Transcription
this is something that no one has ever
seen before so you have to think about
it in slightly different ways and try to
understand what is really happening here
and it is a creating continuous value to
the balance sheet to the asset base
therefore in a way it's a type of
earnings for the company and then we
should perhaps be thinking about this on
a price earnings basis and maybe this is
why sailor is doing this as violently as
he can he wants to demonstrate to people
the value that he can add in a single
year right and if you're not thinking
about this as earnings then you're just
completely mispricing the stock because
he's completely changed the basis of the
value of the company in a single year
hey everyone this episode is sponsored
by Ledger for the past decade Ledger has
been the global leader in digital asset
security trusted to secure more than 20%
of the world's crypto assets celebrating
10 years of innovation Ledger is making
digital ownership more secure and
accessible with their latest products
Ledger stacks and Ledger Flex these
wallets feature the world's first secure
touch screens simplifying your digital
transactions while ensuring
uncompromising security through this
Ledger secure chip and proprietary OS
plus with The Ledger security key app
you can say goodbye to traditional
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today all right welcome back to another
episode of on the margin and joining me
today is Richard byworth who is the
managing partner of C's capital and has
a long story career as a convertible
Bond uh salesman and Trader um very
historic career through a lot of
different Realms so I'm really excited
to get him on the show today we're going
to be chatting alling micro strategy and
just really starting to try to unpack
some of the more you know Advanced
mechanics behind the whole idea so
Richard it's really great to have you on
the show I listened to your your episode
a few weeks ago and I was just mind
blown to somebody who could really
explain these Dynamics so I just had to
get you on the show so it's great to
have you great Felix thanks for having
me always happy to chat about it I think
my strategy is is woefully misunderstood
by the majority of of people so happy to
try and articulate uh as much as
possible uh what is a fairly complicated
subject love it yeah I think that's a
great goal for today so to to set the
stage before we get into it all I would
just love to hear a little bit about
your history as I as I understand it you
worked at namura and you've been in the
convertible Bond industry for what feels
like many years and you have a pretty
good understanding so just love to hear
a bit more about your background and
also just like a quick one1 and what are
convertible bonds and how's that
different from traditional fixed income
instruments sure yeah so um I started my
career in London um I was desperate to
get on a trading desk and by luck just
sort of landed on the convertible Bond
desk um I didn't know anything about the
product uh before I landed there and
within two weeks I was trading a book uh
when my boss went on holiday and uh he
handed me the the market making book for
for these sort of small cap names in in
Japan where we had this rather unique uh
still remaining open outcry Market this
was in the early
2000s basically everybody would call up
all the other Banks and if you were the
first person to call them you'd get to
ask them a price and if they got you
first then they'd get to ask you a price
and so we called it this knock for knock
Market making and these Bonds were super
liquid basically the uh the market
makers were were were the only liquidity
and so we have you know if you didn't
know what was going on in this stock you
know like a let's say a metap planet
today if they've suddenly announced a
Bitcoin by and you haven't noticed it
then uh you know you're going to be
caught caught short or long uh in
something you don't want um but anyway
to cut a very long story short that's
where I cut my teeth um so I sort of
landed on this desk started learning
about convertible bonds and you know I
was discussing this with someone the
other day because a lot of people really
struggle with the payoff of a
convertible Bond and what it looks like
right everyone's talking about you know
these convertible Bond Arbitrage Traders
are aiming for the conversion price
that's just not true at all right you're
there for the volatility you're there to
take advantage of the fact that this
thing moves in particular in the case of
micro
strategy you want to make sure that
you're capturing as much of that
Arbitrage as possible so we can we can
talk about that but uh just to come back
to my my career so I I started as a
Trader um within the convertible Bond
space um in 2002 so two years later
namura namura bought a business from
another bank so prior to
2002 namura in London was basically a
proprietary trading shop like all the
Traders had hardly any client business
we were just trading our own risk on
behalf of the bank and so in 2002 they
started buying businesses from other
Banks they bought a derivative business
from meril Lynch they bought a
convertible Bond business from ING at
that point I then changed from more a
proprietary Trader into a market making
Trader and uh as a market maker this is
extremely frustrating because you come
from a position of saying I want that
Bond I want that on my book and then a
client comes along goes give me a price
in this Bond you give a two-way price
and he buys it off you and you're like I
need my position back guys come on you
know go go get it so it's it's a
slightly bit more frustrating and so I I
got to the point of saying you know what
I just need to join a hedge fund and so
at that point it was around the time
where the new team that had come in were
looking to expand the international
business into Tokyo obviously being
Amura we were very strong in in Tokyo uh
in anything that we tried to put our
hand to so it was very obvious that
you'd want to put a part of our team in
Tokyo and so I thought to myself well
that would be a great opportunity as a
sales guy to be facing some of these
hedge funds and show them how smart I am
