Discover how Strategy transformed into a Bitcoin powerhouse, holding $72B in BTC. Expert Jeff Walton explains their strategy, value, and future in simple terms.
Timestamped Overview
[00:00:00 - 00:20:00] Strategy’s Shift to Bitcoin
- Strategy was a struggling software company in 2020 with extra cash, so they bought Bitcoin to protect against money printing and inflation.
- They now hold over 600,000 Bitcoins worth $72 billion, way more than any other company, creating a huge advantage no one can easily catch.
- Buying MSTR stock is like owning a share in a company that grows by using Bitcoin as collateral to borrow money cheaply and buy more Bitcoin.
- They issue special bonds (like loans) at 0% interest because lenders get a chance to convert to stock if Bitcoin rises, acting like a bet on future growth.
- This setup lets the company raise billions easily, turning Bitcoin’s value into more buying power without selling any.
[00:20:00 - 00:40:00] Bitcoin-Backed Products and Growth
- MSTR creates new financial products like preferred stocks (STRF, STRC, etc.) that pay steady returns, backed by their Bitcoin holdings, appealing to retirees or safe investors.
- These products are like safe savings accounts with high yields (8-10%), protected by Bitcoin’s value, and they help MSTR raise money to buy more Bitcoin.
- The company uses “ATMs” (quick stock sales) to get cash for Bitcoin buys, diluting shares a bit but boosting long-term value as Bitcoin grows.
- Volatility in Bitcoin price is turned into an advantage: it creates excitement, deeper trading markets, and options for investors to bet on ups and downs.
- Compared to big tech like Apple or Microsoft, MSTR’s strategy could make it grow faster by stacking Bitcoin, which rises 50% yearly on average.
[00:40:00 - 01:00:00] Risks, Comparisons, and Future Outlook
- MSTR is like a super-strong bank with low debt (16% leverage), making it easy to borrow; it’s safer than many traditional companies with physical risks like fires or crashes.
- Bear cases include Bitcoin failing (very unlikely) or key person risk if CEO Michael Saylor leaves, but the Bitcoin stays with the company.
- Big companies like Meta or Amazon don’t need Bitcoin yet because they’re successful, but they might if treasuries underperform; MSTR electrifies its stock this way.
- Options and volatility mean more trading activity, like funds (MSTY) that pay huge dividends by betting on price swings.
- Ethereum and other cryptos are seen as less secure than Bitcoin due to decentralization issues; MSTR sticks to Bitcoin for its fixed supply and strength.
[01:00:00 - 01:26:05] Government Role and Final Thoughts
- No margin calls on MSTR’s debt since it’s not tied directly to Bitcoin; even if prices drop, they can hold or buy more.
- Proof of reserves isn’t shown to avoid risks like theft or market panic from wallet moves, but Bitcoin’s ledger is public.
- US government might buy Bitcoin for power, like gold reserves; MSTR could move abroad if needed due to Bitcoin’s portability.
- Bitcoin could hit $500K soon and $20T long-term, making MSTR a top company; Saylor won’t stop buying as it’s the base of global finance.
- Personal stories: Host and guest went all-in on MSTR options at lows, turning big gains; it’s a life-changing bet on Bitcoin’s rise.
Notable Quotes
Strategy's Moat
They've got more than 11X Bitcoin held on their balance sheet than any other company in the world. So that's a literal order of magnitude larger.
Jeff Walton @punterjeff
Bitcoin as Collateral
Bitcoin itself is collateral. It can effectively be pledged as collateral, but what strategy is doing is they're monetizing the balance sheet as collateral.
Jeff Walton @punterjeff
Why Buy MSTR Over Bitcoin
They're fundamentally different products. You're buying an equity for some expectation of that equity to continue to arise. It's effectively a infinite duration call option on the assets of the company.
Jeff Walton @punterjeff
Volatility is Vitality
Volatility is vitality. They're effectively monetizing the volatility. They're selling the volatility of the asset.
Jeff Walton @punterjeff
Future of Finance
This is like redeveloping the world of finance. The total addressable market is the entire balance sheet of the world. This is a $900 trillion total addressable market.
Jeff Walton @punterjeff
Bitcoin's Long-Term View
If you look at Bitcoin on a four-year compound, four-year rolling periods, the 99th percentile four-year compound annual growth rate is like 22%.
Jeff Walton @punterjeff
Saylor's Buying Strategy
It's never going to stop buying. They are going to issue $3 trillion of Bitcoin backed credit over the next 20 years.
Jeff Walton @punterjeff
Transcript
Amit Kukreja [00:00:00]: All right. Hello, everybody. Welcome back to another deep dive. I’m here today with someone who is highly, highly requested over the past few months. We are here with Jeff Walton to discuss MSTR. Jeff, thanks for being here.
Jeff Walton [00:00:17]: Yeah, absolutely. Thanks for having me. And I know the community has been wanting this to happen, so I’m glad we could finally make it happen. Excited to be here.
Amit Kukreja [00:00:25]: Yeah, I’m glad we’re making it happen. Strategy is one of the most exciting stories that is out there. Obviously we saw what happened in 2024 with Bitcoin’s price and given Strategy’s strategy around Bitcoin, that stock has changed many people’s lives. I personally have a friend who bought Call Options when the stock was at 20 for a $40 leap, ended up going to 400. His life was changed, he got to retire. So I think there’s a lot of juice in terms of the story of what’s going on, but a lot of people are still confused why. Michael Saylor is engaging in the accumulation of Bitcoin the way he’s doing it and what it means for the trajectory of the overall ecosystem of Bitcoin. So very happy to have someone who, from my understanding in the community, given how many times you’ve been tagged, is the guy to talk about MSTR. So I’m happy to be here.
Jeff Walton [00:01:09]: Yeah, absolutely. Let’s get into it. Let’s have some fun.
Amit Kukreja [00:01:12]: So let’s get started. I’ll hit you with an easy one. No pressure. Why is Strategy even valuable in the first place?
Jeff Walton [00:01:19]: Why is Strategy valuable in the first place? Well, really they’ve got a moat of capital, right? Let’s think about Bitcoin. Let’s take a step back and Strategy has now capitalized their company on Bitcoin. They were a first mover in the space. They were effectively a zombie company back in 2020 and they were seeing the writing on the wall of their company profile. They were sitting on all this cash and they saw that there was going to be a significant amount of money printed from the Fed as a result of COVID. So they said, okay, well, we’ve got all this cash and it’s just bleeding. I’ve been running a software company. Sailor said, I’ve been running a software company for 20 years. I’m not going to beat Microsoft and I’m struggling to find a way out here. So they’re looking for a place to park their capital. So, okay, do we take over a company? Do we buy some real estate? Do we buy their commodities? And after a bunch of that research, The glaringly obvious takeaway was we need to add Bitcoin to our balance sheet. the vacuum for capturing all of this monetary inflation and can make our company withstand and be powerful into the future. Little did they know at the time, this was really going to rewrite the world and the story of finance. So why is strategy valuable? There’s currently sitting on 607,000 Bitcoin, which is valued at $72 billion. The next closest company that holds Bitcoin on the balance sheet has 50,000 Bitcoin. So they’ve got more than 11X, the next publicly traded company, they’ve got more than 11X Bitcoin held on their balance sheet than any other company in the world. So that’s a literal order of magnitude larger. So you can say that they’ve got a significant moat in between them and the next closest company. You think about, okay, well, what would it take in order for another company to catch them in terms of Bitcoin holdings? Well, they got to go buy $65 billion of Bitcoin. And how would you be able to go buy $65 billion of Bitcoin? You’ve got to go find $65 billion of Bitcoin. That’s likely going to push the price up into a different echelon. How many companies have $65 billion? that are willing and able to do this. You’re looking at maybe a handful, right? Like three or four that have $60 billion in their corporate treasury and they’re not going to do it because it’s mag seven, right? You got Berkshire Hathaway and some of the mag seven largest companies in the world. Why would they switch what they’re doing right now when what they’re doing is working? So they’ve got zero incentive to go do that. So you could think about strategy having a very significant moat here of digital capital that no other company can catch them.
Amit Kukreja [00:04:03]: So, I mean, we’re not going to go super, super deep into like Bitcoin, because I think the people that are watching probably understand like the concept of Bitcoin. But here’s the next question. Did it make sense for a sailor in 2020 to realize the company was dying and that he wanted to recapitalize the balance sheet with Bitcoin? Or was it a get out of jail free card given that Bitcoin is 10x? I mean, like, how do you philosophically think about the idea of saying, all right, the software company is kind of shitty. Let’s just buy some Bitcoin.
Jeff Walton [00:04:29]: You think about, in my opinion, I think it was an opportunity to increase the financial strength of the company. So what’s happening right now in the evolution of the last five years of adding this Bitcoin to the balance sheet is if you look at a company that’s sitting on $72 billion, what can you do with that $72 billion? It is so easy to go raise more money. In the last two years, I think in the last 12 months, strategy has raised $32 billion. This was a billion-dollar market cap company five years ago. It is now a $120 billion market cap company in five years. So by capitalizing their company on Bitcoin, They’ve been able to raise additional capital. They’ve been able to access capital markets because they have significant financial strength. So it’s the same concept, right? Is if you go, if you wanna go buy a house, when somebody is underwriting your loan on your house, what do they do? They look at your risk profile. What are the assets that you own? What are the liabilities that you have? And they say, okay, well, this person, the likelihood that they’re gonna pay back this loan is really high. So the bank gives you a mortgage and you go buy your house. Well, think about that on a massive scale, right? You look at a company like Strategy, they’re holding $72 billion of Bitcoin capital, and they have $8 billion of debt and $3 billion of preferred equity on their balance sheets. They have a 16% leverage ratio. You look at this as an incredibly strong financial company, why would you not give them money? as in a loan or some form of leverage and thinking about the world of Bitcoin backed credit. And we’re gonna get there, but I just wanted to start to tee that up. They’re sitting on $72 billion of capital and effectively $11 billion of debt. So like think about that from an underwriter’s perspective, right? Like that is a very strong financial position. And I think you can argue it’s one of the strongest financial positions in the entire market.
