BTC243: Jim Chanos Vs Pierre Rochard MSTR mNAV debate (Bitcoin Podcast)

0:00You're listening to TIP. Hey, everyone. Welcome to this Wednesday's release of the Bitcoin Fundamentals Podcast. On today's show, we have two very special guests to have a little debate about Bitcoin treasury companies and the premiums they should potentially fetch in the market. On the one side of the debate, we have legendary short seller, Mr. Jim Chanos. He's a Wall Street veteran with legendary calls like shorting Enron, amongst many others. And then on the other corner, we have Mr. Pierre Rochard, who's a longtime Bitcoin OG and financial expert defending the premium that should be paid for these treasury companies.

0:35Pierre and his friend Michael Goldstein were the originators of the paper on Bitcoin's speculative attack on the dollar, which many people in the Bitcoin space hear all the time, but might not know Pierre was the first person to write about it. So if you're in finance, you're probably going to love this conversation. If you're more of a casual observer, the financial jargon might be a little heavy at times, but I really try my hardest to make it accessible for all the listeners and wrap up and provide descriptions along the way. One last thing I just want to say, I love the power of the internet and online social media.

1:08Don't laugh too hard, but this whole conversation happened because one person on X who goes by the name SpacebullHodl58k13percenterADIQHoardingManmadeNumbers, yes, that's his entire handle online, is the reason this whole conversation happened in the first place because of the friendly banter that was happening. So guys, you can't make this stuff up anymore. What a fun place to operate. That's all I got. I hope you guys enjoy the show.

2:00Hey everyone, welcome to the show. We got a hot one here. Boy, there's been a lot of chatter online and a lot of excitement for this discussion with Pierre Richard, Jim Chanos, legendary short trader, and Pierre Richard, legendary Bitcoiner. So we're talking about micro strategy. We're talking about Bitcoin treasury companies and whether there should be a multiple paid on top of their treasury or their MNAV. And to start off this conversation, what I'm going to try to do, because this is going to get probably very technical in the next hour. And what I want to do for the average listener that maybe isn't dialed into all the financial jargon is I want to try to frame this up so that they understand Jim's position of why he's taking this short position on MSTRs, common stock, and then we'll go from there.

2:50So if you're watching on YouTube, you're going to see the chart. If you're listening on audio, you're only going to hear this. And I would highly encourage you to go back to the YouTube to kind of see this specific chart because I think it's graphically going to help make sense for everybody. But here you go. I'm going to pull up the chart. And when we look at this chart, the number that's higher is the MicroStrategy common stock. The lower number there is Bitcoin's performance. And this is from the start of when MicroStrategy started a Bitcoin treasury strategy. And Jim, I'm not trying to put words in your mouth.

3:23I'm just trying to frame this up. So if I say anything that isn't accurate, just kind of correct me here. But in short, Jim's position is he expects this spread that you're seeing in the chart to collapse and somewhat track what Bitcoin's doing, that this is overdone is Jim's position. Pierre's position is that this is a normal market behavior and that this is going to continue to persist, that a Bitcoin treasury company that does this responsibly, should have some type of premium above Bitcoin's performance. Whether it's this much performance that we're seeing on the chart or somewhat below that, or even higher than that, that is something that is going to continue to persist into the future.

4:07I'm going to start with Jim. Did I frame that correctly as we're looking at this chart? Jim O' Sort of. In the two lines are the price of one Bitcoin and the price of one share of MicroStrategy, correct? Correct. Well, the problem, of course, is that's not the trade. The trade is that MicroStrategy, by its own admission and design, has been increasing the amount of Bitcoin per share of MicroStrategy. So what you really want to look at is the MNAV chart, which is the premium over the requisite amount of Bitcoin per share that MicroStrategy trades at. That's a really important part because I see on social media, people put derivations of this type of chart.

4:51Look how much micro strategy has outperformed Bitcoin. But of course, you would have been buying Bitcoin relative to one share of short micro strategy over this period. The amount of Bitcoin per share micro strategy has battled with this period has increased rather, you know, meaningfully. So that's an important caveat. Yeah. And Pierre, is there anything that you want to clean up from what I said? So, I mean, to be clear, I'm not a big micro strategy holder. I'm a Bitcoin guy myself. And so a priori, I should be very sympathetic to Mr. Chanos' perspective and that I don't want other assets outperforming Bitcoin.

5:32That said, I also have been listening very carefully to the arguments that he's put forth publicly, and I have found a lot to disagree with in those arguments. And I think that having a premium to NAV is not unnatural or something that is wise to short at all times, right? Maybe you could make an argument for a swing trade of, oh, it's overheated at this point. I'm going to take a view. But that it wouldn't surprise me. And I think there's very strong structural arguments for why the equilibrium MNAV is greater than one. Okay. So let's dive into the comment that you just said there, Pierre, which is you're looking at this and you're saying, and I'm going to pull the chart down so we can see each other.

