Transcription
Bitcoin is digital capital, and right now, built on top of it, there's a new type of yield paying 11.5%. They're calling it digital credit, and right now, it's down by a lot. The headlines, they all say the same thing: "Historic lows," "death spiral." And if you own it, or you were thinking about owning it, well, the chart looks terrifying.
But here's what almost everybody who's staring at the price seems to be missing. This is the fourth time that it's done exactly this. And while everyone's watching the short-term price drop, what they're missing is the underlying fundamentals that could be setting up a massive opportunity.
So, is it a crash, or, you know, where you need to run from it? Or are the bulls right? And should you ignore the noise? Well, those are the easy answers, but they both miss it because there's one number on this thing that's completely different this time. Now, we have the same drop with the same timeline, but this one's moving on five times the others. And that one number is the difference between "this is fine" and "this is breaking."
So, in this video, I'm going to break it all down. I want to show you what this thing actually is. Why below 100 doesn't mean what you think it does. The one signal that tells you if a yield like this is safe or about to break. And the number that you watch so you could see the next move coming before everybody else does. You ready? Let's go.
All right, so let's jump right into it. We are talking about a new form of digital credit. We're talking about a new financial instrument that, in my opinion, is way bigger than almost anybody can even imagine. Even for people who are paying attention to it, who are already fans of it, who already like it, who think they know it, it's even bigger than that.
Now, I can't tell you everything about it today because that would be way too big. But I'm talking about this product called Stretch. Strc. It's a stock. It's an equity. You can buy it in your brokerage account, any one that you have: Fidelity, Charles Schwab, TD Ameritrade, whatever, Robinhood. It's all in there. And it's a digital credit that pays you a yield. Right now, it's paying an 11.5% yield, um, on a sort of fixed income asset. It's par. Let me explain how this works.
So, first of all, it's a stock. It's an equity, but it's what's called a perpetual preferred stock. Okay? So, first of all, preferred, meaning it sits up in the top of the stack. Um, and it's perpetual, meaning it goes forever. So, there's no time frame, meaning in 5, 10, or 30 years, they have to give you your money back and you don't get any yield anymore. So, this goes on forever. So, as long as they hold your money, they pay you the yield. At some point, you can sell it to somebody else, but they never have to pay it back. That's a pretty big deal. Okay.
Then, it's supposed to sit at $100 par, meaning it sits at $100. Sort of like, uh, sort of like a money market account, meaning that if I put $100 in, I should always have $100. And it's paying me 11.5% yield, but it's not supposed to go up and down. I don't expect to make money with it. I don't expect my $100 to grow into two or $300, but I also hope I don't lose money with it, and I just want to collect the yield.
So, let's take a look at, at some of this. So, if you go to Strategy's website, you can see this. Um, again, this is, um, off of their website again. So, Strategy has been buying Bitcoin, digital capital, and now they have the credit instrument. So, if you like yield, if you, if you need fixed income, this is what you want to talk about. Now, like I said, this is bigger than most people can imagine. At the end of this video, I'm going to break that down a little bit. If you want more than that, we'll make another video. But we can see it's a short duration, what they're calling a high yield credit. Okay? So, it pays 11 and a half percent. That's certainly high yield, higher than almost any other fixed income that's out there right now.
Today, people are freaking out because the price is $89. It's supposed to be at 100, which means it's about 10%, 11% off of where it's supposed to be. You can see the dividend 11.5%. Um, so you can sort of see some of the information. Again, it's on the NASDAQ. You can buy it in your brokerage account.
Now, how does this work? Well, the dividend is the dial that's supposed to work at this. So, the goal is to keep it at $100 par. Okay? But how do they keep it pegged at $100? Well, they have a couple dials. Number one, they have a rate adjustment. So, that means how much yield they're paying. So, the more yield they pay, more people will buy it, obviously. And the lower the yield, less people will buy it. So, they can adjust the yield. They can adjust the rate. And so they started it low and they've been raising it until they got it to 100. Then they have a yield reset. So, every month they get a new dividend date, they get a new yield, and they can change that if they want. And then the buyers will return in to buy back. So, it depends on supply and demand. Right? So, again, as the yield goes higher, there's more demand. As the yield goes lower, potentially there's less demand. So, that's sort of the dividend thermostat of how this works.