Amit Kukreja [00:06:36]: Right. Okay, so we will dive super deep into the credit markets and why he’s been able to raise this money at a 0% coupon rate, because that I think has been very fascinating. And I think towards the end of last year, I really started understanding why the bond issuers were so excited to get 40% premium, almost like a call option versus 0.75% dips on on the loan itself. So I think that’s really fascinating. We’ll go deeper into that. Before that, let’s start off with a more basic premise as well. Why would someone buy MSTR over just buying Bitcoin?
Jeff Walton [00:07:08]: Yeah, I think that’s a great question. A lot of people are trying to wrap their head around this right now because you’ve got two options, right? Well, you’ve got many options now in this space. You could buy Bitcoin, which is the asset, the commodity. When you are holding the commodity, that is a purely sovereign asset. You could take that asset, you could put it in your pocket, you could take it off in exchange, and you can hold that capital in your brain with the keys, right? You can move that capital very easily. Now, when you think about holding an asset like strategy, it really digs at the very base question of why does anyone hold any equity? Why do you hold any equity? In a nutshell, you think the equity is going to go higher. You think the equity is going to go higher, or it’s some expectation of future cash flows. When you boil down why you hold any equity, in my opinion, there’s two components. There’s expectations of future cash flows, but there’s also the financial strength of the company. So I’ve got a unique perspective, and maybe this is helpful for the listeners that maybe haven’t heard me speak before. I used to be a reinsurance broker. I used to sell insurance to insurance companies to manage volatility on an insurance company balance sheet. So I’m very familiar with valuing insurance companies, but I’m also just fascinated with equities. And it’s just been a ton of fun the last decade, like valuing equities. But when you value an insurance company, you value their financial strength and their ability to leverage their balance sheet. which is different than valuing, you know, a typical equity, some expectation of future cash flows. And now you have this concept of like financial strength and expectation of future cash flows colliding with MSTR and these Bitcoin treasury companies in massive proportions. Like monumental proportions. Like the strategy is bigger than any, like 99% of the insurance companies out there. Like this is a huge story.
Amit Kukreja [00:09:06]: Right. And one of the reasons is a huge, huge story is because if the price of Bitcoin continues to kegger the way it is, I mean, the value of the leverage that they have against that Bitcoin, in your opinion, not even just in your opinion, in terms of the credit market’s opinion is massive and it’s bigger than any other insurance company that exists.
Jeff Walton [00:09:24]: Yeah, and it gets stronger. So, and going back to your original question and make sure I answer this, why would anybody buy strategy instead of Bitcoin? They’re fundamentally different products. You’re buying an equity for some expectation of that equity to continue to arise. It’s effectively a infinite duration call option on the assets of the company.
Amit Kukreja [00:09:43]: So to push back a little bit on that, the sort of argument from the bears on this is that if you’re paying a 2X NAV, you’re paying $2 for one value for $1 Bitcoin. Now, the bull argument would be, well, micro strategy can do something with that Bitcoin that is valuable, which is what justifies it. Just like you pay 30 times earnings on Microsoft. Why? Because you believe Microsoft can do something with the cash flows that they get to continue growing. What is the same analogy for why Strategy can do something with the appreciation on Bitcoin to keep growing?
Jeff Walton [00:10:15]: Because it’s collateral. Bitcoin itself is collateral. It can effectively be, it can be pledged as collateral, but what strategy is doing is they’re monetizing the balance sheet as collateral. So they’re taking this huge pile of assets. You get $72 billion of assets. and they’re effectively transforming that pile of assets into different risk tranches on their balance sheet using their capital stack. And they’re issuing Bitcoin backed credit securities to the market. And this might be a basic segue here, but when they’re issuing Bitcoin backed credit securities to the market, Uh, the buyer of those securities is getting reduced upside and reduced downside Right. So where does that reduced upside and reduced downside go? That reduced downside and reduced upside goes to the common stock shareholder so any excess risk and any excess return is getting delivered to the common stock shareholder in effective a Bitcoin dividend reinvestment program, right? So that’s why you see this Bitcoin per share metric has been increasing over time. And you think about, okay, what’s their ability to continue to do that in the future? Okay, what’s the size of their assets? What’s the size of the debt? What’s the capacity for issuing more debt? What’s that marketplace look like? And how can that- To push back
Amit Kukreja [00:11:44]: real quick right here, this is where people will say it’s a Ponzi. Okay, so they keep issuing more money to buy more Bitcoin, the price of Bitcoin keeps going up, which gives them more leverage to issue more money to buy more Bitcoin. But intrinsically, you’re paying $2 for $1 Bitcoin. They’re not like, for a little example, Ethereum, you can at least stake it, right? So the more Ethereum you have, maybe it justifies the MNAV on these Ethereum Charger companies, because they can get a better yield on Ethereum. for micro-strategies, they can just convince more people to keep giving them more money to buy more Bitcoin. And that’s what creates the hype on the MNAV. Or is there something deeper for why you pay that premium?
Jeff Walton [00:12:19]: Yeah, they’re effectively staking it in the traditional financial markets.
Jeff Walton [00:12:24]: That’s effectively what it is. By issuing these securities, they actually have a senior position on the capital stack. So in the event of a liquidation, if there was ever a liquidation, common stock shareholders are last. They get the last pile of money if there’s any money left. And all of the securitized holders that sit above common stock shareholders, they get money in the event of a liquidation. That’s just how the capital stack works. So you think about What’s important here for strategy is managing their leverage ratio and their overall capital plan and capital strategy, understanding that the entire Bitcoin supply is fixed. This works because there’s a fixed supply with Bitcoin. And they’re printing more dollars daily. You’ve got an asset sitting on your balance sheet that’s growing at 50% compound annual growth rate. You’re issuing securities at $8 per share from a fiat basis. And that interest rate is decreasing over time as the value of your assets get greater and greater. And your credit quality, the credit quality of your balance sheet continues to rise. So this is like redeveloping the world of finance. And I kind of want to hit on this portion real quick. Why is strategy valuable? And when you think about the total addressable market, like what is the total addressable market here for this company to issue securities, Bitcoin backed credit products, the total addressable market is the entire balance sheet of the world. This is a $900 trillion total addressable market. Why? Because the fixed income world is $300 trillion. The real estate world is $350 trillion. The money market is $100 trillion. The equity market is $118 trillion. So you think about the other securities that exist in the market in the fixed income landscape. Go look at any other perpetual preferred equities in the market. You could look at Boeing perpetual preferred equity is paying 6.5% interest rate. And you’ve got airplanes falling out of the sky. You look at PG&E, California electricity provider for two thirds of the state is paying six and a half percent interest. And they just had a $10 billion wildfire loss in 2018, ton massive physical risk. And now you look at the instruments that strategy is providing, they’re 10 X over collateralized by the capital and they’re paying four or 500 basis points spread on top of some of these risky assets in the fixed income market. So the, in my opinion, the physical risk market is mispriced. The Bitcoin backed credit market is mispriced. It’s getting repriced and the world is starting to understand the new risk profile here of a Bitcoin balance sheet, a strong Bitcoin balance sheet.
Amit Kukreja [00:15:29]: Yeah. And I think the other public companies that are engaging in this treasury strategy, like the meta planets of the world in Japan, It’s so fascinating to me because Japan’s debt to GDP ratio is over 250%. And I think a lot of the people in Japan, a lot of the youth in Japan are starting to be like, why should I trust my government’s ability to manage this fiscal catastrophe, given they haven’t been able to do it for the past hundred years? Maybe I should put my money somewhere else. And that’s where you get a meta-plan that starts to get a decent MNAV as well. And so I think it’s definitely creating a new capital structure for what it means to engage in a Bitcoin-based balance sheet. So you got to stack more Bitcoin. Let’s get into this conversation. How is sailor convincing? So there’s there’s a lot of parts of this question, and then I’ll give it to you. How is he convincing people to give him money at 0%? Second, what are all these new strk strc things that he’s putting out there and like, they are like stocks of their own or companies of their own to an extent. He said he’s IPO in 5 million shares of a new one, STRC. How is that helping? And then the third layer to this question is he just diluted, he didn’t have the money of $700 million to buy 6,000 Bitcoin. Why is that also something that adds the pieces to willingfully be diluted just for Saylor to continue to buy more Bitcoin?
