BTC241: Bitcoin Treasury Companies w/ James Check (Checkmate) Bitcoin Podcast
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You're listening to TIP. Hey, everyone. Welcome to this Wednesday's release of the Bitcoin Fundamentals podcast. On today's show, I'm joined by James Chek, also known as ChekMate, one of the most respected on-chain analysts in the Bitcoin space. We cover a wide range of topics like the shift happening from spot to leverage-driven markets, to the mechanics of the Bitcoin treasury securitization, and even the role of KYC and mining incentives in long-term network security.

We also unpack some of the lessons James learned from the 2021 cycle and how he sees Bitcoin dominance evolving in this weird narrative fractured market. All right. So with all that said, let's jump right into the interview with the insightful and knowledgeable Mr. James Chek. Celebrating 10 years, you are listening to Bitcoin Fundamentals by the Investors Podcast Network. Now for your host, Preston Pysh.

Hey, everyone. Welcome to the show. I'm here with Checkmate. James, welcome back. Excited to chat with you. You always have amazing takes. So welcome back to the show, sir. Good afternoon, Preston. Good to be here, mate. All right. So you have some prolific writing in the space. And the reason I love reading your stuff is you usually have a contrarian take on

on what everybody else in the space is talking about. But it's backed up by a lot of research and a lot of data. And that's why I just love reading it and talking to you. And we just saw each other in Seoul, which was amazing, which was fun. Yeah. It's always fun being in Seoul. But let's start here. So one of the things that I see you writing about is the blockchain, as far as the mempool goes, is just dead.

I mean, we're looking at, I don't know how many blocks deep we are right now. I'll look it up, but we can't be more than a couple. A handful, yeah. Yeah. So what are your thoughts on this? Why is this important for people to even think about and then kind of frame it up on maybe a larger context? Yeah, it's funny that you label it as contrarian because generally speaking, I'm just writing about what I think is happening in the real world.

I think what's probably more interesting is how quickly and consistently the narrative on Twitter diverges to the most bullish possible scenario or the most bearish possible scenario. And as always, reality is dead through the center. I'm like, guys, I can see reality. It's like right in the middle. But this is a very interesting topic. And-

It actually comes back to a degree of PTSD for myself as an analyst. So something that I'm very, very aware of is that in the 2020 and 21 cycle, and I can say this with great confidence, there's not a single analyst in the world who knew anything about how to use on-chain data. Yes, we knew what they were. We kind of like, we understood what the metrics stood for, but actually using them in a live fire exercise, nobody had the experience.

It was just too early. Most of these tools were already being invented in 2019 at best. So that's kind of the background. Now, I made two major mistakes in the 2021 cycle. I think I joined Glassnode in February 21. So I'm about three months away from that first major sell-off.

And in that first sell-off, I was bullish as everybody was. And the thing that I primarily missed is the GBTC and also the amount of leverage that had built up. So the first lesson I want to take away from that cycle, do not miss...

when you move from a spot driven to a leverage driven market, which is natural in all markets. You get to the euphoric peak and everyone goes levered long because the market's bulletproof. It can't go down. That's exactly the time when it's going to get down in a very big way. So that's the first lesson. Now, the second one is after we sold off, we had about a 50% sell off, went from 60K all the way down to 29. We spent about two months chopping around there in June, July. And then we finally rallied back to a new all-time high. And

And that second all-time high, all the way up, the one thing that I was looking at is going, guys, there's no activity. The mempool is empty. Blocks are not full. We've got very few transactions.

Volume is kind of in a strange, like it was picking up, but it wasn't really a very organic pattern. And anyway, we got to 69,000 and me being the young naive analyst that I was, I said, okay, I guess my data is wrong. And I flipped from being, guys, I'm a very cautious analyst at this point. And I flipped saying, look, the market's proving me wrong. We're going up. And of course, I flipped bullish at the exact peak. So that was the second lesson learned from the 2021 cycle amongst many others, but they're the two big standouts.

So now when I look at our current market, if we wind back to November, December, the blockchain was packed, right? People are transacting, there's volume flowing through, nothing to be bearish about whatsoever. Since April, we have more or less seen that second dynamic, both of those two dynamics in our current market structure.

and that is that leverage is exploding through the roof. We're seeing futures open interest, options open interest, even lending markets are really starting to speed up, which makes sense. People are starting to feel like this market is more bulletproof at this point. We're seeing a lot more speculation, a lot more of those funds, but also the network itself is very, very quiet.

But we have a very interesting dynamic. So as I mentioned, blocks are almost empty. Transaction volumes are still quite high. And I was doing a breakdown study of this yesterday. Most of the transactions we're seeing now are very large. So there's not many of them, but the mean is moving around like several hundred thousand dollars. And if you think about how means and medians work, if your mean is starting to creep up because you're always going to have a Pareto distribution of lots of small transactions,

and a handful of big ones. What we're basically seeing is those handful of big ones are carrying most of the volume. So on-chain volume is actually very high still, relatively speaking. It's off the peak.

But spot volume is declining, has been since November. ETF trade volume declining since November. Futures volume, all-time high. So we have watched this pivot from a spot-dominated market, even as close as April, all the way into a futures and leverage-dominated cycle. So important just for people to recognize that we have truly phase shifted over the last three months. That is really fascinating.

And I love the call out from the previous cycle of what your major learning point was. If we're looking at the mempool and we're seeing how little transactions are happening there, relatively speaking, to other periods in time, how much of it do you think has just been moved over to the ETFs because so many people own Bitcoin this way? And if Coinbase is moving the net on a one day, every day at the close,

they only really need one large transaction to settle whatever the differences are. Does that kind of maybe throw a wrench into some of the way that you're looking at it or comparing it to a previous cycle? Yeah. So this is a very good question, one I get all the time, this dynamic of do the ETFs break some of the on-chain data and on-chain metrics? And the answer is absolutely not. And the reason is because we have two different buckets of on-chain metrics. There's various ways we can slice and dice it, but there's metrics that describe coins that are moving,

and metrics that describe coins that are not moving. So if we're looking for a sentiment profile of what's going on in the market, we only look at coins that are moving. That's going to be your net flows, that's going to be your exchange inflows and outflows. And here's another important stat. On any particular day, even today with the ETFs, somewhere between 60% and sometimes 80% of all on-chain activity is coins going in or out of exchanges, deposits and withdrawals.

So, basically what we're doing is we're looking at that 60% to 80% of all transactions and saying, is there a signal in what people are? Are they taking profit? Are they locking in losses? What's their overall, how old are the coins? So, we're getting a profile of that and saying, okay, do we think that's a representative sample of everything else that's going on? And generally speaking, if you've got fear in the market, you'll see it in on-chain data, you'll see it in futures data, you'll see it in ETF data.

Now, there's no question, right? As Lightning is going to take some retail transactions, when we're in Seoul, we had a dinner and there's probably, I don't know, 20 people, two dinners, and everyone paid with Lightning. So yes, there's probably 30, 40 transactions that didn't happen on-chain. That said, half of us had to do an on-chain transaction to get into Lightning in the first place. So yes and no. The ETFs, really, it's no different to the

the spot exchanges. People would deposit their coins to Binance or Deribit and they'd do their trading. So all of these things are telling you the same story, but we've got to remember that there's still a whole stack of people out there holding individual coins. And the higher that the price goes, the more they go, "You know what? I'm actually going to start locking in some profit." And what we saw over the last three months, this rally in particular,

It's actually the first time we've seen it this cycle. Coins age three to five years. And if you just think about where three to five years is, this is 2022 bottom buyers, right? People from literally from the previous cycle who bought low and are starting to distribute. This rally is where we saw the first wave of them selling. It was nothing close. We saw in November and December, that was like 86 billion a month. I think we just got up to about 30 or 40 billion a month, 35. So we're at decent levels.

But no, generally speaking, this looks like a very, very quiet market. And it seems like a lot of the speculation activity has shifted. There is definitely more derivatives, but I think these treasury companies are also just where all the punters are going. So this is the question I have is long-term, do you see this to be something that's just a unique situation right now where we don't have much action in the mempool market?