Everyone's focused on par again being 100. So, if it's less than par, is that a problem? Well, let's take a look at that. So, first of all, most people are looking at this par, but they're missing a big piece of this, and this is the duration. What am I talking about when we think about time is money, money is time? Most, most people don't really understand what that means. Um, but money has duration because money, in today's economy, it's a debt-based monetary system. And so, debt has a yield, has a rate, and typically has a duration. Again, 5, 10, 20 years. So, we want to just measure the total amount of money. We want to measure the return of the yield on money, but we also want to know the, the duration of that as well.
So, let's take a couple, look at a couple of things. So, if we look at this right now, we can see that when this is the price, uh, price chart of Stretch right here. So, we can see when they first started out and they were raising the rate. So, right here at this line, it's about, um, this is about 90 right here. This was about 80. What do we got? Yeah, 80 sitting right here. So, it launched at 80, and they kept raising the dividend higher and higher and higher to attract more people to it. And you can see the price has gone up pretty well. And here is a $100 par where it got. So, eventually they got up to there as they continue to raise the rates.
But, as you can see right now, we're sitting in this massive crash that everybody's freaking out over. Like, is this it? Is this the end? Did the Stretch finally fail? Nobody, no pegged assets ever work? Of course, short traders, we're going to try to, uh, destroy all these things. And we can see it's down about 8% right now. But if you zoom out and you look at the chart, by the way, this is only 11 months. It's not that long. But if you zoom out, you'll go, "Wait a minute. Um, I see that we also dropped 6 and a half percent here. I see we also dropped 9% there." So, 9% here, 9% here seems about the same. We had this one right out of the gate. This was 6%. This was 6.5%.
So, huh. When I zoom out over the last year, this kind of looks par for the course. But now let's look at the duration, right? So, the duration, we can see this one took 14 days. This one took 25 days. This one took 22 days. And so far, right now, we're only at 21 days. So, 25 days sort of being the longest in this small sample size. So, we want to look at the duration. So, as we can see over a year, this is the fourth draw down of about the same size. Looks pretty normal. And then the duration. So, we can see the duration is also about normal. So, people are freaking out without any perspective as to what's going on. When I look at that, it looks much more comfortable, maybe, right?
But then, what about the fundamentals? Well, these are the things that we want to be, be paying attention to because what's going on externally that could be driving this draw down and change the duration? Well, first of all, a couple things. Strategy did halt new Bitcoin purchases. All right. So, they've been buying Bitcoin regularly, and they decided to halt Bitcoin purchases temporarily for one break. And then what they did, which seems to have disrupted the entire market, was they did their first Bitcoin sale that we've seen. 32 Bitcoin sold.
Now, let's put this into perspective. What happened and why? First of all, they sold 32 Bitcoin out of about 840,000 Bitcoin. They're buying thousands of Bitcoin at a time. And they sold 32. 32 is a drop in the bucket. 32 is inconsequential. But why did the market freak out over it? Number one, and two, why did they even sell 32 if it's so inconsequential? Couple reasons why. They are not playing a Bitcoin game necessarily. They're playing a financial market. It's a traditional financial market game. They're playing a stock and equity game. And in that world, selling credit instruments, they need credit ratings. And per the credit rating funds, some of them don't treat Bitcoin as actual capital. So, they don't believe that even though they have 50, 60 billion dollars in Bitcoin assets, that they could actually use those assets to pay the debt if they needed.
So, Bit, so Strategy wanted to prove it. They said, "Okay, we'll prove it. We'll sell 32 very Bitcoin. You can see how liquid it is, how easy to sell the money, uh, sell it for money and pay the dividend." And they did. Again, it was a token. It was a drop in the bucket. It was just proof. And what it did is it satisfied the rating agencies, which allows them to move to the next level in the credit game. But the market said, "Wait a minute. You said Michael Saylor said he's never, never going to sell Bitcoin." Michael Saylor corrected that. He said, "I said for you to never sell your Bitcoin." He said, "I have never sold my Bitcoin." Strategy, on the other hand, did sell some Bitcoin. So, he, he was, he clarified that. He said, "He, I, you, and I, we should not sell our Bitcoin." The company is playing a different game. In order to appease regulators, they did that.
So, 32 Bitcoin, but that also pushed the price down. They halted, they halted Bitcoin buys, pushed the price down. Then they sold Bitcoin again, 32 billion, pushed the price down. And then, um, then they're changing the dividend payment, but this is a good thing. We're going to talk about this more in a minute. They've been paying monthly, and now they want to pay semi-monthly, which means instead of paying once a month, they want to pay twice a month, which is great. Most people are getting used to paid, uh, getting paid every two weeks.