Jeff Walton [00:16:46]: Yeah, that’s a lot there. So effectively, what are the treasury operations and how they work? If you were to boil it down, what are the treasury operations and how they work? So let’s start with the 0% interest convertible debt, which I think is a good question and we can focus on this for a moment. So over the past four years, strategy’s raised eight billion, I think $10 billion in aggregate of convertible debt. And that convertible debt is at a 0% interest rate and it’s convertible into shares at a future point in time. You think about this as a 0% interest rate, but really the interest that they would have gotten paid on that effective loan is getting rolled into the conversion price. So the conversion price is a little bit lower. The market, when they offer these types of products to the market, they say, okay, well, you could take 0% interest and a lower conversion price, or you could take 5% interest and a higher conversion price. It’s a function of the pricing mechanism and how that instrument is priced. So when they sell those instruments, it’s just a function of the pricing mechanism. The reason those buyers are interested in that product at 0% interest is because there’s this arbitrage opportunity between the price of the bond trading in the secondary market and the value of the equity that it’s relative to. So when they’re issuing the convertible debt, the debt is convertible into equity at a future point in time. And it has downside protection, right? Because it is more senior in the capital stack. Effectively, if the company would bankrupt, like I get the assets, I have downside protection. Comm stock shareholders don’t have downside protection. And so they have the ability to basically arb trade back and forth between the price of the bond in the secondary market and the equity that it’s hedged against. So they’re kind of arbing and hedging back and forth all day, every day, depending on different price movements in the stock. So when strategy issues those instruments, the buyer hedges out their exposure on day one. So they may short 70% of the stock on day one to hedge their exposure. And over the life of the loan, they will be hedging daily based on price movements of the stock.
Jeff Walton [00:19:06]: Now they’ve got about $5 billion of that equity is currently trading super, $5 billion of that debt is trading super deep in the money. So it’s effectively trading as equity and there’s basically short interest that’s matched one-to-one hedged with that equity exposure. So when you look at the short interest with strategy, it’s a little bit different than most stocks because they’ve got all this convertible debt holding on their balance sheet. You can match a lot of that one-to-one with the convertible debt.
Amit Kukreja [00:19:36]: Okay, so we’ll take it step by step. The way I understand it is, if I buy a call option on MSTR for 500, I need MSTR to get in the money and be 500 by my expiration date to make that money. These convertible notes are like, hey, instead of paying the premium for the call option, or the prune that you pay for the call option is something the company will use today. And we’re not going to pay you any interest. But if MSCR gets to the conversion price, aka the strike price on what would be my call option, we will dilute the shareholder base by XYZ amount of shares, but you will get your shares at 400 stocks at 500. You just made 100 bucks a share. So you don’t really care about 2% interest.
Jeff Walton [00:20:17]: Right. But the difference is they’re hedging along the way. So like while it’s trading in the money, once the once the bond itself is closed, there’s no the dilution has already happened. The dilution has already occurred. because they’ve already shorted the stock along the way as the price of the stock was going up. So they’ve already hedged out their exposure 100%. Basically, they hedge out the conversion premium, that 40% between when it was issued and that conversion price. So that premium has already been hedged out, basically.
Amit Kukreja [00:20:51]: So even with the hedge, it is still attractive to them because the return they would get is better than a regular, like Boeing.
Jeff Walton [00:20:59]: Absolutely. Convertible bonds have been the best performing bonds in the entire market by like an order of magnitude right like most of these convertible bonds in most marketplaces There’s some proportion of them that go bust like they’re not worth anything at the end of the period now now you’ve seen strategy issue these and They’ve been able to hedge out the entire conversion premium in six months and which is crazy. These are like eight year, six, eight year duration instruments and you’ve hedged out your entire exposure in six months. Like that’s not typical. And the reason this is also incredibly attractive is the liquidity of the market. So strategy is incredibly liquid stock. It’s been effectively top 10, top 20 publicly traded equity by volume since October of last year. And if you’re a convertible bond arbitrager, you want liquidity to be able to move in and out of a stock, short it, long it, short it, long it, short it, long it all the time. And that’s one of the reasons that it is one of the most liquid stocks because there’s a lot of trading activity going in between.
Amit Kukreja [00:22:12]: Yeah, and we’ll talk more about the options portion of it, because that also is very interesting to me. This picture right here, what are all these new preferred things that Sailor keeps putting out into the world?
Jeff Walton [00:22:24]: Yeah, so let’s shift gears. So we talked convertible bonds. All right, debt. We’ve got Bitcoin-backed debt. That’s done. What you’re looking at on the screen are on the bottom part of this pentagon here. These are the four perpetual preferred equity instruments that strategy is IPO’d and released into the market. Four different publicly traded tickers effectively operating as fixed income instruments in the market, but they’re tradable just like a public equity is. So instead of having some illiquid paper instrument that’s not tradable in the secondary market, they’ve created a liquid tradable fixed income instrument via perpetual preferred equity that you see outlined here. Now, the four of these all sit differently in the capital stack. So again, thinking about they’ve collateralized the positioning in the capital stack to create different risk return tranches throughout the capital stack. So the most senior is the convertible debt. It’s got a duration on it. The second most senior is STRF. STRF is their effectively investment grade instrument. STRF is $10 per share paid in perpetuity. Yeah, over time, not convertible or anything into any MSDR shares. And it is second most senior in the capital stack. Then you think about the second product is STRC, which they just released yesterday. This is a perpetual preferred equity that has a stable price and a floating dividend. So they’re looking to fix and peg the price at $100. It’s got a floating dividend. The third instrument is STRK, which is a convertible perpetual preferred equity, which is basically that convertible bond that we just discussed in a perpetual preferred equity that’s publicly traded. And then the final one is STRD, which is the final perpetual preferred equity. And it’s last on the capital stack, which is effectively their junk status perpetual preferred equity.
Amit Kukreja [00:24:37]: Why are bondholders buying these?
Jeff Walton [00:24:41]: Yeah, I think every single one of these instruments are structured and designed differently with different features. And they all have different risk return metrics, right? You’ve got something that’s the furthest away from risk. And you know, maybe it’s helpful. I’ve got a presentation that I could pull up some slides as well. The equities that are furthest away from risk should pay the lowest yield. If the instruments that are closest to risk should pay the highest yield. And sorry, what was your question again?
Amit Kukreja [00:25:17]: Why would they be buying STRC or STRD?
Jeff Walton [00:25:20]: Every single one of these has a different capital pool that it’s targeted. So there are ETFs in the market that are fixed income ETFs. and perpetual preferred stock ETFs or different capital pools. And you think about who’s buying these ETFs that are fixed income ETFs or who’s buying these instruments. It’s pension funds, it’s banks, it’s insurance companies, anybody with a fixed liability where they know that they have to pay a certain amount at a certain period of time, you want a fixed income instrument to meet that liability at a future point in time.
Amit Kukreja [00:26:00]: People who are close to retirement love fixed income.
Jeff Walton [00:26:02]: Bingo. Yeah. And you think, okay, well, what’s the total addressable market for that? For the fixed income market, right? It’s massive. A lot of people that are holding real estate, hold real estate for the fixed income. A lot of people, right? You think about mortgage backed securities fit into the fixed income market. So these pools of capital are enormous that need these instruments. And these instruments that Strategies created, they’re unrated in the market. So Moody’s, S&P or Fitch, they haven’t rated these instruments. These are unrated instruments. So because they’re unrated, that actually limits the capital pools that could potentially buy these, right? These capital managers have mandates on the certain types of instruments that they can buy. So if they go to their manager and say, Hey, I want to buy this, uh, you know, unrated Bitcoin backed credit fixed income instrument. Their boss might say, you’re out of your mind. It’s unrated. Like, what are you talking about?
Jeff Walton [00:26:59]: Yeah.
Jeff Walton [00:27:00]: Uh, but there are some fringe money managers out there that would be, that would eat this up because they they’re paying attention. They know what’s going on. They believe in Bitcoin. They are following along. As this world matures, as these instruments mature and the credit rating agencies begin to rate these instruments and look at the credit quality, look at the risk profile of these things and start to understand these products, the pools of capital that could buy these instruments, probably 100Xs. Because it then fits in the mandates of all of these different capital managers and capital pools. And I’m going to say one more thing here. Fixed income money managers are never going to buy Bitcoin, ever. Too volatile, not in the mandate, it just doesn’t fit. So these instruments that strategy have created are product market fit for the entire capital market.
Amit Kukreja [00:28:02]: That’s a big deal, because if you’re a fixed income money manager, you cannot buy something that does not guarantee that you will have a certain type of yield. The question is, if you buy these MSTR financial products, I guess this leads into this question, what happens if there is an issue with MSTR? Do these things perpetually pay out the yield that they’re promising to the bond market?
Jeff Walton [00:28:26]: Yeah, yeah, yeah. These instruments are paid out in perpetuity. And I’ve got some math here that I think might be just good to share. Think about the risk profile, right? Like you’re asking a question of risk, right? What’s the risk? And you think about, okay, well, what is the risk here? Volatility is the risk. And you’ve got, maybe you’ve got some custody risk potentially. So you’ve got like bad actor custody management risk. Other than that, There’s not much risk. You don’t have physical risk. It’s not like a tornado is going to take out your Bitcoin. It’s a completely different risk profile. So when you look at a company like Strategy, they’ve got $72 billion of assets. And after this new capital raise with STRC, they’re going to have $6 billion of perpetual preferred equity. That’s $6 billion of perpetual preferred equity. They have a $607 million annual dividend liability. Let’s just say composite 10%. $600 million annual, uh, dividend liability. They just raised $700 million last week on their MSTRA ATM.
Amit Kukreja [00:29:34]: Yep.
