BTC241: Bitcoin Treasury Companies w/ James Check (Checkmate) Bitcoin Podcast

22:35You have your newsletter, which is amazing. And one of the things that you recently talked about was this is a quote unquote, weird cycle. So what do you mean by that? We had a little bit of the discussion at the start of the show, but help us understand this framing of it being a weird cycle. It is a weird cycle. And I wrote another piece yesterday called Same, Same, but Different. I've been exploring this idea of how the cycle is different, how it is the same. And it is a bit of a strange cycle and it's thrown a lot of people for a bit of a loop. I think the first one that has definitely confused people, and this is one of my base cases for this cycle, is it's just going to confuse people.

23:10They're going to lose track of where we are, where the floor was, where the ceiling was, did we top, did we bottom. I just think there's a lot of dynamics that's going to break people's existing mental models. Strangely enough, we are still following the quote unquote four year cycle. If you measure it from the cycle bottom or the cycle low, but we've got to remember that we're a hundred times bigger than we were in 2016, 17. And you get a lot of the behaviors. If we look at people's unrealized profit or loss, the way that that's trading, the way people are accumulating at their cost basis and selling it slightly above it, all these dynamics look very similar to 2016, 17, but we're a hundred times bigger.

23:44In the piece I did yesterday, if we look at the ETFs, they got$132 billion in AUM. If we combine that with some of the biggest treasury companies, we're like$220 billion. The Bitcoin market cap peaked at$260 billion in 2017. So just the capital that's in the ETFs and strategy and a couple of other companies is the entire 2017 market cap. So you kind of look at that and go, really, it's amazing that it's behaving the same way, but really it shouldn't be because it's so much bigger that it doesn't really make sense. It's quite remarkable. It's a bit of an anomaly that we're following such a similar pattern.

24:20Now, there's another thing that's really thrown people, and that is no question, that is Bitcoin dominance, which has been a 3.6-year, unrelenting, unstoppable uptrend. And I think there's just a lot of crypto investors who have just been left at the altar holding bags of stuff that nobody actually wants. And look, even amongst the Bitcoin crowd, there's going to be a lot of Bitcoiners out there who also wanted to speculate, play some fiat games. And even they're being re-reminded, hey, remember when you were Bitcoin only? This is why. And people are now starting to shift back again. So if you go back to 2018, 19, 20, the Bitcoin dominance started to peak in June 2019.

24:56It was about a one and a half year period of altcoins getting crushed. And then they started to slowly recover. It has been nonstop, just perpetual bleeding for 3.6 years, which is more than double what we saw in the past. So it's really just thrown a lot of people for a loop. Why do you think that is? Why did the altcoins, because I mean, the last cycle, it was crazy. I remember just like, how are people this mental to be, and it was just all speculation. Like people knew they were buying something that was a scam, but they didn't care because everything was just bidding. And so they just jumped in, but you haven't seen a trace of this on this cycle.

25:35It's almost like it just died on the vine. I think so many people, maybe it's because they all got wrecked so bad in the last cycle. Yeah. No, there's a lot of elements here. And I think the first thing to understand is that, and I've been an astute observer of the crypto ecosystem for a long time, for the first and foremost reason that we got to watch all the reason. We got to watch Wall Street get built bug for bug, error for error. And we got to see why the world has regulation. Because if you just give, if you allow people to speculate on whatever they want, they're going to create Fugazi tokens and just take people's money.

26:06So we got to actually speed run and see how the financial world got set up. So to me, as an engineer, I'm like, wow, I get to speed run and watch how the financial system came to be. So every cycle has been defined by a new distribution mechanism. In 2016, 17, it was ICOs. People could launch their own tokens on Ethereum. That's like crowdfunding. They then moved towards this VC funded, right? Because suddenly they realized, oh, we probably shouldn't fleece retail like this. So then VCs go, don't worry, we'll invest and get it up to a$6 billion round and then we'll issue it to the public. And then they would just down earn.

26:38Every coin that lists on Binance was just down earn. So retail go, okay, we're getting scammed again. So then they invented yield farming. And this is another key element. If you go back to the 2017 cycle, you had to buy Ethereum to trade on these ICOs. So that's where the demand from ETH came from. And I think the Ethereans got a lot of things wrong this cycle. They believe that people actually wanted the ETH. They forgot that they actually had to buy the ETH as the casino chip in 2017. In 2020 and 21, you had to buy ETH to plug it into these yield farms and get 16 quadrillion thousand percent APYs.

27:12But again, it was the casino chip. And same for NFTs. You had to buy ETH to trade NFTs. If you then go across to this cycle, Solana has been the darling for all the crypto investors, but they also didn't recognize you had to buy, sell to speculate on meme coins. And the meme coin phenomena also tended out to be a huge grift. We saw what happened with the Libra token. If anyone's seen that interview with CoffeeZilla, I feel his name Hayden Davis or whatever it was, a real eye-opening. I mean, no surprises, but grift upon grift upon grift. So I think that a lot of crypto investors have just finally worked out.

27:45First thing, retail got destroyed in FTX, absolutely destroyed. I don't think a lot of people really understand. Now I'm of the view, I knew it would be long lasting, but I now think it's permanent. I think the reputation of crypto got so unbelievably destroyed when FTX blew up. There's a lot of retail who would just never come back. Isn't it fascinating that Solana is effectively FTX coin? Yes. Right? Isn't that crazy? And the other thing that I ran a study a little while back where I pulled four different metrics and I was trying to just like, how do you plot the strength or the breadth? It's probably the better term.

28:20The breadth of alt season. because I was trying to understand how these cycles have changed over time. So I did four different metrics. Are we seeing capital inflows over the last 30 days? Yes or no? 50 % of the coins in profit or loss based on their on-chain level, 50 % of investors in profit or loss. So remember, this is 50%. This is not ripping to the upside. This is just not bearish. And then is the price trading above its 200-day? And I ran this study for the top 1 ,000, top 1 ,000 non-Bitcoin, non-stable coin tokens. And what you can see in 2021, and from 2019, it's slowly building, all four of these traces are building up into that final crescendo in 2021.

28:58This cycle, we saw a very, very brief blip where we only just got above 50 % of all coins being not bearish. And even then it was only the 200 day, and then it died off about two weeks later. We haven't seen this sustained altcoin bull run. We saw flash in the pan and it's all over. So I just really believe that the world has clicked and gone, you know what? There's just no there there. And you've shown me now for a decade, there's no there there. And I think Alex Thorne from Galaxy had a really good line. He goes, crypto's been like the dog barking at the postman. And he's finally caught the postman and he doesn't know what to do with it because he actually didn't build a product.

