Strategy Was Bitcoin's Marginal Buyer. What If It Becomes the Seller?

Transcript

Hey everyone, welcome to Bits and Bips where we explore how crypto and macro collide one basis point or I guess over this weekend one point at a time. We're here to discuss the latest stories in the worlds of crypto and macro, but first before we begin a quick commercial break. >> Heads up everyone, we've now fully transitioned Bits [music] and Bips to its new dedicated channels. So, if you're not yet subscribed to the new Bits and Bips channels on X, YouTube, [music] Spotify, Apple Podcasts, or wherever you get your podcasts, go there and subscribe now.

>> [music] >> For the next few weeks we'll play segments of the full interviews on Unchained as a reminder, but for now you'll only hear those short segments of Bits and Bips on Unchained. No more full episodes. You can get links to all of the dedicated channels with the full episodes at unchainedcrypto.com/bitsandbips, [music] spelled bips. Thanks again. Fidelity has been investing in blockchain since 2014. They're not wondering if digital assets will shape the future, they're hiring the talent to help ensure they do. Explore opportunities today at crypto.fidelitycareers.com.

Fidelity is an equal opportunity employer. This episode is brought to you by Cape, America's privacy-first mobile carrier. Same premium service you'd expect from any other carrier, but designed so your number, your location, and your data actually stay yours. Get 33% off 6 months at cape.co/unchained. All right everyone, as always I'm your host Austin Campbell, high scholar of Zero Knowledge Group. I'm here with my two co-hosts, Raoul Pal Walia, meister of wealth, the leader of Lumida, and Chris Perkins, the golden hand of 250 Digital. So, first a quick programming note.

We moved Bits and Bips to its new channel. So, the full interviews and this show are on the dedicated channels. If you haven't already, subscribe to the channels on X, on YouTube, on Spotify, on Apple Podcasts, or wherever you get your podcasts. And with that said, let's talk about the market action this weekend, guys. So, we're starting with this segment titled is AI eating crypto's bid as a place to start because a lot has gone down. Crypto just logged its worst week since the FTX collapse. Bitcoin was down 17%.

ETH was down 22%. We lost about a third of a trillion of total market cap. The SpaceX IPO is coming, allegedly a 75 billion raise at a 1.77 trillion valuation. But, is that what's draining crypto or is this a myth? So, let's start with the people talking liquidity drain. So, Lashmi said, "Where do you think the liquidity for a 75 billion raise is going to come from? Expect a bloodbath. People selling shares, selling crypto, liquidating everything to get a piece of the biggest IPO in history. And I will remind everybody at that point that SpaceX has been marketing aggressively to retail as

well. This is not solely an institutional one." Another comment, "75 billion in SpaceX shares need to be absorbed on June 12th to raise cash. You sell what you already own." "Retail sees Elon hype. I see the force selling that pays for it." from 0x Pepe SSO. Now, there are some others who pushed back. Uh friend of the show, Eric Balchunas, "Shocker, the S&P will not fast-track SpaceX, so it will take at least a year. Every other big boy index is 5 to 15 days, but this is an index mechanics play and will create significant return dispersion between passive indices, choose wisely.

Um Kathy Wood, SpaceX is not the only one. This is a broader IPO wave. Anthropic, Databricks, we know there are rumors of OpenAI. And the median US company is now 12 years old at IPO versus five. So the most value is created before a company lists. But Rom, I want to start with you. You have a lot of experience investing in public markets. What are you making of this price action in front of the SpaceX IPO? Is that the driver or is something else going on?

>> Well, starting off with Bitcoin, the primary issue there is that the mark the marginal bid was MicroStrategy. And we talked about this about one or two months ago. It's like when those preferred security products trade below par value, then the capital flywheel that issues new securities to then buy Bitcoin stops. So STROF and STRC have a significant discount to NAV. That is the issue. Need a marginal buyer. Every cycle, 2017, 2021, 2024, you can identify a major new bar marginal buyer that enters the market. 2017 was retail. 2021 was MicroStrategy. The 2024-2026 was the

ETFs. Uh they were able to buy after uh cleaning up the SECs. So that's the main issue. Interestingly enough though, there's been so much pain and liquidation in Bitcoin, a tradeable bounce seems appropriate here. The challenge though is your other point is that these are attention assets. They compete with other attention assets. And people have to fund a purchase of Bitcoin with the sale of similar asset. So I would expect that you get some traders that step in. There's a bounce of some type here. On the new IPO issuance, you know, it's as a percentage of market cap, it's less than 2021. So, here's some numbers for you. In 2021, the IPO SPAC

boom was about $150 billion of new issuance that had to be absorbed by the market. That was on total US equity market cap $48 trillion. Call it $50 trillion. Fast forward to where we are now, US equity markets around nearly $70 trillion in value. And new issuance is about double from 2021. So, as a share of issue of new issuance divided by market cap, it's about 30 basis points or half of what it was in 2021. So, I think it's like a modest drag, but I don't think it's a significant uh drag. You know, there are no accelerated unlocks that could be bad. I wouldn't be surprised if people sell Tesla to go buy SpaceX. Like the the Elon crowd will sell their other Elon

holding to go buy SpaceX. Uh I'm not excited about the outlook of names like that. If you look at Cerberus IPO as a leading indicator, what came out not too long ago, uh it popped quite a bit, which is an early sign of euphoria and late-stage market dynamics, which can continue for a while, by the way. That's an early sign. So, these these massive pops. But then it sold off again. And we saw this with the uh Figma IPO uh in the summer of last year, and that wasn't a great sign for the IPO and the dot cycle.