Jeff Walton [00:29:36]: So you think about their ability to pay out $600 million as a function of the dividend, and you think that they’re highly likely to be able to pay out the dividend just by using the existing ability to raise capital. So we’re going to start there. Now, the risk is Bitcoin’s volatile. What if it falls? That’s what everybody says. a bear market, let’s think about a bear market. What’s a bear market look like here? If the price of Bitcoin were to drop 70%, which can happen, right? In the past, it’s dropped 80, 85%, 80%, 75%. That’s been the last three bear cycles. I’d argue that the Bitcoin architecture has fundamentally changed now that these products exist and they have ATM ability on these products. But let’s just say Bitcoin were to drop 70%. Strategies assets would go from $72 billion down to $21 billion. Okay. So we’re talking about the price of Bitcoin going from 118,000 down to $35,000. I think it’s incredibly unlikely personally. So they’d have $21 billion of capital and they’d have effectively $6 billion of perpetual preferred equity. So the net capital, and they’d have $8 billion of debt. So the net capital that they’d hold on their balance sheet is $7.3 billion. So you’re just taking, just take the assets minus the debt plus the preferred equity. They would have $7 billion of net capital held on their balance sheet. Now. MSTR, the price of MSTR would probably be hammered, right? The price of MSTR would probably be hammered in this scenario. But as an underwriter here, would you underwrite this risk and give strategy a loan? You’ve got $21 billion of capital and you’ve got $14 billion of debt. So they’ve got $7 billion of net capital. You’re talking about like the 750th largest company in the U S from a market cap perspective.
Amit Kukreja [00:31:44]: Yeah.
Jeff Walton [00:31:45]: So it’s a lot of money, right? If the price of Bitcoin fell 70%, they’d still be sitting on a lot of net money power. And their ability to go raise capital is still pretty high, right? Like I would underwrite that loan. I believe in Bitcoin, I would underwrite that loan. I know there are many other people out in the market that would also underwrite that loan. Would the terms be egregious? Yes, probably. But they would have the ability to pay out the dividends moving forward because of their financial strength and their ability to raise capital.
Amit Kukreja [00:32:17]: Right. The 700 million ATM they just did on Monday, there is a debate in the MSTR community that I’ve seen of people that feel like they’re getting screwed when he does this. And then there’s the sort of faithfuls that are like, this is the smartest thing ever. He gets to use this as liquidity, he gets to buy more Bitcoin, Bitcoin’s going to a million bucks. Eventually our MSTR is going to be worth a lot more. What is your take on him using these ATMs?
Jeff Walton [00:32:42]: I think it’s completely necessary. And this to me is a stock that like I’m gonna hold for the rest of my life. This is equivalent to buying Apple in my opinion in like 1980, 1989. And why do I think that? I think that because the total addressable market here is enormous. And I’m thinking about this from the longterm. Now, every time they use the ATM, they’re buying Bitcoin today at $118,000. I think the price of Bitcoin is going to $5 million, $10 million. Would I rather them get the Bitcoin today at $118,000? Absolutely. Because that increases the credit quality, right? It increases the amount of assets that they have on the balance sheet relative to the debt that they have on the balance sheet. I want strategy to be able to issue hundreds of billions of dollars of this perpetual preferred equity in the coming years. So every Bitcoin that you stack today, is that much more power and ability to speed up the amount of perpetual preferred equity that they can issue in the future. And in my opinion, these instruments that they’ve created are too good not to hold. Like the incentives are aligned. They are too good not to hold. You’re going to have fixed income money managers that are gonna buy these instruments and they are gonna whoop ass on all of the other fixed income money managers out in the market. And that money is gonna follow success. Wait, how did you do that? How did you beat us by 200 basis points when everything else in the market is 600 basis points? How’d you do that? It’s like, well, I bought these instruments, these Bitcoin backed instruments that have significantly less risk. They’re over collateralized and they have no physical risk. And I’m seeing an opportunity that the market doesn’t see yet. And as that matures and evolves, more capital is going to come in the door to buy those instruments. And I think because I think they’re too good not to hold
Amit Kukreja [00:34:46]: money finds success. I mean, we see this in the stock market all the time, right? I mean, like these, these mean stocks, right? Open door. If it goes up, you know, 30% in a day, you have money from across the world, find its way into their brokerage app saying, Hey, I want to buy some open door. So the idea that these preferreds, these, these convertibles can perform obviously is definitely going to attract capital, which does beg the question.
Amit Kukreja [00:35:11]: around Bitcoin’s volatility. So if Bitcoin stops cagering at this level, then I think a lot of this stuff isn’t as exciting anymore. Do you think there is a world in which Bitcoin just doesn’t perform 20, 30% a year like it’s been doing for the past 10
Jeff Walton [00:35:27]: years? I don’t think so. And the reason being is that you have strategy in the market doing this and you now have over a hundred companies in the market that are looking to do the exact same thing. You’ve got a wave, five years ago, there was one company that had Bitcoin in the balance sheet. Fast forward today, there’s 150 companies that have Bitcoin in the balance sheet. Fast forward five years from now, there’s gonna be 2000 companies that have Bitcoin in the balance sheet. And they’re all going to be hungry to store their energy into a capital that doesn’t decay. You look at a company like Strategy, right? Why would you not do this? Why would you not do this? Look at the performance of the stock. And it’s consistent, right? It’s beat everything. It has beat everything in the market. And if you’re a S&P 500 company, you’re like the 400th largest company on the planet, the S&P 500 is gonna have 50% turnover with AI over the next seven, eight years. I can almost guarantee it. And so if you think about, okay, well, I’m, you know, 400th largest company in the world and I’m just, I have no excitement in my stock. I’ve just been issuing a dividend when I have excess capital. When companies are issuing dividends, when they’re issuing stock buybacks, that’s an admission that I don’t know what to do with his money anymore. And you’re pulling the volatility out of the stock. Like you’re pulling, you’re getting rid of all the excitement in your stock. Why was Amazon super exciting in the early 2000s? Because they were taking all the money they were bringing in the door and they were shoving it into R&D. That’s why it was exciting. That’s volatility. You’re like, what is this going to be? It’s something bigger than what it is right now. what’s happening with MSDR is you’ve got all this capital coming in the door and they’re shoving it into an asset that’s caggering at 50% compound annual growth rate. It’s outperforming anything else in the market and the supply is just getting less and less. And you’ve got the number of companies that are doing this are increasing exponentially. So much so I joined one, I quit my reinsurance job to do this full time because this is the best opportunity in the entire market.
Amit Kukreja [00:37:45]: It’s something that I think even I had to come to grips with. For a lot of the people that say, MSG is a Ponzi, Bitcoin is a Ponzi, none of it makes any sense. You can’t deny something for the past decade that has outperformed everything. Every single, I mean, like that should make you curious as Michael Saylor says, right? It’s just like, well, why? Because usually if it was a scam, it was a fraud, it was a Ponzi. I mean, maybe they can go on for multiple decades, but usually the gig is up at some point and people start to recognize there’s no intrinsic value. And that’s obviously subjective and debatable, but what’s not subjective or debatable are the results, right?
Jeff Walton [00:38:21]: Yeah. One of my favorite things about this entire concept here is you have two valuation systems that are also clashing in epic proportions. And what do I mean by that? You have a fiat valuation system and a Bitcoin valuation system. And a lot of people say, like, as you pointed out here, like, why would you buy a strategy at 2MNAV? Like, you just buy Bitcoin. Well, that’s taking a Bitcoin mindset. If you’re taking a Bitcoin mindset, you should also price the rest of the world in Bitcoin. What’s Nvidia worth? Nvidia is worth 35 million Bitcoin. Well, that’s worth more than all the Bitcoin in the world. Is Nvidia overvalued? So stocks, if you’re going to compare them, they have to be compared in the same valuation system. So people are taking this Bitcoin mindset and saying, oh, strategy shouldn’t be worth two MNAV. Well, it’s priced in dollars, though. So how does it rank relative to everything else in the market? And what is the architecture of the equity market? The architecture of the equity market is as your market cap increases, the passive flows and the passive demand on your equity increases, not linearly, it increases exponentially. Yep. So if you have a
Amit Kukreja [00:39:53]: really good point to collect rocket lab, right? This is a company worth 50 times sales. Why? Why the hell would you pay 50 times sales for this company? Well, It could be a small SpaceX. It can get more contracts from the DOD. You come up with all these re like these subjective arguments, the sort of basic valuation argument that people come up with to try to make sense of why it deserves to be at that multiple. And guess what? It’s traded at 50 times sales for about a week and a half now. It’s not falling off because people believe, I mean, Tesla is Tesla really worth a trillion? Maybe, but it’s at a trillion right now instead of, you know, 40 billion, like a regular auto company, because people believe in it. So I think the point you’re making here as well is that valuations are subjective. And if you value things in the context of Bitcoin versus Fiat, you can take any argument for why you pay 30 times for Microsoft earnings, just like why you pay 2X NAV for MSTR.
