➡ The company has created a unique financial instrument that adjusts its dividend monthly, a practice not seen in the history of preferred stocks or credit markets. This instrument is similar to what central banks do with their currency interest rates. The company’s goal is to offer a higher return than traditional banks, aiming for 10% instead of the usual 2-4%. This is achieved by holding Bitcoin as digital capital and issuing credit instruments on top of it, with the risk level and yield decided by the company. This approach is seen as a significant innovation in the digital assets industry.

➡ This text discusses the concept of price to book value, comparing it to various companies and banks. It explains how banks generate leverage using different types of equity capital and debt, aiming to increase the value of their common stock. The text also mentions a hypothetical scenario of selling Bitcoin and Stride to achieve a leverage factor of 50%. The main point is that banks and companies strategically create leverage to enhance their common stock value.

So we just left the world-famous Watergate Hotel, the hotel I’m staying at, heading over to the Kennedy Center for the Bitcoin and policy event. In just a couple of hours, I got Michael Saylor coming up to the suite, so we can sit down and do a deep dive on a bunch of questions I’ve been dying to ask him. I’m sure you want to hear. So stay tuned. Since we’re here in Washington, D.C. in the nation’s capital, at the keynote you just gave earlier, I love the way that you closed it down. It was like this empowering message of sort of telling people like this amazing opportunity that we have right now.

The winds have shifted, like now’s the time for those that want to embrace digital intelligence and digital capital. That’s kind of how you said it. In New York, you had said, I want to push back on the fix the money, fix the world narrative. And because it was like, in order to succeed, we have to go fix the equity and fix the funds and fix the bank. So we need to go build the world that we want. And so I’m just curious while we’re here in D.C. thinking about Bitcoin policy, how do you think we should be sort of fixing that in this political environment? More of like a constitutionalist, we’re sort of trying to get them to sort of pass laws that sort of protect us, or are we pushing for regulations that give us clarity and direction? Well, I think the good news is Bitcoin has already got the best regulatory treatment of any digital asset in the world.

And has, right? It’s globally recognized as a digital commodity and property. Even in China. In China, where crypto trading is illegal, where crypto mining is illegal, Bitcoin mining is illegal, Bitcoin holding is not illegal. And Bitcoin is recognized by the courts as digital property, as property. You can own it. So we’re already starting with a good place. If your business model is digital credit, we’ve already got pretty well-developed credit laws. The U.S. has the most advanced rules. So if you’re a U.S. company, there are a thousand ideas. I just gave you, who knows how many different ones.

There’s a thousand things you could do, starting with Bitcoin in a publicly-created company right now. You don’t need any regulatory changes. You don’t need any new laws. You can go at it. If you’re a Bitcoin treasury company outside the U.S., look, the Swiss are a bit behind on some things. The Europeans are slightly behind. They’re slower on ATMs. The Swiss are slower on preferred stocks. The Japanese are a bit slower on this and that. So you have to go and lobby those regulators and those politicians to upgrade and update their exchanges, their regs. Sometimes the tax code is prejudicial.

Like in Japan, the taxes on Bitcoin were much higher than the taxes on equity. So any company has a responsibility for advocacy on behalf of its investors and on behalf of its constituents. We think about what’s good for the credit buyers and we think about what’s good for the equity holders. We think about what’s good for the world and what’s good for the United States. And we only advocate for things that are good for everybody. The thing is, there are no losers here except the 20th century antiquated oligopoly that is selling inferior credit instruments. So it’s like you just invented the car and there are a lot of horse and buggy manufacturers that are going to be out of a job.

And if you feel sorry for them, no one’s getting cars and we’ve got the atomic powered flying faster than like hover car. And yeah, there’s a lot of people selling antiquated crappy vehicles and no one’s going to want to buy them anymore. But that’s technology. The human race has got to move forward. So if you’re offering digital credit, digital capital, digital equity, it’s a better thing. And ultimately you’re feeding the 400 million companies. Look, for every company that can’t sell a crappy credit instrument, their treasurer can buy our credit instrument and get triple or quadruple and maybe that’ll save the company.

So yeah, there’s technology that’s putting you out of business all the time. And then there’s new technology that will make you a fortune and put you in business. If you’re a critical, skeptical curmudgeon, you just focus on the negativity and you’re just negative on everything. I hate that. I hate that. That’s bad. I hate that. I don’t want to change. And if you’re constructive and cheerful and if you’re an optimist, you’re like, well, I won’t be, you know, my A-track take collection isn’t that valuable anymore. But I do have unlimited free streaming music, you know, and I guess, you know, I lost a little money invested in whatever record stores.