So, I wouldn't be a chaser of it. There There are really good values though in equity markets. And now I'm seeing that earnings expectations may be revised yet again higher from 21%, possibly to 24%. This morning I ran a screen. I said, "Hey, show me where the earnings growth is coming from." And there are quite a few companies delivering earnings growth. There is a baton being handed off though from the Mac 7 complex ex-Nvidia to these other names and categories. So, I'd expect that we're we're set up for a rotation.

Uh and some of the weakness you saw last Friday is a part of that. You're seeing some weakness in these high momentum semi, you know, bottle bottleneck names like CN. They're They're trading low, so I would expect that you see some of that. Broadcom was the uh uh the first sign of weakness after they reported. They had strong numbers, but it sold off anyway. Uh so, a lot of bag holders there. They're probably going to sell when it rallies. Uh so, a rotation from semis to other categories including software um I think is is likely in order including financials which have been lagging, but has a great story. Like look at Goldman Sachs. These guys have major blockbuster IPOs coming.

They get investment banking fees. They got markets volatility. Names like that will do well. Disclosure, we own that but those are the kinds of things uh I'd I'd expect, but do think that headline is this is a bull market. Tremendous amount of fear we saw last Friday. The VIX spiked 39% day over day. And my team looked at historical events. You have things like Brexit. It was the bottom of Brexit. It was a shock left tail event to the market they didn't see coming. The day after that, markets started rallying. This week could be a little choppy, but looking out 3 months and 6 months, I expect you're at all-time highs.

>> Chris, what do you think? >> Well, first off, I wanted to thank the BMNR team for giving me this cubicle here at the ETH conference. Dialing in from the Javits Center in New York City. Uh big game tonight, by the way, fellas. Um Look, for us for those of us who've been in crypto, uh this type of volatility is something I don't want to say you get immune to it cuz it it never do, uh but it's something that happens. Um it rips down and it rips up. Uh volatility is the nature of the space. Largely retail driven flows. Uh you know, this is a market still defined by retail.

Yeah, we have the AI narrative going on. We also have macro, right? And when it comes to macro, there's a lot of concerns strong with strong jobs last week. The feeling that maybe Worsche is in a pickle. He's coming into lower rates. His boss wants him to lower rates. Is he going to lower rates? You got inflation that's starting that's still kicking. Though gasoline is still in check. It's I think the national gas price is around four four and change. Which you know, experts say it should be multiples by now. So, you have these macro factors that are, you know, coupled with the AI shiny new toy that leads to this retail concern.

But I got news for you. Crypto's not going anywhere. You can leave it for dead. It keeps coming back. It's resilient. And and like, you know, again, we're part of a cycle. I'm even hearing people talk about the four-year cycle coming back and saying, well, yep, this is kind of what we think's going to happen at this point in time. Uh and you know, it it should be constructive from here. So, watch macro. That could change pretty quick, too. You know, if you start seeing Iran come off a little bit. It seems like things are heating up at the same time. I think crypto's got crypto especially has gotten him wrong since day one.

Oh, he's going to get rid of quantitative easing. We're in big trouble. He's going to God knows what's going to happen now. I think they're looking through um like a legacy paradigm of what would what would Jerome do? >> So, a couple of thoughts on the market and to raise rates. in sort of quality later stages of bull markets like this. And if you're saying we're still in a bull market, it is relatively typical to have high volatility like large single day moves. Right? Seeing what's been happening with Korea yo-yoing back and forth like it was way up, comes back down, way up, comes back down. These are pretty typical as people start rotating between different categories. So, if you know your market regimes and you kind of

understand volatility, we've seen this pattern before in US markets previously, in other markets previously. Two, I'm very interested in the IPO performance coming forward for an IPO paradigm. A lot of the large-cap IPOs in particular have performed pretty poorly in year one. In particular, Coinbase did it like, you know, as one of the big crypto IPOs, Circle did it.

Where you have this pop as people are buying it originally and year from the highs in many of these stocks. They kind of lay on the ground for a while and then they start moving. So, you have this paradigm where a lot of the sound and fury is front-loaded. People buy in. Energy for that fades away. Prices go down and then things pick back up. But, when it's the biggest stocks leading the market, what I'm watching there is if these resist that signal, to me it's a sign that the party is still on. If these all fall forward especially badly, given how large they are, then I start to get worried about the market paradigm shifting. Um on the earnings growth Sorry, go ahead,

Ron. >> Go ahead. Go ahead. >> Go ahead, please. All right. >> No, I I think you're right, Alex. South Korea is a great callout because one is, you know, these news articles we've seen over the last 2 weeks of retail traders liquidating their pensions and buying memory stocks, which is a classic kind of intermediate top signaling. This is over positioning and crowded. On the other hand though, like South Korea is still cheap. The earnings growth is still there. The valuation is still there. The demand for memory is still high, even despite the next Nvidia framework having less HBM. It's still like we're still sold out for the next 5 years. So, that it's the tension is between people chasing the obvious, everyone knowing that's the obvious move,

