deal. They could borrow money that whether it's convertible or just a debt deal, raise, you know, a couple billion dollars. Uh, convertible bond investors actually may be very interested in doing a convertible bond deal after Strategy stock stock has dropped 85%. Right? Imagine the potential upside on that deal. So they they may have all kinds of levers to pull here that we're not really thinking about in terms of accessing the capital markets in the event of some kind of crisis. And by the way, they could actually sell Bitcoin to cover this if they needed to. And in the short term, if you're doing that to preserve the company and and maintain these payments, then investors will say, "Okay, that was a crisis. That really sucked. That hurt, but, you know what? We live another day and we can make this back up over time."

So, I would actually I'm just talking here as a just, you know, someone who just thinks it through right right now. I think there are two measures that would give me much more peace of mind from Sailor. The first thing is I do not think it's actually smart of Sailor to say they will never sell Bitcoin. I would rather hear him say that's not our intent. Of course, we accumulate that stuff, but that's the whole point. When things go really bad, we sit on this giant asset and we can use that to improve and maintain the highest possible confidence.

That's right. I think that's what he should say, not we under no circumstance will we ever sell Bitcoin. I think that's a mistake because I'm as an investor like that's your whole asset that you're sitting on these assets when things go really wrong that's your biggest lever you should use some of that and the second thing is the cash reserve I think it's just it doesn't hurt the company much to have 600 million in cash like to have one year or 9 month some rule 6 months 9 months 12 months of dividend payments are always being kept that would just completely mitigate this crash risk and I'm talking more about a market like a macro crash fresh risk that always exists and that would just massively increase my confidence because I believe in the mid and long-term strategy a lot. But the short-term stuff and you're really running on fumes in terms of dividend payments, I don't like that too much and it seems easy to mitigate.

I think your first point is really good. I think that if you think of Strategy as a Bitcoin treasury company, then yes, the statement of we'll never sell it. This is the pristine asset. We're never going to do anything with it. That makes sense. I think what we're seeing is this evolution towards this company that's issuing Bitcoin backed securities, Bitcoin collateralized securities. And there you to your point, you need to be more flexible. You need to be able to say to the market, you can trust us. We're selling these securities to us and come hell or high water, we're going to make these payments. And here are all of our options, right? As we've discussed today, all the different things, right? And if we need to and the last the last one, if we need to sell some Bitcoin to make a hole, we are going to do that.

Yeah. Because if if you're a common investor, you rely on the preferred mechanics to give you your leverage. And that means you're relying on the market truly completely believing in the preferreds.

Yeah. And so you should have nothing against selling Bitcoin in a certain extreme situation if it's wise to do so.

And what they might want to say is, you know, there's a trigger. If Bitcoin drops a certain percentage, and I don't necessarily expect them to tell us, but just to say it exists, if it drops a certain percentage, we're going to sell some Bitcoin and we're going to raise or if we can't raise capital, we're going to sell Bitcoin and get $2 billion worth of of cash and we're going to hold that. Something like that. Some some sort of mechanism so that people understand that as this crisis starts to unfold that they've got a strategy for dealing with it all along and not like we're going to wake up one day and they suddenly make an announcement that, oh, we're suspending all preferred dividends. And I feel like I feel both of my points are valid even if you I understand the second point is more like for performance-driven investors like really dude you want to like inflate your cash away and sit there but I think there's some trade-off maybe 12 months is too much but something between one quarter and four quarters could probably it's one quarter or two quarters where you get the biggest bang for the buck high a huge boost in confidence with very marginal costs.

Right. Uh, and then in conjunction with this bitcoin selling strategy. Yeah. Um, just just to give a sense of u STRF the the upside downside with the security. Okay. So right now it's yielding 9%. So that's right here on this chart. Okay. 9%. Here's the yield. Okay. If the stock yields 10% for some reason because it's perceived to be more risky, there's like a 10% downside. If this if the security, you know, should only yield 8% because it's perceived to be less risky, then the stock has, you know, 13 12.8% upside. All right, that makes sense. It's a very linear relationship. And here's the same thing for STRD. Right now, it's got this 12.6% yield. And here it is down here. And if for any reason that yield spread between STRD and STRF narrows, let's say it's trading at 10% par, that's a 26% appreciation. And if at some point STRD trades at a yield of 8%, that's like a 57 58% return. That would be quite a narrowing of that of that spread. But I could see over time as the market gets more comfortable with Bitcoin as collateral, as Bitcoin volatility comes in, as Bitcoin is perceived to be a less risky asset that this is the kind of potential you could see in these preferreds over time at some point. I don't know when this will be. It's not this year, but some point in the next four or five years.