29:35There's no thing there. So now that you've caught the bike, all right, you've made a lot of noise, buddy. What are you going to show me? And there's just, there's very little to show. aside from stable coins, there's just not much there. Yeah, that seems like that's the real innovation with all of it, which is you've been able to tokenize sovereign debt and saleable all around the world in a way that for a lot of this, especially Tether, this is like non-KYC. If you want to be able to buy something in dollars, you don't have to buy some ETF that isn't saleable that you can spend as a token. That seems to be the real innovation.

30:11It's yet to be seen whether that turns into tokenized equity, which then can be used in a very similar way as the stable coins for real businesses and not some clown coin. And then even so, what's the value in that system? The value is the equity. So the platform that you're tokenizing stuff on, there's no reason for that to attract any value. So really, what we're actually finding is that yes, you've got this baseline infrastructure. I do believe that at some point there's going to be equities and tokenized stuff moving around. There's no question that Wall Street's going to go down this path.

30:44That doesn't mean there's going to be any value accrual for the L1 token that it sits on, same way that protocols on the internet don't accrue any value. I think this point is a massive, massive footstomp for anybody on Wall Street that's playing in this space. That point is so important because look at the Taproot Asset Protocol. That is just one example where you can do all of this stuff on top of Bitcoin and you don't need some native token like Ethereum or Tron or Solana to be able to do it. And this is the part that I think is really important and that's missed on non-engineers is when you look at how that's built, you get faster transactions.

31:25You're going to have lower fees, right? The incentives that are built on top of the Lightning Network by issuing tokens on top of that, you're just getting better performance. And you have better infrastructure and better software engineering underneath of it. And so long-term, I just don't know how those networks are going to be able to continue to compete against something that has lower fees, faster transaction settlement, and it has a more robust network of nodes that are all running the software. I don't know. I don't see many people talking about that. And I see it as being something that is super obvious and super important for Or where are we in five years?

32:07Where are we in 10 years with respect to tokenizing more stable coins and tokenizing actual real companies' equity and making it saleable? When I peel back the onion, I've looked at the whole scaling concept from several angles. But the thing I've always found very interesting is we've more or less accepted the blockchains don't scale. They're a very inefficient database. Now, if we look at it, and this is my contrarian take about Ethereum, a lot of people will say that it's not decentralized. It's controlled by a small cohort. And parts of that may be true, but the reality is I actually think it's too decentralized.

32:38They have over-designed the system that it's trying to support when if Tether and Circle turned off all their stable coins, the whole DeFi system collapses. So at the end of the day, your real weakest link is Tether and Circle. So this is where you then look at something like Solana, where they've tried to speed everything up and basically have very, very high compute nodes and all this kind of thing. And they've sacrificed the illusion of decentralization. but in many ways that's actually more in line with the level of centralization of your weakest link which is your stable coins without stable coins your whole system collapses but the other thing is that with ethereum they've tried to scale a blockchain with more blockchain we know the blockchains don't scale whereas lightning and it very much remains to be seen whether we're going because a taproot assets is very early and whether we do actually get some kind of adoption the user experience challenges and liquidity and all that's a real challenge but lightning is infinitely scalable because it is strictly not a blockchain.

33:30And this is why it's quite interesting. Just as an observer, we're still many years away from some kind of serious scale there. However, it is infinitely scalable. It's not constrained by all these blockchain dynamics. And in many ways, they're over-designing the system for what it's actually trying to do. And everything that's being issued on top of these quote-unquote blockchains, they've got an issuer anyway, which is centralized. Call it Tether or Circle or whatever. It doesn't matter who you are. If you're issuing something on top of it, you're a centralized entity anyway. So I just think so much of this is missed, especially from the technical standpoint as to where the incentives are going to drive this in the future.

34:11There's the assumption that the blockchain is a piece of technology that's useful. But the reality is the concept of a blockchain has been around long before Bitcoin. There's a reason why nobody was building on this stuff for many years, because they've basically you looked and gone, there's not really an edge here. It's a database. And really the main benefit from any of this blockchain technology, having any kind of decentralization is really some form of arbitrage. So for Tether, for example, there's a jurisdictional arbitrage and it's actually in the US's interest that people can access dollars.

34:41So for example, Tether is heavily adopted in the emerging markets. And for whatever reason, Tether, it's not Circle, it's not USDC, it is Tether. And maybe that's because they have the allure of being somewhat KYC free, despite the fact that they actually freeze far more funds than Circle have to date. So they actually are more prolific with their censorship than USDC is, but the emerging markets have selected it nonetheless. So there is that kind of, maybe it is KYC free and the US benefits from it being a bit KYC free. I struggle to see tokenized equity in Apple stock. I struggle to see the brokers allowing that to be KYC free.

35:19So suddenly you're like, okay, you're probably still going to have a walled garden here for this stuff to work. So do we really need a blockchain? How about 20 years from now? Because I agree with your point, but on the timeline, if we really go far out, I think there's going to be a huge push for KYC to be lifted and for it not to be used. I mean, I certainly hope so. Yeah. I think that's where it's all going. But timeline wise, I think it might be out there a lot further than many of us would like for it to go. but I think that the natural incentives and the competition from a global perspective is going to naturally take it there.

35:54Would you agree with that? I would certainly hope so because the challenge with KYC is first of all, it's obviously there's just a privacy element, but these things become honeypots. And how many times do you see people losing or companies or even government agencies losing big honeypots worth of people's data that you really shouldn't have to collect these things. And a part of freedom is that you don't have to KYC for everything that you do. So I would certainly hope so. I consider me a little bit more skeptical on governments willingness to let go of that kind of secure surveillance state, but we'll see.

36:21I certainly hope it happens. Yeah. I think it will happen. I just think it's way out there. I think they're going to fight very hard to keep it in place. Okay. So you described all these rug pull things that happened through the previous cycles. You have a lot of rumblings online saying that the Bitcoin treasury companies are the next wave of this. Well, I don't want to give you my opinion. I'll tell you my opinion after you kind of respond to that. Yeah. So I think I put a tweet out the other day. Their coins, call them what they are. That's basically what I think treasury companies are. Now, by the way, that's okay because everything, remember, how did every single cycle in the altcoin space happen?

