The Future of Bitcoin Treasuries | Jeff Walton

22:42Jeff Walton:And I do think that there's... Well, let's dive into this a little bit because if you're... I'm not recommending anybody sell Bitcoin to do any of this stuff, but you've seen large OGs do this, right? People that have had, you know, thousands of Bitcoin. I mean, Adam Back's funded pretty much every treasury company. You look at Adam Back, he's like, well, this is actually a really appealing opportunity if I could do this in a tax efficient way. If you could do this in a tax efficient way and start getting into this market. Yeah, you start to look at, you know, if you've got so many Bitcoin you don't know what to do with, yeah, you might want to have some exposure here if you're underweight in some of these deals.

23:26Yeah. Maybe that makes sense. But if you're like, if you've got, you know, two Bitcoin, probably doesn't make sense to sell your two Bitcoin and then buy. Like, it probably makes sense to just work more. Yeah, exactly. Like, buy additional exposure when you want it. And it's just, it's the like high volatility, the amplified part of your portfolio. That's probably more.

23:45Jeff Walton:Yeah. And there's nothing more risk-free than owning self-custody Bitcoin. Right. And Adam Back is a, like Adam Back is obviously an incredible person, but he's also like, he's always been a trader. Like he loves trading Bitcoin. That's true. He does. That's like part of his shtick. Do you think there's kind of a dynamic going on now where as Bitcoin price is dropping, the market is almost testing a lot of these treasury companies to be, because like microstrategy went through this in 2021 or 22, whenever it was. Well, it traded at a discount. It's like, let's see whose operational team are on it, who's going to survive this, who's going to position themselves really well.

24:19Jeff Walton:Do you think we're going through a bit of a stress test in that market? Yeah, a little bit. I mean, you try to compare it to 2022 and MicroStrategy had less assets than they did dead on the balance sheet at that time. Now you look at the company right now and they have 12 % leverage. Yeah. It's like completely, completely different. Now, some of the other smaller, some of the other smaller companies, yeah, they're starting to get tested a little bit. You've seen a couple of margin calls. You saw a company like Saquon's, they sold some Bitcoin to reduce the leverage from the convertible bond on the balance sheet.

24:53Yeah, that might have been a good idea. but realistically I think what we've seen kind of going on with Bitcoin probably has more to do with just the credit environment in the broader business macro ecosystem right we've got interest rates coming down in a couple days potentially in the U.S. and a lot of incentive for the economy to be roaring in 2026, right? You've got Donald Trump. You've got elections in November of 2026, midterms. He's going to want the economy hot. You want everybody fired up. You just want everybody like, yes, I want more of this, right? Give me more of this. So there's every incentive for the economy to be rip-roaring in 2026 and potentially replacing Jerome Powell and the Fed with somebody that wants easy money and lower interest rates and the business to be booming.

25:56So I think that the four-year cycle is probably broken and you've got a lot of people that have been selling because of, you know, four-year cycle, this is the top. But we really haven't experienced a euphoric bull run. No. And we haven't experienced euphoria. The market's incredibly healthy from a leverage perspective. You've got infrastructure that exists that's never existed before. You now have credit markets expanding for capital. We're running around here in the Middle East, and we're talking to oil-rich countries that have tons of wealth that are exploring and looking into this stuff. FOMO is intensifying, and I think we are getting very close to a lot of noise within this marketplace, especially if interest rates come down and money returns to risk on assets.

26:48Let's go. I mean, I agree with you, by the way.

26:51Jeff Walton:I think that you can almost, after being in Bitcoin for a while, you almost feel when things are getting ready to heat up again. Yeah. And I'm getting that feeling. Bubbling. I mean, it's not always right, full disclaimer, but I do totally see what you're saying. Is there a world where Bitcoin starts ripping and treasury companies don't perform better? Maybe. Yes, some of them may not. It's quite possible that they underperform. it's also quite possible that a lot of them overperform because they're leveraged Bitcoin, right? So they, like our company, for example, if Bitcoin runs up, if Bitcoin increases, that gives us more capacity to issue our perpetual preferred equity.

27:36And if we issue more perpetual preferred equity, we're buying more Bitcoin with it. That's an attractive model, right? If Bitcoin goes up 10%, We pay out our monthly dividend, and we are able to issue more perpetual preferred equity, buy more Bitcoin. It starts to become a very attractive business model. That looks appealing. We've got amplified Bitcoin, and we've got digital credit. We've got two products. And so do you already have a preferred outlet in the market? Yes, we do. Yeah, and SEDA. And what are the terms on that? Yeah, so SEDA is 12 % on par. So it pays$12 per share. Currently, it pays$12 per share.