Because there's this whole host of people out there that say, long term, we need transactions to be picking up in order to substantiate the fees and everything that miners are going to continue to work towards, like all of that piece of it. Do you see this as like a real issue long term? Or do you think it's just kind of where we're at right now?

in the cycle, and with more time, you're going to have a lot more transactions that pick up, call it five, 10 years from now. Yeah, it's a little bit of both. And I think there's definitely a valid case to say that, like for me right now, I'll do a handful of transactions a month, part of my regular DCA, but generally speaking, most people are hodling. And I think that's in this monetization period. It does make sense that more people are going to hodl. Now, I am surprised when I log in or I look at some empl.space, I see 115

waiting transactions. I'm like, you're telling me there's 115 people in the whole world who want to transact in the next 10 minutes? Remarkably quiet. So I don't really have a good read on why it's suddenly gone this quiet. It's definitely like, if I call back to my 2021 analyst self, it's generally a sign. It's like, well, if people aren't really using Bitcoin, probably not the best sign. It would naturally be far more bullish if loads and loads of transactions are waiting to be mined. So

So I think that's probably the first dynamic to take away. In terms of the long-term arc of miners, I actually wrote a piece some time back called Securing the Bag. And what I was trying to capture is my long-term thoughts on the mining picture and probably the key insights that I pulled from that. The first one is that we have to separate miners and mining. One is an individual company or an entity. And frankly, they are expected to go bankrupt all the time.

This is part of the natural cycle of Bitcoin. They are fighting the most ruthlessly capitalist, I don't even know what you call it, right? The difficulty adjustment wants to send you broke. And it's a really, really cutthroat industry. You don't control your energy prices. You don't control your output prices. The difficulty adjustment's always making it harder and people keep coming on trying to fight for that block reward. It's just an impossible industry to win in. So miners are expected to go bankrupt all the time, but they are also forced to innovate.

They have to find the cheapest energy. They've got to come up with the most creative and ingenious solutions, long-term power contracts, flaring methane, landfills, whatever it is that they can do to stay alive. So the second insight that I took away from it is that the one-dimensional argument of, look, subsidy going down mean Bitcoin dead, is a very, very surface... There's really no depth to it. It takes away the idea that miners have to innovate.

And look, if a miner goes bankrupt, they will have to fire sale all of their rigs. And this is the other key insight. The rigs have a cost basis. So yes, it may not be profitable for somebody who just bought a new fleet of the latest gen ACES. But if they have to fire sale them at 10%, it's going to be profitable for that dude anywhere in the world. So if you sell those rigs at the right price, they will always be profitable to mine somewhere in the world at some point in time. So-

It's really this transition of rigs between balance sheets. And all of this insight came down from a very, very simple observation. Hash rate is always at all-time high at and after a halving, which makes no sense. If we've just had a cut down of issuance, why is the hash rate ripping to the upside? And there's only two ways this can happen. New rigs coming online of the old generation, which is CapEx, or new rigs of a new model coming online, and they're more efficient, which required R&D and CapEx.

If an industry, the mining industry, not miners, if the mining industry was stressed, they wouldn't be investing more money in R&D and CapEx. They wouldn't have the cream on top of their revenue to do this. They would purely be just running the OpEx as long as they could. So the fact that we see hash rate climbing means that there's enough cream on top of the industry to continue to do this.

to continue to invest capex. So they're actually going to continue to be in a very, very healthy spot. So far, there's no evidence that declining subsidy is bearish for the mining industry, certainly bearish for miners. Yeah. Yeah, I think long-term, I think the concern that I have with this particular topic is people

people just want to get into the code and start making updates and changes because they're looking at how little action is currently happening this month in the mempool and they're saying we need to do something long term this is going to be bad and it's like no

a free and open market, you really need to take your hands off of it. And I love your point about if you die because you didn't have cheap enough energy or you just really were bad at operations or whatever the case might be, those rigs are going to be resold at some type of discount to somebody that is doing that better or eventually they'll flow into the hands of somebody that's doing it better.

And I think that's so important for the space to understand is really, you got to take your hands off this thing and not mess with, what's the word I'm looking... It's like physics, right? You don't want to go in there and start adjusting the dials of gravity or these key inputs that everybody has to build foundations on top of. Preston Pysh : And the other thing that Eric Voskuhl has done a very good job of explaining in his book, Crypto Economics, which is a dense read, but very, very good, is he basically describes that fees are the only thing that protects Bitcoin from censorship.

Because if you're an attacking miner and you're doing some kind of 51% attack, let's just say you're mining empty blocks, you're getting the block subsidy too. So putting a tail emission on actually just gives your attacker the exact same reward as your modest miners.

The only thing that stops that attack, if somebody is mining empty blocks, is that all the transactions that want to get mined start banking up and they have to start outbidding themselves and putting higher fee pressure. And eventually that fee pressure gets big enough that all those dusty S9s and all those other miners that are in people's cupboards, people will pull them out, plug them in because they want to collect those rewards. So there becomes an incentive.

to get back above that 51% and kick that miner off, right? Start earning the rewards instead. So the block subsidy doesn't actually secure Bitcoin. It's the fees that secure Bitcoin from censorship resistance.

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All right, back to the show. This is a topic that the casual listener or somebody who's interested in Bitcoin, they might not understand the deeper, not mentioned topic that you're addressing here, which is filtering and spam on the blockchain. So tell people what, because I think this is a really nuanced insider. If you're really close in following Bitcoin a lot, you understand what we're getting at.

but for the casual listener, help them understand what the deeper context is to what you're saying there. Josh Young : Yeah. So at the end of the day, what do miners do? They're responsible for building the blockchain. So taking all the transactions that are out there in the mempool, putting them into a block and that selection of what goes into that block is a debate that we're currently having of what miners put into that block. But effectively, the way the Bitcoin protocol was designed is miners can choose from whatever is waiting to be confirmed. And generally speaking, they'll choose the ones that pay them the most.

the ones that are paying the highest fee. So within that context, if you have a miner come on or a mining pool, at the moment, that's really one of the biggest risks is the centralization we have in mining pools. Really, you could say that the Bitcoin mining pool network, probably about three or four mining pools

Some of them are even the same entity. So that's definitely a risk factor. But they're designing what goes into that block. Now, imagine that, let's just say, for example, if you've got four entities that control the pools, and let's just say, for argument's sake, the Chinese and the American government decide to lean on both of those pools. You might have 80% of the network now that's getting leaned on say, okay, you have to mine empty blocks. You are not allowed to put transactions in.

you now have a situation where all of those mining pools will be mining empty blocks and all the transactions are effectively being sent. Now, let's just say there's 10% of the hash rate that chooses to mine everything as per the standard rules and they don't care. They're not being leaned on by any government. That means that one in every 10 blocks on average will actually mine your transactions.

So this idea of censorship, it's a spectrum. It's never going to be, if you've got 51% of the miners, they're not going to include anything. There's still 10% that will. The risk is that those, that 80, 90%, they could say, we're actually not going to build on top of any of the blocks that the 10% mine. So the 10% mine block 100,000, and they say, no, we're actually going to remine 100,000, and there's a one in or a nine in 10 chance that we're going to do that.

and we're basically going to center your entire chain that you're building. So that's another risk that comes into this whole dynamic. It's why pool centralization is a major risk. But at the same time,

as those fees build up, right? It would be tremendously disruptive for the Bitcoin network, but this is the most important thing. It's not fatal. There is a recovery process here where essentially the fees continue to build up. The miners who are recognizing that this is probably destructive to their pool, to the hardware and the Bitcoin network by and large, individual miners can then say, oh, you know what? I'm going to switch my hash rate somewhere else.

This is obviously tricky when it comes to, you know, if there are governments leaning on pools, because if you're a regulated US miner and you're in the US and the US is saying you have to mine through this pool, suddenly it gets very tricky. But there is the option for miners to point their hash rates somewhere else.

It's why a lot of this stuff going into legislation, particularly in places like the US, is quite important. Just giving that right to mine and all these dynamics. So there is definitely a risk over the long term of this pool centralization. But effectively, they can say, well, we're not going to include these transactions.