and then i' join one of those hedge
funds and and go back to putting
convertible bonds on my my book and
trading them well it turns out I was a
better sales guy than I was a Trader and
so I ended up just building a career as
a sales guy and that sort of took off we
we ended up being um being one of the
number one houses or the number one
house I should say within a matter of
months uh of landing on the ground in
Tokyo uh unseating Goldman sacks at the
time um and then Leman happened so in
2008 um I ended up running all of the
derivative business as well as the
convertible Bond distribution business
and then Futures and options and Delta 1
um and so in 2009 I moved to Hong Kong
um which is where the majority of the
clients were that I was facing um and I
started you know really building out
that business within by 2012 we were the
number one aurex derivative house as
well as the Japan derivative house so
that was a big win for us uh as we we
didn't manage to keep it for very long
but uh we uh by 2014 it was starting to
slip again and this was a point where
the result of negative interest or or
zero interest rates or negative interest
rates had started to really permeate
into the financial
system sprads had gone really tight it
was really hard to make money on all the
products uh that I was selling and so it
was just becoming more and more
frustrating um and so by 2017 I just
decided to to leave the bank I was going
to join a private private Equity Firm um
and in the end I was approached by a
crypto company that I was invested in
and they were mining uh ethereum in
China and so I joined this company to
help them build out Financial Services
ended up becoming CEO of the company we
sold the mining business we listed the
company on NASDAQ through a spa um and
uh that
um that process of dpack was a as a
whole three-hour podcast on its own but
uh basically at the end of 2021 binance
came along and they wanted to buy the
company because we had a lot of licenses
including the UK where they'd just been
kicked out by the FCA that was the point
where I said to the chairman and the
board I don't want to be involved with
binance step down and and we found
myself sitting on on the beach in Costa
Rica and got a call uh from uh Mark C's
at part of the family and CEO of C
capital and asked me if I'd I'd be
interested in joining to look after the
hedge fund business at CES Capital um
the hedge fund business at CES capital
is about $1.3 billion we do invest in
convertible Bond Arbitrage managers so
obviously that skill set of having
looked at managers over the years sort
of um is very helpful and and work with
them for a long time so yeah we as well
as uh hedge funds we do private equity
and litigation Finance as well so that's
another 500 million so in in total we're
about $1.8 billion do F awesome okay so
I feel like that paints a good picture
of of your background of understanding
the CT Bond business but also the crypto
business and how they both intersect the
perfect you know expression of that is
obviously micro strategy so you know the
the the secret sauce behind
you know what sailor is up to is the
convert bonds and what he can do there
so I would just love for you to unpack
what are the unique properties of
convertible bonds you know it's it's not
it's a relatively young product compared
to a lot of other you know products that
are out there so what are the unique
properties of it and why is that you
know the the secret sauce that micro
strategy has started to leverage um what
are the what are the reasons behind
those properties that make it you know
so great for him to issue so so
basically a convertible bond is priced
um on a number number of factors um so
it's priced based on interest rates it's
priced based on credit of the company so
credit worthiness of the company um it's
priced on the underlying stock where
that is and it's priced on the
volatility of that stock so all of those
things come together to contribute to
the pricing of a convertible Bond what
Sailors realized is because his stock is
so
volatile it allows him to price Bonds on
a zero coupon
with a massive
premium Now to to price a bond on a zero
coupon on a 55% premium I mean you would
basically need rates to be at zero I
mean the only place I'd ever seen that
before was in Japan where rates were at
zero for a very very long time and when
you combine that with a volatile stock
like a soft bank for example um then you
could you could end up with that level
of a premum but even that was very very
rare in a zero interest rate
environment the thing that sailor has is
this very high volatility because he's
basically sitting on the volatility of
Bitcoin adding leverage to that and
therefore getting even more
volatility and and so he's basically
just uh realized that this volatility is
what allows him to completely price a
ridiculous outome come for him and his
shareholders because what's he doing
he's selling stock not just at the
current rate which is what he's doing
with the eatm he's selling it at a
massive premium and then using that cash
to buy buy Bitcoin right and I think
this is the ultimate hack that he's
managed to find and obviously now we're
starting to see people start to
replicate it but he is now so far in the
lead this 42 billion 21 and 21 plan
uh that he launched I really I mean I
was blown away by that um it really was
something that I didn't think the market
could could handle in the way it did I
mean he went live with that 21 billion
AUM day one and the m and the stock went
up I mean it was absolutely phenomenal
when you had that level of dilution I
mean he was a at the time he was a $50
million 50 billion company and he issues
you know 40% ution in the stock now and
the stock goes up I mean that was the
point where I realized okay something
has shifted here like this is a
completely different Paradigm that we're
now in and he's operating on this new
glitch yeah so to come to come back to
your point about convertible bonds if
you think about what he's doing in the
stock he's let's say I use this example
on the other uh chat I had but I think
it's the simple one to just try and help
people understand if he's got $100 of
market cap in stock and he's got $30 of
Bitcoin he goes and issues another $100