Jeff Walton [00:40:44]: Right. Exactly. If you, if you look at, I think about this, you look at PE ratio, price to sales, or MNAV, right? Multiple and net capital is effectively what that concept is. Apple is trading at a 47X multiple on net capital held on their balance sheet. You just take their assets, less their debt. And the market cap is 47 times the net assets that they have on their balance sheet. Why does that exist? It’s like, well, everybody’s got an Apple cell phone and everybody knows what the product is. And everybody thinks that everybody in the world is going to have an Apple cell phone and an Apple computer and all that. To your point, once a company gets this energy and floats up to the top of the publicly traded leaderboard, it’s kind of a self-fulfilling prophecy. It kind of just stays up there. Because you have this passive demand that’s continuing to push it up there and you have these communities that are building behind it now that are pushing it up there. Now, one thing I think is unique here with strategy is if you think Bitcoin is going to a million dollars, strategy is going to hold $600 billion of capital on their balance sheet. The company’s priced at 120 billion right now. So should the company be worth less than what the capital is on the balance sheet? Probably not. And if it goes to 600 billion, that means the passive flows that are coming in the door from all these index ETFs that they’re included in is going to be increasing exponentially as the value of the company goes higher. So
Amit Kukreja [00:42:18]: I’m so happy you said that because for, for the Tesla shareholders, which, which I am one of, and I’m a Tesla bull, you believe robotaxing optimist is going to be worth so much more in the future. So you’re paying a trillion today in market cap, cause you think it’ll be worth eventually 5 trillion or 10 trillion. And so if you think Bitcoin’s going to a million and you think, uh, you know, strategy, which is worth 120 billion, we’ll have 600 billion on the balance sheet, which if it gets a two X multiple will be worth 1.2 trillion at that point. It’s cheap.
Jeff Walton [00:42:45]: Right. All equities are forward looking. Right? But the question is how far forward looking are they? Right. At any given time. And how much does the market understand what the value proposition is? And you look at the companies like the Palantir, you know, Tesla, and they’re sexy, right? They’ve got these sexy products. Finance is way less sexy. Historically, it’s just way less sexy. People don’t get it. It’s confusing. People don’t get Bitcoin, let alone Micro strategy who’s capitalized on bitcoin, let alone a fixed income instrument that’s backed by bitcoin and the the marketplace that that tackles and approaches i’ve got a unique lens into this because I literally worked with insurance companies and managing their balance sheets for a decade So I know how big the pools of capital are that want these instruments and they want duration assets with stability and and those insurance companies If they can’t hold Bitcoin in the balance sheet because they don’t get any credit to leverage against it. Same with banks. Like they can’t hold these instruments. But if they hold equity or fixed income instruments, they can leverage against them. Because those instruments from the rating agencies, they give them credit for holding these instruments where you get no credit for holding Bitcoin. So this is product market fit for the entire financial world. And these products, everybody needs these products. Right? They are, everybody needs them. Nobody understands them. And I think that’s where we are in this landscape.
Amit Kukreja [00:44:23]: What is your biggest bear case on MSTR?
Jeff Walton [00:44:25]: Biggest bear case is there’s some systemic problem with Bitcoin. some systemic problem with Bitcoin quantum. I
Amit Kukreja [00:44:37]: was just about the quantum computer quantum.
Jeff Walton [00:44:39]: You think about the quantum risk. Okay. Well quantum risk starts becoming a real risk. What’s your bank account screwed first? Your bank account is like your JP Morgan bank account is screwed first. That’s the lowest hanging fruit. And at that point you Bitcoin has the ability to be quantum proof. You just increase the algorithm in order to prevent a quantum attack. There are ways around it and it’s something that the community is actively talking about in strengthening Bitcoin.
Amit Kukreja [00:45:08]: But you don’t think there’s any other bear case outside of Bitcoin itself?
Jeff Walton [00:45:13]: Yeah, so some things that come up often are like key man risk with sailor, right? If something happened to sailor, you’ve got key man risk. Yeah, that’s possible. But this Bitcoin is held by strategy, not by sailor. And there would probably be a down scenario. If something happened to sailor in the short term, the stock’s going to go down in the short term. That’s just a reality. But they’ve got a really strong, small capital team that’s actually been running this. Saylor is the voice, and he’s been a lot of the brain from the instruments that have been created so far. But there’s also a team behind him that are actually talking to the capital providers in the market and going to get these things done as well. There’s a team there and that capital is sitting on strategies balance sheet. So you can think about key man risk, but I think that’s a less of an issue. A lot of people also ask about, you know, what is the probability of paper Bitcoin? Does the Bitcoin actually exist? What if something happens to Coinbase or one of their custody providers? Yeah, I think that’s a possible risk. I think it’s incredibly unlikely. But again, When I think about risk in the marketplace, again, my background as a risk manager, this seems like the best risk adjusted return opportunity in the entire market because everything else has significantly more risk. You know, population risk, AI risk, competitor risk, physical risk.
Amit Kukreja [00:46:44]: In video, I mean, imagine there’s some competitor with better GPUs. I mean, there’s all these idiosyncratic risks, but with MSCR, it’s literally just Bitcoin or bust.
Jeff Walton [00:46:53]: It’s capital. It’s capital. It’s digital capital that’s not going anywhere. And it’s not subject to all of these risks. This is the best idea in all of finance. Capitalize your balancing on Bitcoin and offer securitized products backed by Bitcoin. Manage your leverage ratio. This is the best idea. All companies, if you’re a zombie company, and you’ve just been petering around your top 1000, maybe you’re in the Russell 2000 and your stock hasn’t gone anywhere and your CEO, you’re like, well, I can’t inject any more electricity to my company. My dollars are getting printed away. I own the piece of property that I’m in. I might as well just buy Bitcoin. And at the end of the day, at least I have Bitcoin. If I think Bitcoin’s going up and the dollar’s going down forever, at least I got Bitcoin in my company. I could sell my company for Bitcoin because it’s got Bitcoin.
Amit Kukreja [00:47:51]: Agreed. And I think I want to underscore what you’re saying right here. It is so difficult to stand out in today’s environment and get people’s attention, right? It’s a noisy economy. AI is making it even easier. Money is not the asset. Attention is the true asset that the byproduct of that attention inevitably can be things like money. But you have to get people to care about what you’re doing. And I’ve seen so many companies public companies over the past couple years that have not been able to invigorate a shareholder base. I mean, I’ve seen them try to replicate the sort of magic that the Palantir community has, that the Robinhood community has, and they just can’t do it. They’re not exciting companies. And if they try to cultivate an investor base with no authenticity, no one really cares. And at the end of the day, you need people to care to buy the damn
Amit Kukreja [00:48:35]: Right.
Jeff Walton [00:48:35]: And
Amit Kukreja [00:48:37]: the fact that MSTR sailor has figured out how to get people’s attention and that Bitcoin in and of itself is electrifying inside of a balance sheet for a company. That is something that can’t be ignored because if you do not have people’s attention, you don’t have their liquidity. So the question here is why don’t meta Microsoft and Amazon understand this and why are they not investing?
Jeff Walton [00:48:58]: Yeah, that’s an interesting question. I just don’t they don’t have to. They don’t have to. Microsoft had a shareholder vote to explore the possibility of putting Bitcoin on the balance sheet. It was voted 99% against. Meta did the same. And I think Zuck abstained from the vote, same thing. 99% voted against exploring the opportunity to add Bitcoin to the balance sheet. Even though Zuck, I think has goats named Satoshi and like, you know, I think he’s a Bitcoiner, but he doesn’t need to put it into his company because they’ve been successful in what they’ve done in the past. What I think a lot of people miss here is they confuse volatility with risk. Bitcoin’s been incredibly volatile in the past. Go look at the chart. It’s incredibly volatile. Everybody has bought the top at some point in time. Everybody has bought the top. And it’s been volatile that entire time, but they confuse volatility risk. And if you look at Bitcoin as a duration asset instead of a short-term asset, And what I mean by that, if you look at Bitcoin on a four-year compound, four-year rolling periods, the 99th percentile four-year compound annual growth rate is like 22%. So if you start thinking about Bitcoin in a different framework as a duration asset, okay, this is an asset I need to hold for four years. This is a bond. Start to think of Bitcoin as a bond. I need to hold it for four years. that fundamentally changes how you view the asset class. Whereas a lot of people don’t, they don’t see that, they don’t zoom out and see that, okay, if I just hold this thing for four years, it doesn’t matter if I bought the top 99th percentile, I’m still net positive here with a 22% compound annual growth rate. I beat the money supply increasing, I beat S&P 500, I beat everything, even if I bought the top. And so you can go look back. Since the beginning of, I think since 2014, there have been something like 4,000 four-year return periods. If you’re to buy on January 1st and four years later sell on January 1st, there’s been about 4,000 return periods. Go run the math. You can hold this as effectively like a bond and that capital is continuing to come in the door and that excitement is increasing in this space.
Amit Kukreja [00:51:33]: So the excitement is there for Microsoft Meta Amazon, which is why they don’t need to do it. Do you think at some point they think treasuries are not the best option and they also want else? I mean, they all started giving dividends outside of Amazon, which is kind of them recognizing, Hey, we have excess capital.
Jeff Walton [00:51:48]: Yeah, that’s we get into this concept of buybacks and I’ve been really focused on this recently because I think this is where the narrative shifts. I think it’s inevitable in my opinion that strategy is going to go to the top of the Bugwood Traded Leaderboard at some point in time and then the conversation changes. It goes to why aren’t the other companies doing this? And all of the attention is going to go from strategy to all of the other companies and the dividends that they’ve issued and the buybacks that they’ve issued. What’s the point of them? What’s the point? What’s the point of holding the equity? What’s the point of issuing this dividends? Is there a better opportunity cost of capital here? So- It
Amit Kukreja [00:52:29]: already started with Apple, right? Yeah, you
Jeff Walton [00:52:31]: look at Apple. And when you issue this buyback, you also set this threshold for what the buyback should be next year.
Amit Kukreja [00:52:40]: Yeah.