But I also bought some Apple stock and made a fortune. Right. And I would say all these corporate operators, their job is, you know, look at that, you know, anticipate the future, look at the past, move forward, do it in the most graceful, civil, responsible, you know, elegant fashion you can. Right. The world isn’t the way it was 100 years ago. It won’t be this way 100 years from now. That’s the human condition. If there weren’t, if there wasn’t work to do to move us from the past to the future, you wouldn’t have a job. There’d be no reason to get up in the morning.

There’d be nothing to get excited about. Right. You’re irrelevant. And I got to tell you, you don’t want to wake up one day and think I’m irrelevant. Nobody needs me. No one will care. And and the way we did it for the past 100 years is probably just the way we should do it forever. On your keynote, you said you spent, I think, about 30 years trying to come up with a billion dollar idea, which you did, and then couldn’t come up with the next one. And now half a dozen billion dollar, billion dollar ideas in the last year or two.

In New York at the Unconference, you talked about this refinery model and Standard Oil sort of taking this raw asset like Bitcoin and creating products off of it. And so you’re creating now products off of it. That’s the model to do this. What would be the kerosene of this industry? Kerosene represents most highly refined crude oil. It’s like it’s pure liquid energy. Right. It’s jet fuel. You put it in rockets like you can’t refine oil more than kerosene. So it’s an important metaphor. It’s the cleanest, highest grade distilled liquid energy, like pure grain alcohol. Right.

That’s what you’re talking about there from a from a bunch of potatoes, a stack of potatoes and outcomes, pure grain alcohol. The equivalent of kerosene in the Bitcoin industry is a treasury preferred credit instrument like stretch. So on one side, you have digital capital, Bitcoin, and Bitcoin is a long duration, volatile, high energy, high performance source of capital. Long duration. Think of it in terms of like 240 months, like 20 years. You should if you want to get the optimal performance, you’re going to hold it for 20 years. Like it’s a 10 to 20 year type investment.

Right. High volatility. Right now it’s about 45 vol, implied vol. It’s been 50, it’s been 60, it’s been 70 vol. And high performance, you know, appreciating 50 percent a year. Right. So that’s the raw commodity. What happens if I strip away the volatility, strip away the risk, strip away or compress the duration, translate it to a given currency and extract the yield. That’s what a treasury credit instrument or treasury preferred is. So that’s what stretch is. The idea is you build something that’s got one month. Like I’m going to give you 10 percent dividend yield for one month.

Like the duration is one. The yield is 10 percent. The currency base is U.S. dollars. Right. The spread is like if the risk free rate is 400 basis points and that’s like a 600 basis point credit spread. I’ve extracted a 600 basis point spread for the next month in U.S. dollars. Right. Maybe I 5X over collateralize it. Maybe I 10X. If I, you know, raw Bitcoin is like one to one. It’s like if I have a dollar of Bitcoin, I have a dollar of Bitcoin. If Bitcoin trades down 50 percent, I’ve lost half my money. But if I 10X over collateralize something, I have $10 of Bitcoin.

I have $1 of stretch. If Bitcoin trades down 50 percent, I still get a dollar of stretch. If Bitcoin trades down 90 percent, I still have a dollar of stretch. The statistical odds of Bitcoin trading down 90 percent are like point something. Right. It’s a small percentage. So by over collateralizing, you strip away the risk by structuring it to adjust. If you put a set of adjustments or representations below par, below 100, you start to strip away the volatility on the downside. Like with stretch, what we did is we put in a call option at 101.

And then we told the market we’re going to sell it actively at 100 or better. Right. And we also told the market we’re not going to sell it below 99. And if it’s below 99, we’re going to raise the dividend. OK, so you’re you’re kind of coloring this instrument. And then then the last point is we created a preferred instrument where we pay it monthly in cash and then we adjust the dividend every month. So it turns out if you scan in the history of preferred stocks or the history of the credit markets, no company has ever issued a preferred preferred stock where the management has discretion to adjust the dividend every single month.

Like there are some preferred that are floaters where they set the credit spread at 350 basis points over sofa and they will float with sofa with the risk free rate. And there are a lot that are fixed where you set it at 7 percent and the principal trade up and down if sofa falls or rises. But the idea that the credit spread is completely variable is a new idea. But by the way, not a new idea in the world of credit, because who does this? Well, nation states do it. Right. Literally, that’s what a central bank does, right? That’s what every central bank does.