But that fee pressure will build. And that's this natural incentive for miners to say, but I want to collect those fees. And the bigger they get, the juicier the reward becomes. And actually, this is even more so when the subsidy is lower. Imagine the subsidy is 5, 6, 7, 10 halvings away. And we're well below one Bitcoin per block. Suddenly, you've got 20 Bitcoin worth of fees. This is a goldmine. They're going to turn around and say, oh, you know what? I have to point somewhere else and collect these fees. So there is a natural incentive to recover from this.

Yeah. I think when you just kind of look at the game theory that plays out in some of those scenarios that you're saying, you do see now you have pool operators or individuals that are going to go out there and try to start a new pool that isn't going to be censored by the government as well. And I think that there's just a lot of, when you think of the second and third order effects of governments trying to do something like that, the robustness of all of these incentives really start to shine and really start to come out and express themselves.

You have your newsletter, which is amazing. And one of the things that you recently talked about was this is a quote unquote, weird cycle.

So what do you mean by that? We had a little bit of the discussion at the start of the show, but help us understand this framing of it being a weird cycle. It is a weird cycle. And I wrote another piece yesterday called Same Same But Different. I've been exploring this idea of how the cycle is different, how it is the same. And it is a bit of a strange cycle and it's thrown a lot of people for a bit of a loop. I think the first one that has definitely confused people, and this is one of my base cases for this cycle, is it's just going to confuse people. They're going to lose track of

where we are, where the floor was, where the ceiling was, did we top, did we bottom? I just think there's a lot of dynamics that's going to break people's existing mental models. Strangely enough, we are still following the quote unquote four-year cycle, if you measure it from the cycle bottom or the cycle low. But we've got to remember that we're 100 times bigger than we were in 2016, 17. And you get a lot of the behaviors. If we look at people's unrealized profit or loss, the way that that's trading, the way people are accumulating at their cost basis and selling it slightly above it,

all these dynamics were very similar to 2016, '17, but were a hundred times bigger. In the piece I did yesterday, if we look at the ETFs, they got $132 billion in AUM. If we combine that with some of the biggest treasury companies, we're like 220 billion. The Bitcoin market cap peaked at 260 billion in 2017. So just the capital that's in the ETFs and

and a couple of other really companies is the entire 2017 market cap. So you kind of look at that and go, really, it's amazing that it's behaving the same way, but really it shouldn't be because it's so much bigger that it doesn't really make sense. It's quite remarkable. It's a bit of an anomaly that we're following such a similar pattern. Now, there's another thing that's really thrown people, and that is no question, that is Bitcoin dominance, which has been a 3.6 year undercurrent.

unrelenting, unstoppable uptrend. And I think there's just a lot of crypto investors who have just been left at the altar holding bags of stuff that nobody actually wants. And look, even amongst the Bitcoin crowd, there's going to be a lot of Bitcoiners out there who also wanted to speculate, play some fiat games. And even they're being re-reminded, hey, remember when you were Bitcoin only? This is why. And people are now starting to shift back again. So this has been... If you go back to 2018, 19, 20,

The Bitcoin dominance started to peak in June 2019. It was about a one and a half year period of altcoins getting crushed, and then they started to slowly recover. It has been nonstop, just perpetual bleeding for 3.6 years, which is more than double what we saw in the past. So it's really just thrown a lot of people for a loop. We're now seeing a lot more- Why do you think that is? Why did the altcoins... Because I mean, the last cycle, it was crazy. I remember just like...

How are people this mental to be, and it was just all speculation. Like people knew they were buying something that was a scam, but they didn't care because everything was just bidding. And so they just jumped in, but you haven't seen a trace of this on this cycle. It's almost like it just died on the vine. I think so many people, maybe it's because they all got wrecked so bad in the last cycle. Yeah. Yeah.

No, there's a lot of elements here. And I think the first thing to understand is that, and I've been an astute observer of the crypto ecosystem for a long time. For the first and foremost reason that we got to watch all the reason, we got to watch Wall Street get built bug for bug, error for error. And we got to see why the world has regulation. Because if you just give, if you allow people to speculate on whatever they want, they're going to create Fugazi tokens and just take people's money. So we got to actually speed run and see how the financial world got set up.

So to me as an engineer, I'm like, "Wow, I get to speed run and watch how the financial system came to be." So every cycle has been defined by a new distribution mechanism. In 2016, '17, it was ICOs. People could launch their own tokens on Ethereum. That's a crowdfund. They then moved towards this VC funded

right? Because suddenly they realized, "Oh, we probably shouldn't fleece retail like this." And then VCs go, "Don't worry. We'll invest and get it up to a $6 billion round, and then we'll issue it to the public." And then they were just down on it. Every coin that lists on Binance was just down on it. So retail go, "Okay, we're getting scammed again."

So then they invented yield farming. And this is another key element. If you go back to the 2017 cycle, you had to buy Ethereum to trade on these ICOs. So that's where the demand from ETH came from. And I think the Ethereans got a lot of things wrong this cycle. They believe that people actually wanted the ETH. They forgot that they actually had to buy the ETH as the casino chip in 2017. In 2020 and 21, you had to buy ETH to plug it into these yield farms and get 16 quadrillion thousand

AP-wise, but again, it was the casino chip and same for NFTs. You had to buy ETH to trade NFTs. If you then go across to this cycle, Solana has been the darling for all the crypto investors, but they also didn't recognize you had to buy a soul to speculate on meme coins.

And the meme coin phenomena also tended out to be a huge grift. We saw what happened with the Libra token. If anyone's seen that interview with Coffeezilla with a theater's name, Hayden Davis or whatever it was, a real eye-opening. I mean, no surprises, but grift upon grift upon grift. So I think that a lot of crypto investors have just finally worked out. First thing, retail got destroyed in FTX, absolutely destroyed. I don't think a lot of people really understand

Probably now I'm of the view, I knew it would be long lasting, but I now think it's permanent. I think the reputation of crypto got so unbelievably destroyed when FTX blew up. There's a lot of retail who would just never come back. Isn't it fascinating that Solana is effectively FTX coin? Yes. Right? Isn't that crazy? And the other thing that I ran a study a little while back where I pulled four different metrics and I was trying to just like...

How do you plot the strength or the breadth, is probably the better term, the breadth of alt season? Because I was trying to understand how these cycles have changed over time. So I did four different metrics. Are we seeing capital inflows over the last 30 days? Yes or no. 50% of the coins in profit or loss based on their own chain level. 50% of investors in profit or loss. So remember, this is 50%. This is not like ripping to the upside. This is just not bearish. And then is the price trading above its 200 day?

And I ran this study for the top thousand, top thousand non-Bitcoin, non-stablecoin tokens. And what you can see in 2021, and from 2019, it's slowly building all four of these traces are building up into that final crescendo in 2021. This cycle, we saw a very, very brief blip where we only just got above 50% of all coins being not bearish. And even then it was only the 200 day. And then it died off about two weeks later.

We haven't seen this like sustained altcoin bull run. We saw flash in the pan and then it's all over. So I just really believe that the world has clicked and gone, you know what? There's just no there there. And you've shown me now for a decade, there's no there there. And I think Alex Thorne from Galaxy had a really good line. He goes, crypto has been like the dog barking at the postman. And he's finally caught the postman and he doesn't know what to do with it because he actually didn't build a product. There's no thing there. Now that you've caught the bike,

All right. You've made a lot of noise, buddy. What are you going to show me? And there's just, there's very little to show aside from stable coins. There's just not much there. Yeah. That seems like that's the real innovation with all of it, which is you've been able to tokenize sovereign debt and saleable all around the world.

in a way that for a lot of this, it's like especially Tether, this is like non-KYC. If you want to be able to buy something in dollars, you don't have to buy some ETF that isn't saleable that you can spend as a token. That seems to be the real innovation. It's yet to be seen whether that turns into tokenized equity, which then can be used in a very similar way as the stablecoins.

for real businesses and not some clown coin. And then even so, what's the value in that system? The value is the equity. So the platform that you're tokenizing stuff on, there's no reason for that to attract any value. So really what we're actually finding is that yes, you've got this baseline infrastructure. I do believe that at some point there's going to be

equities and tokenized stuff moving around. There's no question that Wall Street's going to go down this path. That doesn't mean there's going to be any value accrual for the L1 token that it sits on. Same way that protocols on the internet don't accrue any value. I think this point is a massive, massive foot stomp for anybody on Wall Street that's playing in this space.