of stock market cap becomes $200 but he
buys a $100 of Bitcoin he's suddenly
increased the r decreased the ratio the
multiplier on that Bitcoin so massively
ACC created value to shareholders all
right and this is the point the dilution
is a creative and this is what everybody
in financial markets is really
struggling to get their head around
right so as long as that multiple trades
there almost needs to be more multiple
right so so as long as he's got a
multiple there should be more multiple
it should just be going high but
obviously he's selling into it and
pushing it down but even if it goes back
down to a multiple of one he can do more
converts selling it again another
multiple so it everything that he's
doing continues to be a creative yeah so
it's really a very fascinating situation
that he's found himself in did I explain
enough on the convertible Bond or yeah
I'll um I'll just summarize one quick
thing and then dig in deeper on that
that question of of value acur because I
think it's very important but you know
effectively you know sailor has has two
options to basically raise Capital he
can either issue Equity at the market
like he'd mentioned but to do that he
generally speaking needs needs a premium
um to be able to issue into um versus
you know it's a lot harder to to issue
Equity when you're at a discount to nav
of of the Bitcoin so that's the one
route and then the other route is what
you just described which is the convert
bonds which you know depending on on
where they trade versus the conversion
price they can often you know if it's
below it trades more like a bond and
then if it trades you know closer or
above the you know conversion price it's
more like like Equity or like a call
option so based on that capital
structure framework I want to follow up
on this question of what you mentioned
about um value acrel um obviously you
know you mentioned that it's you know
you issue 40% more like increase in
equity and you're you're saying it's a
creative and I think you're right that's
the thing that people are having a lot
of difficulty wrapping their heads
around um so that assumption does it
require the assumptions of being
positive on bitcoin and does it also
require the assumption that it continues
to go up in price in the future or can
it still be a creative even if we you
know go flat here if we go flat here in
the multiple remains it's still
accretive right you think back to that
example I gave of 100 and 100 right it's
whenever there's a premium to nav it's
ACC creaive right and even if as I said
that nav drops to one the multiplier on
the nav drops to one he can still do the
CB which is again net accretive there is
obviously a third option he can do
straight debt with no convertible uh
strike price I think that if you if if
you look at the way that the converts
trade um it it's also important to just
understand the way the payoff looks
because a lot of people get their heads
stuck around this conversion price and
that is important at expiry it's not
important now necessarily right so
because of the volatility you end up
with what we call in options terms you
time value so the time value he's
issuing a fiveyear piece of paper it's
got a three-year put so essentially that
pushes up your bond floor because the
credit is only to three years that's
where your credit risk is going to get
tested is because he's got a put in it
where you as an investor if par is like
20 you can say you know what you you're
going down the toilet I'll put those
bonds back to you you got to pay me full
full par price right so so that that put
a there's a bit of a a stagger in the
maturity curve of of the convertible
Bond
but forget about that for a moment just
let's let's just talk about the payoff
because I think it's it's really
important for people to understand
you've got the the bond floor right
which is calculated based on the credit
okay as I said the put will affect that
so it pulls the bond floor higher
because it's three-year paper rather
than fiveyear paper right so you've got
the bond floor and then you've got the
payoff of the equity so as Equity goes
up one the the price of the bond goes up
one right so post the conversion price
you've got this pay up sorry I'm in the
wrong part of the camera angle so youve
got the payoff going like this
diagonally right so what happens though
Pro like that's the payoff so that's
what it looks like at maturity only at
maturity I care about that conversion
price prior to that you have what we
call time value which creates a curve
where the fair value pricing of the
convertible bond is so it tails off and
as you go lower and on the parity it
will get almost to that Bond floor price
right and then as you get close to the
conversion price you have this huge
amount of Premium between the the the
value of the bond at par and the final
sorry the trading price of the bond and
that is the time value of that option
and the time value of that option is so
rich because it is so volatile his stock
is so volatile so the market today is
pricing his Bonds on like a 70 70
implied volatility that is almost
unheard of of a convertible bond for
that type to uh term right because when
you trade a one month or a three-month
or a six-month option sure you're going
to be fairly close to the actual realize
today but you're always going to assume
as that option gets longer that you will
have with a very volatile stock you will
you will have um a depletion of the
volatility over time right that's just
generally the way that the options will
price as they get longer and longer
dated so for a convertible bond to trade
at 70 implied Vol is is absolutely
insanity but it just shows you how
volatile his stock is and how volatile
everybody anticipates to be and I was
just looking at the stock this morning
it's down 5% bitcoin's down not even
2% and the stock's down 5% so five time
16 roughly you're looking at that's sort
of about a 90 Vol on the day I want to
ask you super quick just to compare what
you just explained to something people
might be more familiar with
which oh yeah there you go um if we can
just compare that to something that
people might be more familiar with like
a black skulls model of like a call