Jeff Walton [00:52:40]: And this is already starting to come into play with Apple. I think last year they did $110 billion buyback. This year they did $100 billion buyback. Now the question’s, whoa, is that a bad sign because they did a smaller buyback this year? Does that mean the tide is turning? What’s the reason for that? And what would be a better use of that capital? Is it better to buy those shares back? Or is it better to buy Bitcoin and hold that as permanent capital on your balance sheet to leverage against? It’s been very clear that strategy has been able to raise a ton of money in the capital markets because they’ve held the Bitcoin in the balance sheet. Now, if you look at a company like Apple, they’ve got this business and if they had Bitcoin on the balance sheet, they could also go leverage the capital markets. They can already leverage the capital markets because they have these future cash flows. But if you have these two components, if you’ve got this powerful capital and this business, you know, what does that look like? I think that’s where the narrative shifts and changed. And I’ve done some research on this, just looked at buybacks over the last three years. The one that stood out to me was Chevron. Chevron in 2023 issued a $75 billion buyback. Since then, the market cap of the company has dropped from 357 billion down to 319 billion. So if they would have bought Bitcoin, They would have returned 405% on the Bitcoin that they purchased and the Bitcoin would be worth more than the market cap of the company today.
Amit Kukreja [00:54:13]: My goodness.
Jeff Walton [00:54:15]: So I think that’s where some of this narrative starts to go. And I focus on the MAG-7 because the numbers are just enormous, right? But this also applies to companies that are smaller. And you look at a company like Intuit, I think Intuit’s got a $200 billion market cap. They issued a $2 billion stock. Is Intuit ever gonna be the top 10 publicly traded company in the world? No. It’s not sexy. So what should they do? And how do you get attention into your stock? How do you add volatility in your stock? How do you get electricity into your stock? And the easiest way is you add Bitcoin to your balance sheet. It’ll increase your volatility. It’ll increase your liquidity. It’ll increase your options market. There will be excitement in your stock. There’s energy clearly from the Bitcoin market, everybody that’s following these things. And that’s the way this thing is moving.
Amit Kukreja [00:55:11]: Can we speak about volatility and options for a second? Why is that so important to MSTR’s thesis? Saylor’s quote is, volatility is vitality. What does that mean?
Jeff Walton [00:55:24]: Yeah. Well, volatility is vitality. They’re effectively monetizing the volatility. They’re selling the volatility of the asset, right? They are restructuring they’re monetizing the volatility and adding the volatility to the balance sheet. But every time they issue one of these instruments, they are selling the excess volatility and the excess upside and the excess downside, and that gets delivered to common stock shareholders. And that volatility is what generates excitement in the stock. You’ve got this possibility for high outsize returns. Yeah, there’s possibility for high outsize losses as well, but that increases depth in the options market. It increases depth in liquidity in your market. People that are hedging both ways, directionally, back and forth, increase shorting, increase longing. There are new instruments that have been created around it. Think about the micro strategy ecosystem. And you’ve got an instrument, MSTY, that’s monetizing the volatility by selling covered calls on the instrument. That fund in 12 months went from $0 to $4 billion of assets under management. $5.6,
Amit Kukreja [00:56:31]: I checked yesterday.
Jeff Walton [00:56:32]: $5.6, oh my god. $4 billion was just a little while ago. $5.6 billion in assets under management in 12 months. That is insane. And I think the first year, the first 12 months, MSTY delivered a 95% dividend. That is monetizing the volatility. Then you think about the other products that are in the ecosystem. You’ve got MSTX, IMST, MSTU. You’ve got the leverage products, 2X leverage to the upside. We’ve only just started here. This is the first year. I think of this similarly as The creation of mortgage back, this is very similar to like the creation of mortgage-backed securities in the 70s, where mortgage-backed securities went on an epic run for 40 years. As the monetization of the value of bundling real estate, people saw the fixed income opportunities there, steady stream of cash flows. This is a very similar type situation, but it’s monetizing the value of one of the most powerful assets on the planet with a fixed supply. the volatility of it.
Amit Kukreja [00:57:47]: Right. Is Ethereum valuable to you at all?
Jeff Walton [00:57:54]: I own zero Ethereum, despite I have an NFT, which was my original PFP. And it’s the only thing I own in the Ethereum landscape.
Amit Kukreja [00:58:03]: You’re a Bitcoin maxi. You don’t believe it.
Jeff Walton [00:58:06]: I’m a Bitcoin maxi. Yeah.
Amit Kukreja [00:58:08]: It’s so funny just I just had this it’s like it’s always like yeah, I’m Christian Yeah, it’s
Jeff Walton [00:58:23]: I’ve explored all of these from curiosity I’ve explored aetherium In the throws of the bear market. I was playing around with NFTs. I was like, oh, this is interesting Let me see how this works. So I like went and bought one. I’m like, huh, that’s wow, this is cool. I could kind of see it. NFT is like a call option on Ethereum, basically. It’s like if there’s craziness on this one little thing, it could be a call option on the underlying asset. And I looked at Solana and I’m like, okay, there’s a lot of speed here. This is different. This is interesting. But it really came down to decentralization for me and proof of work versus proof of stake. So the ability, the fundamental concept here with Bitcoin being a decentralized, securitized computer system that nobody controls and the issuance itself is fixed into the future. Nobody can change it. Nobody can change how it’s structured or how it’s designed It’s it’s been online since it’s been created, right? It’s 99.9% of the time it’s been online and no block has been missed Every block has been mined and there’s all of the incentives are aligned in the entire structure of the system So I’ve been a Bitcoin maxi the entire time
Amit Kukreja [00:59:42]: Sailor, this is a really interesting question. A lot of people are thinking, would he ever have to sell Bitcoin if he got margin called?
Jeff Walton [00:59:51]: There is no margin call.
Amit Kukreja [00:59:53]: Why?
Jeff Walton [00:59:55]: All of the debt that they’ve taken on historically, the convertible debt, is unsecured. It is not securitized, it is not collateralized. It’s very different than some of the convertible debt that exists in the market with some of the other Bitcoin treasury companies, by the way. Some of the other Bitcoin treasury companies, some of the newer ones, they raised capital via convertible debt and it’s backed by 2X the collateral of Bitcoin. So if the value of the Bitcoin falls below two times the securitization of the value of the bond, then they do get called. They have to post more capital in that circumstance. in strategies instruments that there isn’t, they’re not secured. All the debt that they have on the balance sheet is not secured by the Bitcoin. So the price of Bitcoin could go down to $5. They’re not going to get margin called. They’re just going to buy all the Bitcoin.
Amit Kukreja [01:00:46]: Well, okay. So if they buy all the Bitcoin, why would the stock be valuable if it prices $5 for a Bitcoin?
Jeff Walton [01:00:54]: Well, if they buy all the Bitcoin, it’s going to keep going up.
Amit Kukreja [01:00:59]: Okay, so they can’t get margin called because of the nature of the financial instruments. That makes sense. But if Bitcoin goes to zero, you’re saying the
Jeff Walton [01:01:09]: stock goes to zero.
Amit Kukreja [01:01:11]: If Bitcoin goes to five,
Jeff Walton [01:01:13]: Bitcoin goes to five, they buy all the Bitcoin.
Amit Kukreja [01:01:16]: But why would anyone buy the stock?
Jeff Walton [01:01:19]: because the price of Bitcoin would go up because they bought all the Bitcoin.
Amit Kukreja [01:01:21]: But if they bought all the Bitcoin, if they have 21 million of it and it’s still worth five bucks. I think
Jeff Walton [01:01:25]: it’s such a tale. That’s such a tale scenario. It’s not even realistic. We’re talking like 0.0000001% chance. It’s super extreme,
Amit Kukreja [01:01:35]: but people wonder like if Bitcoin were to collapse, MSGR would just get all the Bitcoin and then they would have to reinvigorate people to get excited about Bitcoin for the price to go up.
Jeff Walton [01:01:45]: Right. Yeah, that’s possible. That’s possible. I think it’s a black swan tale scenario that’s very, very unlikely. You think about that, like strategy doesn’t own 90% of this stuff, right? This is a two and a half trillion dollar asset and strategy owns 3% of it. So that means there are people out there that hold 2.5% you know, 2.4 trillion of it, right? It’s, uh, or not 2.4. Yeah.
Amit Kukreja [01:02:21]: Is there a concentration concentration risk to one entity, not just MSR, but any entity owning that much of something that’s supposed to be decentralized?
Jeff Walton [01:02:31]: Yeah, that’s a good question. Uh, I think in this circumstance, right. I think the reality is Bitcoin for most people, for most of society, Bitcoin is too complicated. trying to go convince somebody to go take money from your bank account, go put it into an exchange, go buy Bitcoin, something that’s kind of hard to wrap your head around conceptually, and then take that money off of an exchange and plug it into a flash drive. And you see these 24 words that pop out. Now, these 24 words are your keys. If you lose them, you lose the money that you just put in there. and you better keep those safe. You should go find a safe. Maybe you should go store them geographically dispersed. It’s a difficult value proposition. Buying an equity is a far easier value proposition because you open up your Robinhood app and you say, Oh, my paycheck just hit $40 came in swipe. I just bought $40 worth of Bitcoin or I bought $40 worth of MSDR or $40 worth of, you know, the perpetual preferred equity instrument, whatever that may be. And so it’s, it’s meeting the potential buyers where they are and In my opinion, this is a necessary reality is that there’s going to be some centralization, some large holder. I personally hold Bitcoin myself just because it’s fascinating and I want that sovereignty and I’m willing to spend the time to think about it and figure it out and do that whole thing. That’s not for everybody, though. And these instruments that are being created are much more approachable for a lot of people. And like my father-in-law, for example, he bought Strike in his retirement account. He’s about to hit retirement and he’s like looking at his bond portfolio and he just just finished his job. He had his last bonus and it was like, dude, put it in strike. This is going to outperform all of your bonds and you have this perpetual call option to the upside. It’s collateralized. It’s over collateralized. It’s going to be everything in your portfolio. And he did. And he hasn’t, he hasn’t bought Bitcoin. He wasn’t going to buy Bitcoin. He’s been, he’s got a little bit of strategy or strategy, but this was far more appealing to him. And that he didn’t want to be involved in the Bitcoin ecosystem and have to hold this asset for four years. And he didn’t want the stress of having something go down 60% and then up a hundred percent. He didn’t want to deal with that. Right. And I think the reality is that most people don’t. And now the instruments that strategy is created are, they fit a investor’s appetite much easier than the volatility, the typical volatility of Bitcoin. The instrument that they just came out with is effectively a stable coin. It’s going to be fixed at a hundred dollars, but pay you, it just came out at 10% yield. That’s a high yield savings account.