37:01It was a new distribution mechanism. So it used to be ICOs, then it became yield farming, then it became meme coins. There's always a new way. It is funny that this cycle, the coins are equities who are now buying Bitcoin. And the idea is if you give that company money, they will buy more Bitcoin than you otherwise would be able to, and their stock price will go through the roof, which will allow you to buy more Bitcoin. It is literally the same mechanics for a Bitcoiner who's looking to build more Bitcoin in a very fast and high adrenaline environment. It's coin trade. It's exactly the same thing.

37:33Now, that doesn't necessarily mean that the companies are going to be coins per se, but in just a very rudimentary framework, they are. And when I look across all these different treasury companies, it quickly becomes apparent that most of them, like any company or any business, is going to be a Pareto distribution. There's going to be some that are going to really kick ass and stand out. And I wrote a piece the other day just about analyzing treasury companies and looking at various metrics, MNAV, days to cover, a metric that I kind of iterated on called days to replace, kind of like stock to flow.

38:03But for treasury companies, Helen's taking to double their overall stack, price performance, a whole bunch of different things. I didn't look at all treasury companies because they're popping up like mushrooms at the moment. But the ones that I did look at, it very quickly, if you run through these different filters, basically strategy and metaplanet were the only ones that really stood the test. There's going to be a bunch of other ones that are popping up here and there, but they're the two that stood out. The other ones like Seminar has been really underperforming and all the miners have been very much underperforming.

38:31And some of my key insights here was go hard or go home. This is just very, very clear. If a company is not going all in on this treasury strategy. The market's just simply not rewarding them with a serious premium. So they have to be, and you can see it, right? MetaPlanet hit gets to 10 ,000 Bitcoin, Sailor buys 10 ,000 Bitcoin the next day. So this is like go hard or go home mentality. Over the long arc of time, MNAV has been compressing towards one. I've had this long-term thesis that the gravity, not the result, the gravity is towards one. And what that means is and I run this by going to the extremes.

39:04If a company stopped doing all treasury operations tomorrow and said, we've got enough, we're happy, we're good. That company would trade towards its Bitcoin treasury value, plus whatever premium their operating business is worth. That's really what I would expect to happen. If the stock goes too high and the premium explodes out the roof, then the company has a massive incentive to sell stock and buy Bitcoin, which is going to increase your denominator and reduce your stock price. So they also have an incentive to push it back towards one. So there's always this gravity that wants to pull it towards one.

39:35And the companies that are going to be the most successful are the ones that continue to generate, whether it's excess volatility or some kind of premium. How do you keep the premium going? If we take the other extreme where let's imagine Bitcoin on the balance sheet is normal. Every company does it. It's just part of day to day. You're a value investor. How would you value a company, swap Fiat or the US dollar for Bitcoin, how do you value a company? Book value, plus whatever their growth potential is. The exact same story. So MNAV, the gravity is towards one. That doesn't mean it has to be one.

40:06There's jurisdictional things like MetaPlanet, where I think it's like a 50 or 45 % tax to hold spot Bitcoin, but it's much cheaper to hold the equity. So there's a 2X premium that kind of makes sense baked into it. But again, it all depends when people buy the stock. If you're buying early in their growth curve and at a premium that's not too excessive, if the stock goes higher and they buy Bitcoin and the premium stays at a high level, then you win. If you buy like strategy, a lot of people bought when the premium was at 3x. We saw about$42 billion of trading on the top. The premium has compressed to like 1.4, 1.5.

40:42That means you got crushed. And there's a lot of people who didn't quite understand these dynamics and they bought when the premium was very high. The actual Bitcoin balance could be the same. It could be higher. Premium is compression. That's what squeeze people. Let's take a quick break and hear from today's sponsors. Curious about online trading, but haven't taken the first step yet? You're not alone. And Plus 500 Futures is a great place to start. The futures markets are moving fast. And with Plus 500, you can explore popular assets like oil, gold, S &P 500, Bitcoin, and more. From crypto to commodities, there's always something happening.

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43:10On Friday night, about 20 of us crowded around a long table at a family-style Italian spot near Times Square. Saturday, we did it again. And Sunday morning, a group of us were still debating Socrates over breakfast before everyone headed home. Many of the people at those tables had only known each other from our calls in the Mastermind community. That is the community I host with Kyle Greve and Daniel Manka. Each week, we get together on live calls to dig into markets and individual businesses. We bring in fund managers, operators, and authors as guest speakers. And a few times a year, like New York this fall and Omaha every spring, we meet in person.

43:50If you want to think in decades alongside people who do the same, apply for free at theinvestorspodcast.com slash mastermind. If your application stands out, I'll be the one to reach out to you personally. All right, back to the show. I think that last point, as a value investor and somebody who loves those principles. I mean, this was Ben Graham's big thing was like, hey, if you're going to pay, and he would always talk about growth stocks versus value stocks. And it's like, you're paying 50 times earnings. You better be prepared for it to go to 20 times earnings and get absolutely annihilated.

44:26And it's a very similar concept. We're talking about balance sheet growth with Bitcoin versus what Ben Graham was talking about was basically the income statement and the company's ability to grow its earnings and the multiple that's paid over that. And for people that aren't familiar with any of these ideas, which I would argue was probably most people, they might hear a podcast, they might hear Michael go and talk or whoever, and they're like, wow, they sound really smart. I'm going to buy that stock. And that's the end of their analysis. They don't understand any of these financial terms or even the difference between an income statement and a balance sheet for a lot of them.

45:02And I'm not trying to say it and frame it that way as if everybody's dumb. People are just busy with what they do for a living, their livelihood. And they're trying to preserve what they've made and not lose it. And they listen to a little bit and they just go and make a decision on that because they don't have the time to know all this other stuff. So I think your point is really, really important for people that are buying these things in lieu of just buying Bitcoin. You better know what you're doing. You're going to get destroyed if you don't know what you're doing. Because if the MNAVs three, Michael or whoever, who's ever running one of these companies, they're highly incentivized to capture that premium over the MNAV by selling more stock and trying to transmute it into more Bitcoin.