That point is so important because look at the Taproot Asset Protocol. That is just one example where you can do all of this stuff on top of Bitcoin and you don't need some native token like Ethereum or Tron or Solana to be able to do it.

And this is the part that I think is really important and that's missed on non-engineers is when you look at how that's built, you get faster transactions, you're going to have lower fees, right? The incentives that are built on top of the Lightning Network by issuing tokens on top of that, you're just getting better performance and you have better infrastructure and better software engineering underneath of it. And so long-term, I just don't know how those

Those networks are going to be able to continue to compete against something that has lower fees, faster transaction settlement, and it has a more robust network of nodes that are all running the software. I don't know. I don't see many people talking about that. And I see it as being something that is super obvious and super important.

for where are we in five years? Where are we in 10 years with respect to tokenizing more stable coins and tokenizing actual real companies' equity and making it saleable? When I peel back the onion, I've looked at the whole scaling concept from several angles, but the thing I've always found very interesting is we've more or less accepted the blockchains don't scale. They're a very inefficient database. Now, if we look at it, and this is my...

contrarian take about Ethereum, a lot of people will say that it's not decentralized and it's controlled by a small cohort. And parts of that may be true, but the reality is I actually think it's too decentralized. They

They have over-designed the system that it's trying to support when if Tether and Circle turned off all their stable coins, the whole DeFi system collapses. So at the end of the day, your real weakest link is Tether and Circle. So this is where you then look at something like Solana, where they've tried to speed everything up and basically have very, very high compute nodes and all this kind of thing. And they've sacrificed the illusion of decentralization.

But in many ways, that's actually more in line with the level of centralization of your weakest link, which is your stable coins. Without your stable coins, your whole system collapses. But the other thing is that with Ethereum, they've tried to scale a blockchain with more blockchain. We know the blockchains don't scale, whereas Lightning, and it very much remains to be seen whether we're going, because taproot assets is very early, and whether we do actually get some kind of adoption, the user experience challenges and liquidity and all that's a real challenge. But

But Lightning is infinitely scalable because it is strictly not a blockchain. And this is why it's quite interesting. Just as an observer, we're still many years away from some kind of serious scale there. However, it is infinitely scalable. It's not constrained by all these blockchain dynamics. And in many ways, they're over-designing the system for what it's actually trying to do. And everything that's being issued on top of these quote-unquote blockchains are...

They've got an issuer anyway, which is centralized. Call it Tether or Circle or whatever. It doesn't matter who you are. If you're issuing something on top of it, you're a centralized entity anyway. So I just think so much of this is missed, especially from the technical standpoint as to...

where the incentives are going to drive this in the future. There's the assumption that the blockchain is a piece of technology that's useful. But the reality is the concept of a blockchain has been around long before Bitcoin. There's a reason why nobody was building on this stuff for many years, because they basically looked and gone, there's not really an edge here. It's a database. And really the main benefit from any of this blockchain technology, having any kind of decentralization is really some form of arbitrage.

So for Tether, for example, there's a jurisdictional arbitrage. And it's actually in the US's interest that people can access dollars. So for example, Tether is heavily adopted in the emerging markets. And for whatever reason, Tether has... It's not Circle. It's not USDC. It is Tether. Yeah.

And maybe that's because they have the allure of being somewhat KYC-free, despite the fact that they actually freeze far more funds than Circle have to date. So they actually are more prolific with their censorship than USDC is, but the emerging markets have selected it nonetheless. So there is that kind of, maybe it is KYC-free and the US benefits from it being a bit KYC-free. I struggle to see tokenized equity in Apple stock.

I struggle to see the brokers allowing that to be KYC free. So suddenly you're like, okay, you're probably still going to have a walled garden here for this stuff to work. So do we really need a blockchain? Preston Pysh : How about 20 years from now? Because I agree with your point, but on the timeline, if we really go far out, I think there's going to be a huge push for KYC to be lifted and for it not to be used

I mean, I certainly hope so. Yeah. I think that's where it's all going. But timeline wise, I think it might be out there a lot further than many of us would like for it to go. But I think that the natural incentives and the competition from a global perspective is going to naturally take it there. Would you agree with that?

I would certainly hope so because the challenge with KYC is first of all, it's obviously there's just a privacy element, but these things become honeypots. And how many times do you see people losing or companies or even government agencies losing big honeypots worth of people's data that you really shouldn't have to collect these things. And a part of freedom is that you don't have to KYC for everything that you do. So I would certainly hope so. I consider me a little bit more skeptical on government's willingness to let go of that kind of secure surveillance state, but we'll see. I certainly hope it happens. Yeah.

I think it will happen. I just think it's way out there. I think they're going to fight very hard to keep it in place. Okay. So you described all these rug pull things that happened through the previous cycles. You have a lot of rumblings online saying that the Bitcoin treasury companies are the next wave of this. Well,

Well, I don't want to give you my opinion. I'll tell you my opinion after you kind of respond to that. Yeah. So I think I put a tweet out the other day. They're coins. Call them what they are. That's basically what I think treasury companies are. Now, by the way, that's okay. Because every single... Remember, how did every single cycle in the altcoin space happen? It was a new distribution mechanism.

So it used to be ICOs, then it became yield farming, then it became meme coins. There's always a new way. It is funny that this cycle, the coins are equities who are now buying Bitcoin. And the idea is if you give that company money, they will buy more Bitcoin than you otherwise would be able to, and their stock price will go through the roof, which will allow you to buy more Bitcoin. It is literally the same mechanics for a Bitcoiner who's looking to build more Bitcoin in a very fast and

high adrenaline environment, it's coin trade. It's exactly the same thing. Now, that doesn't necessarily mean that the companies are going to be coins per se, but in just a very rudimentary framework, they are.

And when I look across all these different treasury companies, it quickly becomes apparent that most of them, like any company or any business, is going to be a Pareto distribution. There's going to be some that are going to really kick ass and stand out. And I wrote a piece the other day just about analyzing treasury companies and looking at various metrics, MNAV, days to cover, a metric that I kind of iterated on called days to replace, kind of like stock to flow. But for treasury companies, Helen's taken to double their overall stack.

price performance, a whole bunch of different things. I didn't look at all treasury companies because they're popping up like mushrooms at the moment. But the ones that I did look at, it very quickly, if you run through these different filters, basically, Strategy and Metaplanet were the only ones that really stood the test. There's going to be a bunch of other ones that are popping up here and there, but they're the two that stood out. The other ones like Semla has been really underperforming and all the miners have been very much underperforming.

And some of my key insights here was go hard or go home. This is just very, very clear. If a company is not going all in on this treasury strategy, the market's just simply not rewarding them with a serious premium. So they have to be, and you can see it, right? Metaplanet hit gets to 10,000 Bitcoin, Sailor buys 10,000 Bitcoin the next day.

So this is like go hard or go home mentality. Over the long arc of time, MNAV has been compressing towards one. I've had this long-term thesis that the gravity, not the result, the gravity is towards one. And what that means is it, and I run this by going to the extremes.

if a company stops doing all treasury operations tomorrow and said, we've got enough, we're happy, we're good. That company would trade towards its Bitcoin treasury value plus whatever premium they're operating business is worth. That's really what I would expect to happen. If the stock goes too high,

and the premium explodes out the roof, then the company has a massive incentive to sell stock and buy Bitcoin, which is going to increase your denominator and reduce your stock price. So they also have an incentive to push it back towards one. So there's always this gravity that wants to pull it towards one. And the companies that are going to be the most successful are the ones that continue to generate, whether it's excess volatility or some kind of premium. How do you keep the premium

going. If we take the other extreme where let's imagine Bitcoin on the balance sheet is normal. Every company does it. It's just part of day to day.

you're a value investor, how would you value a company swap fiat or the US dollar for Bitcoin? How do you value a company? Book value plus whatever their growth potential is. The exact same story. So MNav, the gravity is towards one. That doesn't mean it has to be one. There's jurisdictional things like Metaplanet, where I think it's like a 50% or 45% tax to hold spot Bitcoin, but it's much cheaper to hold the equity. So there's a 2X premium that kind of makes sense baked into it. But again, it all depends when people buy the stock.

