BTC248: Bitcoin’s Institutional Wave w/ Willy Woo, Max Kei, Efrat Fenigson, and Preston Pysh at Baltic Honeybadger (Bitcoin Podcast)

0:00You're listening to TIP.

0:30And everybody just brought some really unique insights to the conversation. And I wanted to share the panel with the podcast. So I reached out to Max and Anna, who run Debify and HODLHODL, which are the ones responsible for putting this whole conference together. And they were kind enough to let me re-syndicate this onto the podcast. And with that, I hope you guys enjoy the conversation. It was a fun one.

1:00Investors Podcast Network. Now for your host, Preston Pysh.

1:13Being your moderator today is the star and the host of the You're the Voice podcast, Efrat Fennexton. I don't know if you guys have listened to her podcast. If you haven't, you 100 % should. Efrat, please come up onto the stage. Thank you so much. I have been a guest. Yes, that's true. Max Kai, you need no introduction. He's back. Max is back here. Thank you. Preston, you're back up on the stage to talk about this one as well. And Willie Wu is just making himself up here. So Willie, thank you. Willie on the way from New Zealand. Thank you very much, Willie, for coming across. And the title of this panel is Bitcoin's Institutional Phase, Trojan Horse or Tipping Point?

1:51And just to help get this one spiced up a little bit, did you guys see American Hoddle's meme, who's Trojan horsing who? No? That was very interesting. And his message behind that was, are we being Trojan horsed by the institutional adoption? So anyway, off to the panel. Thank you very much, guys. Give me a big round of applause. Okay. Thank you for being with us after lunch. I'm sure you would have preferred being in the sun, but we are going to be just as shiny. In the past 12 to 18 months, Bitcoin has entered a clear institutional phase. ETFs, treasury companies mainstream stacking but bitcoin was not originally built for wall street bitcoin evolution is being shaped at the moment not just by ideology but by capital flows as someone who truly appreciates self-sovereignty and freedom me i'm opening myself up to this inevitable evolution of bitcoin in our fiat reality and i'm learning much about it so i'm keen to have this discussion with these three masterminds.

2:52The overarching question here is, are we seeing a trend horse or a real tipping point? And let's start with what defines this phase that we're in? How would you personally define the institutional phase of Bitcoin? What triggered it? Who wants to go first? So you can think of Bitcoin as a little Pac-Man and we'll be eating these little dots, gobble, gobble, gobble. Now the big cheese, you dig into that, right? So I think the tipping point, and I think it really was a tipping point, was last year when the BlackRock ETF came on board. And the high priest, Larry Fink, said, we're doing this ETF and now you can talk about buying Bitcoin for the rest of the traditional world.

3:35That encapsulates$900 trillion of wealth assets. Bitcoin at this point is$1 trillion. And we always hear talk about liberty, separation of money and state. That means the government can't overspend and then tax you run through dilution, effectively stealing from the poorest. That doesn't end until that Pac-Man gets big enough to displace the US dollar, flips gold and becomes a monetary standard. And that's not going to happen until you get the large gatekeepers of capital opening up to Bitcoin and pouring that money in. And so it's a necessary step. With it comes risks. We can talk about the fragility of centralization.

4:16If big pools of Bitcoin get stored in one location, that might get nationalized and so forth. But that's a different discussion. This is always going to happen if we're ever going to effectively change the way the world uses or what we use as money. In short, I would just say that it's in Bitcoin's culture to be very skeptical at all times, which is a very healthy thing. And one of the main reasons why it's done so well to date. When I think about just an image of where we were for the last, since its inception until right now, I would say, imagine two galaxies. If you've ever seen these memes of two galaxies, they're coming towards each other and then they're hitting and that's just particles and debris and planets and whatever just flying all over the place.

5:02I would say that we are right at that point where these two galaxies are starting to touch. You have this legacy system that has been pretty much gated off and the flow of capital from that traditional system has been somewhat limited, pretty limited as it flows into Bitcoin. And Bitcoin is really that counterforce. I would argue that all of the crypto tokens that are stable coins are actually a manifestation of the legacy system and not actually Bitcoin. And that those were the early tentacles of the connection between the two, but now you're really starting to make impact. And I would say the thing that's causing that impact to really take place is the massive shift in policy coming out of the United States, which is then having repercussions all around the world that they're also saying, okay, well, if they're doing it and the king of the dollar that's dominated the planet for the last however many decades, there must be something here.

5:57And so that's causing the policy shift. With respect to, are they Trojan horsing us? I'll give you a real simple example. The last administration, when they approved the ETFs, they purposely did not allow in-kind redemptions. I would argue that that act of Gary Gensler and the SEC at that moment in time was very Trojan horse-like in its action. As soon as the new administration came in, all of a sudden, now you have their pro-Bitcoin, their pro-everything, everything. But what I find interesting is I suspect, but I don't know for sure, that BlackRock and some of the larger banks that have the ETFs were actually the ones pushing for the in-kind redemption.