45:48And if you don't understand that and you're not - If you don't know where the yield is coming from, it's probably because you're the yield. You're the yield. Yeah. But that's talking more about the amateur investor that's trying to buy this and trying to really kind of wrap their head around it. But where I would push back a little bit is in the framing that they're all a coin company. This is a super complex financial thing that's playing out right now globally. And what I want to say about this is what I think is happening is you're having somebody perform a service. if they're doing it at a premium of, this is hard to explain.

46:28Let me explain it like this. MicroStrategy, and I'm going to use them as the example because I think they're the ones that are doing this. They're the benchmark. They're doing this responsibly. And people might hear me say that and roll their eyes and say, what do you mean they're doing it responsibly? They're doing it in billions per week. But listen to what I've got to say. They're providing - I fully agree, by the way. This is my conclusion as well. Strategy is the correct benchmark, which everything else should be compared. Yeah. And I think to the point you made about MetaPlanet, I think they're doing it somewhat responsibly, but they're in a unique position because of the setup that they have from a legal regulatory standpoint where it's so hard for people in that country to buy Bitcoin.

47:06And they've got this really unique setup where they can do it responsibly because of this gift that they kind of have by being in Japan. But let me just frame this from Michael's perspective. He is providing a service and he's being paid handsomely for this service that he's providing. And what the service is, he is securitizing fixed income. And he's doing this through convertible debt issuance, and he's doing it through preferred stock issuance. Okay. So what in the world does that mean? Okay. If you go today and you want to buy fixed income because let's just say you're in your 60s or your 70s, and you just want some income on all the money you've made for your life.

47:46Let's say you saved$2 million and you want to live off that $2 million and you need some type of fixed income percentage off of that$2 million, and let's just say the number is 5%, which would give you$100 ,000 a year if you can lock in 5 % somewhere that's in fixed rate terms. There's always risk associated with putting your money in some type of fixed income instrument. That might be if it's in a sovereign, it's whether the government's going to out-debase that percentage of 5%. If the government debases the money by 7%. Well, you just lost 2 % of your buying power by not keeping up with debasement.

48:24If you're a corporate, if you're buying corporate debt, the risk is not only just the inflation rate of the currency, it's also whether the company can actually pay you back if they would go bankrupt. And if you're a preferred shareholder, it's even more risk than that because they might pay out all the, let's say they go bankrupt, they're going to pay out the fixed income bondholders first, and then they're going to pay out the preferred, and then they're going to pay out to the common. So the risk is there when you're talking about corporates. So what is Michael doing as a service when I say he's securitizing fixed income?

48:57What he's doing is mind-blowing because if you look at traditional fixed income, they're going out and they're issuing this debt. They're taking all this money that they raised by issuing the fixed income or the preferred stock. They're taking that money that they made in the hope that they can make it all back and then pay that investor the dividend coupon or the dividend or the coupon back to the investor. They either have to take it, they have to build some infrastructure, they have to make a product or service, and then they have to earn it back into the future. And it's all based on their ability to collect future cash flows.

49:34That's the risk to these investors today and for decades. What Michael's doing, which is drastically different, he already has the money. He doesn't have to go out there and earn it over the next five or 10 years or perpetuity, if it's preferred, in hopes that he can give you that dividend or in hopes that he can give you the coupon. He already has it. In fact, he's got like 5X what it is. And so what's so different is when we look at MicroStrategy as an example, if you add up the coupons that he's got to pay out and all of the dividends that he's got to pay out for everything that he's issued to date, guess what that number is?

50:13It's way lower. It's about 2%, right? I think I did these calculations. I looked at it and I'm like, it's raised like$3 billion a month from memory is what I last looked at. So he's raised$3 billion. I forget what the number of the coupons is, and this is before the latest Stride issuance. It was like 1.6 % or 1.8 % of his raise is being paid out. But it is a drag. And actually, I'm curious about this. The more that he issues these preferreds, because an insight that you had in Sol, which I hadn't actually clicked to, is that he set them at 8 % and 10 % as a reflection of the monetary debasement to make it attractive over the long term.

50:47So I never quite clicked to that, but I always looked at it and go, it's quite high because he was doing converts at zero, basically, where he's got like an effective coupon of 0.5%. I framed it as, oh, he just looked at the M2 debate, global M2 or US M2, and he's just like, well, I'll just pay that. But I think if you talk to Michael, and I haven't, obviously, I think that he would probably frame it more of, well, if you go into the preferred market today, it's paying six or 7%, and I want mine to be the most desirable. So I can afford to pay more because I'm fully backed with this$60 billion treasury of Bitcoin.

51:27But the point that I really want to hit home to people is if you look at the coupons that he has to pay, and you look at the dividends that he's got to pay, it's around like 100 to 120 million annualized. That's not including the face value of the debt that he has to pay back. I'm going to put that aside. But if you just look at it from an interest expense, and I know dividends aren't interest expense, but let's just kind of treat them like interest expense. If you look at these numbers,$120 million to Michael, who's sitting on a 60 billion in treasury is a pittance. It's an absolute pittance.

52:06If we're just going to round the numbers and say they're a hundred million, this is literally 600 times he has in the treasury of what he's got to pay out in the dividend and the coupon. And here's the other point that I think is really crazy for people to kind of wrap their head around. He can print more stock certificates and raise more cash to pay this stuff back if he really wants to. And I think that that's lost on these people saying, oh, MicroStrategy is going to have a margin call. That is the most brain dead thing. And we did hear that on the stage at Seoul. That is the most brain dead thing I've ever heard in my entire life.

52:46It's somebody who just literally hasn't done the math or even understands the math at all. So when I say he's securitizing debt, what he's doing is he's literally, he doesn't have to go out and earn the cash flows in the future. He's already got them. They're sitting in the bank vault 600 times over what he's paying out in interest expense on an annualized basis. And there's nothing on Wall Street even close to this. And when you look at the fact that he's paying more, at least in the preferred market. He's paying 200 basis points higher on these coupons in the preferred market than anything else that's out there with literally 100 times less risk.

53:27Bitcoin could go down 50 % tomorrow. And he's got it for years and decades. He's got it for decades to make these payments. What's so interesting is he's securitizing fixed income, and he's already got all the money in the vault to back it all up. And that's the thing that's blowing people's minds. And here's the recursive loop that everybody's missing and why this is so different than clown coins that were issued in 2017. He is securitizing this debt. They're going out and buying it. It's putting more Bitcoin on his balance sheet, which then makes the common stock run. And what's he doing when the common stock runs?