28:14It's a variable rate. interest perpetual preferred very similar to stretch so we have the ability to adjust the interest rate up and down depending on how it's trading we want it to be within a target range between 95 and 105 so it's got a little bit of a wider band than strategy stretch product which from a mathematical standpoint stretches out the duration a little bit further but we want this to be a more stable version well it will likely be a little bit less stable than stretch. So a little bit more volatile than stretch, but still providing significantly high yield relative to everything else that's out in the market.

28:52So our company, how we manage this, one of the biggest questions is how do you pay the dividends, right? And we pay the dividends by managing the risk on our balance sheet. Okay. So that's something I do want to get into.

29:04Jeff Walton:Yeah, let's talk about it. But quickly, just quickly before we do that, you went for 12 % presumably just to be higher than strategy because otherwise you're not going to be able to compete with them. Well, we're much smaller. So we've got a different risk profile. The other thing that's unique about our product and our structure of the design, we do not have any convertible debt on our balance sheet. So this product is senior on our balance sheet. So we've got the perpetual preferred equity and that's it. So that's a unique capital structure compared to strategy. Now we can also take, we can be a little bit more flexible with the design of that product.

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32:35Jeff Walton:I think strategy is around 750 million. Yeah. In a scenario where your shares price is trading at less than 1x MNav, how do you pay that back? Because you can't really dilute shareholders at that point. So you either issue more preferreds or you sell Bitcoin. And what if the demand for the preferred isn't there. Yeah. There's a few different things. You can also enter the derivatives market for Bitcoin. You've got Bitcoin on your balance sheet. You can enter the derivatives market. What does that mean? What do you do? There's multiple things that you can do. You can sell covered calls. That's the clear one that most people can wrap their heads around.

33:15But there's also the futures trade. You can earn yield through that environment. There's also other yield producing ways that you can use your Bitcoin as collateral for, you know, just little tiny pieces of yield to help pay those dividends. And then you also have operating business. So operating business, any cash flow that comes in the door, you can use that to pay dividends as well. But also another thing that is unique to us, and it's cool seeing strategy follow behind us here, is we came out to market with 12 months of cash to pay our dividends. So we had a 12 month cash reserve. That's quite cool.

33:51So we actually led strategy in that. And then just this last week, or, you know, they come out with a$1.44 billion cash reserve to pay, you know, 18 months worth of dividends into the future to kind of mute this concern of how do you pay the dividends? So it's like, and you can also sell a common stock ATM. But again, if your common stock ATM is below one, you would tap these other pools of capital that you kind of think of it as a line of defense. It's like first line of defense. So like I've got the cash. Okay. I've got the cash reserve. And then I've got, meanwhile, if I have to dip into this cash reserve, because my stock's trading under one MNAB, I'm also going to go explore these other options to rebuild and fill back up that cash reserve.

34:34And if the stock recovers at that point in time, then I can start dipping back into that.

34:40Jeff Walton:Is there like, sorry, it would almost be a great problem to have, but is there a potential problem, especially as a younger treasury company, that the preferred is so popular and the common share price doesn't raise enough that you can tap the ATM, that your interest payments get so large that you kind of get forced to sell Bitcoin. We can control that. We control how much preferred we have outstanding. So we're constantly monitoring our leverage. Right now, we're about 30 % amplified. So our notional outstanding is about 30 % of our Bitcoin balance sheet. So our annual interest payment is$24 million.

35:21We have about$200 million outstanding at 12 % interest rate. So that's$24 million. If you look at the interest, if you were to break down the interest payable by day in the trading days throughout the year, our daily interest payable is about a hundred thousand dollars if you were to break it down daily uh lately our stock has been trading between 50 and 100 million dollars a day so if i just need to raise a hundred thousand dollars on our stocks trading it's not much right like it's uh like yeah i could go issue a hundred thousand dollars of stock a day and And that's, you know, that's an interesting way to look at it.

36:04Jeff Walton:Yeah. So that's, so we're constantly, yeah, you brought up the champagne problem, right? You've got so much interest in the perpetual preferred equity that, you know, you can't sell enough of it or the price gaps up, right? Right now it's trading at$91. And, you know, if it goes above our estimated trading range, we can issue more of it to bring it back down to a hundred. Yeah. Which we would absolutely do. But to the extent that we got too amplified, we would look at, you know, can we issue more equity to bolster our balance sheet to reduce the amplification? Or can we look at taking on a tail hedge?