They set the interest rate on their currency. What we did was just copied traditional bankers and we set the interest rate on our currency, which is stretch. So that is the kerosene of the Bitcoin treasury company or of the digital assets industry because it represents the greatest degree of financial engineering. Just like kerosene represents the greatest degree of petroleum engineering. Right. I’ve done the most refining. I’ve distilled the highest quality product. You could imagine, for example, you could you could extract the same product in yen. So I want to create a yen instrument that’s 10,000 yen that pays, you know, a monthly yen cash yield or a cash dividend.

I change that every month. And now I’ve now I’ve created the equivalent of kerosene for the Japanese market. And of course, what does everybody want? Everybody kind of just wants I’ve got some money I need to park for the next 90 days. If I put it in the bank, if I put it in the bank in Japan, I get 50 basis points or less. I put it in the bank in Switzerland. I get minus 50 basis points. If I put it in the bank in Europe, I get 200 basis points or less. If I put it in the bank in the US, I get 400 basis points or less.

And so what I’d like to do is put it in some kind of structure where I’m going to get my money back in nine months or six months or whatever. The principal is not going to move around, but I’m going to get 10 percent. Right. Everybody wants a bank on the base. 10 percent is at a four percent or two percent or zero percent. And and so I think I think the most interesting product that you can create, the most interesting digital credit product is a treasury preferred credit instrument for corporate treasures or for retirees.

Right. You know, and how big is that market? It’s like 30 trillion dollars in the US. Yeah. Of just short term treasury money. So 30 trillion in the US that’s getting paid so far. Yeah. And the opportunity with digital credit is you create a company. You hold Bitcoin. That’s digital capital. You start to issue credit instruments on top of the capital. And you can decide how much risk do you want to strip away? Is it a BTC rating of two, which is two times over collateralized? Or is it 10? Right. Right. Two is less risk stripped away.

Ten is more risk stripped away. Strip away the amount of risk you want. Strip away the amount of volatility. The smaller the instrument compared to the overall collateral pool, the less the volatility. And then there are a lot of terms and conditions that you can put in the instrument that would constrain the volatility. So you decide how much volatility and risk you want to strip away. Decide how much yield you want to give it. You decide whether you want it to be in pounds or Canadian or euros or yen or whatever. And then you distill out.

You extrude the yield and the pure boost over the risk free rate. And you offer that to the marketplace. Yeah. Now you’ve talked about the different preferreds and how even just one could work and it gives you leverage. And in the last quarterly report, which are brilliant, by the way, you’re changing the industry with that. It’s great. You showed several slides of this Bitcoin factor, which is like this amplification of Bitcoin. And so by doing the preferreds, you’re adding leverage, which then over time use a 10 year window. It can give you a Bitcoin factor of 2.8 to 5, 6, whatever.

Does that number sort of relate into this MNAV number over a long period of time and sort of justify or show why that MNAV number should be greater than 2 or 3 or 4? Yeah. So if you think about the value of the equity over and above net asset value. If the company did nothing, if it just bought Bitcoin and held Bitcoin forever, it starts to look like an ETF. Probably it trades around MNAV. The way that a company generates a premium to MNAV is primarily through credit amplification. So if a company can generate, say, 30 percent leverage, then it’s going to create an amplifier because you can see systemically, I issue a billion dollars of a preferred stock paying 10 percent.

I buy a billion of Bitcoin, right? If I own a billion dollars of Bitcoin already and I was able to do that trade, I’d have two billion dollars of Bitcoin, no additional common stock outstanding. So you end up with 50 percent leverage on that. So you start to generate amplification. Now, we have models to calculate how accretive that is. How does that contribute to Bitcoin per share? And it turns out that it’s more accretive, but this won’t come as a surprise. It’s more accretive if the cost of capital falls. For example, raising the 10 billion at 5 percent instead of 10 percent is more accretive, right? Raising it at 1 percent.

Imagine borrowing a billion dollars at 1 percent and buying Bitcoin that returns 55 percent. You’re capturing 54 percent spread, right? So the spread that you’re capturing is the function of your cost of capital. So the lower the cost of capital, the more the amplification. The higher the leverage, the more the amplification. The faster, if you did all that, the Bitcoin went up 0 percent a year. It’s not terrible. You don’t get a lot of good amplification, right? So if Bitcoin goes up 50 percent a year, right, that’s more amplification. So the rate of growth of Bitcoin, the AR of Bitcoin plus the leverage plus the cost of capital, all those are primary factors that drive the amplification.