option or something like that so let me
get see if I got this straight but what
you're saying is that whereas with a
call option you know the price of that
option is is pretty reliant on the
probability of it to expire in the money
um so like where the Delta is relation
to the strike price but you're saying
that in the convertible Bond area
it's it's it doesn't quite matter until
we're at expiry is that what you're
saying no sorry maybe I'm explaining it
wrong of course the stock price is a is
a factor when you're pricing right but
what I'm saying is when I see these
comments on Twitter everybody's like oh
but you know the convertible Bond guys
they're not going to sell any until we
get to conversion price like no that
that that's not what happens you you're
already on an implied Delta IE and imp
into the price already yeah exactly so
it's already priced there and and
because of that massive amount of
volatility you just have this premium
because it's fiveyear option um you know
so it's very very long so you get this
huge premium baked into the price itself
got it okay okay that makes sense um
cool so I want to talk a little bit
about the people that are actually
buying these convertible bonds um like
you mentioned the last two insurances
have been at 0% coupon so there's no
coupon um so the big question is
where is the yield coming from how are
they getting it and how does it work
that they actually get it okay so let
let's go back to the basics of your
average convertible Bond Arbitrage hedge
fund right so guy gets a call from his
investment banker in the morning uh
micro strategies issue another
convertible Bond right I'll stick it
into my model I'll work it out okay
that's the conversion price he's
proposing that's the coupon he's
proposing I factor my credit to be you
know 600 basis points over rates so this
is where I'm pricing the bond for etc
etc so I'm putting all of these things
into my model and I'm looking at it and
the model's telling me well that's 60
implied and I'm looking at all the other
micro strategy converts and they're all
trading at 70
implied and I'm like call my banker back
okay put me in for the full allocation
right I want Max allocation on this Bond
and this is what's happening across the
street every time he's doing a convert
because the minute he issues he's
leaving enough on the table where the
guys are like of course I want that
right it's 60 Volve compared to a 70 Vol
I think he issued at 60 volt last time
it immediately traded up to 70 volt so
that is a huge amount of profit almost
day one all these convertible Bond guys
so so their yield comes from the Vega
increasing that's one thing that's
what's pricing the bond cheap so to
speak got it right so you get that kick
in the Vega as you rightly out so the
vager is is Big because it's a fiveyear
piece of paper so it's it's fiveyear
Vault so it's very impactful 10v points
you know that could be seven eight% in
the bonds right so it's it's a huge
amount of value that's left on the table
then and then if the guys who want to
trade it and go well 70 Vol is still
cheap for you know a stock that's moving
around intraday often at 100 50 Vol
right so I want to keep it and I want to
trade the gamma right so the gamma is
the trade sorry the change of Delta
every
1% so as the stock goes up let's say 20%
in a single day if gamma is
0.5% then your Delta is going to change
10% right which means at that point
where you're hitting 10% up you have 10%
additional exposure to micro
strategy right I was on the phone to a
convertible Bond AR Trader after I did
that podcast the other day just to sort
of understand what he's going through
with all of this and he's like Rich I've
become a dgen crypto Trader I thought I
thought I was a cbab guy like I'm just
trading crypto like a dgen now he said
it's insane he said I go to the bathroom
if I haven't tightened up all my deltas
and at least left some limits I can come
back and have millions ions of dollars
of exposure this stuff is whipping
around like crazy I mean he's got the
bit de bonds the the um Marathon bonds
the the micro strategy bonds so he's
yeah as I said and to your point as you
say there you know they're not trying to
take on directional exposure Delta
exposure right it's a gamma thing for
them so if if price shoots up they're
shorting right that's where the that's
where the big short interest comes from
is these guys are trying to St delta
neutral right exactly right exactly
right haven't modeled it so I don't know
what the gamar is but you know a big
move like that you're going to get a lot
of selling coming in from the CB guys
that said all the other CBS that he's
already issued are so far in the money
there's no Delta change happening is
they're already on like a 95 Delta right
so it goes up another 10% maybe they go
to a 96 Delta yeah but it's money call
right it's just like yeah exactly
exactly so those bonds he just issued
those are the ones where there's this
big significant move in gamma oh sorry
in Delta each time right so you know
those are the ones that are creating the
the selling or the buying to the
downside so this is you know if you if
you think about what happens when you
have a lot of options in a market you
you generally see a decline in the
volatility because the guys trading the
gamma are essentially cushioning the
moves right they're selling is it
getting over over over strong and
they're buying back is it's it's getting
oversold I'm glad he brought up that
idea of if volatility dampens because I
want to ask you about the ability for
for sailor to issue these at the um at
the coupons that he is doing obviously
you know when he started this there was
a lot of yeah like senior converts that
were you know priced at like
2.25 8.75% so above
zero if VA if implied Vol started to
come back lower um would he have less
ability to issue at zero would that be
dependent on it yeah I mean just to be
clear it's it's realizable so it's
what's actually happening in his stock
implied Vol is is where the the the
convertible bonds are pricing so they're
pricing H the the implicit the thing
that that is is hard to well the thing
that needs to be calculated to find out
the price is essentially the the
