Bitcoin Treasury Strategies with Tim Kotzman & Ed Juline

25:19Alex Thorn:It's true, the PubKey smash burger. Very good. I know it well. Well, is the conference for investors, potential investors in treasury companies, or is it more focused on the companies themselves circulating best practices, things like that? Yeah, I think Ed broke it down as best as we can, which is we anticipate probably 70 % or so investors, some smaller percentage treasury companies, and then a smaller percentage service providers. So I think those are the kind of the three buckets that we've at least identified that will be there and all kind of working together and trying to meet each other.

25:59Yeah, we're currently at about 24 treasury companies from all over the world. Andrew Webley coming over from England, Alexander Lizette from France, Arcadia from Mexico. So there'll be a lot of treasury companies in person trying to tell their story as well as the service providers trying to show them their products and the investors trying to make a decision about where to put their money.

26:23Alex Thorn:Yeah, it is a growing and complex landscape. And I think you guys have made the point well that not everyone is following the same strategy. You know, thank you, Michael, for naming your company strategy. It makes it so easy to talk about, right? You know, for example, I think about, you know, a company like Nakamoto, which is, I assume, although I don't think they've said this or it's not in their docs that I'm aware of. But, you know, assume that BTC Inc. may get folded into that at one point. And then, you know, you've got this big events in media business alongside of the Bitcoin acquisition strategy.

27:02Alex Thorn:Very different from, say, what strategy, micro strategy is doing or what Strive is doing. You know, how, like, is this, does this represent some brilliant new foray in financial engineering and finance like that people haven't done before? Or how diverse do we think the strategies might get? You know, aside from I'm a company, I've got 1%, 2 % of Bitcoin on my balance sheet. Is it going to get – are we at the beginning or the middle or the end of the explosion in innovation here? Yeah, I feel like we're at the beginning. And I feel like especially with social media amplifying and exaggerating even everything, right?

27:44We're up. We're down. It's over. We're back. It's all of those things. it's like when when micro strategy started this half a decade ago a lot of negativity due to ignorance and it's still out there but now it's kind of like oh yeah i mean at least it's more so accepted and then you had meta planet and i don't know that there was a lot of negativity around it but it was just like ah it's just this arbitrage in japan and they're probably going to change the laws it's like right every excuse you could think of to be kind of negative. And then, you know, Nakamoto, right? We're going to invest in other Bitcoin treasury companies.

28:26Everyone, including guys that I'm very good friends with, we're like, oh, that's going to be, that's going to blow up this whole thing. I mean, like very negative and no one knows the future, but I think it's, I think, you know, whether it's six weeks or six months from now, we'd be like, oh yeah, well that makes a lot of sense. It's just like this education curve, this like negativity curve that then you're like, oh, well, yeah, now it's obvious. Now Bitcoin's obvious. Now strategy's obvious. And to your point about the media company potentially being a part of that, I mean, I think it's very obvious all over the place that there's just a lack of visible Bitcoiners that can really communicate that message.

29:10So to have a whole media platform and conferences to support that messaging seems like a great idea. When it came to me was after the first quarter earnings call where Sailor did, I think, two hours on explaining the back end, the financial engineering, the incredibly creative financial engineering that they do over there. and it felt like two hours of like just trad fi creative uh financial engineering and and it's spreadsheets and i've seen these spreadsheets right they're just okay if this and that if this and that all predicated upon this bitcoin hurdle rate you know of saying as long as bitcoin goes up seven percent per year on average over a five-year period all the rest of it works you You know, and the people that I think are struggling with this are the ones that haven't accepted that Bitcoin will go up 7 % per year over a five year period.