36:46Can we purchase a tail hedge where we can pull off downside risk on the balance sheet? So, and so you've got a few things. You've got tools that you can use to manage that circumstance. Yeah.

37:00Jeff Walton:Because when I asked Fong that question, he said he wasn't shy about saying there is a scenario where they may have to sell Bitcoin. They don't want to. It might be there. It's possible. And I get he's got a fiduciary duty. He has to say that. Yeah. But do you think there's, obviously selling Bitcoin as a treasury company is a strange signal to the market, I think. But do you think that changes over time and it becomes a more commonplace thing? Yeah. It's capital. It's the most liquid capital on the planet. Imagine if you're over leveraged and you've got a real estate portfolio. You're screwed.

37:34Right? Like, oh, let me go liquidate the stadium real quick. It's not going to happen. Three years later, you might get rid of it. Yeah, but you could go sell. Like I said, our annual interest obligation is$24 million. Yeah. Bitcoin trades$60 billion a day. like if i can i if i needed to sell uh you know two million dollars of bitcoin i could do the bitcoin price isn't going to move a penny yeah and it would clear like that would clear the market so it's a it's a tool and when you start to run mathematics on the perpetual preferred equity if you take a very conservative view of the math, and let's just assume that you sold Bitcoin to pay the interest obligations, the model still works.

38:28So let me pose a question to you. I think this is fun. If I gave you a Bitcoin today, would you be willing to pay me$10 ,000 in fiat for the rest of your life. $10 ,000 a year in fiat for the rest of your life. Yes. That's effectively what we're doing with Perpetual Preferred. Because - I was trying to figure out

38:53Jeff Walton:what the interest rate on that is and if it's the best decision, but - Let's just say, just make it$12 ,000 a year. Yeah. Okay, so if I gave you$100 ,000 and you bought Bitcoin with it today and you had to pay me$12 ,000 a year for the rest of your life, would you - Would you take that risk? It's an interesting way to think about it, right? Like, you've got a fiat liability that you got to pay into perpetuity. And if we entered that transaction, you'd figure it out. We are entering this transaction. You'd figure it out. Yeah. Even if the price of Bitcoin went down, you would do more podcasts and make more money.

39:36And you figured out. you'd pay me cash maybe next year. And instead, maybe you sell a little of the Bitcoin, but because you're like, I didn't make enough cash, right? You would go through the process and you figure it out. So that's effectively what we're doing on a larger scale. Anytime we issue perpetual-perred equity, somebody is giving us cash and we're plowing it into Bitcoin and we are, our company is taking on the risk of how we pay on the dividends. So one big criticism that comes a lot that mainly in like traditional financial media is bitcoin's not a yield-bearing asset and which is not it's not but neither is real estate yeah that and that's that's a that's a big that's a big statement that a lot of people disagree with and you look at real estate by itself the house isn't yield bearing the house isn't yield bearing house doesn't create more little mini houses next to it.

40:28You have to take risk. You have to put work into it. Okay. Bitcoin is not yield bearing. You have to take risk. You got to put work into it. And that's the big distinction is that our company is risk-taking, right? Like we are risk-taking to buy more Bitcoin. We are taking on that risk of paying that dividend into perpetuity.

40:50Jeff Walton:So apart from the preferreds, which you're offering a similar product to Stretch, which I actually think is the most interesting of Stretch's products anyway. way. It's really appealing. And you're issuing a slightly higher interest rate, understandably, like otherwise you just won't compete with strategy. How else are you trying to differentiate yourself? Yeah. Well, I think one thing that's a big differentiator for us is that, you know, we are a bit smaller and we offer a different risk return metric. There's going to be hundreds. Let me put this into perspective. So So when we went out to market with Seda, we had just came off of a 30%.

41:30This is right after October 10th, the big liquidation event. And we went out to market right after that. Bad timing. Bad timing. Probably is some of the worst timing you probably could have had. And we came out with this product and we're going to pay 12 % interest. And still at this point, strategy hasn't raised any cash. And we went to the market and we're saying, hey, we're going to have a cash reserve. we are our business is an asset management company everybody that works at the company are finance people we're going to operate in the financial markets we're going to explore yield opportunities we're going to find ways to um generate bitcoin yield that are are maybe a little bit more niche than what strategy may do for example like the m &a yeah which which was part of our original value proposition and we went to the market and initially we were going to market to raise$125 million.