and yet the fundamentals and earnings and valuation are still good. We saw this in 2014, by the way. Like memory stocks including Micron and Nvidia then it pulled back, corrected, didn't go anywhere for 6 months, reset, and then names like including Micron, Nvidia, and ASML were off to the races again. So, something like that would be completely natural and healthy now. Just a consolidation for two quarters and then we're off. >> So, another point about that one, too, is we're looking at things like memory and this ties into the inflation point for the Fed that also feeds into earnings growth is you've got to ask, are memory prices up and going to stay elevated because it's so hard to build new capacity or repurpose it? Or are

memory prices up, the market's going to take that as a signal, other people substitute in, and you get a bullwhip effect moving through sort of your supply chain where prices went up, everybody starts producing, they overstock inventories, and then prices crash back down. I think that debate and the whole, hey, if everything's seeing record earnings growth, is this just inflation question is going to paralyze the Fed. And what I mean by that is if you looked at previous votes, and if you looked at who's come in, I don't think they have a consensus to either raise or cut. And so, the easiest thing to do is nothing. And Chris, to your like earlier point, they may have misread war shot on that front, but I feel like the Fed probably ends up

sitting on its hands if it can't find an obvious consensus because the only thing worse than doing nothing is hiking and then cutting and hiking and cutting or cutting and hiking or cutting and right? Like nothing is actually a better thing. Of we're going to wait until we see a decisive signal. So, I don't think the Fed's going to save everybody here. So, let's come all the way back around to the crypto market. Something I am observing. With the overhang from strategy, because Rob, I agree they were the marginal buyer and we'll talk more about them next. And the market dynamics, you've got Bitcoin in one of the largest drawdowns it's had for a while, below its 200-day moving average, I believe.

And quite frankly, without many people being bullish Bitcoin on the timeline right now. So, I'm going to remind everybody the time to buy assets is when everybody hates them. I will say in a weird way, I'm more optimistic about lifting Bitcoin right now than I have been really since prior to Trump being elected. I'm curious if you guys agree there. >> Go ahead, Rob. Well, I I I think there's a tradeable bounce here. I think that's the case. Uh you got to reassess and re-underwrite it though.

Uh it's been a disappointing performance and it's a tension asset competing with the most transformational technology since Bitcoin. It's called AI, right? So [laughter] that's the challenge. You're going up with this technology called artificial intelligence, machines that think. This is wild stuff. And we're still in the early days of adoption. So, you got to attract capital to that and buybacks are there. You got a trillion dollars in buybacks. Trillion's not a small number.

So, Bitcoin may not be inflationary, but earnings fueled buybacks, those are deflationary. In terms of it. >> Yeah. The other thing that's been weighing on crypto that we probably should be talking about is this idiosyncratic challenge around security. So, we saw it with Zcash. Um and you know, we've heard about it with quantum in Bitcoin. And the fact of the matter is is that right now as AI tools, Rob, to your point, are coming online, they're discovering vulnerabilities.

Like like really like terrible vulnerabilities. We saw that with Zcash. Um but here's the good news is that this idea of vulnerabilities existing in code is going to be relegated to history at some point because as we fix them, um they're going to get solved. The foundation will be much much stronger than it ever was. I think AI is actually going to help security more than hurt security through that vector of attack. Now, we have another problem. It's called social engineering. And I think social engineering is actually going to get much much tougher uh because deep fakes, social graphing, um and so I think that's going to be the the the bigger challenge. But but the

good news for DeFi is I think we're going to be much stronger as we go through it. I think but we're we're in this max like uncertainty point for the next few months uh as issues are being discovered, vulnerabilities are being discovered, they're getting patched. There's just like cat and mouse game. Uh generally feeling pretty good about the medium term. Now, on the social graphing vulnerability, how do you how do you deal with that? Like like, you know, we're going to we're old. We've been in the internet for a while. I think at some point we're going to have to just turn over the keys. Not the crypto keys, don't do that. But like keys to the car, the proverbial keys to the car to these agents. And I think the agents are going to be probably a lot more thoughtful about fighting off this

social graphing. Oh, I'm sorry. This uh this uh social engineering that that that our adversaries are very good at. So, that's also really contributing to to uh some of the challenges that we're seeing in crypto. It also helps with the emergence of intermediaries more. And intermediaries who are saying, "Guys, you know, DeFi is a little dangerous right now. Leave it over to me. I'll take care of all of your vulnerabilities. Like, you know, I'm the throat you can choke." And and that's another reason why maybe, you know, ETFs versus going native DeFi right now is having a moment. Again, medium term I think those defi issues are going to be in a much better spot.

Yes sir. >> Question for you both. So, let's say there's a tactical opportunity around around Bitcoin for all the reasons we've discussed above. Despite that, why wouldn't someone position around hyper liquid anyway? Right? Buy the dip on a high momentum asset in a momentum asset class. Right? I mean Go ahead, yeah. >> I was going to say you're kind of getting to something we've been chatting sort of circles around for a while, which is a sectoral rotation in crypto overall. Cuz let me actually take that two different ways here. One, I agree with you hyper liquid is probably one of the most investable tokens out there right now if we're leaving like Bitcoin.

