Transcription
In these many promises, Bitcoin was supposed to replace Wall Street. But today, Wall Street is in the process of making Bitcoin a real shelf for financial products, ETFs, ETPs, derivatives, yield products, and so on and so on. What I observe from my window since 2021 is that all the functionalities on Bitcoin and even on cryptos in general, relating to what is called individual sovereignty, in fact, interest the market very little, if at all. And yes, these promises tend to disappear completely. On the other hand, when it comes to financial functionalities, it's a hit. So goodbye NFTs, Ordinals, or other governance tokens. And I have no illusions about the market for private keys, whose adoption seems inversely proportional to that of holding Bitcoin in financial products hosted on Wall Street. And I confess to being the prime example. So no need to try to convince me at night, I have nothing at home in Bitcoin. All my money, like everyone else's, is in the bank. In short, today, people want yield, but more than yield, there is a real appetite for structuring financial products that distribute performance, volatility, the need for fixed-rate distribution, or conversely, amplify Bitcoin's movements according to each person's needs and preferences. This is also the origin of all the success of MicroStrategy with its preferred shares. So, let's go. Since that's what you want, I'm giving it to you today. I'm sharing my spectrum of building financial products on Bitcoin to find what suits you, and it will allow us to brainstorm together. So, let's draw a horizontal line to start. In the center of this line, spot Bitcoin, that's the benchmark, the reference exposure against which everything else must be measured. To embody this spot Bitcoin in your bank, there is simply BlackRock's ETF and all other ETFs. To the left, financial products that sell volatility for a smaller yield. You are Alphonse, an 85-year-old Bitcoin holder, and you don't want to experience Bitcoin's sharp fluctuations because you don't necessarily have 4 years ahead of you. So, you want Bitcoin that varies very little in exchange for a lower long-term return. Which is understandable given that your long-term vision tends to recede. To the right, conversely, products that amplify performance and therefore amplify volatility. Your name is Lucas, you are 25 years old, so you have little money but a lot of time ahead of you. And moreover, as you work tirelessly to build a bright future, you don't have time to spend your money. Well, in the world of financial product construction, Lucas, you are destined to get along very well with Alphonse. Let's be clear, whether you are Alphonse or Lucas, a good financial title on Bitcoin fundamentally has the same risk, which is, well, Bitcoin's risk. But in finance, when we talk about risk, we talk about volatility. With that, let's go. Today, I present to you a range of financial products on Bitcoin with different flavors to open your financial chakras. Let's start with the center, spot Bitcoin. It's the most direct exposure for which we find roughly two main avenues of exposure. On the one hand, holding Bitcoin directly on a wallet and managing your own keys. And on the other hand, Bitcoins managed via exchanges or ETFs like BlackRock's that I mentioned earlier. Here, there are two approaches. Either you are more of a maximalist and you consider that if you don't have your keys, you don't have real Bitcoin but an exposure to Bitcoin, which is quite true. Or you consider that you live in a safe country and that the mental burden of managing your keys is not worth it. And know that, as I told you in the introduction, the market is proving you right. And I am part of this second category because keeping your keys is risky, you can lose them one way or another. And moreover, in today's world, it's also an additional exposure to crime because especially in France, kidnapping people to get their Bitcoin has become a national sport. And contrary to what one might think, the phenomenon is not calming down. On the contrary, the perpetrators are in a full learning phase, and it's a real epidemic that is spreading. [music] So, well, as far as I'm concerned, in any case, no more evenings spent hitting metal railings to make little keywords, stuff like that. Let's get to the heart of the matter. What is Bitcoin's performance? In other words, what base material are we working with? Well, over the last 6 years, we're at an average of 40% per year. That's the recent historical performance, let's say. And as for the future, if we believe the thesis of Uncle Sailor, who is among those who have done the most exhaustive research on the subject, we can expect roughly +30% per year over the next 20 years. Now, is he right? Is he wrong? Does he overestimate or underestimate? Honestly, I have absolutely no idea. I still don't have a crystal ball. But in any case, the decrease in expected performance seems consistent with the decrease in volatility observed in recent years. So, let's go with that. We have to start with something. For most investors, the journey ends here, and that's perfectly fine. But others want something else. Either less volatility with more regular cash flows, or more volatility for more performance. So, in essence, leveraged instruments somewhere. Remember a general and karmically implacable principle: yield adjusts downwards with a decrease in volatility. And when this is not the case, that is to say, when the yield increases while volatility flattens, it's because there is probably a huge problem or something fundamental to understand. This was, by the way, the problem with Madoff's investments. It went straight up 10% per year, but the volatility curve was flat, which was a bad sign. In short, there are no miracle products, but