If you're buying early in their growth curve and at a premium that's not too excessive, if the stock goes higher and they buy Bitcoin and the premium stays at a high level, then you win. If you buy, like strategy, a lot of people bought when the premium was at 3x. We saw about $42 billion in trading on the top. The premium has compressed to like 1.4, 1.5.

That means you got crushed. And there's a lot of people who didn't quite understand these dynamics and they bought when the premium was very high. The actual Bitcoin balance could be the same. It could be higher. Premiums compression, that's what squeezed people. Let's take a quick break and hear from today's sponsors. With ETFs smashing records, Bitcoin treasury companies redefining corporate finance, and sovereign reserve discussions entering the mainstream, it's clear that the Bitcoin boom is just beginning.

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All right, back to the show. I think that last point, as a value investor and somebody who loves those principles, I mean, this was Ben Graham's big thing was like, hey, if you're going to pay, and he would always talk about growth stocks versus value stocks. And it's like, you're paying 50 times earnings. You better be prepared for it to go to 20 times earnings and get absolutely annihilated. And it's a very similar concept. We're talking about balance sheet growth with Bitcoin versus whatever.

Ben Graham was talking about was basically the income statement and the company's ability to grow its earnings and the multiple that's paid over that. And for people that aren't familiar with any of these ideas, which I would argue

was probably most people, they might hear a podcast, they might hear Michael go and talk or whoever, and they're like, "Wow, they sound really smart. I'm going to buy that stock." And that's the end of their analysis. They don't understand any of these financial terms or even the difference between an income statement and a balance sheet for a lot of them. And I'm not trying to say it and frame it that way as if everybody's dumb. People are just busy with what they do for a living, their livelihood.

And they're trying to preserve what they've made and not lose it. And they listen to a little bit and they just go and make a decision on that because they don't have the time to know all this other stuff. So I think your point is really, really important for people that are buying these things in lieu of just buying Bitcoin. You better know what you're doing. You're going to get destroyed if you don't know what you're doing. Because of the MNAVs 3, Michael or whoever who's ever running one of these companies

they're highly incentivized to capture that premium over the MNAP by selling more stock and trying to transmute it into more Bitcoin. And if you don't understand that and you're not- If you don't know where the yield is coming from, it's probably because you're the yield. You're the yield. Yeah. But that's talking more about the amateur investor that's trying to buy this and trying to really kind of wrap their head around it. But where I would push back a little bit is in the framing that they're all

a coin company. This is a super complex financial thing that's playing out right now globally. And what I want to say about this is what I think is happening is you're having somebody perform a service. If they're doing it at a premium of, this is hard to explain. Let me explain it like this. MicroStrategy, and I'm going to use them as the example because I think they're the ones that are doing this. Preston Pysh : They're the benchmark. Jay Gould : They're doing this responsibly.

And people might hear me say that and roll their eyes and say, what do you mean they're doing it responsibly? They're doing it in billions per week. But listen to what I've got to say. They're providing- I fully agree, by the way. This is my conclusion as well. The strategy is the correct benchmark, which everything else should be compared. Yeah. And I think to the point you made about MetaPlanet, I think they're doing it somewhat responsibly, but they're in a unique position because of the setup that they have.

from a legal regulatory standpoint where it's so hard for people in that country to buy Bitcoin. And they've got this really unique setup where they can do it responsibly because of this gift that they kind of have by being in Japan. But let me just frame this from Michael's perspective. He is providing a service and he's being paid handsomely for this service that he's providing.

And what the service is, he is securitizing fixed income. And he's doing this through convertible debt issuance, and he's doing it through preferred stock issuance. Okay. So what in the world does that mean? Okay. If you go today and you want to buy fixed income because let's just say you're in your 60s or your 70s, and you just want some income on all the money you've made for your life. Let's say you saved $2 million.

and you want to live off that $2 million, and you need some type of fixed income percentage off of that $2 million, and let's just say the number is 5%, which would give you $100,000 a year if you can lock in 5% somewhere that's in fixed rate terms. There's always risk associated with putting your money in some type of fixed income instrument. That

That might be, if it's in a sovereign, it's whether the government's going to out-debase that percentage of 5%. If the government debases the money by 7%, well, you just lost 2% of your buying power by not keeping up with debasement. If you're a corporate, if you're buying corporate debt, the risk is not only just

the inflation rate of the currency, it's also whether the company can actually pay you back if they would go bankrupt. And if you're a preferred shareholder, it's even more risk than that because they might pay out all the, let's say they go bankrupt, they're going to pay out the fixed income bondholders first.

and then they're going to pay out the preferred, and then they're going to pay out to the common. So the risk is there when you're talking about corporates. So what is Michael doing as a service when I say he's securitizing fixed income? What he's doing is mind-blowing. Because if you look at traditional fixed income, they're going out and they're issuing this debt. They're taking all this money that they raised by issuing the fixed income or the preferred stock. They're taking that money that they made in

in the hope that they can make it all back and then pay that investor the dividend coupon or the dividend or the coupon back to the investor. They either have to take it, they have to build some infrastructure, they have to make a product or service, and then they have to earn it back into the future. And it's all based on their ability to collect future cash flows. That's the risk to these investors today and for decades. What Michael's doing...

which is drastically different, he already has the money. He doesn't have to go out there and earn it over the next five or 10 years or perpetuity if it's preferred in hopes that he can give you that dividend or in hopes that he can give you the coupon. He already has it. In fact, he's got like 5X what it is.

And so what's so different is when we look at MicroStrategy as an example, if you add up the coupons that he's got to pay out and all of the dividends that he's got to pay out for everything that he's issued to date, guess what that number is? It's way low. It's about 2%, right? I think I did these calculations. I looked at it. It raised like $3 billion a month from memory is what I last looked at. So he's raising $3 billion. I forget what the number of the coupons is, and this is before the latest...

stride issuance. It was like 1.6% or 1.8% of his raise is being paid out. But it is a drag. And actually, I'm curious about this. The more that he issues these preferreds, because an insight that you had in Sol, which I hadn't actually clicked to, is that he set them at 8% and 10% as a reflection of the monetary debasement to make it attractive over the long term. So I never quite clicked to that. But I always looked at it and go, it's quite high because he was doing converts at 0%.

at zero, basically, or he's got an effective coupon of 0.5%. Josh Young : I framed it as, "Oh, he just looked at the M2 debate, global M2 or US M2, and he's just like, 'Well, I'll just pay that.'" But I think if you talk to Michael, and I haven't, obviously, I think that he would probably frame it more of, "Well, if you go into the preferred market today, it's paying 6% or 7%."

And I want mine to be the most desirable so I can afford to pay more because I'm fully backed with this

$60 billion treasury of Bitcoin. But the point that I really want to hit home to people is if you look at the coupons that he has to pay and you look at the dividends that he's got to pay, it's around like 100 to 120 million annualized. That's not including the face value of the debt that he has to pay back. I'm going to put that aside. But if you just look at it from an interest expense, and I know dividends aren't interest expense, but let's just kind of treat them like interest expense.

If you look at these numbers, $120 million to Michael, who's sitting on a $60 billion in treasury is a pittance. It's an absolute pittance. If we're just going to round the numbers and say they're $100 million, this is literally 600 times huge.

he has in the treasury of what he's got to pay out in the dividend and the coupon. And here's the other point that I think is really crazy for people to kind of wrap their head around. He can print more stock certificates and raise more cash to pay this stuff back if he really wants to. And I think that that's lost on these people saying he's, oh, MicroStrategy is going to have a margin call. That is the most brain dead thing.

And we did hear that on the stage at Seoul. That is the most brain dead thing I've ever heard in my entire life. It's somebody who just literally hasn't done the math or even understands the math like at all. So...

When I say he's securitizing debt, what he's doing is he's literally... He doesn't have to go out and earn the cash flows in the future. He's already got them. They're sitting in the bank vault 600 times over what he's paying out in interest expense on an annualized basis. And there's nothing on Wall Street, even close to this...

And when you look at the fact that he's paying more, at least in the preferred market, he's paying 200 basis points higher on these coupons in the preferred market than anything else that's out there with literally 100 times less risk. Bitcoin could go down 50% tomorrow.