Yeah. You could enjoy a nice yield and potentially have some pretty significant upside for a fixed income investment. For an equity investor, this is boring. I mean my concern is mostly How many slides do you have left by the way?

This is it.

This is it. Sorry. Yeah. Uh, my concern just to give you my concern is not the yield and not missing a payment. My concern is if you put a 100,000 into this thing into preferred and something happens and that 100,000 becomes 50,000 the yield doesn't help you much. Right? And then the question is if that happens, is it just holding through it and recovers back to 100 or what? Which is the discussion we had like well depends how much damage they're doing in between right is is their confidence do they just dilute that's why it's dropping to 50 or do they actually miss payments so it's getting priced in long term blah blah blah so that's the real risk so I want to just ask you first of all thank you so much for this presentation I really enjoyed that I hope the viewers are not getting too many numbers in their minds but you guys are smart you you're listening to all kinds of stuff I'm saying all day long so I think that was super informative very interesting stuff. Now, big picture when you I know you're a very seasoned financial adviser, too. So, if you have someone who has I don't know something like a million and in a diverse diversified portfolio. Let's say some private and real estate stuff. But let's say let's say it's a million in these kinds of things, right? Liquid stock, crypto, bonds. Let's say it's a million bonds and stocks and crypto, right? What would you say? And it's a it's someone who doesn't need the money, who just wants to make money, who wants to be great exposure, growth oriented, but some form of risk mitigation. What place should the preferred have in that? And what place should MicroStrategy has in it have it and what place should Bitcoin directly have in that portfolio in your opinion?

Yeah. Well, let me preface this first by saying none of this is financial advice. We're just talking about some ideas here. The first thing that I would do is again just to reiterate what you said. I would solve for the income need first. But you're saying this investor doesn't have any income needs. Okay. So let's assume there's no income need. So now we're just looking at growth, right? Certainly you want to concentrate your portfolio if you have the stomach for it in your highest expected return assets. Okay? Relative to the the risk that you're willing to take. I have met plenty of people that are willing to put everything into one asset. I have met plenty of people that can't put more than 10% into one asset. They they can't they can't take it. So it just depends on the?

Some people who put uh more than everything into Tesla 15%. I don't advise for that.

So part of it is kind of who you are as an investor and it's important to understand that right. So I can't sit here and say you should do X Bitcoin, X Tesla, X this. It really matters in terms of your own psychological makeup because if you're not comfortable with your risk position, the minute that something goes sideways, you are going to harm yourself because you're just fundamentally not comfortable with the risk you're taking. So that's one of the most important things I think to understand is what what is your capacity to deal with an adverse event. So this the answer to this question there isn't one answer obviously it's it's make up across the board. My personal belief is that there are two major trends in this world that are unstoppable at this point. I don't care who's in power. I don't care what the economy is doing. And I almost don't care if there's a war of some kind. Although certainly a world war would stop things. But AI and robotics is unstoppable at this point. And likewise, this transformation to digital capital is also unstoppable at this point.

And inflation.

Yeah. And inflation, right? And by the way, AI and robotics need digital capital for them to really meet their true potential. They're they're both they're two sides of the same coin in my opinion. So I want to be investor in both in both sides. It comes down to then sort of what's your allocation between the two. And in the case of Bitcoin, do you want to own pure Bitcoin, which is great, or do you want to leverage yourself to Bitcoin? And there are some options.

And what's your personal what's your personal conviction on that side? And because I think the split between AGI, I call it AGI, and crypto is a little bit no one can give you the answer. It's like okay, like hard to tell.

Yeah. I would I would fall into close to 50/50 because these things are just very important and kind of independent even though mutually dependent, but they are like less correlated than the a than the AI stuff in itself or the crypto stuff and stuff. But that's I think very debatable. But inside crypto, what is your personal what is CERN's preference? Do you buy Bitcoin or strategy or the preferred convertible or you know if you look at growth? If I'm purely focused on growth, then I'm excited about the leveraged Bitcoin play, which is strategy, assuming you can get comfortable.