6:14You're saying that in the short term, putting on a trade like what Jim's doing could make sense if you feel like it's overdone. Is that properly stated? Yeah, but that's generically true, right? So you could go long NVIDIA, short Bitcoin, and outperform within some given timeframe. But really what I'm disagreeing with is the underlying thesis, not the timing of a trade. Okay, Jim, how do you respond to that? I thought I heard the opposite, was that the thesis makes sense and the timing may be off, but okay. In any case, we should understand something, that given where the MNAV is now, about 1.9, it only got here since last March.

6:57So over the last 15, 16 months. Prior to that, from the beginning of Saylor's Bitcoin strategy in 2020, the MMAV really traded between 1 and 1.2 for long periods of time and traded down to 1.0, I believe, twice over that time period. So this is really something that's happened in the last little over a year. And what makes it to me interesting, and we got involved with this for our clients in December of last year, I gave this as an idea at my annual investment conference on December 5th. I think the MNAB was about 2.5 at that point, is that we now see catalysts. It's very unusual in these sort of relative value trades to have catalysts, right?

7:42You're buying one thing and you're selling the same thing for some premium, and you hope that investors realize that and act accordingly. In this case, it's dramatically different. You actually have the company at question working in your favor to close that spread by selling common, convertible, and we'll get to the preferreds, I'm sure, during this discussion, pretty aggressively to actually try to capture some of that premium in order to buy more Bitcoin. So you have the company itself working to close the spread. That's the difference. And that was not really the case in material amounts prior to a year ago.

8:23I would push back on the historical MNAV. I think that if we go back to August of 2020, when they started, we could exclude those data points, but it was over 6x. And then it drifted down. It drifted down to less than one for approximately one month, May 2022, before bouncing back. And it has bounced above 1x since that May 2022. And so when I zoom out and look at that MNAV, I think that there are fundamental reasons that are pushing the MNAV above 1. And I think that they're twofold. To Mr. Chaness's point, strategy has a monopoly on the issuance of MSTR. And I think this is really what differentiates it from an ETP, right?

9:14With an ETP, you have authorized participants that are competing against each other on the creation of the underlying, or sorry, the financial instrument, right, of the shares. And that essentially means that the authorized participants are the ones that are capturing the spread between the physical Bitcoin in the trust and the shares that are being traded on the public market. And so with the case of MSTR, that value exclusively accrues to strategy because they are the only ones that can create more MSTR shares. And that benefits the common stuff from that accrued dilution perspective. And so I think that's one is that factor that drives the MNAV above one and gives management an incentive to limit the ATM use in order to drive up the MNAV.

10:04The other is the option value of leverage. Now, historically, they have exercised that option value at times in the form of convertible bonds and in the form of perpetual preferred stock. And that is also very different from an ETP like IBIT, where they do not have the option to lever up. And so when MicroStrategy levers up, the difference, the spread between their cost of capital, the cost of the debt, and Bitcoin's returns, that accrues to the common stock. And so I think that those are the two big factors that mean that unlike Ibit ETP, we should expect a company like Strategy to trade at a MNAV greater than one under normal market conditions.

10:57I would add an asterisk of, yes, if there is a severe bear market like we saw in 2022, you could see it trading at a discount, but that is not an equilibrium position. Well, my response to that was, I think it's a bit of a false equivalent in comparing it to the ETF. Your real equivalent is actually someone like you, right? It's the actual investor who has the choice of what to make. And so my view is, is that the choice is whether I'm going to buy micro strategy for this flywheel type strategy, it's called, or if I'm going to buy Bitcoin directly myself. And I can lever my own balance sheet. There are what you say is the option value of doing it in a corporate structure is, I think, more than offset by the agency risk and double taxation that exists in the corporate structure.

11:48And not a lot of people talk about that, that in effect, you've got a preference above you of federal tax liabilities admittedly deferred until they liquidate or sell the micro strategy. And then any capital gains, of course, that both a Bitcoin holder and a holder of common stock have. On top of that, you are actually owning a piece of paper. You don't own Bitcoin. So historically, and in almost all other types of situations like this, these types of structures have traded. They tended to trade at a discount to NAV for those reasons. In this case, we're trading at a premium, and I think it's unlarated.

12:27So I think this is where we do have a lot of agreement, which is that there are trade-offs between holding spot Bitcoin, you know, self-custody and cold storage versus holding shares in strategy. And you've highlighted the most important ones. I think, though, that we can't underestimate the difficulty of getting leverage on spot Bitcoin and cold storage. Typically, you have to deposit the Bitcoin with a custodian. So you're already adding the agency risk there. And then the terms on that are really much worse than the terms that strategy is accessing. So typically when you're borrowing against your Bitcoin as an individual, you might get a one-year term.