And he's got it for years and decades. He's got it for decades to make these payments. What's so interesting is he's securitizing fixed income, and he's already got all the money in the vault to back it all up. And that's the thing that's blowing people's minds. And here's the recursive loop that everybody's missing and why this is so different than Clown Coins that were issued in 2017.

He is securitizing this debt. They're going out and buying it. It's putting more Bitcoin on his balance sheet, which then makes the common stock run. And what's he doing when the common stock runs? He's issuing more common stock so he can get more cash and buy more Bitcoin, which allows him to securitize more debt or fixed income or preferred issuance. So there's this recursion. So somebody might look at this and be like, Preston, come on, this sounds like a Ponzi scheme.

But what I would push back is what you're missing is that under the petrodollar system for four decades, you had central banks that literally just continued to pump and pump and pump printing into the fixed income market. They did this for 40 years. And if you don't think that bubble is unraveling in some capacity or some way, you are out of your mind and you don't understand it.

And so for people that are looking at MicroStrategy or any of these treasury companies, because

these Bitcoin treasury companies that are number one, profitable with a real operational business at the helm, and then securitizing fixed income, whether that's through preferred or convertible debt in a responsible way that's actually backed. They actually got the Bitcoin in the vault many times over what they're issuing. I just don't think that you as the person who's skeptical or maybe calling this a scam actually understands what's unraveling with a 40-year bubble.

And fixed income is a 40-year bubble. I'm sorry. It is. But I also want to preface something that you said, James, that I think is really important. There's going to be a lot of fakers out there that try to do this that literally have nothing. They don't have a company. They're going out there and they're trying to securitize and they're trying to get this thing rolling. And

I think that to do this, you really do need to have a company. It needs to be profitable at a minimum, because if you're not, you're going to definitely have to sell Bitcoin. But yeah, those are some of my thoughts. And I think there's a lot of jargon in there and people will hear the jargon and they immediately say, this person's a snake oil salesman and they are

a scammer because they don't understand some of the terminology and they don't understand the 40-year fixed income bubble that's bursting. And they don't understand there's a lot going on here to kind of wrap your head around. But those are some of my thoughts.

Well, I agree with all of it. And it is a fascinating trend that we're early in. I agree that calling out like a strategy, a meta plan, I'm sure there's others, but they're the ones that so far from my initial gut checks have basically shown up and go, they are doing it as I think responsibly is a fair way to describe it. I would...

And there's two questions I want to ask you, actually. The first one is this idea of them selling the Bitcoin. So basically, the idea is that strategy's already got the treasury, but in order to service those preferreds, and granted, there's a phase shift that has to happen. We're in, let's call it the growth phase.

They're in the accumulation stage. For Saylor to sell a single Satoshi from that treasury, I think would just break everybody's confidence in the whole model. So I actually don't think he can do that. So what he's really doing is buying the next 100 years worth of dividend payments. Some of you said in Seoul, which I thought it's so obvious, if it is accretive when your stock has a premium to your NAV, it is accretive to sell stock by Bitcoin. 100%. Flip that around. MNAV goes below one, which...

I believe that we will have a down period in Bitcoin. It's going to happen. So if you've been convinced by any influences that we're never going to have a bear market again, I would unfollow because it's going to happen because it always happens. When we have a bear market, many of these companies will see their MNav go below one. And in that world,

it is actually a creative for them to sell Bitcoin and buy the stock, the perfect inverse. Now, I don't believe that Saylor and Strategy are going to do that because that is more or less why I think they've launched Strike, Strife, and now Stride. Stride has preferred that he doesn't have to pay the dividend and it's going to trade more like a junk bond would be my base case. So I've kind of got two prongs to this question. The first one is,

When the MNAV goes below one for some of these companies, how do you think strategy and these, let's call them the responsible bucket, how do you think they handle that situation versus some of the smaller ones? I think there will be just the same way that miners have always been pro-cyclical. They buy too many machines, they huddle too many coins, they go through the bull market peak, and then they yuke it all out at the bottom of the bear. Many of these treasury companies, the smaller ones, the ones that don't have the grit,

the shareholder, because the CEOs have to act in the best interest of the shareholders, not in terms of Bitcoin. And if that requires selling Bitcoin to protect their share price and they don't have any other avenues, they will do that. Strategies of a scale where they have tools to do this. So two questions, what happens in the MNav below one scenario? And the second one, maybe this is just a different topic, the strike, strife, stride,

He's setting up a yield curve. You can actually see what a fixed income does, what he's tokenized bonds, fixed income with strife, convertible debt with strike and stride as a junk bond. I've got all three tickers on my trading view now because when they start to trade above or below $100,

that's going to tell me, does the market think he's going to be able to raise dividends? Because if they think he's going to be able to pay it without selling his Bitcoin, they're going to trade at a premium to their face value. He's selling $100 for $103. Preston Pysh : Especially with it being 200 bps over even more riskier things. Yeah. Luke Gromen : Correct. And then when they start to trade back towards or below $100, that's signaling the market's going, "Oh, I think we might be getting long in the tooth on this treasury company trend." And I'm very confident that in this early phase,

There is only so much demand and money that's willing to pile into these treasury companies. Serious pension funds and institutional capital are not buying the 52nd treasury company, right? They might buy the first one, maybe the second one. There's only speculative retail money that's going to jump into these smaller companies. So I think there's an exhaustion point there too. But some ideas there to bounce around. Yeah.

Help me out. MNAV below one. Let's go with that. Yeah, MNAV below one. All right. So the math is very simple. If the company's MNAV is below one and they're optimizing for Bitcoin per share, they sell the Bitcoin, they buy the stock back, and that's how they're going to acquire more Bitcoin per share. It might sound antithetical to somebody to hear that, but I would challenge that person, go get an Excel spreadsheet, go work the math. And what you're going to find out is that what we're saying is the truth.

Will he do that? Let's talk about Michael specifically. I agree with you. I don't think he's going to do it, even though it's actually- Because that's the reputation that's actually more valuable to him- I think so. ... but to his shareholders. Yes. I think that even though that is a truth that we just said, that he will have more Bitcoin per share for anybody that's a shareholder, if he would do that under that scenario, I still don't think that he's going to do it because what is his product?

His product that he has been, people will say it's a data analytics company, and it is. They have that product line. It only makes 100 million a year. His real product is a service, and that service is the securitized fixed income. And so what I think he does is he potentially spooks that market.

of anybody that's in fixed income that's buying these issuance. He spooks them when he's selling the treasury of Bitcoin that's backing all of this securitization of the fixed income. So for that reason, I think that that's why he won't do it is because he knows his real product or his real service is the securitization of fixed income. And sorry, just to jump in here, there's one thing that I think it was his interview with Alex Thorne. He had this one line that just sat with me and I've been thinking about it ever since.

He goes, someone asked like, if your debt is trading at a low level, right? Distressed level, are you going to go out there and buy it back? And Michael just goes, no, Mr. Bond investor, that is your opportunity to go out there and buy my distressed debt at a cheap price because the face value is $100 and you can pick it up for 50 cents.

And I think that's a good example of him saying like, no, the market can go and pick this up because the opportunity is there and I'm going to follow through. So I think that's something that sat with me ever since he said it. Yeah. Yeah. I think he's very consistent in his messaging. He's very consistent that he is going to be the major player in the United States for securitizing any type of fixed income. That's what he is messaging to the market. And so far...

What a, I mean, the amount of Bitcoin that he has been able to put on the balance sheet by doing this is mind numbing. And just because you don't understand it, or you think that all we're doing is just spewing a bunch of financial jargon, I would highly encourage you to dig way deeper. The other thing that I would say is the second part of your question. So the second part is as we go down this, so MNav below one, I agree that Saylor probably met a planet

I'd say the MNABs compress in a bear market. But my base case is that we're going to just like miners. And I think miners, which are also now treasury companies, they'll do the same thing. They will all puke out their coins at a low price, whether to protect their share price or whether just because they don't have the CEO ownership that Saylor does, right? The buying. So a lot of these companies who aren't all in, they're kind of half in. And I actually, strange enough, and from my studies, I would put miners in the same bucket as being half in because...

because your operating business is incinerating capital. A miner's job is to burn money and dig a hole in the ground.