So, you would have a very high conviction that strategy grows. I understand the theory, but in reality, you would have a high conviction that strategy grows more than Bitcoin.

Yes. Yeah. I think because it didn't this year, like for example, like this year underperformed Bitcoin.

Sure. You can look at it over any short-term time period. I think if you look at it over the last 12 months, it's outperformed. There are going to be periods when it underperforms. Absolutely. Because it's a leverage play. So, it's going to leverage the upside and times leverage the downside. But over any, let's say if you look at the Bitcoin cycle, a four-year cycle, I think it's highly likely that strategy outperforms Bitcoin over any any given four-year time period. And to me, that that would be a relevant time period to look at rather than year-to-date because year-to-date, the return on strategy is driven by the MAV compression, you know, or if it goes up. And that's really out of the company's control. But over a four-year period, you're you're getting to see the company's ability to issue these securities and meet the demand for income that people have. And if they're successful in doing that, then they will accrete the Bitcoin per share and that will drive strategy stock price higher.

Assuming that they can maintain their premium, the MAF premium, because if that collapses to zero, that would offset the leverage effect. So it you know, but yes, I mean, I also think it's more likely than not, but I think I don't know exactly how much more you make because that's debatable. They would need to maintain that premium or expand it, which is a little hype and innovation and sailor out there. Then the question is how much leverage do they actually put on? Are we staying at 20% or are we actually going to 100% like they could do that? I think 30 30 to 50 is what we're likely to see longterm once the convertible bonds are gone. So right now it's what was it for the preferred? I think 9% leverage and the convers with preferred.

Yeah. With the preferred. Yeah, sorry. The the converts are 11 and the preferred is nine. So 20 total. Once the converts are gone, that frees up that and they can expand the preferred to 30 to 50%. So that will allow them to accrete Bitcoin per share that much faster. And I think you actually could see an M mv acceleration at that point. I don't know when that may happen, but the converts are going to roll off over the next several years. I don't know if there's anything they can do to accelerate that. If they could, that would be interesting. If we wake up one day and and Sailor says we have figured out a way to equitize all the converts now, that would be a very bullish signal in my opinion.

Yes. Yeah. Very good. Let me just think and and one of of course the diffuse general risk of anything like that is it's not an ETF that's just leveraged or something. It's a pretty complicated thing. So one thing that scares me about complexity is someone makes a mistake and the whole thing blows up, right? There there can be all kinds of mistakes just the more complicated it gets. So there is?

Sure. The other thing too, Joe, I would mention is that everybody's so focused on the accumulation strategy, right? What's the Bitcoin per share? And that's fine, but what's the endgame? Let's say a strategy gets to the point where they control 6% of all the Bitcoin that'll ever be created. What else can they do with it besides issuing securities? They're moving. They're becoming this capital markets company, right? An issuer of securities. Can they become an insurance company? Can they become Bitcoin bank? Are there other business opportunities now that they that can be afforded to them that they've got this massive hoard of capital?

Yeah, right now.

Yeah. I was just going to say right now they're I think the fifth largest uh reserve of assets of any company in the US. Berkshire Hathaway at you know 300 plus billion Strategy's right up there with the top mag 7 companies in terms of a treasury reserve at about 722 billion what happens if they get to half a trillion in reserve assets they become more you know potentially stronger than Berkshire Hathaway is potentially what other business opportunities does that afford them when they get to that kind of strength and to me that's a really interesting thing to think about.