13:08And if we look at Bitcoin cycles, typically they've historically been four years. So it doesn't get you through the cycle. And that a much higher interest rate as well, because you don't have the ability to monetize the upward volatility skew of the options on the equity. And then on top of the worst debt terms that you have, you also have the illiquidity of the position, right? Which is that in order to get out of the position, you have to essentially delever and sell the Bitcoin versus just selling the stock. So I think that the ability to access the terms that Mr. Saylor has with either a 0 % convertible bond that has a greater than four-year term or a perpetual preferred that has a 10 % coupon or dividend, that is not accessible to individuals holding Bitcoin in cold storage.

14:02And so that's where I would disagree that just empirically, I think that the market is saying there's value in that. Okay, here's my viewpoint on that. And what you're saying is accurate. However, it underscores, I think, a fundamental issue that I have when I spar with people on social media about this trade and others is the size of this position relative to your overall portfolio. So if my entire portfolio is Bitcoin and cold storage, you are correct, right? It's difficult to get good credit terms on that for all the reasons you correctly point out. But if I'm a more typical investor or an institution, right, and Bitcoin is 5 % or 10 % or 20 % of my overall asset allocation or risk asset allocation, then it's a moot point, right?

14:54I have all kinds of other ways to borrow against other equities, real estate, whatever it might be. And the dollars are fungible. The problem I have is that when I have this debate with people, it becomes very apparent to me that they are truly maxi Bitcoiners, right? That the vast majority about all of their net worth or investment portfolio is in Bitcoin or Bitcoin-related securities. Now, I want to point out a really important point here. This trade, as I have it on and as I've recommended it to clients, is less than 5 % of our portfolio. It's sort of like people who like to love Tanakas on Tesla, not realizing that Tesla, even at its worst point, was no more than 4 % of our portfolio in 2020.

15:39Okay, so it's a diversified portfolio of risk positions. It's been our history over 40 years. Okay, it's not 100%. I'm not 100 % short micro strategy and long Bitcoin. And so that difference really changes the utility curve on a lot of this in a lot of our debate, I think. Because, again, I think for an institution or an individual that has Bitcoin as some reasonable part of their portfolio, but not 100 % of their portfolio, they can get leverage. Now, they can get leverage on relatively favorable terms on their other assets. And so I think that perspective, where you're standing on that side of the risk spectrum, I think makes a difference in this debate.

16:21Yeah, and I would encourage those institutions to leverage up against their other assets and buy Bitcoin. I think that would be a really good trade. And so really it comes down to, and this is from listening to you with Joe Wiesenthal on Odd Lots, the size of the market for preferreds and the long-term growth rate for Bitcoin, outpacing the dividend rate on the preferreds. And so that's where I think that I can agree with you that the size for perpetual preferreds or even preferred stock as a market is small. I would argue that it's small because the existing products are no good and that strategy is putting together products that are superior to those.

16:59And if we look at their performance in the market over the past six months or so, they have done much better than the rest of the preferreds. And that that will attract capital and that that will grow that market for strategy and for other leveraged Bitcoin equities that choose to pursue the approach of issuing preferreds. And that as long as Bitcoin's long term growth rate is greater than the coupon, value will accrue to the common stock and justifies a greater than one MNF. Okay, a couple of things on that. Yes, the preferreds have actually outperformed the common recently. So I don't know if that's good or bad, the near term for the common.

17:38But a few things. First of all, the total net debt plus preferreds relative to the enterprise value of micro strategy, at least as of yesterday or the day before, was about 9 % of their enterprise value. It's about$11 billion out of$130 billion in enterprise value. So it's 9 % of their capitalization at market. They are paying pretty much close to double digits, the yield on that 9 % of their capital. So they are an unlevered company right now. And if they are paying on 9 % of their capital, if they are paying 10 % yields after tax or close to after tax, what are they going to be paying if preferred becomes 50 % of their capitalization?

18:22It's going to be a lot higher than 10%. And so you're going to get a crossover effect pretty quickly, I suspect, if he really wants to ramp the preferreds. And I think that that remains to be seen. So we can argue it, but we just don't have enough information. Right now, the preferreds are, as I said, just a small part of the capitalization of microstrategy. And it gives back to something that Matt Labine pointed out in his recent podcast. podcast and that is the perception that if i'm buying micro strategy i'm buying a leveraged vehicle to buy bitcoin but the fact of the matter is if you're buying micro strategy common you're not getting levered the idea of being levered is having more than a dollar of bitcoin for the dollar i put up that's leverage in fact because of the premium the mnav premium you're getting you know 60 cents or 50 cents on the dollar of bitcoin for every dollar you put up.

