Is Strategy a Ponzi scheme? Lyn Alden and Andy Constan debate Bitcoin treasury companies, their risks, and stablecoins' future in this insightful podcast transcript.
Timestamp Overview
[00:00:02 - 00:04:38] Introduction and Andy’s Background
- Lyn Alden discusses how companies can fail if they harm investors without fully collapsing, and asks about managing big risks in large markets.
- Andy Constan explains why he thinks Bitcoin treasury companies like MicroStrategy are like Ponzi schemes because they rely on new money to pay old investors without real income.
- Danny Knowles welcomes Lyn Alden back to the show and introduces Andy Constan, who has 39 years in finance, including roles at big banks and hedge funds.
- Andy Constan shares his career in trading and research, focusing on big-picture economics.
[00:04:38 - 00:07:05] Andy’s Views on Bitcoin
- Danny Knowles asks Andy Constan about his opinion on Bitcoin before diving into treasury companies.
- Andy Constan says he believes in protecting savings from currency weakening, like with gold, and sees Bitcoin as digital gold.
- Andy Constan explains he owns gold but not Bitcoin yet because it moves too much like risky stocks.
- Andy Constan mentions he almost bought Bitcoin but decided not to.
[00:07:05 - 00:10:57] The Debate Begins: Lyn’s Thesis on MicroStrategy
- Danny Knowles asks Lyn Alden to explain her comments on MicroStrategy’s investor call that started the debate.
- Lyn Alden describes following MicroStrategy since 2020, when they started buying Bitcoin, and how their strategy evolved with borrowing and selling shares.
- Lyn Alden says she thinks well-managed treasury companies make sense because Bitcoin grows in value, but some poor ones might fail.
- Lyn Alden shares she asked about bear market risks on the call and agrees their new preferred shares could work well.
[00:10:57 - 00:15:04] Andy’s Overarching Thesis
- Danny Knowles asks Andy Constan to outline his main concerns about treasury companies.
- Andy Constan argues MicroStrategy trades at too high a value compared to its Bitcoin holdings, like an overpriced ETF.
- Andy Constan says without real income from Bitcoin, just price gains, it’s hard to justify high values.
- Andy Constan notes alternatives like Bitcoin ETFs exist now, reducing the need for companies like MicroStrategy.
[00:15:04 - 00:18:29] Lyn Responds on Value and Risks
- Danny Knowles passes Andy Constan’s question on income to Lyn Alden.
- Lyn Alden explains treasury companies increase Bitcoin per share through smart borrowing and selling, justifying a premium price.
- Lyn Alden says as companies grow, their premium should shrink, and she prefers companies with real businesses adding Bitcoin.
- Lyn Alden warns that high premiums are risky and depend on market mood.
[00:18:29 - 00:22:50] Discussion on Zombie Companies and Income
- Danny Knowles asks Lyn Alden if weak companies using Bitcoin will fail and if real businesses are needed.
- Lyn Alden agrees unprofitable companies struggle with this strategy, but cash-positive ones without growth can benefit.
- Andy Constan challenges why companies should buy Bitcoin instead of other uses for cash, calling high premiums a way to trick new investors.
- Andy Constan says selling shares at high prices helps old investors but hurts new ones, like a Ponzi.
[00:22:50 - 00:26:18] Preferred Shares and Leverage
- Danny Knowles asks if preferred shares help common stock holders.
- Andy Constan says preferred shares add leverage but don’t justify premiums, as people can leverage ETFs instead.
- Lyn Alden defends buying Bitcoin with cash because it performs well and isn’t a security like stocks.
- Lyn Alden expects Bitcoin to keep growing due to its potential market size.
[00:26:18 - 00:30:23] Why Corporations Buy Bitcoin
- Andy Constan questions if past performance guarantees future gains and why companies have an edge in Bitcoin.
- Lyn Alden says Bitcoin can match or beat stocks long-term, unlike gold, making it good for company savings.
- Andy Constan asks why shareholders can’t buy Bitcoin themselves instead of trusting companies.
- Lyn Alden notes markets reward trusted teams, and Bitcoin helps companies plan for surprises.
[00:30:23 - 00:36:28] Benefits of Treasury Companies
- Danny Knowles notes the argument aligns with Bitcoin’s self-custody idea.
- Lyn Alden says companies access better leverage and attract capital that can’t buy Bitcoin directly.
- Andy Constan points out companies held cash before Bitcoin but didn’t risk it on appreciating assets.
- Lyn Alden explains MicroStrategy grew by holding Bitcoin, retaining talent.
[00:36:28 - 00:42:46] Premiums and Future Outlook
- Andy Constan agrees corporations avoid risky savings to prevent double losses.
- Lyn Alden prefers premiums below 2 for mature companies like MicroStrategy.
- Andy Constan sees reasonable strategies in trimming at high premiums.
- Lyn Alden cautions against high premiums but sees value above 1 due to ongoing demand.
[00:42:46 - 00:46:31] Income from Bitcoin
- Andy Constan asks for ways to earn real income from Bitcoin beyond price gains.
- Lyn Alden mentions using Bitcoin for payments on Lightning Network for yields, though small now.