6:39And I find that to be extremely healthy and not a Trojan horse. And for people that don't know what the in-kind redemption is, if you have$5 million worth of IBIT or some number like that, is that the right number, Willie? Do you know? It's like a$5 million threshold and higher. If you have that many shares of IBIT, you can actually go to IBIT and you say, here's the shares, give me the Bitcoin, and no exchange. So that's a big... And the fact that that was purposely left out of the past administration just shows you they were really wanting it to be a cash settled market so that it could be compromised just like the gold market's been compromised because it's cash settled and not physically settled.

7:17So things like that are refreshing. It doesn't mean that we're out of the gate or that you can let your guard down, but that would be my argument for why we're not just getting scammed? I would say, I would commend on the current cycle. In developed markets, I think it's institutional bull market. We don't see many retail in developed markets, obviously, but in developing markets, it's actually a retail bull market. So I think that, yeah, the beginning was BlackRock ETF. And before that, it was Michael Saylor. So if we look at the longer cycle than 2020. I think Michael bought first something, something Bitcoin.

7:57I don't remember the amount. It was 500 million in 2020. Yeah. Yeah. And that kickstarted, but it took four years for other companies to understand the purpose and to like Bitcoin treasury thing. And it's only after four years now, we're seeing five years, actually, we see that every day there's like new treasury company coming in, which is kind of unhealthy at this point but i mean it's part of the game it was a year ago when i interviewed sailor and i asked him are any other ceos approaching you to try and copy your playbook and he was like maybe one here or there it wasn't happening in june last year and in one year look where we are at it's crazy the acceleration of this phenomenon okay so the institutionals that are now stacking are they furthering Bitcoin's mission or are they capturing it?

8:48I know you said, Preston, that it's not so much scamming us right now, but where do you think it's leading us? Well, on the treasury thing, I think the reason that it's taken off so much just in the past six months is because I think that there was a massive realization by Michael and MicroStrategy that using preferred stock is very different than using convertible debt. And so what's so different about that is you don't have to pay back the face value if it's not convertible. He just did a new issuance the other day and he's raising$4.2 billion. He immediately sweeps that into Bitcoin that benefits the common shareholder, but he never has to pay back the face value of the 4.2 billion like you do if it was a bond.

9:30And even if it's convertible, if it was a convertible bond, that face value is dilutive to the common shareholders after five years. So even if the convertible debt was running, he still gets that massive dilution factor. So I think that they kind of cracked into something that was really big, which is when you use preferred stock, you get very different economics that you're still servicing the fixed income space in the way that they want, but you never have to pay back the face value or the preferred stock. It's called book value. And I think that was a big unlock. So when the space saw that, you now have this big influx of Bitcoin treasury companies that are trying to do the same thing.

10:08Most of them don't even have access to the markets yet, which is an issue for all of them. But to Max's point that there's concern there, and I agree, I share that concern when you have a Solana treasury company, or you have an Ethereum treasury company, and you got... I mean, it's totally absurd what is coming to market, and it's going to be a lot of froth, and there's going to be a lot of dead bodies that kind of come out of it. With all that said, I do think that where it is healthy is in incentivizing more institutional custodians. Because right now, when you look at the ETFs, you could strongly make the argument that it is very captured with Coinbase being the custodian for almost all of these.

10:51And the whole reason that unfolded is the first one got through with the SEC and everybody was like, oh, well, let me look at their paper. Oh, they use Coinbase. Just use Coinbase. Use Coinbase and we'll get approved. So everybody got Coinbase, but the Bitcoin treasury companies, like you had Adam back this morning on stage, he's getting ready to do one with a lot of Bitcoin in it. And if you think Adam's going to go to Coinbase, I have no idea where Adam's going, but if you think he's going to Coinbase, I would be blown away that he went to Coinbase for his institutional custody. So what you could do is you can make the argument that the Bitcoin treasury companies are actually going to help decentralize institutional custody, which is something that I think is really healthy.

11:32Because if you think that these publicly traded companies are going to self-custody, you don't understand how the public companies work and how their auditing mechanisms work and how their reporting mechanisms work. It will be institutional custody. Whether people like these changes, I would help you go back to the visualization of the two galaxies coming together and they're colliding. And now there's just a different environment. We're operating in a different, as it grows up, things are going to change and people might be comfortable with that. Other people are going to be looking at the old way that things were done and saying it needs to still be done like that.