You have a project that's generating fees, the team uses them for buybacks, it's grabbing significant headlines. We've talked about it on here repeatedly. Like hyper liquid for some definition of business is a very real business, right? And there's a lot going on there. On the other hand, at the same time we have like Cardano, which has very few users. The founder is basically giving up on a live stream and like bouncing out of the thing and everybody is now exiting stage left. I think we're hitting this scissor moment with crypto where you've been around long enough, the regulators are no longer constantly attacking you. If you're not building things or delivering, what is your purpose for existing? And I think what

we're really seeing is the scissoring away of many things that need to be left for dead. And where we can move onwards and away from ideas or ecosystems that didn't work, but reinforcement, as Chris said, in a bear market you get builders who start doing things of projects that might actually bring value forward. And so to me, it's part of a rotation story. The complicated situations are like Zcash, which we could get into a little more in a minute, but like Chris, what was your take? >> But as you as you say as you say rotation, are we talking alt season, fellas? Is it is is that what we're talking about?

>> I >> Uh we've seen a ton of Bitcoin dominance last months, but is that what you're talking about, Austin? >> I I am >> All right. >> Yeah, I I am specifically saying I do not think there is a uniform alt season anymore. I think there will be significant dispersion within alts. >> Violent agreement there. It's about fundamentals. Uh what are the themes that are really emerging right now? Intersection of crypto and AI. One may be founded by Ram's favorite founder. Um we can talk about later. I'm sure he'll bring it up. >> You mean Cathie Wood or something? I get it.

I'm not talking about the company. >> [laughter] >> But but like even think about tradexyz. And what are they what is it what are all eyes on? You know, maybe this is like, you know, space uh I'm sorry. Uh SpaceX, which is also an AI company. If they nail that pre-IPO price, right? All eyes are on it. In a way, that's the intersection of crypto and AI. And so this is a theme that is shining bright right now. Keep your eyes on it. Um but you're right, fundamentals matter. Um what could go wrong? They could miss the IPO and everyone say, "Ah, it's too early. We're not ready. This is not This you know, it's still it what it's not happening." But like if they if they land if they hit the landing on that, hit the landing on Anthropic, I mean

that could completely rewire equity capital markets. Why am I paying a banker to set the price when the market's already doing it for me and I'm not going to leave cash on the table? I'm going to start direct listing. So, anyway, those are the things I'm looking at fundamentals. >> So, I want to talk fundamentals for a moment, Todd, something where AI collided with crypto, which is Claude finding a bug in Zcash. Um so to set that up, uh Taylor Hornby, a researcher, used a custom AI agent based on Claude Opus 4.8 to find a critical counterfeiting bug in Zcash's Orchard shielded pool live and probably undetected since 2022.

Uh, an emergency upgrade patched it. The devs are now weighing a new shielded pool. They are calling it Ironwood. Um, Zcash rebounded 42% after the emergency upgrade, but is significantly off its highs in the 600 to 700 range. There've been a couple of takes here. The AI security angle, Chris, was from Jared Watts. After seeing the Zcash vulnerability, I got inspired to try doing some bug bounty work using AI over the weekend. It's worth running several rounds of long-running agents to find vulnerabilities in your own software every time a new model releases. Um, on the privacy angle, Crypto Lady M, if Zec falters, who steps up as the next

privacy flag bearer? The fundamental demand for privacy isn't going anywhere. And Arthur Hayes, of course, dumped his entire position there along with hype and near. Um, he moves first and explains second. Maybe there are some Andrew Left similarities there, but to me, what was interesting about this is two things. One, AI sort of creating this hyper loop in terms of speed between both attackers and defenders. We've seen crypto getting significantly more dangerous, but we're now seeing people using more AI for defense. You know, as we all know, threat and counter threat is a ladder where each side is climbing up with each other. So, I'm curious, let's zoom out even from crypto. What

are the implications for financial services writ large with this sort of activity? But number two, specifically to Zcash, you've got a pool. People don't know if it was exploited or not. The only way to figure that out is to have people withdraw through the public turnstile and see how much comes out of there, and if there's Zec left in the pool after all that went in came out, you know something bad happened. What do you think the implications are there for privacy protocols going forward? Cuz it is going to be harder to locate and detect bugs in those.

>> This is all around bad. It's the bad news section. Bad news bears section of the podcast, okay? So, markets are built on confidence. After the dot-com bust, markets about to rally, and then Enron and WorldCom were found to be fraudulent and had a bad auditor and Arthur Andersen, which went away, and then all this regulation came, Sarbanes-Oxley and all the rest. So, what would have been a 2-year bear market became a 4-year bear market. Confidence matters that much, and that was just two names in the public markets. Investors said, "Well, gee, if those two companies are cooking the books, then maybe markets writ large have issues."

That's why the Zcash issue around privacy coins and that it's just bad. And we had the another hack a couple months ago. This is just This is just all around bad. There's no way to tell it any other way. It's going to take time for investors to discount the risks around mythos and what that means uh for these assets. >> I I I couldn't agree more. Um investors will be very happy to underwrite and take market risk.

They get paid to do that. Sometimes the asset goes down, sometimes it goes up, but they get it. Um the problem that they have is that they're very, very uncomfortable taking other types of risks. Like getting your assets hacked. Like operational risk, like regulatory risk, reputational risk. And so, this really underscores that risk that makes them very, very uncomfortable taking. Uh it does Rob, you're spot-on. Like when you lose confidence, um then you start people's minds start wondering like well if it could happen to Zcash, it could happen elsewhere.