Jeff Walton [01:05:37]: If you could get 10% yield and the number doesn’t change, if you need money, let’s just say you’re gonna go buy a house and you want a down payment, you wanna make sure that I’ve got those dollars there, but I don’t know when I’m gonna buy that house, you want a product like that. It’s a high yield savings account. And alternatively, some of the other products, STRF, if you think interest rates are coming down, I might wanna hold STRF because I think that’s gonna get repriced higher. because right now it’s paying 8.5% interest. If the risk-free rate drops, the price of the perpetual of preferred equity is gonna go higher to reprice the yield at the same relative credit spread between the risk-free rate.
Amit Kukreja [01:06:21]: Right. It is one of those things that I think a lot of people also are thinking about in the context of, okay, you talk about sovereignty of the individual. What about sovereignty of the government? Do you think the United States will ever actually buy Bitcoin?
Jeff Walton [01:06:36]: I think they should. I think they should. We’ve got a strategic Bitcoin reserve, now executive order by the United States. I think on the 30th, we do get the digital asset report, which was a mandate from Trump, where he’s going to talk about the digital assets that we have and the strategy and the plan for the future. So I think it’s highly likely that the US government holds Bitcoin at a future point in time. And I think it’s at the benefit of Americans, like society, like who holds the most gold? The US government holds the most gold, apparently, in Fort Knox. Apparently. Yeah, apparently. Well, it hasn’t been audited in 40 years. Why do they do that? Because gold is power. Money is power. And if Bitcoin is a new form of money, you wanna hold more than anybody else. You want that power, right? If you wanna be the premier country on the planet, you wanna hold more money than anybody else. I think that’s just period. You want to do that. And if the world, the entire world is shifting faster, more digital, more AI, you want all of the digital power as well. You want all the AI infrastructure in your own country. You want all of the Bitcoin in your own country. You want the future of crypto to be built in your own country. You want all of this to be happening in your borders and you want to hold that Bitcoin in your borders.
Amit Kukreja [01:08:06]: Do you think Tom Lee has made this argument, there’s a sovereign put on micro strategy and one day the US will just buy MSTR stock instead of buying Bitcoin?
Jeff Walton [01:08:16]: Yeah, I think they could. One of the questions that comes up is can the US government just take over MSTR’s Bitcoin? I think they’d probably take over Tether’s Bitcoin first and some of these other companies Bitcoin first. I think they would aim to do that first. Maybe not, but the really unique thing here is this is more like strategy is more in a position like the Dutch East India Trading Company where, except their money and their power, they can pick it up and move it to a different country in 45 minutes.
Amit Kukreja [01:08:54]: Yeah.
Jeff Walton [01:08:55]: Try to do that with $70 billion of gold. It’s not gonna happen.
Amit Kukreja [01:09:01]: Not easy.
Jeff Walton [01:09:03]: And now you can send all of these addresses digitally to a different country and move your operations to a different country. Their treasury team is 20 people. Right, maybe 25 people. Just move 25 people to a different country and move your Bitcoin to a different country that’s going to treat you better. Move to Singapore, move to El Salvador, somewhere that’s going to treat you better. And at that point, the incentives would be aligned for some other country to say, hey, we will welcome you. We will give you preferred tax treatment. We will welcome you to come into our country. So incentives are aligned.
Amit Kukreja [01:09:41]: We have a question here about asking about Strategy’s unwillingness to show proof of reserves. Is there any response
Jeff Walton [01:09:48]: that? Yeah, it’s a good question. Ideally, strategy would show proof of reserves, right? Because it’s an open ledger system. You can go in and track money moving at any different point in time. I don’t think that showing proof of reserves is a risk to Bitcoin, to be very clear. I think showing proof of reserves creates a human element of risk that is greater than zero. If you know where a certain wallet is and if you know who it’s held by and where it’s held potentially, there is a possibility to collude or crime or some sort of situation, some wrench attack sort of situation to steal the Bitcoin. And so that’s one element of risk. The other element is if you hold $72 billion of Bitcoin, there’s thousands of wallets. And at any one point in time, the treasury operation may wanna move those wallets for any given reason. They may want to get cheaper fees from a different custodian, so they may shift the Bitcoin to a different place, or maybe an insurance policy fits within $100 million and the Bitcoin grew, so I need to shift part of this wallet into a different wallet to stay within the insurance policy. And there’s a plethora of different reasons that you might wanna move that capital around. And you’ve seen how crazy people can get when Bitcoin moves. Right. The, a couple of weeks ago, somebody moved 80,000 Bitcoin. It was, it was huge news. Everybody was freaked out about it.
Jeff Walton [01:11:21]: Right. And
Jeff Walton [01:11:22]: it’s like 80,000 Bitcoin were sold. Oh, well, just because it moved a wallet doesn’t mean it was sold. So that can create a shit storm narrative in the market that I don’t think strategy really wants to deal with. If they move a billion Bitcoin from one wallet to another wallet strategy sold their Bitcoin. Oh my God, everybody freak out, run around. Then they have to manage that. They’ve got to come out to the market and say why they did that. There’s just this whole new element of treasury management that they don’t need to do right now by not showing proof of reserves. That’s just my opinion. It’s a lot of money. $72 billion is a lot of capital held in Bitcoin.
Amit Kukreja [01:12:04]: All right, Jeff, it’s been an hour. I got some rapid fire for you and then we are going to get you out of here. First of all, thank you for taking the time. Jeff’s Twitter, I’m putting there right now in the chat for anyone who’s interested in MSTR. I would highly suggest following him and his YouTube channel as well. Given, I think, the past hour has shown he understands what he’s talking about when it comes to MSDR. If you don’t mind disclosing, you can choose how to answer it however you want. Are you all in Bitcoin MSDR? Is that your network?
Jeff Walton [01:12:32]: Yeah, Bitcoin MSDR and a few Bitcoin treasury companies. Yeah. My background, I got involved in the GameStop movement. I yoloed my entire account into GameStop shares. I wrote it to the top. I sold it at the top because I wrapped my head around the risk here. And I realized that there were so many players in the game that once Robinhood turned off the buy button, it was all over. Did you have it
Amit Kukreja [01:12:58]: on Robinhood or on something?
Jeff Walton [01:12:58]: I had it on Robinhood. I tried to, the day that they shut off the buy button, I tried to buy more and I couldn’t. And then I freaked out. I called all my friends and I said, Hey, I can’t buy like what’s going on this manipulation. This isn’t fair. And over the weekend, I go like game theory my way through it. I said, if this moves downward on Monday, I’m out of here. Yeah. And it did and liquidated the entire portfolio. It was crazy. I liquidated everything and I bought GameStop shares and I wouldn’t, you know, the diamond hand, uh, the guys can complain that I didn’t diamond hand it, but it just didn’t, it didn’t make sense anymore. Uh, given the players in the game, right? So many hedge fund managers made 10 years of returns in two weeks.
Amit Kukreja [01:13:42]: So that was kind of your first foray with, with public stocks and you took all that and then went to the MSTR route.
Jeff Walton [01:13:47]: Yeah, I started trading call options during COVID and I was looking at MSTR. I bought the top of MSTR in 21. It’s like, wow, this is fascinating. I was super orange-pilled. I heard about Bitcoin back in 2014. I didn’t start looking more into it until 2017. And over that period of time, I got orange-pilled and been buying Bitcoin. And then the price of MSDR dropped. It went from $1,000 down to $120. And I built a valuation framework on Excel on how to value this company because I felt underexposed to Bitcoin. And I wanted to lever my portfolio as hard as I could on micro strategy at the time. And I bought the deepest out of the money call options at the farthest out in the tail with my entire portfolio. in the end of 22, early 23.
Amit Kukreja [01:14:41]: Oh my good. You went all in at the bottom at the highest possible strike. And then MSTR went on to just
Jeff Walton [01:14:49]: absolutely ripped. Yeah. Yeah. Absolutely ripped. So that that’s my, that’s my background. And I, it was funny. I was running around like my colleagues and all my friends and I was saying, Hey, you got to do this. Like go buy options and the tail and buy it out here. And, uh, did anyone, anyone
Amit Kukreja [01:15:06]: listen at all?