54:05He's issuing more common stock so he can get more cash and buy more Bitcoin, which allows him to securitize more debt or fixed income or preferred issuance. So there's this recursion. So somebody might look at this and be like, Preston, come on, this sounds like a Ponzi scheme. But what I would push back is what you're missing is that under the petrodollar system for four decades, you had central banks that literally just continued to pump and pump and pump printing into the fixed income market. They did this for 40 years. And if you don't think that bubble is unraveling in some capacity or some way, you are out of your mind and you don't understand it.

54:48And so for people that are looking at MicroStrategy or any of these treasury companies, Bitcoin treasury companies that are number one, profitable with a real operational business at the helm, and then securitizing fixed income, whether that's through preferred or convertible debt, in a responsible way that's actually back, They actually got the Bitcoin in the vault many times over what they're issuing. I just don't think that you, as the person who's skeptical or maybe calling this a scam, actually understands what's unraveling with a 40-year bubble. And fixed income is a 40-year bubble. I'm sorry.

55:24It is. But I also want to preface something that you said, James, that I think is really important. There's going to be a lot of fakers out there that try to do this that literally have nothing. They don't have a company. They're going out there and they're trying to securitize and they're trying to get this thing rolling. And I think that to do this, you really do need to have a company. It needs to be profitable at a minimum, because if you're not, you're going to definitely have to sell Bitcoin. But yeah, those are some of my thoughts. And I think there's a lot of jargon in there. And people will hear the jargon and they immediately say, this person's a snake oil salesman and they are a scammer because they don't understand some of the terminology and they don't understand the 40-year fixed income bubble that's bursting.

56:10And they don't understand like there's a lot going on here to kind of wrap your head around. But those are some of my thoughts. Well, I agree with all of it. And it is a fascinating trend that we're early in. I agree that calling out like a strategy, a meta plan, I'm sure there's others, but they're the ones that so far from my initial gut checks have basically shown up. They are doing it as I think responsibly is a fair way to describe it. And there's two questions I want to ask you actually. The first one is this idea of them selling the Bitcoin. So basically the idea is that strategy's already got the treasury, but in order to service those preferred, and granted, there's a phase shift that has to happen.

56:45We're in, let's call it the growth phase. They're in the accumulation state. For Saylor to sell a single Satoshi from that treasury, I think would just break everybody's confidence in the whole model. So I actually don't think he can do that. So what he's really doing is buying the next hundred years worth of dividend payments. Something you said in Sol, which I thought it's so obvious. If it is accretive when your stock has a premium to your NAV, it is accretive to sell stock by Bitcoin. 100%. Flip that around. MNAV goes below one, which I believe that we will have a down period in Bitcoin. It's going to happen.

57:17So if you've been convinced by any influencers that we're never going to have a bear market again, I would unfollow because it's going to happen because it always happens. When we have a bear market, many of these companies will see their MNAV go below one. And in that world, it is actually accretive for them to sell Bitcoin and buy the stock, the inverse. Now, I don't believe that Saylor and Strategy are going to do that because that is more or less why I think they've launched Strike, Strife, and now Stride. Stride has preferred that he doesn't have to pay the dividend and it's going to trade more like a junk bond would be my base case.

57:49So I've kind of got two prongs to this question. The first one is, when the MNAV goes below one for some of these companies, how do you think Strategy and these, let's call them the responsible bucket. How do you think they handle that situation versus some of the smaller ones? I think there will be just the same way that miners have always been pro-cyclical. They buy too many machines, they hodl too many coins, they go through the bull market peak, and then they uke it all out at the bottom of the bear. Many of these treasury companies, the smaller ones, the ones that don't have the grit, the shareholder, because the CEOs have to act in the best interest of the shareholders, not in terms of Bitcoin.

58:24And if that requires selling Bitcoin to protect their share price and they don't have any other avenues, they will do that. Strategies of a scale where they have tools to do this. So two questions, what happens in the MNAV below one scenario? And the second one, maybe this is just a different topic, the strike, strife, stride, he's setting up a yield curve. You can actually see what a fixed income does, what he's tokenized bonds, fixed income with strife, convertible debt with strike and stride as a junk bond. I've got all three tickers on my trading view now because when they start to trade above or below$100, that's going to tell me, does the market think he's going to be able to raise dividends?

59:00Because if they think he's going to be able to pay it without selling his Bitcoin, they're going to trade at a premium to their face value, right? He's selling$100 for$103. Especially with it being 200 bips over even more riskier things. Correct. And then when they start to trade back towards or below$100, that's signaling the market's going, oh, I think we might be getting long in the tooth on this treasury company trend. And I'm very confident that in this early phase, there is only so much demand and money that's willing to pile into these treasury companies. Serious pension funds and institutional capital are not buying the 52nd treasury company, right?

59:37They might buy the first one, maybe the second one. There's only speculative retail money that's going to jump into these smaller companies. So I think there's an exhaustion point there too, but some ideas there to bounce around. Yeah. So help me out. MNav below one, let's go there. Yeah, MNav below one. All right. So the math is very simple. If the company's MNAV is below one and they're optimizing for Bitcoin per share, they sell the Bitcoin, they buy the stock back, and that's how they're going to acquire more Bitcoin per share. It might sound antithetical to somebody to hear that, but I would challenge that person, go get an Excel spreadsheet, go work the math.

1:00:13And what you're going to find out is that what we're saying is a truth. Will he do that? Or Let's talk about Michael specifically. I agree with you. I don't think he's going to do it. Because that's the reputation that's actually more valuable to him, for his shareholders. Yes. I think that even though that is a truth that we just said, that he will have more Bitcoin per share for anybody that's a shareholder, if he would do that under that scenario, I still don't think that he's going to do it because what is his product? His product that he has been... People will say it's a data analytics company, And it is, they have that product line.

1:00:50It only makes 100 million a year. His real product is a service. And that service is the securitized fixed income. And so what I think he does is he potentially spooks that market of anybody that's in fixed income that's buying these issuance. He spooks them when he's selling the treasury of Bitcoin that's backing all of this securitization of the fixed income. So for that reason, I think that that's why he won't do it is because he knows his real product or his real service is the securitization of fixed income. And sorry, just to jump in here, there's one thing that I think it was his interview with Alex Thorne.