30:10And then once you're convicted on that, the rest is just execution. There's never been an asset that we knew was going to go up 7 % per year on average over five years. Now that we know that, my God, just program all that financial engineering on the background, offer it to the fixed income markets, and you're off to the races. The securitization of Bitcoin does give me shades of mortgage-backed securities or other types of – there was a great piece that was written

30:46Alex Thorn:about the investment companies of the 1920s. I'm no financial historian by any standard, but, you know, what are the risks in your mind to these companies? And then I'm also interested in talking a bit about the impact, both positive and possibly negative on the Bitcoin markets generally. Yeah, I guess I'll go first. You take that one. I'm not touching that. I always want to call yesterday, right? Technically a holiday in the US. And, you know, the guy's like, oh, did you see XYZ companies down another 10 % today? And it just got me thinking, you know, what first got my attention several years ago about strategy was, I looked at my Bitcoin stack, and I was used to a certain amount of volatility skewed to the upside.

31:34And I'm like, it's at least during this timeframe, the volatility is going down, What can I do to kind of keep on that path? And the leverage Bitcoin equity seemed like an interesting idea and worth considering. And so I just, I got to think, and maybe it's not the right answer, that if people are not used to, right, if they haven't been through a cycle or two, they're just not used to that volatility, especially not in a public equity. Like, that's not normal. Right. So maybe it's as simple as that as far as just being, if it's going to be a leveraged Bitcoin equity, it's 2x Bitcoin volatility.

32:14Well, just maybe study what that means and be ready for it or don't do it. So just like familiarity or education or something. I don't think we know what the risks are yet. That's a little scary, right? Because if one of these Bitcoin treasury companies loses their keys or insider threat or they get predatory pricing on their financial instrument or yes, all of that can happen. But that's all TradFi games on top of Bitcoin. The underlying Bitcoin doesn't exist, as we well know. So what TradFi games and tricks be put on top of TradFi, which strategy, in my opinion, has put that risk as close to zero as you could possibly come, they're not going to have any problems.

33:05But some of these ones at the bottom of the list, if they don't have an operating business that has positive cash flow, if they've got predatory pricing, if they're keeping their Bitcoin with Bob's Bitcoin wallet, those are risks. and we're just going to kind of uncover them as we come. I think the first Bitcoin treasury company that screws the pooch and goes under, it'll affect all of them in a very, very severe way. But it has nothing to do with Bitcoin. It has to do with the TradFi games on top of it. Yeah, too much leverage. Or if you start like a Dogecoin treasury company that might need to add some Bitcoin to that one.

33:42Alex Thorn:I'm pretty sure. I don't know if Doge, I can't recall if Doge specifically has been done, but there are many altcoin treasury strategy. companies. I guess when I say risk to Bitcoin, I mean more of the Bitcoin market. I think one of the things people highlight is the risk, in particular, if the MNAV goes below one. Now, to be clear, they don't have to do anything. MNAV is not a binding metric. There's no requirement that a company trade at a premium to its holdings, right? But I think people are concerned that if either just because demand dries up for the common equity or some mistake occurs or over leveraging or whatever, and MNAV goes below one, then these companies will be tempted to sell their Bitcoin holdings to buy back their shares to bring it up.

34:27Alex Thorn:And then if this happened, you can imagine, you know, one company can control for that. But everyone can be acting in their own best interest and with pretty good risk parameters. But if the market goes a certain direction, and everyone does it simultaneously, it can create a giant overhang and it's the same flywheel in reverse that has some of these trading in positive. And I think that's what people are worried about, that it can create systemic risk for the Bitcoin market. Yeah, I think negative MNAV will lead to M &A. I haven't thought of a cool Bellagio way to say that yet. But I think you'll see M &A or like, right, hostile takeover, maybe.

35:14But yeah, over leveraged or, I mean, I think the thing that some may be missing is that the common stock is going to get hammered. But unless you have short term debt, you don't have to sell the Bitcoin. So that's where I think maybe the M &A will come in or some sort of like, right, everybody's be up in arms. Like, I can't believe this is happening. It's at a negative MNAV, but it doesn't necessarily mean that they have to sell the Bitcoin. So I just don't see how it's a negative in that lane to the Bitcoin market. I think it's only a positive. And if you take all of the companies and add up all the Bitcoin, if they're not in the top 10, let's say, it's such a negligible amount right now.