Um so security has to remain in the forefront in this asset class. Um I think some of us have got too immune to it. We can't We need to be highly sensitized to it. And um again, but I I'm bullish long-term. I think AI is going to is like it's going to it's going to solve these vectors. Like it has to solve these vectors because agents are so good at optimization, they're better than humans. By the way, I talked to a dinner uh last week with these auditing companies. They're almost 100% agents now. They are going crazy. They're finding things like they've never found before. They're working with companies. And so the good guys are doing good things. Um and and I think I

watching the audit auditing means really evolve in real time. >> I don't think just the auditing companies, right? Like for instance, I know the team over at OpenZeppelin and they're looking at contract standards based on all of these things as well. There's going to be a revision of many of the security practices in this space. The thing I remain worried about long-term are two categories of bugs. One, ones where it's very hard to find them, which I think is the implication for a lot of the privacy protocols. And the other is ones that are largely based on human and social engineering.

Chris, you were pointing out earlier because AI may be evolving rapidly, but humans are evolving somewhat less rapidly than AI. And so if we can get better attackers out of that, it's going to be a problem. If you get better defenders, that's a good thing. And maybe an area where people are under-allocated. Another point I would make is coming full circle. I think this is good for Bitcoin. If you have something that's been around a long time without being exploited. Is a relatively simple code base that is completely public.

Your confidence that there are not critical bugs in there goes up with every single day that that thing continues. To some extent, part of what I'm looking at here is is this just an argument in favor of simplicity given the rapidly emerging threat environment. Like we've seen hacks with helped out. We've seen hacks, you know, with drift. We saw the bybit exploit which was a form of social engineering as well. We have not seen a core hack of Bitcoin. Right? So, to some extent, we're just returning to the very like bread and butter basics in this environment.

>> The Lindy effect matters. Great point. Question for you there. We've got a refactor given all the quantum risk considerations. And that is a new framework that hasn't been battle tested. So, Bitcoin's got to go through the this valley of darkness. And I I agree with the Lindy effect the point you make except for this one fact. How do you How do you kind of square that that tension? >> I would tell you whatever the implication for quantum for Bitcoin is, it is potentially worse on less monitored chains with less eyes and more complex code bases. Right again, if we're thinking about how to break stuff,

the hardest thing to break is going to be the one where everybody is paying attention to it. Now, ETH is probably ahead on quantum defense compared to Bitcoin. I myself have told the Bitcoin community I think they need to take this a little bit more seriously than they are. And you better have a plan in place cuz the problem is if somebody cracks quantum, they're not going to tell you about it. They're just going to do it. Right? And so, it pays to be prepared. But Ram, to your point, it may be one of those like I don't love it here, but it might be worse everywhere else type situations. >> So, Austin, you're bullish ETH now?

>> I did not say I was bullish ETH. I'm just saying I'm going to give them credit where credit is due on the quantum resistance thing. >> All right. >> So. >> You see, uh, top top Tom Lee has his preferreds, but that asset has a yield. You see that? >> I did. All right. Hold on. I'm going to pause you there because before we get to that topic, I need to go to our second set of ads, and then we'll be back to talk preferreds and yield. >> Fidelity has been researching and investing in blockchain since 2014, long before it was a headline. And they're hiring crypto and DeFi professionals to join their team and discover what's next in finance. Fidelity is looking for people with fresh perspectives from different backgrounds, whether it's

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>> All right, everybody. Welcome back. Um on the topic of preferreds and the market action over the weekend, strategy has been squarely in the spotlight. Um there's a lot going on there. They had gone from a slight sale of 32 Bitcoin, paying down some of their convertible debt, issuing more common equity, announcing today they'd acquired 1,550 Bitcoin for 101 million, um and that their cash reserve is now back up to 1 billion on the back of common issuance.

Saylor said Strech and MicroStrategy shareholders approved an amendment to move Strech dividends from monthly to semi-monthly. First record date is June 30 and the payment date is July 15. I will note that doesn't change the amount of payment obligations. It's just the timing. And everybody's talking about a lot of buys and sells. Um Phong Le filed for the sale of 93,738 MSTR shares about 11 million. Um under a preset 10b5-1 plan tied to tax obligations for vested PSUs.

They're saying it's not a discretionary accident CCN citizens. Um others are saying it's an insider dump. The reality is insider sales are complex to evaluate as an outsider as Rom I'm sure can talk about in a moment here. But the interesting part is the pressure points have been Strech which dropped well below $95 and then MicroStrategy common stock itself. Before I get into some of the mechanics and my thoughts though, Rom, I wanted to ask you, Saylor for a long time has been the rising tide in this industry, riding Bitcoin on the way up.

I think this is the first time we've seen him in a sustained bear for a while, and now maybe the first time with cash flow obligations during it. I'm curious what you're making of this whole thing as an investor vis-a-vis like your view of the overall situation and strategy and if there's any opportunities or danger. >> I wouldn't want to trade positions with them at all. Okay, let me do the bull case and the bear case. You got to look at both sides. Remember a few years ago when that New York magazine article came out and it portrayed Saylor in a very negative light. That was the time to to get involved cuz all the bad news is priced in in the wake of the FTX debacle and all the rest, okay?

That's your contrarian bull case, okay? It's a very light, short, and sweet. I don't have much more to say around it than that, fortunately. Maybe there's a tactical bounce here, I guess. The other side of it is you've got a roaring bull market and this asset hasn't delivered and it's back to where it was 5 years ago. And these are momentum assets. They thrive on momentum. They need momentum like oxygen. If the oxygen's not there, they don't go up, they go down. Okay? On average, just given how the skewness of Bitcoin on the average day, the probability of up or down is actually down. You need fuel. Momentum's got to really crank.