1:01:25And he had this one line that just sat with me and I've been thinking about it ever since. He goes, someone asked, if your debt is trading at a low level, distressed level, are you going to go out there and buy it back? And Michael just goes, no, Mr. Bond Investor, that is your opportunity to go out there and buy my distressed debt at a cheap price because the face value is a hundred dollars and you can pick it up for 50 cents. And I think that's a good example of him saying like, no, the market can go and pick this up because the opportunity is there and I'm going to follow through. So I think that's something that sat with me ever since he said it.

1:01:54Yeah. Yeah. I think he's very consistent in his messaging. He's very consistent that he is going to be the major player in the United States for securitizing any type of fixed income. That's what he is messaging to the market. And so far, what a, I mean, the amount of Bitcoin that he has been able to put on the balance sheet by doing this is mind numbing. And just because you don't understand it, or you think that all we're doing is just spewing a bunch of financial jargon, I would highly encourage you to dig way deeper. The other thing that I would say is the second part of your question. So the second part is as we go down this, so MNAV below one, I agree that Saylor probably met a planet.

1:02:37I'd say that MNAV is compressed in a bear market, but my base case is that we're going to, just like miners, and I think miners, which are also now treasury companies, they'll do the same thing. They will all puke out their coins at a low price, whether to protect their share price or whether just because they don't have the CEO ownership that Saylor does, right? The buy-in. So a lot of these companies who aren't all in, they're kind of half in. And I actually, strangely enough, and from my studies, I would put miners in the same bucket as being half in because your operating business is incinerating capital.

1:03:09Miner's job is to burn money and digging a hole in the ground. So as a result, that business will take over in the bad times. That's going to be your primary thing that you have to look after. And your treasury is secondary to making sure that those miners keep spinning. So when we're thinking about this idea of securitizing fixed income, what it comes down to is having a pristine balance sheet that isn't imposing more risk and not making the issuance riskier. And so when we think about a business that, let's just take a miner, for example, let's say that half of the revenue that's coming in is a lot of risk and they're not, like MicroStrategy is a perfect example.

1:03:50If you got $60 billion worth of Bitcoin on the balance sheet, the operational business is a pittance of that. It's almost unnoticeable because it's so small in comparison. If you're buying the fixed income instruments that he's issuing through convertibles and preferreds, you're not worried about the impairment of the operational business really messing up the value of that because he can pay it for literally decades beyond what's been issued. And so you could make the argument that the smaller that the operational business is, as long as it's still kind of profitable relative to the size of the Bitcoin, makes him a better service provider of these fixed income instruments.

1:04:32Whereas a miner convolutes that risk through all of their operations and their sheer size and their capex and all these other things that they've got to potentially service and potentially impair the fixed income issuance so great and i think at the end of the day what we're looking at is that sailors that the bitcoin treasury company i think this is what my biggest insight from this whole study the idea of a bitcoin treasury company is not to just accumulate bitcoin it's actually to accumulate bitcoin and develop some kind of a system like what say there is doing which is a his business line is actually the issuance of the debt.

1:05:09That is what he sells as a product. 100%. There is a huge market for volatility, common equity. There is a huge market for fixed income, literally fixed income, and fixed income, which is paying substantially more than everything else. That is the product line. The treasury is the result and the means to the end. There's going to be a lot of companies out there that are like, oh, I'm going to buy Bitcoin because buying Bitcoin is what we do to get our stock price up. Those companies are not going to be in the same bucket as it's called the responsible, how we want to frame it. That is where there's a massive distinction.

1:05:40What is your product that you're serving? And Saylor has found a very interesting, very unique niche in this particular field. Well, I think Semler is probably a really good example of exactly what you're saying, where they went out and bought Bitcoin. Do you know how much they bought and put on the - 4 ,200 last I checked or thereabouts. So they got 4 ,200 Bitcoin. I looked up the financials. They made like 30, 40 million net income, I want to say, in the last year. So they're a profitable company. They can continue to sweep those cash flows into Bitcoin, which historically has a 40 % to 50 % annualized return profile.

1:06:19So when I'm looking at similar and it's trading below, it's Bitcoin on the balance sheet, somebody would say, see, here's an example of a company that this doesn't work. What Saylor's doing doesn't work here. I just think that the market's looking at them. And first of all, with a base of shareholders, it's way different than the shareholders that are holding MicroStrategy and buying all of the stuff that they're issuing and the common stock itself. You're dealing with a medical company, right? And so you got to swap out all of those investors for them to even think that they're going to try to do what Saylor's doing.

1:06:52And I don't even know that they're going to do what Saylor's doing by trying to securitize fixed income as a service in addition to their medical operational business. And so they're kind of caught in this limbo of like, what are they? And the market's confused. And that confusion might continue to persist. But if I'm the operator at Semler, I'm just saying, I don't care what the market's valuing me at. I'm going to continue to do my operational business. I'm going to continue to make money and I'm going to continue to sweep this money into Bitcoin. And if the market just so happens to start valuing my business above the asset values of the Bitcoin on my balance sheet, maybe I'll issue some more common stock because it's really simple.

1:07:35If your company is trading at a MNAV of 1.5, let's say similar gets to that at some point in the future because the market starts to value it differently. I mean, he's buying the Bitcoin for a huge discount by issuing more common stock and just sweeping it into Bitcoin. So he's incentivized to do that. And he will have, and I think this is important too, for anybody that's doing this strategy of holding your treasury in Bitcoin, you have this option at your fingertips to exercise if the market ever puts you in that position, which is amazing. So it is different. I think that in the future, you're going to have a couple major players in this space.

1:08:17What's really interesting, James, is 21. So 21 comes out, I had no idea for the most part what the operational business is. And going back to our original point of you probably need to have some type of operational business that makes money. I think that's all true. I stand by that. But what I think is really interesting about 21 is how capitalized it was in Bitcoin terms so that I think they can run the exact same strategy that Saylor is going to do, which is start issuing fixed income and securitizing fixed income that is backed by just a ton of Bitcoin. So why did they seed it with so much Bitcoin?

1:08:58I think because they - Yeah, you need the scale. You need the scale to get going, right? That's right. And one of my points in that, because there's a lot of people, and for my subscribers, I try to make sure that none of my subs feel like a deer in the headlights at any point, right? I don't want anyone to be too surprised. And a lot of people, naturally, A lot of people are going to feel FOMO as they see MetaPlanet ripping through the roof and this treasury company ripping through the roof. And I think it's really important to recognize for 21, for example, unless you were in the Telegram group where people were discussing that they're going to do a SPAC with Cancer Equity Partners, unless you were in that group, you're never going to catch that initial pump.