42:19We upsized the deal up to$200 million because there was significant demand. And at the$200 million at a price of$80, we actually had nearly$500 million of demand. So we could have issued even more than that. So there was significant demand from that perspective. And we think this marketplace is going to expand drastically, especially as we start making inroads within the rating agencies, as the rating agency starts to wrap their heads around Bitcoin and digital credit. Then we can start having real conversations with some of my old colleagues in the insurance and reinsurance world about adding these instruments to their balance sheet to protect against debasement and long-tail liabilities that they're not doing a great job managing right now.

43:06Jeff Walton:Yeah. We've not had enough time here, Jeff. We've only got four minutes. We'll do a fourth one down the road. But I do have a question for you before we go. So, strategy obviously have their Bitcoin projections, where they think Bitcoin will go. They have a bull bear case. How do you think about Bitcoin right now? Because I know you are a Bitcoiner, but you've been very heavily in the treasury world for the last year and a bit. What do you project out for Bitcoin? Short-term or short-term, long-term? Whatever you're thinking about. Yeah, we view that over the next... We're in a digital gold rush.

43:41Over the next four to eight years, We think institutional adoption increases drastically. We think sovereign adoption increases drastically. We think digital credit starts to permeate throughout the rest of the market. And because of those dynamics, you've got even the Bitcoin ETF being the most successful ETF in history, those dynamics, that success is going to breed more success. And it already has. So because of those dynamics, the macro environment, we see probably the next four to eight years between a 30 to 50 % compound annual growth rate for Bitcoin. And we think that will start to taper off as economies of scale start to come into play.

44:25Once Bitcoin's at a$10 trillion asset, it's probably going to be significantly less volatile. And the compound annual growth rate will be reducing over time into the future. But you think we get 30 % to 50 % over the next decade?

44:38Jeff Walton:Yeah. I'll take it. I'll take that. Right. I mean, you look at the last seven years, and it's been like 70%, 70 % compound annual growth rate. Even what in 2022 is at 16 ,000, and we're at 90 ,000 right now. What is that? That's a lot. A lot. Annualize that. That's 70%, 80 % probably. and I don't think it takes a lot of capital to move it much higher. So one of the interesting things in the treasury world is that when strategy came out, started this whole genre, it took quite a long time for the companies to do the same thing, which always surprised me. When Saylor first came out and started doing his thing, I thought there was going to be essentially a gold rush of corporations trying to earn Bitcoin and it wasn't really until 12 months ago, maybe 18 months ago, that really kicked off.

45:32Jeff Walton:If you were to look out another four years, how do you think these business models will have evolved and what kind of market will they be fulfilling there? Yeah. Yeah, the market will evolve significantly. I think there will be another doubling of the number of companies that hold Bitcoin on the balance sheet and then it'll double again. I think that will happen. There are millions of companies out in the world. I think small, medium enterprises will start to adopt bitcoin as well uh out of necessity and i think i think digital credit is a multi-trillion dollar idea and that that will probably take off like a wildfire and it will likely get to a point where some of these larger capital institutions will have no other option but to own it you compare it to some of the other debt in the market and And these products are so much better on a risk-return basis that banks and pensions and insurance companies will not be able to not hold these things, especially if they get rated appropriately.

46:41And so, yeah, I think we've got a lot of excitement on the horizon. And the yield-generating opportunities are going to expand as well. If you think about if the price of Bitcoin goes from, you know, 100 ,000 to 500 ,000, the number of people that are interested in taking out a Bitcoin back loan is going to 5x. Yeah. Yeah, that's not just going to double. That's not going to double. It's going to 5x, right? And if that happens, that provides more opportunity for these other type of yield environments or credit environments where the infrastructure can support itself as long as the risk is managed appropriately, which I think is incredibly important.

47:23And we now have institutional actors that are operating in the traditional financial markets with risk backgrounds that view their responsibility as very large, right? So, Saylor and the strategy team and our team at Strive, we have a really big responsibility here. And we are laser-like focused on making sure that we manage our liabilities into perpetuity. are, you know, every part of the company is aligned for that. And we want to be the second largest issuer of digital credit on the planet.

47:54Jeff Walton:Awesome. I'm sorry we had to speed run this one so quickly. We've been really tight on time, but I love talking to you, Jeff. We definitely should do it again. Appreciate it. Thanks for the time.

48:17Thank you.