volatility so it's like what volatility
is the price of this CB implying right
so it's the realized V if realized Vault
drops as you say it is going to impede
his ability to continue issuing zero
zero coupon uh convertible bonds hey
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Ledger secure chip and proprietary OS
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and then my next question is just around
like claim on the Bitcoin and and value
Cel as well because you know as we
discuss this it feels like and you know
this is something the critics may bring
up is that effectively Sailors using you
know people that don't understand these
Dynamics who just buy the Equity is
basically exit liity for the convert
Bond guys to be able to you know Harvest
this gamma and this in this yield so my
question is um you know if you're an if
you're an equity holder how do how do
you see that claim on on on the Bitcoin
um but obviously with respect to you
know these fix fixed income instruments
they're not secured by the Bitcoin or
anything like that so I'm just wondering
like in a in a potential you know when
you when you are in fixed income worlds
you're always thinking about what does
it things look like during a liquidation
scenario so during a liquidation
scenario
where does the claim on the Bitcoin
reside in basically is my question so I
think none of the converts have any
claim on the Bitcoin um so that is not a
collateralization option he's literally
just pricing these on the volatility of
the underlying stock right but as his
Bitcoin stock gets bigger and bigger and
more important then obviously that
provides some level of credit Clarity to
the convertible Bond Traders because
they're like okay you know they they
might not have a claim on the Bitcoin
but they do have a claim on micro
strategy so in in the event that there
is a uh a bankruptcy um then he would
end up selling the Bitcoin but the only
event that there would potentially be a
bankruptcy is when he can't you know pay
pay things anymore he can't pay the
coupons or he can't pay off the debt
that means that Bitcoin is reversed
quite violently and we're in a bit of a
a dire situation with Bitcoin so if you
basically try and map out where does
this go wrong it's basically Bitcoin
having some level of failure and and
dropping below 80% from where we are
today so so long as you're a Bitcoin
Maxi um I think you're fairly
comfortable owning micro strategy stock
and my view very strongly is that this
mnav should be actually trading a lot
higher than one and a half two but it's
going to trade it's going to struggle to
keep premium while he's smashing the ATM
to the degree that he is I mean there
there seems to be a level of urgency
with sailor's behavior I'm intrigued as
to what you think like I never imagined
he would have done this amount of the
ATM by this stage I mean it's absolutely
crazy to to think of how much he's
actually raised I haven't done the math
since this morning based on his latest
purchase but I think we've got to be
getting close to 10 billion of the ATM
already done yeah it feels like you know
obviously the the the first level
assumption is oh you know bitcoin's up
and he you know his premium's up so you
know he can issue buns but I wonder if
it's more to do with just where implied
ball is sitting and just the ability to
uh to issue into that well the implied
ball is affecting or the the realized
Vol is affecting the convertible Bond
pricing I I'm so I'm talking about the
premium to na here oh okay yeah so I'm
like I think that that should go higher
um I think that you know S&P inclusion
being on the horizon um NASDAQ Etc all
this passive flow money that could come
into micro strategy I think also the the
fact that no one can catch him even if
micro stoed at their board meeting you
know next week or this I think it's this
week isn't it is if they announce it
that they're going to start buying
Bitcoin they're never going to buy
Bitcoin with their entire balance sheet
and even if they did I don't think
they'd ever managed to acquire as much
Bitcoin as sailor has got so but the
point I was making is he seems to be
just urgently trying to get as much
Bitcoin as he possibly can so you know I
think this is what's interesting is
obviously what's holding the the
multiplier down um because he just keeps
selling into it every week um but I'd
I'd be intrigued as to your uh your view
on that there was a lot of discussion
about when the Bitcoin ETFs came out
whether that would you know remove the
premium to nav right because you know
there's there's some theories that the
reason for that premium is is due to the
ability for you know some of these
certain deaths to be able to buy like a
you know a you know license security
Equity um and it's a bit more
complicated for obviously like spot
Bitcoin and and even more so or lesso
for the the Bitcoin ETF so what I find
really interesting is that we have the
Bitcoin spot ETFs now we even have the
options on them as well and yet we
haven't seen that premium come lower so
obviously you know it's not it can't be
that hey because I thought you know you
know decent probability that when those
options launch and especially the ETFs
launch that we would see that come back
down to zero but we haven't so I don't
really know well this is exactly what I
thought and I think I think sailor
probably thought it as well to some
degree yeah so maybe he was rushing and
he's just like oh I got to get
these out of
here but I think what what has changed
in sailor's mind is he's had a
realization that and he talks about it
now he talks about micr strategy as
being a Bitcoin Refinery company and you
know that he's taking the oil and
refining it into usable instruments and
I think this is is really interesting
basically it's probably a bit of a
stretch to call it Refinery but he's
he's running a treasury management
company he's leveraging the capital
markets to get even more Bitcoin and if
you take a step back and go okay if I
could
myself issue future equity in my
performance right could I and use that
to buy Bitcoin would I want to do that
today rather than wait until I've earn
that money yeah definitely if I could
borrow money and buy more Bitcoin and
