Why Strategy's Capital Stack Is Starting to Show Cracks

Transcript

Speaking of things that might need a better market structure, let's talk about micro strategy. Um, people have been describing this jokingly as sailor's threebody problem. And what's going on is that for the first time since 2022, and yes, that is correct. For all of you who said strategy sold Bitcoin for the first time ever, you were wrong. They did this before. But for the first time since 2022, Strategy started selling some Bitcoin. They sold 32 BTC. largely is what looks like mostly a test transaction because that's $2.5 million per their 8K to fund distributions on preferred stock. Now that is less than 0.01% of their holdings, but they chose to sell some

BTC rather than drawing the cash reserve and they sold as Bitcoin fell under 72K on the news. Why is this happening? So their capital stack, I will remind everybody, has equity. It then has preferred which are the STRC's of the world that right now round numbers seems like they need about $1.5 billion a year in dividends. They have $900 million of cash and the MNAV is basically at parody. So that's not really a good vehicle for issuing more to make the gains work. Um Sailor is saying that our goal is to make SDRC the best credit instrument in

the world. He called the sale quote Rahm a big nothing burger. >> Ah >> however >> the show Michael you should come on join us. >> There you go. Now let's talk about the bears on the other side of this though who are saying maybe it is a problem. So Jeff Dorman was saying 15 billion in preps have a 1.5 billion a year dividend. He raised two billion via stock then used a bunch of it to buy back 2029 maturity bonds. Someone is going to lose badly here and it will happen in the next four months. Uh Rich Galvin said that Sailor faces a threebody problem. He can't indefinitely support all of equity, Bitcoin, and the preferred debt stack. Eventually, they

fly too close to the sun. So, I'm curious. Let's start with the capital stack component of this. Do you agree with Dorman's point that now we're in a world where Bitcoin prices are not shooting upward? we have differential interests between equity holders, Bitcoin holders, and the preferred holders. Like, is that conflict real? >> I I'll launch in there. I say you have a threebody problem. I think he's right. Unless Bitcoin is coded to go up in perpetuity, which a lot of investors in that believe, and so they dismiss this issue. If however that does not happen then you have issues like this and you

know one of the challenges is that a lot of investors are in Bitcoin because of the velocity. It is an attention asset. I coined that term a few years ago seeing more of that being used. But here's the issue. There are a lot of assets competing for attention now. Many many assets are competing for attention. You know AI is an example of that. Um a lot of things are going up into the right now too. biotech has gone up and to the right. So, um, that makes it harder. That makes it harder for digital assets when when you're in a momentum market. This is a momentum market. We're two standard deviations into a momentum market and you have an asset that's supposed to have momentum and velocity and it's not running fast,

then it cuts against you. That's what we're seeing now. So uh I I this is not good when you sell even if it's a small number it doesn't matter perception is reality it's an attention asset it's not about the 0.1%. >> Yeah it's a social consensus asset and one of the largest um evangelists of that of that thesis um just sold his assets for the first time. Now, a couple things. Uh, first off, he's a DAT and he's acting like a DAT because a DAT has to act in the interest of its shareholders. And, you know, by selling you, most stats will tell you that they don't like it. They'll grind their teeth, but the right thing for them to

do is to sell their underlying tokens when certain conditions are met. And I wouldn't say this was necessarily a sale. It was symbolic um to say, look, I'm a dad. I need to do certain things to optimize my capital stack. This is a source of funding when I need it. Um maybe it's a quest for him to lower his lower his cost basis. Uh because he's provided a degree of centralization into an asset that should be totally decentralized. And so by by impacting the narrative by impacting you know the this this theme of consensus you would expect for the price to go lower. Um, so maybe he's, you know, maybe that's fine.

Maybe he has some ideas about when he's going to go long again and and um, you know, obviously he would never be manipulating markets, but but maybe he this is going to be an opportunity for him to lower his his cost basis in time. Um, the other thing that's challenging with Bitcoin and and you know, Ethereum is a little bit different, other assets, Salana, other assets are different, a little different. Bitcoin is an inert asset. It is not a yielding asset. And so when you start offering to investors um a yield on an underlying asset that does not yield, it's hard. Um and and so that's another conundrum that people need to think about. Now is selling that asset a way to generate that yield that

you're promising? It's one of many. Can you hit the ATM if you have a positive MNAV? Yeah, that's another way. So it's it's but that under underlying conundrum um does result in some challenges when you have >> 100% >> right there is an asset liability mismatch right? >> Yeah like a coupon coupon coupon coupon mismatch >> 100%. Well, whereas like for some of the yielding products, at least you have that that that organic yield where maybe it's easier to structure um cash flows or payments and and maybe you have that dollar uh crypto mismatch, but you're getting a three, you know, 2.8 2.7% yield on ETH as an example, like you

know Salon Avalanche Hyperlid you name it. Um, I'm g I don't want to get anyone mad at me if I forget the name their their ecosystem, but it's it's just a a fundamental mismatch in Bitcoin that you don't have in other places. Now, those who can successfully drive sustainable yield on Bitcoin, that's very powerful. Like, and and how many strategies I've seen where people have been trying to to generate yield on gold, not easy to do. Um it's very it's a very similar type strategy but it but you know to the extent someone can deliver and and this is what he's trying to do deliver a scalable yielding Bitcoin exposure I think there's going to be demand for something like that for a long time.