As a result, that business will take over in the bad times. That's going to be your primary thing that you have to look after. And your treasury is secondary to making sure that those miners keep spinning. Preston Pysh : So when we're thinking about this idea of securitizing fixed income, what it comes down to is having a pristine balance sheet that isn't imposing more risk and not making the issuance riskier.

And so when we think about a business that, let's just take a miner for example, let's say that half of the revenue that's coming in is a lot of risk and they're not... MicroStrategy is a perfect example. If you've got $60 billion worth of Bitcoin on the balance sheet, the operational business is a pittance of that.

it's almost unnoticeable because it's so small in comparison. If you're buying the fixed income instruments that he's issuing through convertibles and preferreds, you're not worried about the impairment of the operational business really messing up the value of that because he can pay it for literally decades beyond what's been issued. And so you could make the argument that the smaller that the operational business is, as long as it's still kind of

profitable relative to the size of the Bitcoin makes him a better service provider of these fixed income instruments. Whereas a miner convolutes that risk through all of their operations and their sheer size and their capex and all these other things that they've got to potentially service and potentially impair the fixed income issuance. Preston Pysh : I agree.

And I think at the end of the day, what we're looking at is that the Bitcoin treasury company, I think this is my biggest insight from this whole study. The idea of a Bitcoin treasury company is not to just accumulate Bitcoin. It's actually to accumulate Bitcoin and develop some kind of a system like what Saylor is doing, which is his business line. Yeah. Exactly. His business line is actually the issuance of the debt. Yeah.

That is what he sells as a product. 100%. There is a huge market for volatility, common equity. There is a huge market for fixed income, literally fixed income, and fixed

Fixed income, which is paying substantially more than everything else. That is the product line. The treasury is the result and the means to the end. There's going to be a lot of companies out there that are like, oh, I'm going to buy Bitcoin because buying Bitcoin is what we do to get our stock price up. Those companies are not going to be in the same bucket as let's call the responsible, however we want to frame it.

that is where there's a massive distinction. What is your product that you're serving? And Saylor has found a very interesting, very unique niche in this particular field. Preston Pysh : Well, I think Semmler is probably a really good example of exactly what you're saying, where they went out and bought Bitcoin. Do you know how much they bought and put on the- Jay Gould : 4,200 last I checked, or thereabouts. Preston Pysh : Okay.

So they got 4,200 Bitcoin. I looked up the financials. They made like 30, 40 million net income, I want to say, in the last year. So they're a profitable company. They can continue to sweep those cash flows into Bitcoin, which historically has a 40 to 50% annualized return.

return profile. So when I'm looking at Semler and it's trading below its Bitcoin on the balance sheet, somebody would say, see, here's an example of a company that this doesn't work. What Saylor's doing doesn't work here. I just think that the market's looking at them. And first of all, with a base of shareholders, that's way different than the shareholders that are holding MicroStrategy and buying all of the stuff that they're issuing and the common stock itself.

You're dealing with a medical company, right? And so you've got to swap out all of those investors for them to even think that they're going to try to do what Saylor's doing. And I don't even know that they're going to do what Saylor's doing by trying to securitize fixed income as a service in addition to their medical operational business. And so they're kind of caught in this limbo of like, what are they? And the market's confused. And that confusion might continue to persist.

But if I'm the operator at Semmler, I'm just saying, I don't care what the market's valuing me at. I'm going to continue to do my operational business. I'm going to continue to make money, and I'm going to continue to sweep this money into Bitcoin. And if the market just so happens to start valuing my business above the asset values of the Bitcoin on my balance sheet, maybe I'll issue some more common stock.

Because it's really simple. If your company is trading at a MNAV of 1.5, let's say Semler gets to that at some point in the future because the market starts to value it differently. I mean, he's buying the Bitcoin for a huge discount by issuing more common stock and just sweeping it into Bitcoin. So he's incentivized to do that. And he will have, and I think this is important too, for anybody that's doing this strategy of holding your treasury in Bitcoin, you have this option at

at your fingertips to exercise if the market ever puts you in that position, which is amazing. So it is different. I think that in the future, you're going to have a couple major players in this space. What's really interesting, James, is 21. So 21 comes out. I had no idea for the most part what the operational business is. And going back to our original point of

You probably need to have some type of operational business that makes money. I think that's all true. I stand by that. But what I think is really interesting about 21 is how capitalized it was in Bitcoin terms so that I think they can run the exact same strategy that Saylor is going to do, which is

start issuing fixed income and securitizing fixed income that is backed by just a ton of Bitcoin. So why did they seed it with so much Bitcoin? I think because they- Yeah, you need the scale. You need the scale to get going, right? That's right. And one of my points in that, because there's a lot of people, and for my subscribers, I try to make sure that none of my subs feel like a deer in the headlights at any point, right? I don't want anyone to be too surprised.

And a lot of people that naturally, a lot of people are going to feel FOMO as they see like MetaPlanet ripping through the roof and this treasury company ripping through the roof. And I think it's really important to recognize like for 21, for example, unless you were in the telegram group where people were discussing that they're going to do a SPAC with cancer equity partners, unless you were in that group, you're never going to catch that initial pump. And since then, right, they immediately shot to an MNAV of like five or five or something like that.

But it's still not trading in the public market. They haven't completed the stack yet. So there's a risk factor in there as well. So look, there's a potential and a possibility that they go and try to compete with strategy. And again, competition is good in all facets of business. So that would be a good thing. And I think obviously they've got the scale, they've got the backing, Tether's got a huge amount of Bitcoin behind them. So there's a whole lot of things that they could do there. But

But just don't lump into these things. I know a lot of people have bought into this CEP not realizing that that SPAC represents like 2.7% of the eventual shareholder equity. So I initially did the calculation. I was like, hey, look, their MNAV is trading at like 0.05. I'm like, hey, it makes sense. But then I found out it was a 2.7% equity share. And then you've got to flip it over like, oh, no, no, no. They're not trading at an MNAV of 0.2. They're trading at an MNAV of 5%.

So suddenly you realize that you've got to be in the right room before these things move. Don't go feeling FOMO. If you have missed the latest treasury company, they're going to come and go all the time. And that's why I think spending more time studying on really the ones that have staying power, particularly when the bad times come, I think is going to pay a lot more dividends as a value investor. It's going to be a way more beneficial process. Two points on that that I think are really important for the listener. Number one is

Going back to what we said earlier in the show, which is as a retail investor or somebody who's looking at all this and saying, oh my God, I feel like I'm missing out because these people are going on these shows and talking about these things and they're really smart. It sounds like they're really smart might be the best way to describe it. And I need to own that. If you're buying it at an MNAV of five and you're

it's just hitting the public markets. What in the world do you think is going to happen with that? It is going to be the most volatile, violently traded thing on planet Earth as it tries to- Preston Pysh : Welcome to Bitcoin 2013.

Right. Yeah. I mean, if you want a flavor of that, and a lot of people jump on the bandwagon, like, whoa, it's volatile to the downside. Like, yeah, it's going to be volatile to the downside a lot. Yeah. Well, and who knows in the first days that it's listed, you might see a rip to seven, a multiple of seven back down to two, then the four and then the one and a half. And if you're, you know, if you're investing in this and you don't have the stomach because you don't even understand what I just said or what that even means, you're

you are going to be in for the pain train as to how these things are going to be received and hit into the public markets, especially considering it's something that we've never even seen before hit public markets. This idea of a company that's securitizing fixed income with Bitcoin as its backing, like all this stuff is like,

Never been done before. So that's the first thing I really want to impress upon people that are listening to this is be careful out there. If you don't deeply understand this stuff and you like Bitcoin, buy Bitcoin. Just look at what the companies are doing. They're selling the equity to buy the Bitcoin. They are telling you which part is the valuable bit. Just nothing wrong with just stacking stats. So that would be the first point. The second point that I just want to kind of foot stomp is going back to like,

Maybe you do have a competitor that's a worthy competitor to MicroStrategy simply because they have so much Bitcoin that they're starting out with on the balance sheet. And it seems like they deeply understand what his business really is, which is the securitization of fixed income. And they're really trying to make a splash and go into competition with him.

And what I think is an interesting talking, and I'm really curious to hear your thoughts on this. How does this evolve from a competition standpoint? Is there a market for three of these types of companies in the United States? Is there a market for 10 of these companies?