borrow money on fiveyear debt right
would I want to do that and buy Bitcoin
yes I absolutely would certainly on an
LTV of like 20 right which is I think
what he's at today versus the market cap
so when you put all that together you go
hang on this is just an amazing way to
add leverage into
Bitcoin without doing it in a way that
is gonna just cost you and bleed you
like a a leveraged Bitcoin ETF would
because they're just using options right
so this is actually a very sophisticated
way for you as an average investor to
get leverage into Bitcoin and and to
keep growing your Bitcoin stack and I
think and fast forwarding what you can
actually get as your Bitcoin stack and
that's the point as well is like you
know that by adding micro strategy
you're going to increase the amount of
Bitcoin per share every year so that's
way better than an ETF so it definitely
deserves to trade on a premium and then
you know the other thing that we've sort
of I've been trying to to debate with
with Equity people is well okay sure
it's not earnings that he's producing
but it is increasing the asset base
right which is what earnings essentially
end up doing to a company so if you just
kind of say okay forget about the fact
that it's not technically
earnings and this is money hitting the
asset base why is this not the same
thing and therefore why should I not
apply a multiple to earnings and
therefore you can see this a lot lot
higher right you know if he's earned $40
million of new assets this year in terms
of that uh that accretive
dilution than you know 40 million on a
multiplier of of or sorry price earnings
of 40 billion sorry on a price earnings
of of 20 well then that's an $800
billion company yeah those are the
underlying assumptions between you know
some of these metrics that they've come
out like with Bitcoin yield and Bitcoin
per share right like what are those
about because I feel like you know it's
obviously not a yield bearing instrument
so what do they mean by that when they
say that was that's exactly it that's
the increase in the in the Bitcoin per
share so so that's that's him saying you
hold your Bitcoin you hold your micro
strategy share one share every year
we're increasing that this year we've
increased it by 60% or whatever the
Bitcoin yield is that's hugely accre to
the shareholder again right so then if
you take that 60 and you go okay that's
earnings right then you can forward
extrapolate what I was saying before
rather than you know people go yeah but
it's not earnings you're like okay okay
fine but where do earnings end up
earnings end up on the balance sheet as
new assets so this is essentially a way
to consider that this could be earnings
and therefore back to my point if you if
he goes and does another series of ATMs
next year and and Carries On at the rate
he's going I mean he's going to be
adding a 100 billion of new Bitcoin in a
single year I mean that is turning that
company even on a 10 PE into a trillion
dollar
company so where do you put the
multiplier right yeah you got to rethink
them yeah you you can't just go okay
this is just a slightly better than the
ETF no no this is a very different ball
game now we're talking about have
modeled much in terms of liquidation
risk quote unquote other than saying you
know if Bitcoin goes down 80% there
could be some issues you know sailor has
already ridden a pretty significant draw
down though it wasn't quite as levered
at the time obviously of course but they
have been through that at least once um
you know just looking at the current
like annual interest expenses you know
correct me if I'm wrong but I have like
34.6 million roughly a year have you
modeled out how you think or or how they
might be thinking about you know that
interest coverage um in terms terms of
potential liquidation risk or something
or what could happen and how much of the
traditional software business revenues
cover that interest expense I haven't
modeled it or spent time on it in any
particular detail but what I do know is
that last time I looked at the numbers
they the revenues from the software
business were just about covering all of
the interest rate expenses and obviously
the more he can issue at zero coup on
and he will be those bonds that he's got
at 2.25 you said and 0.875
yeah he's going to be calling them as
soon as he possibly can he's going to
call all of them but that that's
probably something also to mention for
people to understand is that there is
this soft cool feature in all of these
bonds which means after a certain period
of time if the if the price of the stock
is a certain amount above the strike
price he can go to all the bond holders
and do what is called a soft call so
it's it's basically his call to say I
want you to either convert your bonds or
I'm buying those bonds back from you at
par now par obviously he's got a a 30%
premium to par they're trading at 30%
premium to par because they're 30% of
the money at least so what what they
tend to do is price in a soft call after
a period of time where you will have had
that time Decay decrease a certain
amount and they tend to price it at a at
a level where the options guys have at
least managed to make uh make their
money right so after a certain amount of
time they become callable for him which
means he can say okay I'm calling those
bonds if you don't convert I get to buy
them back at par where they par is
already at 130 so par means 100 so he'd
be buying them back off them at at a
discount of 30 points so of course they
convert they convert straight away right
which means that debt is suddenly
removed from his balance sheet you get
new share
issuances those shares collapse into the
Delta so there's no impact on the on the
share price because it's new Shares are
issued there's that short that short is
collapsed by the convert Bond Bond
holders into that short right and that's
really interesting so the reason the
upside like if you just think about a
normal payoff di diagram the reason the
upside is s un limit is because it gets
called but you know just turns into
Equity so you still have that UPS versus
like AA a traditional you know callable
Bond when that gets called like the
upside is capped right because you don't
actually get anything out of that right