- Danny Knowles notes varying yields reported by companies like Block and River.
- Lyn Alden says currently, it’s mostly about Bitcoin’s appreciation.
[00:46:31 - 00:52:29] Is It a Ponzi Scheme?
- Danny Knowles asks Andy Constan to define why he calls it a Ponzi.
- Andy Constan says paying dividends without income relies on new money, like a Ponzi.
- Lyn Alden agrees they use new capital but notes no secrecy or fraud, unlike typical Ponzis.
- Andy Constan calls marketing based on price gains fraudulent.
[00:52:29 - 01:00:39] Failure Modes and Risks
- Andy Constan says Ponzi schemes fail when they can’t raise money.
- Lyn Alden disagrees on fraud but questions PE comparisons.
- Andy Constan predicts failure if access to markets ends.
- Lyn Alden describes failure as impairing investors, even without liquidation.
[01:00:39 - 01:05:05] Long-Term Chances and Stablecoins Intro
- Lyn Alden says MNAV compression can happen without Bitcoin drops.
- Andy Constan estimates 50% chance of failure in 10 years.
- Lyn Alden puts permanent failure below 25%.
- Danny Knowles shifts to stablecoins, asking Andy Constan’s views.
[01:05:05 - 01:09:14] Andy on Stablecoins
- Andy Constan focuses on regulated, fully-backed stablecoins holding safe assets.
- Andy Constan sees uses for payments, transaction balances, and savings.
- Andy Constan thinks US payments work well, but global demand could grow.
- Andy Constan doubts big new savings demand in the US.
[01:09:14 - 01:14:32] Lyn on Stablecoins Growth
- Lyn Alden agrees stablecoins grow but much isn’t new dollar demand.
- Lyn Alden cites reports showing shifts from existing dollars.
- Lyn Alden sees new demand from easier access in weak currencies.
- Lyn Alden highlights small businesses needing dollar accounts globally.
[01:14:32 - 01:18:45] Stablecoins as Dollar Accounts
- Danny Knowles asks if stablecoins act like US bank accounts abroad.
- Andy Constan explains dollars come from existing sources, not creating much new demand.
- Lyn Alden says easier access increases demand surface area.
- Andy Constan agrees on disintermediation but sees limits.
[01:18:45 - 01:23:29] Demand Sources and Impacts
- Danny Knowles questions buying stablecoins with local currency.
- Andy Constan says new minting needs US dollars; secondary trades don’t add demand.
- Lyn Alden argues easier trades boost total dollar demand via arbitrage.
- Andy Constan sees pressure on weak currencies.
[01:23:29 - 01:28:38] Yield and Regulations
- Danny Knowles asks about yield-sharing stablecoins.
- Andy Constan warns of risks in leveraged stablecoins.
- Lyn Alden notes international stablecoins can back with foreign dollars.
- Andy Constan sees it as shifting existing dollar supply.
[01:28:38 - 01:33:18] Demand Mechanics Example
- Danny Knowles seeks clarification on demand creation.
- Lyn Alden uses Egypt example: easier access reduces premiums, increases users.
- Andy Constan questions net demand in secondary trades.
- Lyn Alden explains brokers facilitate, creating premiums for minting.
[01:33:18 - 01:38:22] Physical Dollars and Flows
- Lyn Alden compares to physical dollar trades with premiums.
- Andy Constan sees reverse flows of physical dollars to stablecoins.
- Lyn Alden says easier process generates new demand.
- Andy Constan agrees on currency pressures leading to easier policy.
[01:38:22 - 01:42:00] Magnitude and Closing
- Lyn Alden says magnitude is debatable; not dollar savior but a factor.
- Andy Constan estimates $750B market, mostly from physical currency.
- Lyn Alden sees potential trillions with businesses.
- Danny Knowles thanks guests; they share contacts.
Notable Quotes
Bitcoin Treasury Risks
If the company doesn't necessarily liquidate, but they have permanently impaired the preferred holders and the common equity holders, that would be a failure mode.
Lyn Alden @LynAldenContact
Ponzi Definition
There is no hope of paying the preferred dividends without new proceeds from issuance. And that's a Ponzi scheme.
Andy Constan @dampedspring
Bitcoin Value
Bitcoin's the first asset that can actually compete with equities long-term in returns.
Lyn Alden @LynAldenContact
Corporate Edge
Why should I trust a company that manufactures, creates software, does whatever it does as a business to have the expertise that you do?
Andy Constan @dampedspring
Stablecoin Demand
A lot of it will come out of existing usage of dollars.
Lyn Alden @LynAldenContact
Dollar Plumbing
You cannot get a newly minted stablecoin created without US dollars.
Andy Constan @dampedspring
Easier Access
Stablecoins can make dollars easier to get. First, it can collapse the gray market premium. Then it potentially can increase the total demand for dollars.
Lyn Alden @LynAldenContact
Income Sources
Right now, firmly, it's more about the appreciation.
Lyn Alden @LynAldenContact
Premium Justification
I think something in the one and a half range makes sense.
Lyn Alden @LynAldenContact
Corporate Cash
They consider it a rainy day asset. They're not considering it an earning asset.