12:07And I would argue things are changing. Willie, your take on that? I don't think centralization around Coinbase and that being hacked is the danger. I think it's really the nationalization path which happened with gold and it's happened before and if the us dollar is structurally getting weak and china's coming in i think it's a fair point that the us might do an offer to all the treasury companies incentivize that it could be then put into a digital fort knox create a new you know gold standard you could then rug it like happened in 1971 it's all centralized around this digital bitcoin the whole history repeats again and back to fear it again.

12:46And then now we're in this position where we tried this Bitcoin thing, but that didn't work. So it makes the second temp harder. I think that is the centralization risk when it comes to a very big and powerful nation state. Let's take a quick break and hear from today's sponsors. One part of being an investor that I don't think gets enough attention is how hard it can be to continue to improve as an investment researcher. And for myself, I often find that when I finish a great conversation with some industry expert or fund manager, my head is full of ideas. But by the time I sit down to write it all up, half of them are already gone.

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15:58If your revenue is at least in the seven figures, go to netsuite.ai slash tip. Built for every industry, ready for every boardroom, netsuite.ai slash tip. All right, back to the show. So do you think it's more probable that the US may acquire an existing company with a lot of Bitcoin and treasury rather than holding their own treasury? Yeah, I think that if you were like, say you wanted to get, say, 4 % of the 4 million of the Bitcoins, are you going to buy it on the open market and drive the price to infinity? and Michael Saylor becomes probably the richest person alive and therefore, well, let's say most powerful person alive because it's common stock held.

16:43Or you're just going to do a share offer and effectively nationalize in a very free market fee away. You've got this big bag of X million by then, Bitcoin, you haven't run up the price. And then everyone who's just sold their MicroStrategy stock, let's say, now has to buy back their Bitcoins and then it runs up. I think that would be the smarter way to do it. But just thinking about the dynamics of how would you get a big bag of Bitcoin and then create dollars trading off it or backed by it, and then how do you rug that into fiat? I think that's a path that's been done before. If you want to try to predict the future, you start with the incentives and you try to deeply understand how the incentives are going to interact.

17:22So when I look at every developed nation state in the world right now, they've got a massive addiction, and that addiction is to spend way more than they actually bring in or the value that they add. And that trend is only accelerating. It is only becoming more popular to promise a bunch of money. Hey, I know you went to college and you made these decisions and you were going to pay back this debt, but don't worry about it. We're going to just print some money. We're going to pay off that debt for you, even though people that went to school five years ago paid for their debts because they want the political vote.

18:00So that trend against Bitcoin is a massive issue because where this is going to go is they're going to be so in debt up to their eyeballs. And more importantly, their collective cognitive decision-making is to just get more votes by wishing away more printing. And you're up against this thing that is immutable. And so once the politicians eventually get to the point where they realize, oh no, it's literally an oh shit moment that's on the horizon. And that moment is going to be, well, who can we rob? Where can we get the Bitcoin to rob? And this is thinking through their incentives. How does a politician think?

18:44How can I get the most amount of Bitcoin with impacting the least amount of people possible. And what I would argue is number one on that list is a private entity that has a lot of Bitcoin. That's like number one on the list. Okay. Because you can scrape that Bitcoin and you might have impact, you've made 20 people upset. But when you're doing it with a public company, now you have to ask yourself, is that public company in the S &P 500? And how many people in the S &P 500 own it? And I'm not saying that they won't rug it. It might be the first place they go. You never know. But I'm thinking through the incentives of the politician.

19:22The politicians want, they're going to rug somebody. I can tell you that right now. They're going to take the Bitcoin because it's going to have an institutional custodian that does not want to go to jail. So that's their incentives. I don't want to go to jail. So yes, I'll give you the Bitcoin. Okay. And then after they give you the Bitcoin, you know what they're going to do? They're going to jam dollar bills down your throat and Bitcoin is going to be moving like that. and the Bitcoin's gone, but you got the dollar bills and you got them here, and now they're that compared to Bitcoin. So there's a lot of people that are going to have a really...

19:51And so when we talk about treasury companies, can... And this goes back to what I said this morning. Can they outperform Bitcoin? Yes. Do they come with more risk? Yes. Are you accounting for the nationalization of a treasury company in your risk assessment of your position size of Bitcoin versus owning a treasury company. I would argue most aren't. And that's why from a sizing standpoint, I think the sizing should be pretty minimal, relatively speaking, if you want to try to outperform Bitcoin, at least today, because all the incentives are pointing to what Willie just described. And I would tell you, I think that's a very probable event.

20:31It's just how it actually unfolds is the question. And we might be five years, we might be 10 years, I don't know when that happens, but based on the incentives that I'm looking at and how they're going to interact, it leads there pretty quickly. No words of wisdom to add to that. Nothing to add. I get you. Saylor's model is debt-fueled Bitcoin stacking. Is this innovation or risk to Bitcoin's fundamentals? I don't see it any different than borrowing and lending for the individual. Only it's happening at an institutional level. So if he's over collateralizing Bitcoin by 5X, and he can peg it between 4X and 5X.