>> I think the hard part is the mechanics of the yield though right because if you look at STRC you have an asset that needs to be paying an 11.5% dividend by buying Bitcoin. So, like the math on that is actually very simple. And to the point Rh was making earlier, it's that if I raise 15 billion dollars of it and I just hold the Bitcoin, if that doesn't go up by 11.5% per year, if I start selling it back, I'm just reducing the amount of Bitcoin that I have. Period. Full stop. And so fundamentally what you're ultimately asking there is is the price of Bitcoin going to go up more than 11.5% per year.

And part of what's interesting about this as well is as Bitcoin has gotten larger and larger over time as a market cap asset, just as one would expect, you're seeing a reduction in the rate of gains. Right? Back to the law of large numbers problem. It's a lot easier to get a hundred bagger with a $10 million asset than with a $1 trillion asset. >> And so I think a lot of the people who have been parameterizing this based on historical Bitcoin performance have not normalized that for the current size of Bitcoin. I just wonder like if we're not staring down the barrel of very significant inflation like what is the game plan to continue playing paying that dividend and not sort of stripping

Bitcoin off the balance sheet over time? >> Yeah, go ahead. >> Both are selling below par STRC and STRF and they sold off today. That's not good to see. Now, if you're selling Bitcoin to generate cash, the idea would be to create confidence for the providers of your debt financing. So, one would expect that these would close closer to par, but they did not. So, if those assets sold off, it means the cost of financing actually went higher.

Kristen Austin knows what that means. That's not good. >> Yes. >> That's not good. So, that you know, like if you're at a bank, right? What's a good analogy here, Austin? You want to >> I would I would say a good analogy for a bank is that you have a bunch of loans on the balance sheet that are paying you 6%. And you've want short-term rates doing this inexurably while you're still getting paid six. There comes a point where if rates go up enough, you just die. Um, and if you don't believe me, the name of that bank was Silicon Valley Bank. Like this has happened in the not too distant past. You have an asset liability mismatch.

Yeah. The other issue we have time and time again in our industry is this uh the arbitrage between equity and token where it's hard to buy a token. It's hard for people to buy a token. Uh and so they they go in through an asset class that that's that's easy. Um a trust uh an equity and that works sometimes when there's more demand, but when there's less demand um maybe it can be sold faster as well. So it works in both directions. uh it's been uh it's it's that basis you know last cycle was one of the the core challenges with uh you know with the bare market that we entered with that that basis between equity and token uh a lot of people died on that hill um we can go through some

of the names but yeah interesting times interesting times >> I it adds proyclicality to Bitcoin >> too right like Micro Strategy was a bid for Bitcoin now they got to sell Bitcoin to fund the obligation on Bitcoin. >> So, this is the first time we've seen in a really long time where people are saying, "Uhoh, Strategy is, you know, sold some Bitcoin." And then you're seeing some like a some incredible momentum amongst a handful of names in the alt space. And so, I don't think it's time for for me to say, "Hey guys, it's alt season again. Giddy up.

Let's go." But it's what we've been talking about. It's those those alts are getting looked at now through new more sophisticated eyes, I think, >> where the alts with fundamentals are outperforming those that are not. It feels like a like a fundamental season, if you will, an alt fundamental season, but you know, I'm we're starting to see like excitement. We're starting to see um you know, maybe a little bit less focus on on this bit. Like Bitcoin has been very very dominant in our last cycle. massively dominant. It is the largest asset class of the to largest of the tokens across the you can't ignore it. But for the first time, it feels like, you know, you're seeing some very

very strong momentum uh within a handful of projects that are out eclipsing like they're they're they're eclipsing u Bitcoin for the first time I've seen it in a while. >> Heads up everyone, we'll now be [music] fully transitioning Bits and Bibs to its new dedicated Bits and Bips channels starting next week. So, if you're not yet subscribed to the Bits and Bips channels on X, YouTube, [music] Spotify, Apple Podcasts, or wherever you get your podcasts, then go there now and subscribe. After that transition for a few weeks, we'll play segments of the full interviews on Unchained as a reminder, but head there now and subscribe so you don't miss an episode.

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