you're talking about a cable straight
Bond yeah with no yeah yeah yeah yeah I
mean of of course if it doesn't have a a
cool option in it then there's there's
no ability to to convert it into the
stock but that's the thing they convert
it into the stock if they want they can
keep running it very unlikely by the way
that a convertible Bond AR guy would
keep running it he just converts
straight into the stock Nets out his
position he's out right ready for the
next one please Michael let's go which
is exactly what will happen so he has
this this captive
Market but I think to your earlier the
earlier part of the question what can go
wrong I think if we had an 80% draw down
in Bitcoin obviously then get to a point
where the amount the value of the
Bitcoin is the same value of the
outstanding debt I think you then run
the risk that we trade at a discount to
a
Navy um and so that obviously um gets
quite hairy uh for an investor so it's
something that people need to pay
attention to like this is leverage
upside it's also leverage downside
obviously you know there's a lot of
speculation right now on this idea of
being included in either like the NASDAQ
or or the S&P how do you view the
probabilities of that occurring and how
much do you think of that as like big
into where the price has gone recently
and also potentially that premium I I
would just like to say that I'm probably
not qualified to to make a a view on
this I don't know much about index
inclusion rules in the United States uh
but what I would say is that from my
understanding um Tesla uh was um
obviously not included for some time and
I think that a part of that was it had
run up very quickly and people thought
or the people making the vote on the
index
uh team had some view that you know
perhaps it could draw back down again
and then you know they're they're
rotating straight back out again so I
think what what the the team that will
make this decision will be deciding will
be a number of inputs and it won't
necessarily be a slam dunk for sailor
because he's got there so quickly and
they probably want to see a few rounds
of um of potential index inclusions and
him always being on the ticket uh for
for him to make it that's that's that's
what I hear from people way smarter than
me about index inclusion okay so
circling back on everything that we've
talked about thus far you started the
show by saying that micro strategy is
one of the most misunderstood Financial
assets and instruments around so after
everything we talked about how would you
summarize is like the the biggest
misconception of everything we've talked
about thus far I think the earliest one
is is basically an ETF and I still see
people make that comment so like that's
a really bad misconception as we've
we've discussed because he's always
aiming to add to bitcoin per share so if
you're an ETF if you're a holder of an
ETF you're essentially just bleeding
because you're you're paying the fee out
of your shareholding every year um you
know there's a there's an ETF in in SW
in Sweden listed in Sweden it charges
you a two and a half% fee annually on
the Bitcoin it holds so so you're just
bleeding 2.5% out of your shareholding
the value of your shareholding every
year with mic strategy is the opposite
so you're getting more Bitcoin per share
he's charging you no fee um so it's
secretive as as we've discussed many
times so I think that's the number one
misconception and I hear it all the time
why wouldn't you just buy
ibit like it's it's so different uh from
ibit you know he is literally leveraging
violently leveraging the capital markets
to get as much Bitcoin as he possibly
can think back to that example of you as
an individual saying how can I bring
forward my future earnings on some sort
of equity of Felix right I would love to
be able to forward sell that and buy
Bitcoin with that right but you can't
but Micro strategy can by selling their
stock right same with the with the debt
I can borrow money in the form of either
convertible or straight debt right no
one no one as an individual can do that
unless they're worth billions most
likely and you know their bank loves
them and will always lend them money um
but I it's certainly not true of me and
I'm sure it's not true of the majority
of people um that you can't just go to
your bank and go can you just let me 50
million bucks to to buy some Bitcoin um
it's not going to happen so I think
there's that aspect of basically using
sailor as your way of increasing your
Bitcoin Holdings now of course if
Bitcoin goes lower there is a chance
that you get all that detraction and so
you end up with less Bitcoin than you
could have had than if you spent you
know 10 grand on bitcoin versus 10 grand
on micr strategy stock right so there is
of course this this thing to understand
that and this is where of course all the
the the people that are being negative
about his stock pointing to for them
they see absolutely zero value in that
premium so and the minute you say well
you know what about earnings and why
can't we attribute some level of price
earnings to this then they oh of course
it's not earnings you an idiot it's like
well it's not earnings I get that but
where do earnings end up as I said
previously it's like they end up on your
balance sheet they end up as Assets in
the company or potentially as a dividend
paid so that's exactly what he's doing
so why could we not just sort of think
about it in a different way this is
something that no one has ever seen
before so you have to think about it in
slightly different ways and try to
understand what is really happening here
and it is a creating continuous value to
the balance sheet to the asset base
therefore in a way it's a type of
earnings for the company and then we
should perhaps be thinking about this on
a price earnings basis and maybe this is
why sailor is doing this as violently as
he can he wants to demonstrate to people
the value that he can add in a single
year right and if you're you're not
thinking about this as earnings then
you're just completely mispricing the
stock because he's completely changed
the basis of the value of the company in
a single year and that's essentially
what an amazing earnings year would do