Then as a rule of thumb, you know, we kind of calculated that, you know, assuming Bitcoin appreciates 30 percent a year and we get 30 percent leverage, then we should be able to get a 3X BTC factor or we can accumulate three times more Bitcoin per share over a 10-year timeframe. So you could imagine an MNAB floor of three, right? Makes sense. Or, you know, what do you do in percentage? Or do you do that a factor? And, you know, when you’re evaluating a company, the question is how high can they take the leverage? How much is it going to cost them? There’s second-order effects like credit risk, right? So I’m describing perpetual instrument never comes through.

There is no credit risk there. But if you were achieving that leverage with a six-month loan, right, you can go on an exchange and you can actually crank up the leverage to three or four or five. But the duration is instant, right? You get force liquidated overnight. When we’re managing the business, we’re constructing credit amplification in the most intelligent way. And, of course, in my opinion, the least risky, most intelligent way to create credit amplification is through publicly issued preferred stocks that are perpetual, right? For the obvious reason, you never refinance them.

The principal doesn’t come due. And so the risk on the principal is the minimus. And then the dividends, you know, are subject to the approval of the board of directors and the company can suspend the dividend or delay it for a time under financial duress. And so the coupon risk is the minimus as well as the principal risk. The opposite extreme is a one-year senior loan, pledge the collateral of Bitcoin, pay off the principal in one year, and pay interest every month as a coupon. Miss the interest in a month, you’re in default. Miss the principal, delay it, you’re in default.

Miss the principal, you’re in default. And the collateral gets ripped away and the entire company collapses, right? So intelligent leverage, unintelligent, risky leverage, right? You want to go for one, not the other. So you think in that example, as you said, there’s three different factors in there, but that’s sort of, in that example, that set up an MNAB number about three times. When you look at other asset-heavy companies, banking, insurance, oil, they kind of trade in that one to two times. But you think because this is not oil, this is an asset that’s got this 50 times or call it a 30 times CAGR over this long period of time.

Well, I would stop there and I would say MNAB is just price to book value. Okay, well-run banks trade at a price to book north of two. But what is Microsoft’s price to book value? Right. It’s like 20. Zero. Ten. So a lot of companies trade at a price to book five, six, seven, eight, ten, right? They have very productive capital, right? They have huge leverage on it. So MNAB and MNAB of three is just a price to book of three. Right. So, you know, how do you get there? It’s simple to figure out how you get there.

For example, if you have $10 billion of Bitcoin and you sell $10 billion worth of Stride, S-T-R-D, you would have a leverage factor of 50%. No credit risk, right? So you’d sell another $5 billion of Stride, right? If you can sell it, right? This all comes down to not should you, can you? Can you, yeah. Right, not should you. And if you do, you will get there, right? In that particular case, it all comes down to what kind of credit can you issue? And under what terms? And how rapidly? So at 50% leverage with no credit risk? I mean, then there’s a five times, right? Yeah, you could get to have a five or you could be price to book a five.

Right. But ask yourself the question, how do banks get to a price to book more than one leverage? Right. Why do preferred stocks exist at all? So banks can generate leverage on the common, right? And so everything I’m describing is not, we didn’t invent that. There’s 5,000 banks in the country right now. There are 25,000 banks a hundred years ago. Thousands and thousands of banks and all sorts of finance companies, they generate intelligent leverage using various, various tiers of equity capital, mezzanine equity, preferred equity, senior preferred, junior preferred, little bit of debt.

And then they got common equity. And the question is, so why, I mean, why does, why does your favorite bank have to issue anything at all? They’re the bank. And the answer is because they’re actually creating a liquidity on the, they’re generating leverage on the common. That’s all. I mean, JP Morgan, all these companies, they could basically pay off all their debt if they wanted. But the point is they’re, they’re trying to create leverage on the common to give the common stock value. So the only difference is they’re not really strategic about their, they’re not trying to make their credit instruments the best in the world and brag about it and make them homogeneous and transparent.

We are. Hey, if you liked this short conversation I just had, you’re going to love the full length conversation. Don’t miss it. You can go ahead and click right over here and I’ll see you over there. [tr:trw].

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