Okay, so we looked at it coming off of par, off of the 100. We looked at about how far they've dropped and how long that's lasted. We looked at the fundamentals. And of course, we realized that part of the bigger fundamental is that the underlying asset, the digital credit, Bitcoin, is also down about 50%. But the other thing we want to keep in mind is compared to what? How does 8% drawdowns compare compared to what?
Well, the fixed income market is the largest market in the world. $350 trillion of fixed income. It's three times larger than the next biggest market, right, than the equity market. And so, some people just need income. Not everybody can buy Bitcoin and wait for five years. Some people need income right now. I'm retired. I need to pay my bills, pay my medical expenses, whatever it is. We need income. It's the largest market in the world.
So, where do people typically invest to get income? Well, sometimes there may be dividend-paying stocks. Obviously, it could be real estate, but most of it is in the bond, money market, um, institutional grade credit funds, things like that. So, let's compare this. Let's look at the yield and the volatility comparison in a matrix.
So, money market funds, they typically yield about 4 to 5%. Pretty low, about the same as treasuries. Um, the volatility, how much they go up and down, is near zero. And the typical draw down is minimal. They don't really go up or down. So, you get about 4 or 5% return, not a lot of return, but there's very little volatility or downside risk.
Then we go to the T-bills, treasury bills, US government bills. Uh, the bills are the short end of the curve. Those typically yield a little bit less, three and a half, 4%. There is a little bit of volatility. The price of bonds goes up and down, maybe 1 to 2% volatility, but the draw down is typically pretty tiny.
Then we wanted to get into more yield. So, if you want more yield than just treasuries, which are not keeping up with the rate of inflation, then I need more. So, I might go into, um, institutional grade credit. So, now I'm buying like credit bonds, institutional credit, and that's going to get me a little bit more, to 6%. But there's a little volatility, 1 to 6%. So, up to 6% volatility on an annual basis. Not big draw downs because it's institutional grade credit.
Then we have high yield credit. So, now I need a little bit better return. High yield credit is up to about 7 to 9% yield. Little bit better. I can get above the rate of, uh, I can probably keep up with about the rate of debasement, rate of inflation. But the volatility goes up as well. 10 to 12%. That's the volatility of that. And it could drop, the typical draw down could be as much as 20%. So, it'll probably go back up, but at any given time, I could be down up to 20% while I'm getting a 10 to 12% return. Okay.
Then, we go to private or alternative credit. Private credit, I've talked a lot about this on this channel. That's going to pay a little bit more, 8 to 12%. Little bit smoother on paper, the volatility, but, uh, could be very dangerous. I did a whole video on the private credit market breaking down. Maybe we'll link to that in the show notes down below.
And then finally, let's compare Stretch. So, Stretch, again, it's 11 months old. It's a brand new product, digital credit, built on top of digital capital, Bitcoin. It's paying nine to, right now it's paying 11.5%. So, it's paying as good as, uh, as good as private credit, better than high yield credit. The volatility is, is very low. Um, but the typical draw down could be as much as, when I say very low, it's probably 10 to 12%. And so far, we've seen a 6 to 9% draw down. So, when we compare it, it's much better than the high yield credit at 20%. 6 to 9, a little bit more volatility, about the same volatility as high yield credit, so it's kind of about the same, but it pays, of course, quite a bit more. So, when we want to understand things compared to what, I think that's helpful to figure out how this fits into, into your portfolio. Okay.
Now, the one thing that nobody seems to be watching because they're also focused on the price, they're focused on the $100 par and the drop down, we're at 90, but what they seem to be missing is volume, right? We want to understand volume. How many people are moving in and out of this? Because as this gets bigger, as we have a lot of liquidity, bunch of trading volume, we want to look at the volume as well.
Now, we have to understand that volume cuts both ways. What we can see is that, of course, as more people bought this, the market cap went up, the price went up, and then as this drew down right here, there was a lot of volume. There's a lot of people selling, 5 million. There was also a lot of people buying. It cuts both ways. What we don't know was this volume made up of sellers or buyers? Well, was it made up of a combination? We don't have the breakdown of both of those. We can see in this draw down right here, of course, as the market cap got bigger, more people were in there. We saw the volume go up to 13. Then in this draw down, we saw it go up to 25. And now where we're at right here, we're at 58 million. So, we've seen this volume grow by what is that? Uh, I mean, almost 10 times. It cuts both ways. People buying, people selling.