we can find nice balances. The most emblematic of them today, of which I am a client, is Strike, MicroStrategy's STRK. [music] It is probably the most misunderstood product currently, and perhaps that's why it's so interesting right now. Moreover, Strike is what is called a perpetual convertible preferred share. Perpetual means that once you have given your money to MicroStrategy, they promise never to give it back to you. On the other hand, they commit to giving you a return on the capital you have abandoned to them. By the way, incidentally, it's the same for Stretch, STR, and we'll come back to it. The word "preferred" refers to seniority in case of bankruptcy. When you issue a preferred share, it means that in the order of compensation in case of bankruptcy, it is located above other financial securities and notably above the company's common shares. And finally, the word "convertible" means that each Strike share can be converted into 0.1 MSTR share. So now, let's get out the calculator. The nominal value of Strike, i.e., the value at which the company issued them on the market, is $100. Let's add that the conversion ratio is 0.1 MSTR share per Strike. So the implicit conversion price is $1000 per MSTR share. In the meantime, owning a Strike share also entitles you to an $8 coupon per year for each share. But it turns out that Strike shares are tradable on the stock exchange in the secondary market, and the current price of a single Strike share is $74 because the secondary market has decided so. So $8 divided by $74 = 10.8% instead of the original 8%. And this is starting to be interesting because to date, you have a yield of about 11% with convertibility into MSTR shares. So it's a bit of both. So, let's detail it a bit to understand why. Know that today, Strike hovers around $77 after having dropped to around $65 in March, against a historical high close to $130. And we need to understand why the market has repriced it so much. First reason, the integrated conversion option has lost a lot of value. When MSTR shares are trading around $180 today, the conversion threshold where we find the $100 base corresponds to $1000 for the MSTR share is very far-fetched. For the conversion to become a truly useful feature again, MSTR would have to go up by roughly X [music] 5. And mechanically, the further MSTR moves away from this level, the less this option is worth. Second reason, MSTR's volatility has decreased. Now, an option is worth more the more violently the underlying can move. If the market thinks MSTR can explode very quickly, it pays a lot for the optionality, and vice versa. So with a lower MSTR and lower volatility, the Strike conversion option has gone from possibly useful to frankly, who cares. And when this option is worth less, Strike falls mechanically. Third reason, the effective yield has been repriced by the market. Remember that the Strike coupon is $8 per share because, at the outset, MicroStrategy wanted to launch an 8% yield on a $100 security. But these $8 per share will never change. MicroStrategy cannot come and say, "Hey, the coupon is now 6% or 10%, thanks for everything." No, that's not possible. But if the price of Strike falls because the secondary market reprices it for the reasons above, then the yield for a new buyer automatically increases. At $80, it pays 10% yield. At $76, it pays 10.5% yield because we still receive $8 per share and the share price has fallen. So when we observe a yield of 10.5%, it's not MicroStrategy that is raising its coupon. It's the market that has lowered the price to a level where the fixed coupon yields what buyers consider fair for the risk taken in the secondary market. You now understand the nature of Strike. A product that combines three things: a fixed coupon, credit risk related to MicroStrategy, and a currently distant option on MSTR. That's why it's more volatile than MicroStrategy's other preferred shares. Other products depend mainly on the yield demanded by the market and the perceived credit risk. Strike, however, also depends on the MSTR stock because it includes this famous conversion option. But if the Bitcoin-MicroStrategy pairing succeeds and MSTR eventually goes far above $1000, which I hope, then Strike will demonstrate its value. It would allow capturing part of MSTR's appreciation while having collected a coupon during the wait. It is precisely this compromise [music] that makes the product interesting, and that's why I am a client. Strike can make sense if you believe in a scenario where MSTR eventually ends up well above $1000, but you also want to be paid while waiting and assume less volatility than on common stock. Under current conditions, I find Strike more interesting than Stretch, which gives you a variable coupon of 11.5% for two reasons. First, Stretch is a variable coupon set by Michael Saylor, so it can be revised downwards, which is not the case for my Strike. Moreover, I don't know where the price of MSTR stock will go, but since I'm giving up my capital, I might as well benefit from a conversion right in case of a pleasant surprise. I remind you that Stretch gives you 11.5% but it is also a perpetual share. The capital will never be reclaimable from Saylor. Personally, I find that Strike at the moment pairs well with Lombard credit. You have 11% in dollars with a fairly reasonable volatility, and your Lombard costs 5%. So when you borrow $100 in Lombard, you can buy $50 of Strike [music] to generate $6 in interest, which covers your Lombard interest. Then, with the remaining $50, buy whatever makes you happy without worrying about paying your credit interest. Well, now let's move to the right of Bitcoin. We're moving to pure amplification, MSTR stock. We've talked about it extensively in previous videos, so I'll get straight to the point. MSTR