And it hasn't rallied with momentum. That's the issue. Your point on insider sales is significant, right? The leader other than Saylor, I can see we can see on the Lumen app, by the way, you can type in the ticker, selling 10 million 10 million dollars out of his personal holdings near the near the lows. That's not a confidence signal. Uh and we talked about this in the last couple shows is a is like a coupon mismatch between the assets and the liabilities. And you know, you talked about that eloquently, Austin, around how do you create cash flow? You know, there's this framework that uh Hyman Minsky created around to think about market cycles and it's really appropriate here. It's it's it's like the perfect analogy for MicroStrategy. I'll I'll explain it

briefly for the audience. I think it's a fascinating way to think about markets. So, the three phases. Phase one, investors buy because of cash flow yield. That's enough to justify making investment. The expected return on the yield is enough to justify the buy decision. That's phase one. It's a good healthy market. Phase two is asset prices have rallied, yields are lower, so you need a you need a little leverage to make it interesting. That's phase two of the market. Phase three is now asset prices are even higher, yields are even lower, you've got to bet on price appreciation to justify the asset. And that last phase is it takes place in a momentum phase, also

the riskiest phase in the market. Cuz eventually it comes undone and all the debt build up that fueled that also comes undone and you get a deleveraging. So, the bid on the way up fueled by the issuance comes comes undone and can create risks. If there is a forced deleveraging, which they're trying to protect against by building their cash reserves. So, it's a they're in a complex position and you know, like I said earlier, every cycle there's been a major new marginal buyer. In 2017 it was call it early retail investors.

2021 it was MicroStrategy itself. People thought that Tesla would get involved, remember they were pitching Microsoft board, all this stuff. That didn't happen. Uh and now, you know, you had the ETFs get involved. Okay. Uh the sovereign wealth funds are where are they? If you go look at IBIT, look at top holdings, where are they? They they haven't stepped up. Like the bull case is Trump does a deal with Iran and the Strait of Hormuz payments are settled in Bitcoin. That's your bull case. If that happens, we'll be at 100k like in a heartbeat. Okay? 125k.

Uh but it's a very it's a complex it's a chal- it's a challenging story uh for MicroStrategy cuz they were built for that third phase. They were built for the third phase of the Missed Opportunity Hypothesis, where price appreciation is the bailout that solves all issues. >> So, I actually want to counter that point and say I think you've articulated a good bull case for Bitcoin there, and I'm like totally on board with that. >> the point on MicroStrategy, the two different assets.

>> Exactly. And and I'm I'm not sure how much it helps MicroStrategy cuz like as I look at their balance sheet, they currently have, you know, round numbers cuz Bitcoin's moving around intraday, about you know, 32 billion of Bitcoin that you can allocate to the common stock, which has a value of about 36 billion dollars. So, if you're buying into the common stock, you're paying a premium to buy Bitcoin. And then you've got to look at two things, which is essentially what is the cost of funding on the total Bitcoin stack, because that's what the debt and the preferreds are. They're a way to get leverage on Bitcoin because they raise that in dollars, and they have to pay it back in dollars, and there's an interest rate on that. That's borrowing

to invest. That's leverage, right? And if you take the premium and amortize it over like four-ish years on the stock, and you take the annual funding cost, you're at a net funding rate of close to 9%. to just buy Bitcoin. And so, the question that I kind of look at here is like if you want just Bitcoin unlevered, why not buy an ETF? And if you want Bitcoin levered, a lot of people are going to be able to get leverage in their brokerage account cheaper than 9% and can buy a big ETF leverage. So, what what is the argument for the commons, I guess is what I'm asking. It's >> It's an excellent point. I mean, it's a

it's it's now a trading vehicle. It's a trading vehicle. That's what it is, right? Like you said, that funding cost is 9%. That's the same thing as the cost of capital. >> Yes. >> Right? Bitcoin needs to compound at a rate greater than that cost of capital, which is higher than the inflation rate that we see today. >> Yes. >> It hasn't done the last few years. So, that that cuts both ways. It's a complex story. It's a complex story. You know, this is an asset that will be prone to short squeezes though. Because people are going to do the outline of what you described, like long Bitcoin and probably short MicroStrategy, something like that, right?

Um you know, I think you you make an excellent point. Yeah, I agree. >> I I mean, I think So, if I'm pointing a finger here, I think the sin of Saylor on this one was in the time before ETFs existed and his insight was, "Wait a minute. People want Bitcoin exposure in equity format. The SEC is, as it turns out, illegally impeding ETFs in this product. >> Yeah. >> I can fill a market need by filling my company up with Bitcoin and allowing people to buy the common stock there so that it trades as a proxy for Bitcoin.

That is essentially an ETF by another name. And by the way, I salute the MicroStrategy guys for figuring out that regulatory arbitrage at the time because that was clever and they did a good job with it. I think the problem there is when you're unlevered with common stock and you own a bunch of Bitcoin and the Bitcoin goes up and you were buying buying buying and then it goes down catastrophically, you know what you can do? Nothing. You can just wait. Right? Cuz you don't have all these cash flow needs that go out into the world and require you to do things. Like Saylor could have been like, "Okay, I'm going home for 4 years, and I'll be back when Bitcoin's back up." And that would have worked in a purely common structure.