What is this really doing though? What this does is it resets the floor. It gets the weak hands out. It brings the strong hands and it helps to form a bottom. So, again, people are focused on the price, but you're not seeing the underlying fundamentals of this being built up and the volume coming in. As I said, it cuts both ways. And so people are rushing for the exit, some of them, and then other people are rushing for the entry. Why? Well, we know if the target is 100 and I can buy it right now at 90, that means I have about a 10% return potential on the cap gains on the price performance, and I'm also going to collect 11, 11.5% yield at the same time. So, traders love this because they know Michael Saylor is pretty smart. They know he's pretty successful. They don't think this is going to collapse, and I could just buy it at 90, right up to 100, make 10% and capture the yield at the same time. It cuts both ways.
So, what we want to be watching right here is, sure, watch the par, watch this number. Can we get it back up close to 100? And then also watch the payments. Do they keep making the payments? As long as they keep making the payments, it's going to get back to par, even if they have to increase the payments. Now, this, uh, this went out on X today on Twitter from Strategy itself, and they said right here: "We have 32 years of dividend coverage through their Bitcoin reserve." So, 32 years. So, a lot of people wonder like, "Can they keep making the payments? What happens if they don't have any more income? What happens if the credit market seizes and they owe $1.7 billion per year?" Now, that's if they wanted to tap into their Bitcoin, but they have lots of other things they can do before they have to get into their Bitcoin. I'm going to cover that in a minute. But, so those are the two things that we want to be watching here.
Now, here's a couple ways that we can think about how they can handle those payments. So, first of all, they have this dividend obligation. As I said, it's about 1.7 per year they have to pay out for money they've received. So, a couple ways they can do this. So, number one, they have a cash reserve. Right now, they had it up to about 2.5 billion. I think it's down to about a billion or so right now, but they have this cash reserve. It kind of goes up and down, and they keep that on hand to pay this out. So, they have about a year's, uh, reserves on hand.
Then, they have equity issuance. So, they sell their common stock ATM at the market. And so, they sell MicroStrategy stock that raises money, which allows them to buy more Bitcoin, or they could pay the dividends on the press. They also can issue more Stretch. So, whenever Stretch goes over $100, they can sell more Stretch at the market into the market, and they can generate that money as well. And then finally, if they need to, they could dip into their Bitcoin treasury, which is of over 840,000 Bitcoin.
Now, there's also other ways they could get money. So, for example, they have credit available to them. We saw them raise billions of dollars at almost 0% interest. So, they can go back to the capital markets. They can do private equity raises. They can sell the equity in the market. They can borrow money. They can do capital raises. Uh, they can issue more Stretch. They can sell the common stock into the market. They can sell the Bitcoin if they need to. There's lots of tools they can do before they ever have to tap into the Bitcoin reserve. And if they have to, as we saw right here, they have over 32 years backing that. So, the chance of this blowing up is extremely low.
Now, this is bigger than the ticker. Okay? This is not just about a stock. And as I said, this is one of the biggest opportunities. Maybe opportunity is the wrong word, but maybe this is one of the biggest fundamental shifts of the entire global monetary system that we've ever seen or we'll ever see in our lifetime. Anyway, it's not just a stock. It's an entire new financial system. It's digital capital, and now this is digital credit built on top of the digital capital.
What do I mean by that? So, right now, we've seen digital credit grow from zero to $13 billion in less than, less than a year. It's about 11 months. 11 months. And this is really the category's first punch. What do I mean, the first punch in the face? Mike Tyson said, "Everybody has a plan until they get punched in the face." And so, this is sort of the first real stress test. We're getting punched in the face. Bitcoin has drawn down 50%. Lots of FUD in the marketplace about MicroStrategy. They sold some Bitcoin. They paused their Bitcoin buys. And we're seeing the first punch, and we're seeing it sort of hold up about the same way it's been holding up this whole time. But what we're witnessing is something much, much bigger.
As I said, the capital rotation. So, typically money, people need yield, and so they go into treasury bonds. They go into corporate credit. I kind of broke these down: preferred stocks or money market funds. What that means is that's all yield-seeking capital. Again, about $350 trillion needs yield. Okay? And now all of this, this $350 trillion pie is starting to find its way into Stretch because, of course, the yield is very attractive, better than any of these other products, but also because the way this works from a safety or security standpoint.