is partly an imperfect leverage on Bitcoin, and I emphasize "imperfect," sprinkled with strong confidence in the board's execution capability. So, in short, in the personality of Michael Saylor and Phong Le, the CEO who is increasingly prominent in the media. If the amplification that MSTR offers on Bitcoin is interesting, it's because it doesn't work like classic leverage that you could take on Binance or Hyperliquid. You don't have an automatic liquidation price on your position. And that's an incredible feature. On the other hand, this amplification is not fixed. Hence the reason why I insist on its imperfect nature. It moves over time depending on the multiple between the company's value and the value of the Bitcoins it holds, what is called the famous NAV multiple. Historically, since MicroStrategy's adoption of the Bitcoin standard, MSTR has performed about 2.5 times the total performance of Bitcoin. In annualized return over the same period, the amplification is around 1.5 times, and over 1 year, it drops back to about 2.3 times. So, let's say, amplification works both ways. And if I absolutely want to insist on the imperfect nature of this amplification and the long-term aspect of potentially holding MSTR stock, it's precisely because it's not symmetrical. If you take 2.3 times the drop in Bitcoin but only 1.5 times its rise, then when Bitcoin rises for some reason, you could lose Bitcoin equivalents even if Bitcoin rises. So, we don't buy MSTR on a 4-year cycle but rather on a 10-year cycle when we are cautious. This is the product's own financial risk aspect. As for the existential reasons related to credit, execution, etc., I refer you to the video I made on the subject specifically focused on the risks of the model, as well as the very latest on the new developments implemented in the first quarter of this year. In short, if MSTR amplifies Bitcoin's movements, there is a financial product that allows amplifying MSTR in turn. A product whose value can explode in a few months or fall to zero permanently. And for today, this will be our last marker on our horizontal scale because I've saved the most fun for last. Now, I'm talking about my strategy, my personal case, and therefore it's a case study and absolutely not investment advice. Do what you want with your money, I don't care, and do it at your own risk because it's very, very risky investment, which we'll talk about right after. But I also think that all of this will give you food for thought, and that's the whole point, and that's why I'm sharing it with you. So, I buy call options on MSTR. A call is the right, not the obligation, to buy something at a predetermined price, at a predetermined date. So, at its core, it's designed as an insurance tool. To obtain this right, you pay an entry ticket called the premium. Here is my exact deal, which I will drastically simplify. For about $50 paid today, I bought the right to buy MSTR at $300 at expiration, so by January 21, 2028 at the latest. The $50 is the premium. The $300 is the exercise floor, called the strike. January 21, 2028, is the expiration date. I hope it won't be the downfall. So, to make money at expiration, the MSTR stock price must be $350, which is the strike of $300 plus the premium of $50 that I have already paid and that I must therefore take into account to know if I have gained or lost money. Above $350, I make money. Between $300 and $350, well, I get something back, but only a fraction of my capital. Below $300, it's zero. Yes, it's a gamble. I lose 100% of my stake. Thank you, goodbye, and that's it. So, why am I inflicting on myself an instrument that can end up at zero? Am I overcome by casino madness? Well, no, but for one single reason: convexity, that is to say, the ability to transform a moderate movement of the underlying into a spectacular movement in my position. For those who are wondering, here is the difference between the concept of leverage and convexity. Leverage is proportional. If you have a leverage of two, you will gain or lose twice as much depending on whether it works or not. On the other hand, convexity allows you to have an increase in your gain multiple, and on the downside, you lose less and less until you lose your entire premium. This is the whole point of call options. Let's take some examples with rough calculations. So, this is not an absolute truth, but it gives a good idea of the potential. Let's assume that MSTR maintains its amplification factor of about 2.5 times Bitcoin by expiration, which is not guaranteed, but hey, we have to start with an assumption somewhere. And since we are potentially at a market low, it's not necessarily foolish to think so. No case in my opinion. A call option at expiration is simply worth the difference between the stock price and the price at which I have the right to buy it. First scenario, Bitcoin ends around its current level, $82,000. MSTR remains more or less at its current levels. Well, then it's very simple, my option is worth zero since it's worth nothing as long as MSTR hasn't passed $300. So I lose everything. Second scenario, Bitcoin goes up x 1.5. MSTR then goes up 120%, or about $385 per share. At expiration, my right to buy a share worth $385 for $300 has a value of $85. I have turned $50 into $85. My stake is therefore multiplied by 1.7, while Bitcoin has done 1.5. Third scenario, Bitcoin goes up x 2 and ends at $164,000. MSTR goes up +250%, or about $600. My right to buy at $300 is then worth $300. $600 - $300 equals $300. My stake is therefore multiplied by 6. Do you see the convexity effect emerging here? And if we allow ourselves to dream a little, Bitcoin x 4 and it ends at $328,000. MSTR then ends at about $1500. My option is worth $1200. This time, $50 has become $1200. My stake has been multiplied by more than 