35:58Right? You guys sell more Bitcoin in this office than all those companies have combined. I don't see that as a big risk. All these treasury companies have an investor relations challenge in front of them. Most of them don't have people on their team to deal with that. Strategy does it brilliantly through sailor traveling the world and being the spokesman for strategy. And Metaplanet's done a fine job of it. Others are trying to figure out how they're going to do that, how they're going to tell their story. I think one fantastic way to tell your story is to sponsor the Bitcoin Treasuries Unconference in New York City on September 17th.

36:36Is that coming up September 17th? That's coming up. Here in New York City. This is after September 17th. When you're listening to it, wow, did you miss out? Yeah. There were laser beams, smoke machines.

36:46Alex Thorn:It's true. It either is going to be great or will be great. I hope it is still coming up when this podcast airs. I think that's a fair point, by the way, that there – and even when it comes to the debt, the vast majority of debt that exists is strategies debt. Most of these are shelf companies not able to really – certainly not able to tap the convert markets the way Michael Saylor is. And I should also point out that by our tracking, his debt is quite small relative to strategy size. Really small. Yeah. So it's – maybe I haven't looked that recently. We call it 15 percent of – which is really not that much.

37:26Alex Thorn:It's nominally quite a large amount because strategy is worth what? $100 billion or 70 – I don't know what the current value is. It's over 70 billion of Bitcoin and it's trading around a 1 to 1.4, 1.5 MNAV. So it's a huge company. So the nominal amount of debt is large, but it's manageable. It's also termed out relatively far in the future. So, yeah, I agree. There is nothing forcing a treasury strategy company to sell their Bitcoin to – unless they have debt, they have to pay, but most don't have it. So we're early. In that sense, it feels early. Yeah. Also, the vast majority of Bitcoin owned by these companies as a cohort is owned by MicroStrategy and not by the others yet, at least.

38:13Yeah. Yeah. They built an amazing toolbox, too, because they've got cash flow coming in from their underlying business. They've got Converse, they've got ATM, they've got Strike, Strike, Strike, Stretch. And so the same way that us as personal individuals, we've all been in that point where it's like, oh, crap, I need a few extra thousand dollars. and you go tap your kid's college account, or you go into the shed and you say, I'm going to sell this bike or whatever you have to do to end up getting back on top of your cashflow. Well, strategy has got this massive toolkit that just on every Monday, they probably say, okay, which one are we doing this week?

38:49Spreadsheets selling them which one to do based on market conditions. A lot of these other ones, if they just have the ATM and they don't have cashflow from the underlying business, or they don't have converts or whatever, they don't have the toolbox and and they could get in trouble. So you're going to see the convert companies and the ones that do the preferreds, and you're going to see 20 more tools in the next year that people like Jeff Walton and Ben and those guys are going to come up with, and strategy themselves are going to come up with to say here's another way to react. Yeah, I think a big part of the conversation that you'll see over the next quarter, two quarters, year, is what strategy is laid out with the preferreds.

39:29Let's say they retire all the converts, and they can get, they've stated, right, 30 to 50 % leverage when it's just preferreds. What are those numbers like? I mean, then you can start buying billions or tens of billions of dollars worth of Bitcoin every, name your time period.

39:46Alex Thorn:Yeah, it's something for sure. I mean, what Michael and the team there, Fong and Sharish and whoever else, it's not that many people, right? I mean, how many people are actually working on this part of its strategy? Maybe 10 people. Yeah, it's incredible. Like what they've done, I mean, like I said, it really wasn't a joke. I was giving a guest lecture at Columbia Business School last fall, really like in October, maybe like late October, maybe a week before the election or so. And Strategies' common stock was hyperbolic. And it was literally the biggest story on Wall Street. And I think one that will be studied for decades.

40:26Alex Thorn:It's nobody has done what Michael Saylor has done. And when you look at the value he's brought to say, I mean, just to long-term shareholders of MSTR, it's astonishing. A company that was, in fact, go and look at the micro strategy, the MSTR, just stock price chart all time. It's one of the wildest charts you'll ever see. So, yeah, truly something. The toolkit is, I mean, he's inventing stuff, you know, most of us, the vast majority of us. And the vast majority of Wall Street had never even contemplated. Well, what do you think, Alex? I mean, why hasn't another Fortune 100, Fortune 500 company jumped on this?