>> Yeah. >> When you introduce the preferreds and the debt, now you're on the clock. >> Yeah. >> Strategy is no longer a play on Bitcoin structurally. It's a play on Bitcoin over very specific time frames at a rate. And I think that was the change that really created this problem. >> Well said. So, you can't turn financial bronze into gold. Like alchemy doesn't work. This is one of the lessons of the 2008 crisis. You can't take a subprime mortgage and turn a a senior tranche of that into AAA.

Um and that's what you have with STRF and STRC. Right? Imagine you bought an asset that you thought was going to yield 10% per year. That was the marketing. And now it's down at least 7% depending on which asset you're looking at. So, you say, "Wait a minute. I got a principal impairment. Am I going to get a dividend of 10%? So, I'm up three points? I didn't sign up for this. I could have bought ETF with ST of Treasury notes." So, yeah, it's a They have a marketing problem. So, they're related in the sense of this.

They've got to find the marginal buyer of Bitcoin. Who's the next leg? Trump needs to get the aliens to settle in Bitcoin. It's that or Iran. You can pick which one. You need someone to settle You need someone that's the marginal bid. Who is the marginal bid? >> And I don't think there's a like answer to that in the market right now, which explains a lot of the price action. >> Where are the Where are the sovereign wealth funds, right? >> Right. And and honestly, like Okay, let let me put my trader hat back on here for a minute. Even if I'm thinking of being the marginal bid, why would I step in front of that before there's some degree of resolution in this

MicroStrategy thing? Because if they keep having to tap the ATM with common, you're going to compress that premium. It might even go negative. Like people forget, but GBTC flipping from a premium to a negative was a major sign of a regime change previously. >> Yeah, that's a fantastic point. And when GBTC had a premium, or sorry, it was a discount of 20% to NAV, that led to a number of these funds like Three Arrows levering up and then blowing up and then taking down the ecosystem including FTX and exposing a lot of financial malpractice that was happening behind the scenes, right? The tide went out, you saw who was naked and negligent and fraudulent, right? But

that discount can get wider and wider and wider. Right? That discount to NAV on Ethereum got as wide as north of 50%. It's insane. It was also the greatest buy that year. Like we bought that and GBTC was amazing. But all to say is like the the spreads can get wider. You need some mechanism to close it. And markets, they can smell blood on the water. They see the spread and they say, "It's not Okay. The thing is wide. Why can't it go wider?"

And people bought an asset and they're disappointed. Same thing happens in IPOs, right? Someone buys the IPO, "Wait, it didn't pop. I thought it was going to go 50%. I'm going to go sell this." Then someone else said, "Gee, I thought it was going to go 40%. That didn't happen." They're going to sell that. Now it's down 10%. The guy that thought it was going to go 30%, he sells it. And then you get this pro-cyclical dynamics. And these are you know, these are the concerns and the questions around that asset. Unfortunately, I'm just >> And in the case of MicroStrategy, like that's a stock. They're probably somewhat more exposed in two ways than GBTC because one angle of that is

if you start having a significant discount in the commons, how long until hedge funds start getting involved and agitating like, "Hey man, just unwind your entire holding and cash this thing out. We'll make a profit on that trade." >> Well, that goes back to the Bitcoin versus MSTR and these are linked. >> Yeah. So, MicroStrategy was the marginal buyer. What if they become the marginal seller? >> Exactly. I mean, I think we saw last week what happens when they become the marginal >> It was for a hot minute to to test the market, whatever that was.

>> 32 Bitcoin. >> Right. And they bought back some Bitcoin based on the cap. What did they buy back enough to offset the sale or no? >> They did, but they're now buying back by issuing more of the common and used half of it to buy Bitcoin, half of it to stock up for the dividends. It goes back to the funding problem. Like there's no way around they have to pay 1.7 billion of cash out the door and Bitcoin is falling, not rising. >> Exactly. The The way accounting works is only three ways you can fund an asset purchase. You issue stock, which they did. You issue debt securities, which they did and they can't do now because they trade below par.

Or cash flow from operations. >> Which they don't really have. >> Correct. So, they're in they they're they have to keep issuing common stock to fund this because those preferred securities are trading below par. >> Yeah, I mean, as a thought experiment for folks at home who are looking at this, let's just hypothetically say Bitcoin doesn't go up or down in price for 2 years, right? Like it does neither of those two things. Strategy owes $3.4 billion of cash to service the preferred over that time frame. Which means either wrong as you said they're issuing stock to fund that and continuing to pay it.

They are selling Bitcoin and then become the marginal seller which will deplete the balance sheet to pay that. Or they're suspending the dividends on the preferred which is going to absolutely tank those. That would be a world of trouble. Well, legally like look, I'm just going to say don't run around marketing your preferred as a money market fund and then turn off the dividends like that would be a bonanza for plaintiff's attorneys quite frankly for the SEC and the DOJ. So, that's >> They didn't market it as such. That would be >> They did. Saylor, I'm quoting, there was a I think Axios article about this where he was talking about it as this is like a money market fund. Things you should

not say. >> Oh, yeah. Right. I mean money market funds are ultra short duration government bonds are facing off with the US Treasury. >> Yes. >> That's money good. Money good. It's not a good investment, but it's good. You'll get your principal back. That's the key point. >> Right. I mean it's a good investment if you just need a place to put your cash. Oh, before I get killed that was Protoss who published that. That was March 27th, 2026. So, this is not financial or legal advice but if it's not literally a registered money market fund, don't market it as such.