19:17So your trade is not levered, even though micro strategy is trying to lever up. It's a paradox. Well, so is it a paradox? I don't think it is a paradox because that is what equities are abound, is what are expectations about the future. And so we would expect the future leverage to be priced in today, right, with some kind of discount rate. And I agree with you that strategy should not over lever itself with preferreds. I think though that I'm bullish on Bitcoin. I think that the value of the asset side of their balance sheet is going to continue to increase and that they will naturally be deleveraging if they don't do anything else.

19:55And that if they continue to tap off for ATMs, that they're going to be able to continue to accrue Bitcoin onto the balance sheet and grow into their MNAV. And so there's not so much a paradox, I think, as much as it's about the forward-looking nature of financial markets. Let's take a quick break and hear from today's sponsors. For most of my 20s, my money story was simple. Earn more and the rest takes care of itself. My income did go up. My spending went up right alongside it, though. I just didn't notice. My savings rate had quietly slipped from 30 % down to 20%, and I didn't catch it until Monarch put every account on one screen and showed me the trend, which sings a little for a guy who spends all day pulling apart someone else's balance sheet.

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24:13then the MNAV is rich. If we think that Bitcoin is going to perform very well over the coming decades, then we can have a debate as to whether it's a fair value or if it's undervalued. Jim, would you agree with that? I would agree. Again, in theory, the problem becomes in practice. And we can add to that the additional... Now, we've been talking about the universe of Bitcoin and microstrategy relative to Bitcoin. But now we have to bring in to the fact of what also is new in the past handful of months 2025 and that is the proliferation of me too strategies and i think that is more i believe grants interest rate observer quoted over 130 companies as of a month ago i think it's more now that are embarked on bitcoin treasury strategies and because there is nothing proprietary in theory here and we can have an argument about that about micro strategies first mover advantages.

25:09But in theory, these companies can proliferate. If I am going to be able to create value in a corporate structure by issuing stock at a premium and levering it up in judicious amounts, there will be no shortage of companies that will be created or will transfer themselves into becoming Bitcoin treasury companies. And of course, the proof in the pudding is that we're seeing that right now by the day. You know, coffee shops in Spain, more than SPACs. I mean, it's going to increase as long as this is profitable. And so far, because it's been profitable, we're going to see an explosion of issuance.

25:48And that's beginning, of course, to happen. It's really been happening in the last four or five weeks. So I really like this point. And if I was just going to kind of expound on it, if new Bitcoin treasury strategies come in and they're very small and market cap size relative to MicroStrategy, and they're implementing this same approach, shouldn't their stock trade at a much bigger MNAV and potentially collect a lot more market interest than MicroStrategy, which is a behemoth that has to do a whole lot more to continue to expand their treasury than call it a company that's doing this at a market cap of a billion or less.

26:25And the proof that I would kind of point to is when we look at MetaPlanet and we look at the size of MetaPlanet and how fast they're expanding their treasury, you look at their MNAV and it's massive. So if more companies come onto the market and start implementing this, and they're at a really small market cap, do they take attention away from microstrategy and somewhat collapse their multiple over their MNAV because the market loses? And this is obviously over the coming five or 10 years as this plays out. Do you think that that could potentially collapse down the MNAV of MicroStrategy because of all these competing companies.

27:02And Jim, am I explaining this kind of in what your, what your question is? I'll have to your answer first and then I'll go. Yeah. So I think that at a macro level, what's happening is that these companies are shorting the dollar, right? They're borrowing dollars, they're buying Bitcoin. In my view, it's a classic speculative attack. It's what Treasury Secretary Scott Besson was doing in England with Mr. Soros. and it's happening at a scale that is unprecedented and in vehicles that are unprecedented, right? That we're doing this in publicly traded companies, not private hedge funds. And so this is, I think it's public in a way that is unusual.

27:39Where does it stop being profitable? Where do we have a kind of convergence to a 1x MNAV? I think that it's with the success of Bitcoin, right? that once you can no longer borrow dollars and dollars are worthless and so are yen and other currencies so that at that point it will trade at one x multiple of the bitcoin right assuming that management is not taking on some other kind of business to generate more sats flow uh bitcoin revenues right so how long will that take when i first started learning about bitcoin i thought it would take less than a year i thought that the entire monetary system would be replaced by bitcoin by the end of 2014.

28:19I was wrong. It's now a decade later. And so, you know, I would just draw a line and say, it's going to take a few more decades. It might be by the year 2050 that will asymptotically approach 1x MNAV equilibrium point and that coin has reached full market saturation. But before that, I think that there's plenty of room for competitors and imitators. and that I would argue that Saylor needs all the help in the world to execute on this epic trade. I would also add that I do think strategy has some moats around it. So one is the liquidity. So I think liquidity network effects are very important in financial markets.