41:03Alex Thorn:Well, I mean, I would say I would ask it a specific way, Ed, about why, you know, why did Apple's board like or was it Microsoft's board that Michael Saylor talked to, Microsoft's board, just like categorically refused to buy any Bitcoin. Right. Yeah, I know the answer to that. There's a name for it, but there's companies out there that tell the Microsoft board what to do, and it's driven by, to not throw out a name, but Vanguard tells them what to do. Yeah, and they are, by the way, a huge holdout, Vanguard in particular, one of the largest shareholders in the world. They, I think, still don't even allow their retail brokerage clients to buy the ETFs, is my understanding, on their platform.

41:43Yeah, and it's because their traditional investors are still thinking that it's a Ponzi, still thinking that it's a high risk, it's toxic. And so even one of the other financial services companies that's heavily into Bitcoin told me this. They said, yeah, we can't associate ourselves too much with Bitcoin because our traditional investors will think that we've turned into a high risk partner. And so if a Coca-Cola or a Delta Airlines and they say, hey, we want to put 500 million, there's that risk that their stock actually goes down. And then what executive that's making millions of dollars per year is really going to look at that career risk and say, yeah, I want to do this.

42:27The strategy thing was unique in that you had Sailor with 51 percent voting shares. His ice cube was melting and he said, I'm going to take this risk. And in 22, it looked like he made the wrong decision. And in the long run, he was okay. But I am really struggling to figure out how these Fortune 100, Fortune 500 companies are going to have the fortitude to even buy one Bitcoin on their balance sheet and not have it risk their careers and their shareholder perception.

42:57Alex Thorn:It's so interesting that you're saying career risk still exists there for the public company CEO and treasurer and CFO because from a registered investment advisor standpoint, we largely see that the career risk has been removed mostly thanks to the ETFs themselves, right? And that owning it in a traditional portfolio, even a small percentage, we and everyone else have done the math on this, but historically speaking, going from 0 % to 1 % has the single biggest benefit to your portfolio. I mean, you can go – you could do math. Sure, there were times when having 100 percent would be best or having 10 percent.

43:36Alex Thorn:But just having any is, I think, widely regarded now in the investment advisor community as beneficial to the Sharpen-Sortino ratios of any portfolio. So the career risk, I think, because the ETFs exist for an RIA, have been largely removed. And you see pensions and endowments and other types of vehicles buying the ETFs and getting Bitcoin exposure that way. But it sounds like from your point, Ed, that the career risk is different for a publicly traded company than for an investment. Yeah, I mean, the life of the CEO is how many years. And he's just looking at how do I survive this and get my bonus and my parachute.

44:13You should have Rick Edelman on your show. He is doing God's work in this space, spending his own money to get out there to RIAs. And he made a really good post on X the other day where he basically said to the Bitcoiners, stop telling everybody to go all in. It's counterproductive. You know, just tell them to go 5%. Let's tone this down a little bit and get everybody on the 5 % watermark. And then the maxis lose their mind and say, oh, it's all or nothing. And it's like, no. So, yeah, Rick Edelman is doing God's work on this topic. Yeah.

44:44Alex Thorn:And I think, you know, Vanguard will allow their clients to own like, you know, 3x levered VIX ETFs and other totally absurd stuff. But apparently Bitcoin's a bridge too far. Sorry, I'm just going to take a little shot there at Vanguard too. But one thing you mentioned earlier, Tim, that I wanted to bring up is you were saying that one of the big risks to investors in owning these is just volatility, right? And by definition, they're trying to bring more volatility to Bitcoin or in their stock. And Michael Saylor has talked about this a lot. It's called volatility is vitality, right? He's sort of monetizing and weaponizing his stock's volatility, which is another fascinating part of what strategy is doing.