1:09:33And since then, they immediately shot to an MNav of like five, four, five, or something like that. But it's still not trading in the public market. They haven't completed the SPAC yet. So there's a risk factor in there as well. So look, there's a potential and a possibility that they go and try to compete with strategy. And again, competition is good in all facets of business. So that would be a good thing. And I think, obviously, they've got the scale, they've got the backing, Tether's got a huge amount of Bitcoin behind them. So there's a whole lot of things that they could do there. But just don't lump into these things.

1:10:03I know a lot of people have bought into this CEP, not realizing that that SPAC represents like 2.7 % of the eventual shareholder equity. So I initially did the calculation. I was like, hey, look, their MNAV is trading at like 0.05. I'm like, hey, it makes sense. But then I found out it was a 2.7 % equity share. And then you've got to flip it over like, oh, no, no, no. They're not trading at an MNAV of 0.2. They're trading at MNAV of 5. So suddenly you realize that you've got to be in the right room before these things move. Don't go feeling far, though. If you miss the latest treasury company, they're going to come and go all the time.

1:10:37And that's why I think spending more time studying on really the ones that have staying power, particularly when the bad times come, I think is going to pay a lot more dividends as a value investor. It's going to be a way more beneficial process. Two points on that that I think are really important for the listener. Number one is going back to what we said earlier in the show, which is as a retail investor or somebody who's looking at all this and saying, oh my God, I feel like I'm missing out because these people are going on these shows and talking about these things and they're really smart.

1:11:08It sounds like they're really smart, the best way to describe it. And I need to own that. If you're buying it at an MNav of five and it's just hitting the public markets, what in the world do you think is going to happen with that? It is going to be the most volatile, violently traded thing on planet earth as it drives - Welcome to Bitcoin in 2013. Right. Yeah. I mean - You want a flavor of that. And a lot of people jump on the bandwagon like, whoa, it's volatile to the downside. I'm like, yeah, it's going to be volatile to the downside a lot. Yeah. Well, and who knows in the first days that it's listed, you might see a rip to a multiple of seven back down to two, then the four, and then the one and a half.

1:11:50And if you're investing in this and you don't have the stomach because you don't even understand what I just said or what that even means, you are going to be in for the pain train as to how these things are going to be received and hit into the public markets, especially considering it's something that we've never even seen before hit public markets, this idea of a company that's securitizing fixed income with Bitcoin as its backing. All this stuff has never been done before. So that's the first thing I really want to impress upon people that are listening to this is be careful out there. If you don't deeply understand this stuff and you like Bitcoin.

1:12:30Buy Bitcoin. Just look at what the companies are doing. They're selling the equity to buy the Bitcoin. They are telling you which part is the valuable bit. There's nothing wrong with just stacking stats. So that would be the first point. The second point that I just want to kind of foot stomp is going back to maybe you do have a competitor that's a worthy competitor to MicroStrategy simply because they have so much Bitcoin that they're starting out with on the balance sheet. And it seems like they deeply understand what his business really is, which is the securitization of fixed income. And they're really trying to make a splash and go into competition with him.

1:13:09And what I think is an interesting talking, and I'm really curious to hear your thoughts on this, how does this evolve from a competition standpoint? Is there a market for three of these types of companies in the United States? Is there a market for 10 of these companies? Or is there a market for one of these companies in the United States? How do you see the sizing? And I think internationally, we're going to see a bunch that crop up and take different fixed income markets around the world. But in the United States, how do you see that competition playing out? Is there space for 21 to play against micro strategy?

1:13:44Yes. No, I think it's a very interesting question. The truth is I don't know, but what I do know is that there is not room for a thousand or 10 ,000. That's one thing I do know. And that's why I think it was good that we actually touched on the experience of the last couple of cycles, because we have already seen the lessons of how markets adapt when you give them a certain set of stimulus. In the ICO days, there was like a couple of thousand coins, and they all went up together. In the yield farming phase, it went through waves. There was like, you know, the L1s went, then this went, then that went.

1:14:14And then in this cycle, there was millions of tokens being printed every single day, and the cycle lasted in a blink of an eye. This is the same idea. If you oversaturate the market with too many of these things, everyone just goes, ah, I can't. How do I pick between these things? I'm just going to buy an index, right? I'm just going to buy an index and not worry about it. And then you get the balance weighting and you get the magnificent seven. That's what passive ends up looking like, where it just continues to weight towards the biggest. So I also think potentially you've got like a Microsoft and an Apple type scenario where you've got this kind of duopoly on these two different entities.

1:14:48So I think there could definitely be room for two. Competition is always good. You're probably going to have one that's going to be bigger than the other. I don't think there's room for 1 ,000. So it would probably somewhere in that gray zone, far more towards the Pareto distribution dynamic, as we've seen in the Bitcoin world, right? Strategy really is the Bitcoin of treasury companies. And every other business is trying to either find their unique niche or find where they sit in the broad spread of things. So that's my general mental model. I also think that going back to what we said at the start of this call, if we are in the euphoric phase of this bull, where leverage is now everybody's friend, and people are starting to get very confident in the bulletproofness of the bull.

1:15:27And I still remain bullish as long as we're above the short-term cost base. I remain a bull. But I'm also seeing a lot of signs saying we're later in this Bitcoin trend for this particular cycle, assuming cycles are going to be the same, but they may not. They could completely evolve. But one thing I know is definitely a characteristic of late-stage bulls in every market, in every asset, is leverage and speculation. And we are seeing a lot more leverage and speculation. But they're the things to just pay attention to as these companies pop up. Do they have the grit and the tools and the toolbox to survive in a downtrend?

1:16:00And the downtrend may only be down 50%, but it could take a year. It could take a year and a half. It could also be that there's an endless amount of printing that's about to come and go through the roof. All these things are possible. These companies need to be able to survive all these scenarios. I'm just curious, because I know we haven't touched on it. What are your thoughts on the strike stride? This I find such a fascinating idea. As a civil engineer's background, I'm learning about bonds. I understand how bonds work, but I actually charted these things out and I showed the effective yield for the 8%, the 10 % and then where each of those assets currently live.