So if I had any advice not that he needs it from me but any advice as a sailor to make this stock mega hot. It's these three things, the two we discussed. Make Bitcoin more flexible and don't say you will never sell this thing. Then my very tactical advice just have some stack some cash to have one quarter or two whatever just you know so you also come across as someone who has this governance like oh yeah I fiduciary like I make sure nothing can happen. It's not a big expense for you to stash the cash. But the third thing because so far why I'm still hesitant to sell my Bitcoin and buy strategy, right? That's the question because it's like, yeah, it's nice, maybe I get some leverage, maybe not. You know, what about the MNAV? It's all about the MNAV. Can they keep it up or not? Or does it compress? How much leverage do they take on? So, it's like, oh, it's a lot of effort and some additional opaque risk of execution just to outperform my Bitcoin, maybe. So, that doesn't get me excited enough to pull the trigger. Even though I would say if I would pull the trigger, the odds that I make more money than Bitcoin are reasonably high, probably 70%, but I don't like the 30. Why? Why? Right. But your last point might be the most important, especially for offensive investors like me and our viewers who love Tesla. Where's the fantasy? And he doesn't need to do much. He just has to hint at it. He just has to say, "Imagine the possibilities. This is not just about Bitcoin. We are super focused on Bitcoin. We become the world's pre-eminent treasury company. Bitcoin is a big deal, but it could go whatever to Mars, right? And because you're totally right, but I don't I don't hear that. So, just opening up that because that gives me confidence that this MNAF story is real, that the MF could go to six, whatever. Like, because then then it becomes a whole story situation to distill that genius of that Bitcoin treasury strategy into a first principle and say we did it with Bitcoin, but think about it. And the yield curve is the first good point that they're making. It's like look this is not just treasury bitcoin. We are constructing the yield curve on a new asset that is actually and so I think that it would give me more confidence not just as someone who loves vision and future but just on a market narrative story I to protect and expand the MNAF if you show me a path to that makes me confident that there's come more is coming and entertains the market enough to give me high confidence that MNF doesn't go to one but it goes to four long term right or something that would then it becomes a very aggressive move where I say that Well, that's pretty cool. Maybe it's even not exchanging my Bitcoin, but changing some. But this is a new thing that I like.

So, a couple thoughts on that, Joe. One is, and this may be for another show, but I've I've built a model that actually calculates what the warranted MNV is. It's a term I I I made up. You know, if you get from point A to point B given certain assumptions, then you can back into what what is the what MNEV should it trade at if you go from A to B. And you can look at different B points, B1, B2, B3, and look at the different warranted MNAVs. That's an interesting exercise. And I I learned actually quite a bit about what where the drivers of value are for for strategy looking at that model.

And the naive my naive point would be well, it's the leverage. If you have 50% leverage, it should be 1.5 because?

Yeah, there's some other really interesting factors, too. But let's save that for maybe another show. We'll use that as a teaser. The second point I think is also very interesting. It's kind of a greater point. I've I've actually been out there recently saying and posting about the idea that companies that are buying back stock today are making a big mistake. Okay, it's great in the short term, but think about we are moving from this world that we know well to this uncertain world of AGI ASI. We don't yet know what capital will mean and how much companies will need to see themselves through this. If you're heading into any period of uncertainty, the more capital you have, the better, right? And so I'm suggesting that companies instead of buying back stock, they should be buying Bitcoin, building this massive reserve of capital. That's one benefit. And the fact that if you can get to, you know, trillion dollar balance sheet, you know what also happens is it reduces the riskiness of the valuation of your company on the due to the income statement side. All these companies today generate their value from their income statement for the most part generating earnings or earnings growth and they work really hard to give most of that capital away. They buy back shares and it makes equity investors happy in the short term. I feel like we're all partying like it's 1999. Here we are looming ahead of this is this great period of uncertainty and I want to see companies hoard the capital right now because we just don't know what they might need it for. I mean look at these AI companies and the investments they're making. What happens if to be a leader in AI you really need to invest 10 trillion dollars? Wouldn't Microsoft and Nvidia have preferred not to give all those billions back years ago and now have that capital at their disposal?

So, of course it's based on the assumption that they believe in Bitcoin. That's that's kind of the question. And then CEO incentives of course CEOs want to have quarterly stock price Yeah. appreciation.

And it's not mutually exclusive. They could still buy back enough stock maybe to cover the dilution from the employee stock options and and that kind of thing, but they're going well beyond that. They're actually reducing their share counts. Yeah, I think it's a well, it's all, you know, it's all a question. Do you believe in Bitcoin? You could also argue just don't don't buy your stocks back like do a diversified growth portfolio or something, you know. I think that's the discussion. But yeah, sir, I think that was super interesting. That was probably the most comprehensive coverage here of MicroStrategy and the new preferred. So I hope everyone enjoyed that. I want to thank you a lot for this very structured overview and our very interesting discussion. I think there's more to come. We should definitely cover more of that. We took a real deep dive here and I got very educated on things. So I'm happy to do more of this. Bit mine is another big topic maybe for another session and these Bitcoin strategies and you know keeping our eyes on micro strategy. So thanks a lot sir to for for you visiting today.

My pleasure. Uh, and I hope everyone enjoyed that. See you next time.