22. Do you see the mechanism? If Bitcoin doubles, which is not extravagant over 20 months, the option doesn't double, it can do x 6. That's convexity. With leverage, you would have simply applied your leverage. Now, one last point. Why 20 months and not 3 months or 6 months or a week? Well, you've understood, because a short-term option imposes a precise thesis and timeline. If Bitcoin doubles just after your expiration, well, that's really unlucky because it's too late, your option has already expired worthless, and you're watching the train pass from the platform. With 20 months ahead of me, I significantly reduce the pressure of timing. I don't need to be right about the right month or the right quarter, but I still need the trajectory to materialize before time works against me. Obviously, this comfort has a cost. The further the expiration date, the higher the premium you pay upfront. It's a fairly intuitive trade-off. You pay more to afford more leeway. A similar option with a 6-month expiration would have cost me significantly less, but it would have crushed my execution window. And between paying a little less and having to time the market, no thank you, I prefer to pay for patience. That said, all of what I've just said, the simulations, etc., is in the case where I exercise my option at expiration and everything goes well for me. But an option is not necessarily exercised at expiration. In many cases, it's quite the opposite. At any time between now and January 2028, I can resell my contract. It is quoted in real-time every day. If MSTR rises sharply in the coming months, and especially if implied volatility rises at the same time, my premium, which was worth $50, can be worth $100, $150, or I don't know what, and I can then resell and pocket the gain directly without waiting until 2028. Concretely, for each dollar of increase in MSTR stock, the premium of my option currently gains something like 50 cents. This is what is called the delta. And the closer the MSTR stock price gets to my strike of $300, the more the call's delta will tend to increase, and vice versa. Remember that the delta is never fixed. It evolves mainly based on the distance between MSTR's price and my strike, but also based on the time remaining until expiration and implied volatility. B, it's still a hell of a mess. And now, the most important part of this entire section, the position size. Personally, I allocate less than 10% of my overall MicroStrategy exposure to this type of position because we are perfectly entitled to believe that the Bitcoin thesis is inevitable and to build our wealth accordingly. No problem. But I find it at the very least very reckless, let's put it that way, to build a position where a simple timing error can wipe out a significant portion of your capital. Here, we're more in the casino than in wealth management. With a maximum of 10% on this call, the worst-case scenario will cost me 10% of my exposure. It's unpleasant, I'll look like an idiot. But if you consider Bitcoin's volatility, and even more so MicroStrategy's stock volatility, it remains within the margin of error in the end. The day I lose all my options, the condition for me to recover my capital will be an 11% increase in my MicroStrategy shares. Which, if we look at our amplification of 2.4 times, would correspond to a roughly 4.6% increase in Bitcoin. So, it's okay, I'm not dead under pressure. On the other hand, in the best-case scenario, this single line can make my portfolio explode upwards. That's the idea to remember. A call is not an alternative to Bitcoin or MSTR exposure. It's a small, hyper-aggressive layer placed on top of an existing exposure. A capped fraction of capital risked with full awareness to capture a potentially extraordinary upward movement. I also specify, and this is very important, that I have deliberately oversimplified. Options are a world in themselves. You need to understand implied volatility because the movement of an option doesn't just depend on the underlying; it also depends on the amplitude the market anticipates in the future. You can be right about the direction, see MSTR go up, and still experience an unrealized loss because you bought your option when implied volatility was at its peak. Then, you need to know that the cost of time, theta, is not linear in the last weeks before expiration. The value of an option melts away at full speed, and to that, you have to add all the other greeks. But not only that, there's also skew, liquidity, or even time value, on which I could have insisted further. In short, all factors that themselves depend on many other variables, the explanation of which would require hours of video. And that's not the goal here. And for those who really want the detailed version of my strategy with the explanation of each of these elements, I'm putting a complete article in the description just below. So if the subject attracts you, I can only encourage you to look into it because it's really very stimulating. But please, don't jump in based on this video alone. Dig deeper, understand precisely what you are buying before putting a single euro into it. And if it goes wrong, I repeat, it will be your problem and not mine. A poorly understood option is the best, fastest way I know to turn a good intuition into a dry loss. I have taken two extreme examples today, on one side and the other. But as I said at the beginning of the video, there is today a whole panel that allows you to best manage your Bitcoin exposure. And if you apply unique strategies, don't hesitate to tell me in the comments, it interests me and I think it interests others. Finally, if you want to understand why you can cross out the word crypto from your portfolio and leave only Bitcoin, despite the real service they provide, watch this video. Yo