Jeff Walton [01:15:07]: I had two buddies buy one option contract. The options were $4,000 a piece at the time. And the stock has split since then. And I was like, this is the most mispronounced thing in the market. And they’re like, I don’t want to spend $4,000. I’m like, all right, well, I got a lot of them. And they’re like, you’re crazy, dude. Like that’s kind of to zero. And it was like right after FTX and the price of Bitcoin had turned around. It would be like bottom at 16. And I set price alerts on my phone. Like when it goes up, every thousand dollars it went up, I got a price alert. And once it hit 19,000, I said, okay, it’s time to go. It’s time to go. And I had my valuation framework with this MNAV multiple and thinking about how that could play out.
Amit Kukreja [01:15:54]: You said father-in-law, so you’re married?
Jeff Walton [01:15:57]: Married, yep.
Amit Kukreja [01:16:00]: Were you married at the time you were doing this
Jeff Walton [01:16:02]: YOLO event? I got married in 21. No, no, 2020, September 2020.
Amit Kukreja [01:16:08]: So what was the wife thinking when you were saying, Hey, we’re going to YOLO into MSU our call options.
Jeff Walton [01:16:12]: The, uh, the game stop. Well, let’s start with a game stop that ruined an entire vacation, uh, because I was a total mess trying to figure out like what to do with things. I was just, I couldn’t think about anything. Um, and then in the micro strategy bet, that was, that was a little quiet. I was a little quiet on that one. She didn’t, she didn’t necessarily know how much exposed, how much leveraged exposure we had, but I thought it was the best risk adjusted return on the market.
Amit Kukreja [01:16:38]: He had no idea what you were doing on. Yeah. Yeah, no. Probably probably probably better that way. Probably
Jeff Walton [01:16:45]: better. Yeah.
Amit Kukreja [01:16:47]: What is your personal price target on Bitcoin?
Jeff Walton [01:16:51]: Higher personal price targets going higher. I In the next couple of years, I think it could go anywhere from 200,000 to 500,000 and where it peaks out, I have no idea. And long-term, I think this is a $20 trillion asset. This is going to be priced up with gold. It’s got all of the qualities of gold, which is better. And so I think Bitcoin is going to $20 trillion long-term.
Amit Kukreja [01:17:21]: Last question for you, how many Bitcoin until Sailor stops buying?
Jeff Walton [01:17:27]: It’s never going to stop buying. They are going to issue $3 trillion of Bitcoin backed credit over the next 20 years, maybe 15 years. They’re going to have I think strategy is going to go to the top of the publicly traded leaderboard. It’s going to go to number one, and then it’s going to separate and go higher. And there’s going to be an order of magnitude in between the next closest company because the total addressable market is an order of magnitude greater than The total addressable market of capital in the entire world is an order of magnitude greater than AI or computers or robots or anything like that. It’s the base layer of the economy. The total addressable market is the base layer of the entire world.
Amit Kukreja [01:18:21]: Right, which is the capital markets. You would also assume that more liquidity, more M2 supply, better for Bitcoin, right?
Jeff Walton [01:18:30]: better for Bitcoin. It’s the vacuum that’s sucking up all this excess liquidity and you’ve got more and more people, companies, more companies are buying Bitcoin, more people are buying Bitcoin, more nation states are buying Bitcoin and they’re not stopping. They’ve leaned into it and they are fully committed and their lives have been changed for the better. So why would you change now? Why would you do anything different?
Amit Kukreja [01:18:56]: Right. I mean, I’m impressed every time I see sailors say we bought 6,000 Bitcoin, 10,000. It’s like the guy is, you know, I’ve like, I’ve kind of adopted his methodology with with Robin and I’ve been buying it from I’ve been buying from eight to literally 110, you know, and because I’m like, I think Robin, it’s going higher. So it’s a good deal to me. But it’s easier to do it when you started buying it at eight. It’s hard to do if you’re buying it at 110. And since sailors been buying Bitcoin since what 8000 seems like that’s his mentality.
Jeff Walton [01:19:22]: Yeah, nominal bias is really weird here, right? People look at Bitcoin and they’re like, oh, it’s 118,000, I’m never gonna buy it. Well, when it goes up to 400,000, people are gonna say, wow, okay, that’s actually the price of the average family home in America. And then it’s gonna go to a million and then it’s going to feel out of reach. Okay, well if Bitcoin is out of reach, it’s not even worth buying. People are gonna sit on the sideline forever here. And that’s what I mean when I said earlier that these products that Strategy is creating are more consumable for the typical person than buying Bitcoin. A typical person isn’t going to buy a million dollar beach home because it’s just out of reach. But they might get a credit card with airline miles. Something like that. Then it’s these products have product market fit for different groups of people
Jeff Walton [01:20:16]: And
Jeff Walton [01:20:17]: strategy next week is going to buy 20,000 Bitcoin They just raised two and a half billion dollars on stretch that they it got priced today So within the next week, they’re gonna buy 19 to 21 thousand Bitcoin within the next week That and that I want to hit on one more thing because we didn’t hit on this at all and FASB fair value accounting. And this was the accounting rules changed for digital assets and strategy has the ability to mark the Bitcoin to fair value on their accounting. And this quarter, they’ve got an earnings call in six days. And this quarter will be the first quarter where they have posted a positive gain on their balance sheet from holding Bitcoin. They had a $14 billion gain in Q2. $14 billion, this is the biggest story in all finance. $14 billion gain in Q2 on a net income basis, this is 10 to $11 billion. The estimated earnings per share for strategy is gonna be 36 to $40. Analysts are targeting negative six cents consensus. This is gonna be a huge blowout. And the narrative is going to shift. How do you value this company when they got an EPS of 40 35 or 40 and the the PE ratio on the stock is Six. Yeah, should it be repriced? What do you pay for that dollar of earnings? I Don’t know that like does does the mnav narrative shift and does the world start looking at this is from a PE ratio and this will also be the last and final necessary piece for strategy to qualify for the S&P 500 and
Amit Kukreja [01:22:02]: I was just going to ask, do you think they will ever let them into the index?
Jeff Walton [01:22:06]: The, the incentives are aligned. I think that if they don’t strategy is going to keep growing and they’re going to have a very similar situation on their hands with, uh, like they had with Tesla,
Jeff Walton [01:22:18]: Tesla,
Jeff Walton [01:22:18]: they didn’t include in the S and P 500, the market cap went from 150 billion to 600 billion. And they’re like, wait, hold on, I guess we got to include this company. And it just kept going higher. And a similar situation here, strategy’s valued at $120 billion. If they don’t and Bitcoin keeps going up, they’re gonna start making a relatively larger part of the index. And what I mean by incentives are aligned, BlackRock has the biggest S&P 500 index. They make fees on the S&P 500 index. BlackRock has the biggest Bitcoin ETF. BlackRock wants money If the S&P 500 starts underperforming, they get less money. Incentives are aligned. Larry Fink calls up the S&P 500 committee. Hey, you gotta add this company in.
Amit Kukreja [01:23:09]: We have no idea who decides what company is getting in or out. But we do know Larry Fink kind of owns the world. And so he can make that one call. So your argument here is that the S&P 500 has to outperform. If MSTR, which has already been the best performing asset in the past five years, continues to be, it is inevitable that they have to get in. And then those passive inflows that get into MSTR from the S&P 500, that’s a game changer. Massive.
Jeff Walton [01:23:34]: Massive. The Mag-7, if you look at the Mag-7, the S&P 500 holds 6% of those stocks. Strategy is in the top 100 right now with no S&P 500 holdings. Yes, maybe it’s been front run, maybe, but I’d argue that the market doesn’t even know this has happened because they haven’t even posted a positive earnings period yet. Six days from now, they’re gonna post a positive earnings period. And I think this is going to be a big surprise to a lot of people. Where did this come from? It’s like, well, there was actually this accounting change and they’ve been buying all this Bitcoin. And I think a lot of people are not paying attention. This is a very big story and it’s just ballooned. And most institutional money managers have no idea what’s going on here. I talked to a guy that’s issued thousands of preferred stocks last week. He didn’t even know strategies, preferred instruments existed. This is a guy, his job is working in capital markets with preferred equities and he didn’t even know they existed. I got laughed at in my reinsurance job. I’d go run around London, Bermuda, New York. I would talk about Bitcoin and say, hey, this company is holding $50 billion of this stuff. And they would laugh at me like, oh, that’s a Ponzi scheme. I’m like, well, this is actually bigger than all of the reinsurance companies that I deal with. There’s a hundred reinsurance companies out there and this is bigger than all of those companies. This is a huge deal. Like this isn’t laughable. Like I’m dead serious right now. This is a really big deal. And yeah, just people aren’t paying attention and don’t get it. They don’t want to take the time.
Amit Kukreja [01:25:18]: Last question for you, actual last question. Where were you and what was it like when you saw 100K on Bitcoin?
Jeff Walton [01:25:25]: Where was I? I was probably in my basement. Actually, I was in my basement. I think we were either live streaming or we had just live streamed and Bitcoin hit 100K. It was a ton of fun. I did go to Sailor’s 100K party in Miami on New Year’s Eve, which was a total blast. It was a blowout party and I look forward to the million dollar party at a future point in time.
Amit Kukreja [01:25:48]: I love it. Jeff, thank you so much for taking the time. We are very grateful for it. Uh, everyone can follow Jeff. His Twitter is there. His YouTube is in the description and hopefully we get to do this again and learn a lot more about. Hey,
Jeff Walton [01:25:59]: thanks for having me. I’ve been following you for a long time and I’m glad we can chat. I look forward to future conversations.
Amit Kukreja [01:26:05]: I love it. Thank you everybody. See you guys later. Good night.