45:23Alex Thorn:But part of what I have been noticing, Bitcoin's volatility has absolutely been declining, as you pointed out, for years. It's really not very high now. I mean, I think you're on a 30 handle and realize volatility, which is quite low. And part of me wonders if the investor interest here, especially among some longer-term Bitcoiners, is just the need for that volatility. You know, it's been years. You wanted to own a volatile asset. Yes, mostly volatile to the upside. but bitcoin's not really that volatile anymore um and so maybe you know part of the appeal and thus the growing demand for and resulting explosion in these treasury companies is a desire for the volatility that bitcoin used to be known for but really frankly hasn't been around for that long what do you think about that yeah i i think that's spot on i think what's swirling around my head right now is that these Bitcoin treasury companies, the ones that are, you know, they have a great communicator, they're executing the strategy.

46:31They're going to be seen by TradFi as like the next iteration of Bitcoin. Like, oh, now it's Bitcoin treasuries and that's where the volatility is. But it's still going to be seen to all of our points as volatile slash risky because it's so volatile and they'll just be part of how it plays out but yeah i think yeah it's kind of wild to think that bitcoin itself could become more of a lower vol more conservative play versus a bitcoin treasury company yeah hal finney wrote uh you know famed

47:08Alex Thorn:uh cryptographer hal finney just a couple weeks after bitcoin launched that there was a very good reason for Bitcoin banks to emerge. I'm sure you guys have read that famous post. He really was talking about traditional banks, as in like commercial banks that issue debt and fund projects that are sort of the mechanism whereby fiat currency gets into circulation, I think. I think he was describing a little bit more of sort of a free banking model. But he said that there was a very good reason for banks to own Bitcoin and then issue their own paper on top of it and that you could end up in sort of a free banking model along the lines of what George Selgin has written at lengths about where banks are capitalized with Bitcoin, but they issue currency that is itself collateralized by that Bitcoin to some degree.

47:59Alex Thorn:And some are more collateralized and some are less collateralized. And so they trade at premiums or discounts, but that the underlying is a gold-like instrument that is Bitcoin. He literally wrote this like six weeks after Bitcoin launched. I think that this is sort of the instantiation of that idea, these Bitcoin treasury companies. They are collateralized by Bitcoin. They are issuing paper. In this case, instead of currency, it's stocks of various types, securities with varying levels of premia or discount. um so in some ways it does feel like the i mean hal finney not the creator of bitcoin i don't think um but obviously the receiver of the first transaction ever um and having this view you know 16 years ago does it feel like this is like i don't know i don't want to call it end game because you know bitcoin continues to surprise and come up with new things so i don't mean that this is the end, but this feels almost like a fulfillment of a multi-decade long idea.

49:04Yeah, the last session at our conference will be Bitcoin Treasury Companies, the Rise of a New Class of Financial Institution, and that'll be Michael Saylor, Brian Dixon, and Mark Moss. And so that's exactly the topic they're going to talk to. You know, I started the title of that one with Bitcoin Treasury Companies, the Future Central Banks, and I was told to reel it in a little bit. So, you know, it is going to be the last topic of our conference and it's clearly the direction we're going. Exactly what you're talking about. Yeah. It's wild to look back on those writings and just the, trying to imagine the thought process and the vision that they had to just say those things.

49:52Just wild.

49:53Alex Thorn:Really cool. Well, there's a lot more going on. I encourage people to check out the conference. And it's on September 17th in New York. September 17th, LeVon, if you go to Luma and search for Bitcoin Treasury's Unconference. Check it out on Luma, search for Bitcoin Treasury Unconference. And Ed Juleen and Tim Kotzman, thank you so much for coming on Galaxy Brands. Thanks, Alex. Thank you. That's it for this week's episode of Galaxy Brains. Thank you to our guests, Tim Kotzman and Ed Juleen from Bitcoin Treasuries and our good friend, Bimnetta Beebe from Galaxy Trading. Everyone have a safe and happy weekend and we will see you next week.

50:53Alex Thorn:Read our content at galaxy.com slash research and follow us on Twitter at GLXY research. See you next week.