21:12If you go and you want to take out a loan, and you put Bitcoin on deposit, the LTV on it, and you're depositing$200 worth of Bitcoin to borrow 100, that's over collateralization of two. And he's over collateralizing at a five, but he's doing it at an institutional size. The sizing is just different. And for a lot of people that don't understand the financial terminology, they just can't wrap their head around what he's doing. But when we say these ratios, he's over collateralized five to one, what else I think is really interesting is those dividend payments are denominated in fiat. If you run the power law, let's just say power law is valid.

21:53We had Mr. Mashinskis up here earlier today talking to you about the power law and the R-squared values and all that. If we take that model and we take the dividends on preferred stock and you model it out for the next 10 years, those dividends, if it's issued at 100 and he's paying a$10 dividend annually, do you know what that$10 looks like 10 years later if you swept all the book value in the Bitcoin? It's almost zero in relative value. He's still paying the 10 bucks per share, but you know what the value is in Bitcoin terms, it's almost zero. After the first year, it's like six bucks. It's not$10, it's$6.

22:32So there's something to be said for a person who understands the idea of stacking your assets in Bitcoin and denominating your liabilities in fiat. It's a very powerful concept if you really understand it. And I would argue it's maybe even, and this is very controversial, but I'll say it anyway. I would argue that the backing is better than five to one simply because he's of this assets or Bitcoin liabilities are fiat. Well, strategy is probably the most robust of these companies. And you see in this cycle, everyone's following the model, but it's not the exact model. We have to be careful of the risks that are being taken.

23:17Strategy, originally when they were doing the convertible debt was I think was a five-year-old debt and so you know I think MicroStrategy might have been close to liquidation in the last bear market had the debt not been pushed out five years so I see a lot of these companies now have quite short dated debt using the older model of convertibles where strategy went to eight to twelve years and now they're doing the preferred stock you look at Metaplanet and they're doing this sort of hedge fund play where there's a hedge fund, they're doing a back and forth, back and forth to simulate a at the market offering to effectively simulate the ATMs that Mark's strategy are doing.

23:55But they're taking big tranches of debt, 300 million at a time, and then selling that into the market to replenish, to then pay off the debt. If the market turns on that at the wrong time and they cannot do this market operation, you're going to get liquidated. And it's not four-year debt. It's not eight-year debt. it's immediate debt. And so you really need to look at the copycats and look at the dangers in the debt structuring and liquidation risk. And in my opinion, Metaplanet is that they are quite expert at timing the market. Maybe that's the game that they played. They absolutely bought the bottom wick of the last major dip and unloaded almost 300 million in that one buy.

24:38So maybe they're proving they can time the market, but that's what you're buying. You're buying a treasury that has opted to time the mark and they think they can unwind the debt at the top from the looks of how they've structured things. And, you know, there's a lot of these treasury companies, a lot of paperwork to work through. You want to know what you're buying. There's risks in it. My strategy is the blue chip. Very, very robust. Still risks, obviously, with everything. My concern is the copycats that aren't doing it at the same level or have, you know, how many of these guys can offer preferred stock?

25:09What are their options? a lot of the latest vogue is to really start small and run up the leverage get the yield right up and grow fast we're tail end of a bull market right now so i think a lot of people are going to get hurt and we'll have massive m nav compression we're going to have liquidations of some of the weakest treasury companies and we'll see who's you know who's going to survive and what's going to break over the next bear market and i'm wondering about what the commentary from tradfire will be is I'll look at those Bitcoin or crypto people, look what they did there and look what broke and another cycle of jokes on us.

25:47Yeah, there'll be survival of the fittest and a lot of FUD around that, right? So in terms of adoption, Willie, you've estimated 1 billion Bitcoin users by 2030. Do you see treasury companies and corporate adoption accelerate this pace? I'm not sure, to be honest. I'm not even sure if that projection will... It's very hard to count. like what do you call an adopter like you know today it's hard to say to your point it's like if strategy gets included into the s &p 500 exactly how many people own spy index exactly if de facto they have bitcoin through you call it surrogate right yeah so it's it's very blurry right now we own a lot of assets everyone pretty much has exposed just the s &p 500 even if it's in a pension funding you're saving retirement you don't know what you're owning but it's going to be the s &p 500 in there so that means bitcoin's in there so i think these metrics have become a little bit more clouded i was tracking self-custody and exchange custody so but that's it's growing at a you know a decent clip almost five percent of the world population has exposure to this asset excluding the sort of s &p 500 pattern so yeah it's and given that it's still quite early i think it's still quite early.