Andy Constan @dampedspring
Stablecoin Uses
There's three things I care about: payment rails, transaction balances, and savings.
Andy Constan @dampedspring
Global Businesses
I think there's a business case where a lot of these businesses will want to hold some stablecoin balance that's pretty substantial.
Lyn Alden @LynAldenContact
Questions & Answers
Question 1: Is MicroStrategy a Ponzi scheme?
Answer: Andy Constan argues yes, because it relies on new investor money to pay dividends without real income, while Lyn Alden says it’s not, as there’s no secrecy or fraud, though it uses new capital for obligations.
Question 2: How do Bitcoin treasury companies create income?
Answer: Lyn Alden explains they mainly rely on Bitcoin’s price appreciation now, but future options like Lightning Network payments could generate yields; Andy Constan says they don’t create real income beyond gains.
Question 3: Why do corporations buy Bitcoin for their treasury?
Answer: Lyn Alden says it competes with stocks for returns and helps save for surprises; Andy Constan questions why shareholders can’t do it themselves and sees no corporate edge.
Question 4: What is the right premium (MNAV) for MicroStrategy?
Answer: Lyn Alden prefers below 2, around 1.5 for mature companies; Andy Constan thinks 1 is fair, as higher is unsustainable.
Question 5: What are the risks in a bear market for MicroStrategy?
Answer: Lyn Alden notes they might pause dividends and impair investors if MNAV compresses; Andy Constan says failure happens when they can’t raise money, leading to losses.
Question 6: Will stablecoins create new demand for US dollars?
Answer: Lyn Alden believes yes, marginally, by making access easier and boosting demand; Andy Constan says mostly not, as it shifts from existing dollars like physical bills.
Question 7: What is the potential market size for stablecoins?
Answer: Lyn Alden sees trillions possible with global businesses; Andy Constan estimates $750 billion, tripling current size.
Question 8: How do stablecoins work as savings abroad?
Answer: Lyn Alden explains they act like digital dollar accounts, reducing frictions; Andy Constan notes they need existing dollars to mint, limiting new demand.
People and Organizations Mentioned
- Lyn Alden: Macroeconomic researcher and author mentioned as a guest debating Bitcoin treasury strategies; she runs LynAlden.com and wrote “Broken Money,” known for Bitcoin and economic analysis.
- Andy Constan: Finance veteran and guest arguing against treasury companies; he runs Damped Spring research, with past roles at Salomon Brothers, Bridgewater Associates (major hedge fund), and Brevan Howard.
- Danny Knowles: Podcast host facilitating the debate; he runs “What Bitcoin Did” podcast, focused on Bitcoin discussions.
- Michael Saylor: CEO of MicroStrategy mentioned for leading their Bitcoin strategy; founder of MicroStrategy, a business intelligence firm turned Bitcoin holder.
- MicroStrategy (MSTR): Company central to the debate for holding Bitcoin as treasury; publicly traded software firm that adopted massive Bitcoin accumulation since 2020.
- Bitcoin: Digital currency discussed as an asset; decentralized cryptocurrency created by Satoshi Nakamoto in 2009.
- Bridgewater Associates: Hedge fund where Andy Constan worked; world’s largest hedge fund, founded by Ray Dalio, known for all-weather portfolio.
- Brevan Howard: Hedge fund where Andy Constan was chief strategist; global macro hedge fund managing billions.
- Salomon Brothers: Investment bank where Andy Constan started; defunct firm absorbed into Citigroup, famous for bond trading in the 1980s-90s.
- Tesla: Company that dabbled in Bitcoin treasury; electric car maker led by Elon Musk.
- Block Inc.: Company using Bitcoin for payments; formerly Square, led by Jack Dorsey, involved in Bitcoin and Lightning Network.
- MetaPlanet: Japanese company mentioned as a treasury example; small firm adopting Bitcoin strategy, gaining high premiums.
- Citigroup (Citi): Bank whose report on stablecoins was cited; major US financial institution providing research on markets.
- River: Company mentioned for Lightning yields; Bitcoin financial services firm offering custody and payments.
- Checkmate (James Check): Bitcoin analyst referenced; on-chain analyst known for data-driven Bitcoin insights.
- Pierre Rochard: Early Bitcoin thinker mentioned for speculative attack idea; Bitcoin advocate and educator.
- US Treasury Secretary: Official who tweeted about stablecoins; likely Janet Yellen, head of US Treasury Department overseeing financial policy.
- SEC (Securities and Exchange Commission): US regulator cited for Ponzi red flags; government agency enforcing securities laws.
- Federal Reserve (Fed): US central bank implied in dollar discussions; issues currency and sets monetary policy.
- Tether: Stablecoin company mentioned; issuer of USDT, largest stablecoin, often backed by treasuries.
- Microsoft: Company Michael Saylor tried to convince for Bitcoin; tech giant known for software.
- Costco: Retailer mentioned for high PE; wholesale club chain.
- Bernie Madoff: Fraudster referenced for Ponzi; ran largest Ponzi scheme in history, convicted in 2009.
- SPACs: Investment vehicles mentioned as failing trends; special purpose acquisition companies for mergers.