1:16:34And it was the first time I've actually done the work and visualized how yields trade, how bonds and yield prices and yields change. I was like, ah, okay, that's really interesting. How do you think strategy, because they are in this more mature position, so even if 21 does get to their scale, strategy has a much bigger toolbox at this later stage of the bull market in determining how far it goes. That toolbox, how does he deal with strike, strife, stride? The first two obviously have to pay the dividend. Stride is interesting because he doesn't have to pay the dividend. So he's in a very interesting spot where if he wants to generate demand for it, he should probably pay the dividend.

1:17:10My assumption is he'll pay you the first dividend, but there will come a point in time where he's going to sell stride, probably in the bear market. It's going to trade most likely at distressed levels, I would think. But really what he's trying to do is take pressure off the common equity. He's really incentivized to pay that thing relentlessly, the one that he doesn't have to. He's to pay it relentlessly, get the whole market in there believing, oh, he will always pay this thing so that he has the option to not pay it. And he does that after it does a whole bunch of more shares issued under that vehicle.

1:17:44Right. So it almost be like poker where you never lie. Anytime you have to flip your cards over, you're always telling the truth. And then at the very, you know, you're late in the game is when you pull up the massive bluff and you're paid handsomely for, you know, convincing everybody that you were always going to tell the truth. That's how I would... I know that sounds horrible to say. No, no. I think that makes perfect sense. That was my base case that he has to pay these things upfront to generate interest. Because if he just immediately stopped paying them, it's going down to 30 cents. Yeah.

1:18:16Which then if he's issuing more shares, he's only getting 30 cents on the dollar, but he has to pay... He doesn't have to pay anything, but he can raise a whole lot more through that vehicle if he continues to convince the market that he's always going to pay the dividend. It's also very interesting that he's issued strike, which was a tokenized convertible debt. Then he's done strife and he's got people used to this idea. And then he's done stride. It is very, very clever. The way that he's actually structured this whole thing out, the way I looked at it, because my long running thesis for MSTR is it was hard for me to see how it did well in the bear market.

1:18:50There's a lot of people at the moment who are saying it's not doing well in the bull market either. But at the same time, I was like, in the bear, it's going to be tough to raise capital. I can now see a bigger toolbox and I understand a lot more about how he's going to navigate the bear. Then I take a look at all the other treasury companies. I'm like, you guys are so far behind. You're not even close to the ability to withstand a drawdown. He's built a transmission, right? At the end of the day, it's like a bicycle that, you know, it's a 21 speed bike. And if you're going up a really steep hill, call it a deep bear market.

1:19:22There's a lot of adversity in your environment that you're dealing with. he has a lever to pull that puts him in a different gear to be able to handle that environmental setting. And by issuing all these different securities into these different pools, think of them as different pools of capital that you can issue the securities into, there are junk bond mandates that that's what this fund does is buy junk bonds. And so he wants to suck on that soda straw of capital onto his balance sheet to transmute it into Bitcoin. So he's just going out to all these different buckets of capital that are there.

1:19:57And he's creating a gear for each one of these things that then he can use for his environmental setting that he's dealing with as that constantly is changing. If there's one constant in the world, it's that change. You better be ready for change, right? And so that's what's really unique about MicroStrategy is I think that they are geared for all sorts of environments to try to continue to keep the MNAV above one, because if it doesn't, then he's got this really challenging situation that we talked about earlier in the show. Or he then says, that's your job, Mr. Distressed Equity Investor. This is where you step in and that's your opportunity.

1:20:31He's on record saying that he's just going to sit there on his hands and wait for the environment to change. And what he's got going for him is Bitcoin is just so volatile. It can change on a dime. And if the governments print a bunch of money and flood it into the system, Bitcoin is going to rip. And then the common stock is going to get whipsawed with it. was I think the way he would think about it. And then he's back in the business of securitizing fixed income. It's funny. I wrote a piece, in fact, very early when I started the newsletter about a year and a half ago, and I called it the flip-flopping, documenting my journey, how I came to the conclusion of being Bitcoin-owned.

1:21:07I called it the flip-flopping because through that journey, many of us will have done this. I was like, wait, Ethereum is the best thing to slice bread. I'm like, actually, you know what? I don't think it's going to work. And then I would keep going back and forth. And eventually, the more that I studied it, the more I go, no, it is. It's cooked. It's not going to make it. For strategy, this is the only other time when I can observe my own mental processing. And I have flip-flopped back and forth just the same way. But instead of falling on the side where I'm like, no, it's cooked. I'm actually flying on the side being like, you know what?

1:21:34This is kind of brilliant and it's fascinating. It's taught me so much about financial markets. So it's the only other time I can in this space that I can remember doing so many back and forths, but just falling on the opposite side now in a positive camp. And they are, they're just in a league of their own. It's a fascinating dynamic and I've learned a hell of a lot. I haven't sold my leaps. They come due in December. So we'll see. I'm still holding onto them and I don't know, I'm hopeful. But I think more interestingly is we are getting a masterclass in just financial engineering. In macro, I mean, it is just beyond fascinating to study and to discuss from a financial media standpoint, because it's just endless.

1:22:20You're just seeing stuff that's never been done before. I mean, it's just - The one thing that has struck me recently is Bitcoin, as simple as it is, the orange boomer coin just continues to invent new narratives to bring it back into the limelight. They just can't keep it quiet. it. It's amazing to watch. And you compare that to the rest of this space and they don't have any narrative. So it's fascinating to watch that Bitcoin just reinvents itself. It just comes back from the dead time and time again. And here we are in 2025 and nothing has changed. Yeah. Well, James, I appreciate it. I really enjoy these conversations.

1:22:55This is what we were talking about when we were in Seoul, right? Now we're just putting it on the airwaves. Thank you so much for coming on. Give people a handoff to your newsletter and anything else that you want to highlight. Thanks, mate. Head over to checkonchain.com. So our newsletter, we do two a week, written and video. And a lot of people, a lot of our subscribers have said that it's like having a second opinion because we all have our Bitcoin instinct. And a lot of people go, you know what? I just got to see the worked example. Like, that's why I felt that way. Okay. Makes sense. So it helps people really articulate their internal thoughts and feelings.

1:23:25Just give them the data and the evidence and sometimes a brand new opinion on how these things shape out. But also check out our charting website. We've got all the charts are free. We've got stuff for strategy, treasury companies, and pretty much any Bitcoin chart you could want. So head over there at checkonchown.com. All right. Thank you, James. And we'll have to do it again soon. Good on you, mate. Thanks a lot.

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