>> Financial engineering doesn't end well. It just doesn't end well. And you get a lot of smart people that figure out how to do financial engineering, turn bronze into gold, and it just doesn't work. Eventually the bill shows up. This the lesson from the 2008 crisis. This is >> Well, I'm I'm going to point I'm going to point to the different crisis this kind of reminds me of, which is people buying an asset they thought was money good into an environment that was very unfriendly for that asset and suddenly having cash flow needs. You know what story that is? Silicon Valley Bank.

>> Yes, 100%. >> thing cuz if if nobody had done anything, SVB was fine, but they had a depositor flight in that case. MicroStrategy essentially has 1.7 billion of depositor flight every year because of the dividends they have to pay. >> Yeah. >> So, they're on the clock. Again, this is not a hold it forever and do nothing. They are on the clock. >> Yeah, they're on the clock, exactly. When you have a debt obligation, you have a contractual obligation to pay a coupon at a certain date regardless of what's happening in the world.

So, they they need is a a common stock equity bail-in. That's what they need. >> Yeah. >> a big buyer that's going to say, "I'm going to do a secondary purchase of your common stock. It'll be at a discount to the current price today, number one. And number two, they got to close the discounts on those preferred securities to par." You need something like that. It's not going to be the Federal Reserve. It's not going to be Jamie Dimon either. Okay. Maybe Stone Ridge, the former employee, I don't know. Someone's got to step in to do something.

>> we'll we'll see. Probably somebody who understands Bitcoin pretty well. I worry it's going to be an activist hedge fund. All right. Final lightning round for you. Speaking of people stepping into things, Hunter Biden has been tweeting about crypto um making a hyper liquid post, uh replied to people, um and Justin Slaughter, caveat, personal friend, urging crypto podcasts to book him. Hunter, if you want to come on, we'll talk, man. I'm like one of five Democrats still left in crypto, dude. And what I found interesting about this is one of the things he called out um was one, putting art on the internet,

accepting Bitcoin as payment, the Internet of Money book, and talking about the whole like sovereign debt problem. So, I'm going to ask this about the Hunter Biden thing. Do you think this is just to get attention? Do you think it's genuine? Like this does seem like a pretty heterodox move for somebody in his situation. So, >> I don't have any I don't have any special insight into Hunter Biden. Well, like I was surprised when like Eric Trump got involved, but it looks very genuine. The interest that uh Eric Trump has in Bitcoin. It looked It looked sincere.

Um notwithstanding like the self-dealing around Trump. Well, that's different. That's a meme coin. That's not Bitcoin, right? But I don't know. I uh it's hard to read it It's hard to make sense of the reasoning. It's uh But certainly attracting a lot of attention. Uh Is it good attention though? I don't know. It's not Warren Buffett attention, right? It's not >> [laughter] >> Here Here's your marginal buyer. I don't know about that's the best marginal buyer. >> I So, I actually think the most interesting part of Hunter's comments to me is something that I do think will come back around eventually in the long run, which is the connection to the art community.

If you're looking at a market that is broken, where discovery is hard, where middlemen are a mess, and the legacy structure is like genuinely FUBAR, art and music are two of those. And while most of what's been done with NFTs is complete garbage, I don't think that's a reputation of NFTs as a concept. I think that's a reputation of the implementation of them that was very extractive. But maybe a better example of this whole principle was Does anybody remember Constitution DAO? Right, where they raised an insane amount of money to try to buy a copy of the Constitution that Ken Griffin bought instead. Talk about like a hilarious villain story there for crypto. But, that sort of direct like consumer to art

or consumer to historical artifact is not possible currently in many cases and this enables it. So, it it's fascinating to me that in like this time of crypto downturns, the guy who got interested is talking about art. >> Fair point. I mean, one of the lessons for digital assets is the power of internet-enabled capital formation. Constitution DAO is a part of it. The market caps on these different protocols and chains is a part of it also. That one of the lessons is that crowdfunding, capital markets actually can work.

Now, do you get good assets? Most of the time, no. But, there is a new way to raise capital directly from the public. Of course, the Google did this in their IPO. Um and uh you know, that that's progress. But, the overall fact pattern here is just challenging at the very least. And add to it the fact that when all these bets launched into the public securities markets, it took liquidity that was on chain and put it into public markets.

And it's really easy to sell in public markets and go buy other assets. Before you at least had two different pools of capital and you could get them through a bridge or whatever else. But, now we just air-lifted all this capital in the on-chain world to this public markets world where they're seeing semiconductors go up into the right. >> Yeah. >> So, it's a it's a it's just a more challenging backdrop for the categories. If you're in the category, own the winners. Own momentum and be incredibly selective.

There was a shot at an alt-season not too long ago, but I think that when SCRC and SGRF kind of proverbially broke the buck, that put water on all of that, cold water on that, unfortunately. >> The The history of crypto is that something big breaks, you have a larger downturn than people expect, everybody leaves it for dead, and that's when it recovers. So, on On that note, on the happy note, as Rom said, part of this would be trouble today. I want to thank everybody for joining us for this episode of Bits and Bips.

Remember to follow all of our new channels, and we'll be back in 1 week to discuss more about how the worlds of crypto and macro are colliding. Until then, everyone, thank you for watching, and hope you enjoyed this episode of Bits and Bips. Just remember, nothing we say here is investment advice, and please check unchainedcrypto.com/bitsandbips for more disclosures. [music]