What do I mean by that? All of these treasury bonds, corporate credit, preferred stocks, etc., are based off this same model that the entire financial system is based off of, which is discounted future cash flows. So, if I do corporate credit, for example, I'm going to buy a Google bond or an Apple bond or a, whatever bond. So, I'm going to, I'm going to buy a Google bond, and I'm going to give them money for a period of time, and they're going to take that money, that loan, and they're going to invest it into, say, um, some new model, some AI models. They're going to invest it into a data center. And they hope and they pray and they promise that that data center, that investment into that new model, whatever it is, will pay off. And in the, whatever, 5, 10 years, they'll have the income to pay the bond. Hopefully it works out. Hopefully they'll have the income to pay the bond. The entire financial system is built off of that. Even equities, I'm buying a stock at a PE ratio, a price-to-earnings multiple, off of how much revenue or income they'll have in the future. But with AI disrupting every business model, how do we know they'll have the income in the future? How do we know that in 10 years they'll even still be around anymore? That's how this entire system is built. Discounted future cash flow. Sorry, discounted future cash flows.
Stretch, Bitcoin, I'm sorry, MicroStrategy is doing something different. When you give them the money, they buy the asset. They're not investing it. They're not hoping that in five or 10 years they'll have the money to pay you back. They have the asset today. Which is why they have, what did I say? $60 billion in assets. They have enough for like 30 years of payments because they have the assets here. All of this, Google, Apple, Tesla, the governments, etc. We hope that in five or 10 years they'll still be in business. We hope that in five or 10 years that investment pays off and they have the cash flow to pay that. Versus over here, they have the money themselves, which is why this model is completely different than anything that we've ever seen before.
Let's go back to why I think it's going to be so big. So, we have $350 trillion of yield, yield-seeking capital, and currently all of that $350 trillion of yield-seeking capital is based off of, uh, equities and bonds on a dollar standard. Now, the demand for that yield doesn't go away. It just transfers. Already about $13 billion, which is nothing out of $350 trillion, $13 billion has moved over to be backed by Bitcoin. And eventually, more and more and more. And so, if we have, let's say, this $350 trillion dollar pie, all USD denominated, eventually get to four, you know, six, 100 billion, right? The point is, this kind, this pie keeps growing. So, this is a Bitcoin-denominated pie. And what happens is more and more and more starts moving over. The $350 trillion demand doesn't go away, but maybe this goes to 100 trillion and this drops to 200 trillion. We're witnessing the entire bedrock of the global financial system be switched out in real time.
Okay. So, what I'm trying to give you here is a skill and not just a tip. You know, I'm not a tip guy. I'm not here to give you tips. I'm here to teach you how to fish, not tell you how to bait the hook. Okay? So, now you know how to read what these are. You understand digital credit. You understand the underlying mechanics of this. And you can see now that it's behaving as it's designed. There's volatility built into this, and of course, that's going to be part of how they adjust that dial based off of the demand, the yields, and things like that. Um, now we want to understand when we look at this, the volatility, and we want to understand compared to what, compared to other fixed income type instruments. And as you can see, when you compare it against other options in the marketplace for fixed income, it ranks pretty well, as a matter of fact. Um, now, what's important here, like I said, the big, big, big shift here is what's backing it, because there's two kinds of yield. You have the printable backing. So, treasury bonds, corporate bonds, traditional preferred, money market funds are all backed by dollars, which are printable, or backed by, uh, more stock, which is printable. But over here, this is unprintable backing. So, Stretch and Strategy are backed by Bitcoin, backed by the 840,000 Bitcoin capped at 21 million supply. No central issuer of the collateral. So, what we're witnessing is the, all this yield move over here. Okay.
So, as this develops, a couple things that you should watch. Number one, watch for the recovery. Watch if we can go from whatever we're at 89. Can we get back up to 100? Number one. And number two, watch the dividend. If they stop paying the dividend, that could be some smoke. Maybe. It's important to watch. Watch the dividend. Watch the payment. And watch digital credit explode and start to change the monetary system as we know it. It's the only time we'll see it in our lifetime. Anyway, uh, that's what I got. Hopefully it makes sense. Let me know if you want any breakdown, any deep dive on any of these subjects. And of course, as I always say, to your success. I'm out.