so maybe he's acting in this very
violent way in order to try and
establish that base of saying you need
to give me a PE that's such a great
point because you know to your to your
point like the only reason it doesn't
show up in an income statement is just
because of how we decided to ruct income
statements right but to your point where
does that income go it goes on to
retained earnings or as a dividend so
it's just instead of just showing up in
an income statement which is just
arbitrarily what we decided are things
that show up there it just goes on the
balance sheet that's really interesting
I'm just thinking out loud with you now
and just sort of extrapolating that I
think that could potentially be an
explanation of why sailor is moving as
aggressively he is so in 2025 people are
like oh my God this guy has just added
so much value to this
company right we're thinking about this
wrong and suddenly it's just this wakeup
moment for the whole market and then the
mnav goes through the roof yeah
something I meant to ask you but didn't
get a chance to earlier was just around
the the levered micro strategy ETFs and
your thoughts on those because you know
classic Financial world you take a good
thing and then you you start to depress
it a little bit and uh I don't know if
you're ever like a vault Trader but I
was messing around there in the days of
like when XIV blew up and it just kind
of reminds me of these things so curious
your thoughts on on the impact of those
lever ETFs well I was a derivative
Trader and I was a convert Trader which
you know very similar types of things
and for me when I look at those products
I'm like you
unfortunately you know it having traded
options if you're not arbing if you're
not gamma trading those options with the
richness of the price of the
implied you are believe leading to death
right and we we all know that short
dated options unless you get the
direction right first time you are going
to just bleed to death so I I really
don't trade the options and I would not
touch those products because those
products are built through basically
going long very high gearing options
which are short dat you know options out
of the money they'll be building a curve
so that they can participate and then
rolling out the strikes and and doing
all of that but yeah for me that unless
you want to trade it for maybe two or
three days and you're like I'm very sure
that bitcoin's gonna have an absolute
flyer and micro strategy is going to do
2x that and then you know mstu or
whichever one is the two or 3x ends up
doing you know two or 3x times that then
sure you know if you have a particular
view over a three-day period yes but but
even holding over a weekend you're
bleeding to death right Monday morning
you come in there's no free lunch yeah I
I I mean I for my personal I feel that
micro strategy is is more than enough uh
volatility yeah yeah agreed and if you
want more vol I don't know like like you
said I'd we prefer to just do my own
leverage in options than try to just
bleed out on a lever DTF and I know
that's my perspective for all the lever
dtfs you know you see you compare like
the 3x cues or something like that and
you know the tracking error is just a
mess yeah it's because it's because of
the cost of of transacting these options
but also as you say it's that bleed
which is just horrific to deal with if
you get your timing wrong like that's
the thing with with with options if
you're not camera hedging them you've
got to get your timing absolutely spot
on certainly for the short dated any
closing thoughts there overall on the
whole micro strategy world and and your
thoughts on where this goes for the next
12 months before we wrap up look I think
it's an absolutely fascinating stock I
think it is changing the whole Paradigm
of markets I think that we will see more
and more companies announce the Bitcoin
strategy because of the success he's
happening he's having I'm paying close
attention to other early movers in
specific markets I think meta planet is
is someone to watch obviously uh
employing a very similar strategy to
micro strategy I mean I mean what
they've taken it from 20 million to 500
million and now you know obviously if
they get to a billion then they're start
going to start to attract much larger
investors and then they can also have
their own flywheel I mean they're
trading I think about a five times
multiple um but I think that that is
demonstrative of of the growth that they
can potentially have versus uh micro
strategy in terms of just accreting much
faster that lower rate which we've
already seen um so yeah look I I think
this is a really fascinating space to be
watching I I'm not giving anyone any
investment advice of course um but I do
think that that premium to nav uh should
expand as people understand more and
more that this is a way to be thinking
of earnings coming into the balance
sheet rather than okay it's not
technically earnings so I'm not going to
count it as earnings as you said um I
think that that is potentially a
fascinating way to be thinking about
this and it puts the stock a lot higher
but of course there's downside if
Bitcoin starts crashing this Stock's
going to crash a lot harder you will see
that uh premium Tav probably drop to one
as things get really hairy and uh and
maybe even a discount well said look
Richard it was great to finally get you
on the show um where can folks go if
they want to hear more about your your
thoughts and and amings like any good
Finance Pro I'm on LinkedIn um and so
LinkedIn under my own name I think
there's only one Richard byworth based
in Switzerland certainly um and then on
Twitter I'm Richard byworth um so all
one word so easy to find awesome all
right well thanks for joining us that
was really fascinating for me thanks one
more thing I should say Felix is I I
have my own podcast slightly different
it's not designed to be a Bitcoin
podcast it's designed to be a podcast
looking at various different issues with
the world that's called sees the future
syz that's on YouTube Spotify Apple Etc
so I'd love to have people come join me
there as well yeah love it all right
thanks Richard thanks Felix
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