Or is there a market for one of these companies in the United States? How do you see the sizing? And I think internationally, we're going to see a bunch that crop up and take different fixed income markets around the world. But in the United States, how do you see that competition playing out? Is there space for 21 to play against MicroStrategy?

Yes. No, I think it's a very interesting question. The truth is I don't know, but what I do know is that there is not room for a thousand or 10,000. That's one thing I do know. And that's why I think it was good that we actually touched on the experience of the last couple of cycles, because

We have already seen the lessons of how markets adapt when you give them a certain set of stimulus. In the ICO days, there was like a couple of thousand coins and they all went up together. In the yield farming phase, it went through waves. There was like, the L1s went, then this went, then that went. And then in this cycle, there was millions of tokens being printed every single day and the cycle lasted in a blink of an eye.

This is the same idea. If you oversaturate the market with too many of these things, everyone just goes, "Ah, I can't. How do I pick between these things? I'm just going to buy an index. I'm just going to buy an index and not worry about it." And then you get the balance weighting and you get the magnificent seven. That's what passive ends up looking like, where it just continues to wait towards the biggest. So I also think potentially you've got a Microsoft and an Apple type scenario where you've got this duopoly

on these two different entities. So I think there could definitely be room for two. Competition is always good. You're probably going to have one that's going to be bigger than the other. I don't think there's room for a thousand. So it would probably somewhere in that gray zone, far more towards the Pareto distribution dynamic.

as we've seen in the Bitcoin world, right? Strategy really is the Bitcoin of treasury companies and every other business is trying to either find their unique niche or find where they sit in the broad spread of things. So that's my general mental model. I also think that going back to what we said at the start of this call, if we are in the euphoric phase of this bull, where leverage is now everybody's friend,

And people are starting to get very confident in the bulletproofness of the bull. And I still remain bullish as long as we're above the short-term cost basis. I remain a bull, but I'm also seeing a lot of signs saying we're later in this Bitcoin trend for this particular cycle, assuming cycles aren't going to be...

Are they going to be the same? They may not. They could completely evolve. But one thing I know is definitely a characteristic of late-stage bulls in every market, in every asset, is leverage and speculation. And we are seeing a lot more leverage and speculation. So they're the things you just pay attention to as these companies pop up. Do they have the grit and the tools and the toolbox to survive in a downtrend? And the downtrend may only be down 50%, but it could take a year. It could take a year and a half.

It could also be that there's an endless amount of printing that's about to come and go through the roof. All these things are possible. These companies need to be able to survive all these scenarios. I'm just curious because I know we haven't touched on it. What are your thoughts on the strike, strife, stride? This I find such a fascinating idea. Yeah. As a civil engineer's background, I'm learning about bonds. I understand how bonds work.

But I actually charted these things out and I showed the effective yield for the 8%, the 10%, and then where each of those assets currently live. And it was the first time I've actually done the work and visualized how yields trade, how bonds and yield prices and yields change. I was like, ah, okay, that's really interesting. How do you think strategy, because they are in this more mature position. So even if 21 does get to their scale, strategy has a much bigger toolbox at this later stage of the bull market industry.

in determining how far it goes. That toolbox, how does he deal with strike, strife, stride? The first two obviously have to pay the dividend. Stride is interesting because he doesn't have to pay the dividend. So he's in a very interesting spot where if he wants to generate demand for it, he should probably pay the dividend. My assumption is he'll pay the first dividend, but there will come a point in time where he's going to sell stride, probably in the bear market. It's going to trade most likely at distressed levels, I would think.

But he's really- Really what he's trying to do is take pressure off the common equity. He's really incentivized to pay that thing relentlessly, the one that he doesn't have to. To pay it relentlessly, get the whole market in there believing, oh, he will always pay this thing so that he has the option to not pay it. And he does that after he does a whole bunch of more shares issued under that vehicle, right?

So it almost be like poker where you never lie. Anytime you have to flip your cards over, you're always telling the truth. And then at the very, you're late in the game is when you pull up the massive bluff and you're paid handsomely for convincing everybody that you were always going to tell the truth. That's how I was.

I know that sounds horrible. No, no. I think that makes perfect sense. That was my base case that he has to pay these things up front to generate interest. Because if he just immediately stopped paying them, it's going down to 30 cents. Yeah. Which then if he's issuing more shares, he's only getting 30 cents on the dollar, but he has to pay or he doesn't have to pay anything, but he can raise a whole lot more through that vehicle if he continues to convince the market that he's always going to pay the dividends.

It's also very interesting that he's issued strike, which was the convert a tokenized convertible debt. Then he's done strife and he's got people used to this idea. And then he's done stride. It is very, very clever. The way that he's actually structured this whole thing at the way I looked at it, because my long running thesis for MSTR is I was hard for me to see how it did well in the bear market.

There's a lot of people at the moment who are saying it's not doing well in the bull market either. But at the same time, I was like, in the bear, it's going to be tough to raise capital. I can now see a bigger toolbox and I understand a lot more about how he's going to navigate the bear. Then I take a look at all the other treasury companies. I'm like, you guys are so far behind. You're not even close to the ability to withstand a drawdown. He's built a transmission, right? At the end of the day, it's like a bicycle that, you know, it's a 21 speed bike.

And if you're going up a really steep hill, call it a deep bear market, there's a lot of adversity in your environment that you're dealing with. He has a lever and a pool that puts him in a different gear to be able to handle that environmental setting. And by issuing all these different securities into these different pools, think of them as like different pools of capital that you can issue the securities into, there are junk bond mandates that that's what this fund does is buy junk bonds. And so

he wants to suck on that soda straw of capital onto his balance sheet to transmute it into Bitcoin. So he's just going out to all these different buckets of capital that are there, and he's creating a gear for each one of these things that then he can use for his environmental setting that he's dealing with as that constantly is changing. If there's one constant in the world, it's that change, you better be ready for change, right? And so that's what's really unique about MicroStrategy is I think that they are geared for all sorts of environments

to try to continue to keep the MNAV above one, because if it doesn't, then he's got this really challenging situation that we talked about earlier in the show. Or he then says, that's your job, Mr. Distressed Equity Investor. This is where you step in and that's your opportunity. Yeah.

He's on record saying that he's just going to sit there on his hands and wait for the environment to change. And what he's got going for him is Bitcoin is just so volatile. It can change on a dime. And if the governments print a bunch of money and flood it into the system, Bitcoin's going to rip. And then the common stock is going to get whipsawed with it. That's, I think, the way he would think about it. And then he's back in the business of securitizing fixed income. So-

It's funny. I wrote a piece, in fact, very early when I started the newsletter, about a year and a half ago. And I called it the flip-flopping, documenting my journey, how I came to the conclusion of being Bitcoin owner. I called it the flip-flopping because through that journey, many of us will have done this. I was like, wait, Ethereum is the best thing to slice bread. I'm like, actually, you know what? I don't think it's going to work. And then I would keep going back and forth. And eventually, the more that I studied it, the more I go, no, it is, it's cooked. It's not going to make it. Yeah.

For strategy, this is the only other time when I can observe my own mental processing and I have flip-flopped back and forth just the same way. But instead of falling on the side where I'm like, nah, it's cooked,

I'm actually flying on the side being like, "You know what? This is kind of brilliant and it's fascinating. It's taught me so much about financial markets." So it's the only other time I think in this space that I can remember doing so many back and forths, but just falling on the opposite side now in a positive camp. And they are, they're just in a league of their own. It's a fascinating dynamic and I've learned a hell of a lot. Preston Pysh : I haven't sold my leaps. They come due in December.

So we'll see. I'm still holding on to them and I don't know, I'm hopeful. But I think more interestingly is we are getting a masterclass in just financial engineering in macro. I mean, it is just beyond fascinating to study and to discuss from a financial media standpoint because it's just endless. You're just seeing stuff that's never been done before.

Totally. The one thing that has struck me recently is Bitcoin, as simple as it is, the orange boomer coin just continues to invent new narratives to bring it back into the limelight. They just can't keep it quiet. It's amazing to watch. And you compare that to the rest of this space and they don't have any narrative. So it's fascinating to watch that Bitcoin just reinvents itself. It just comes back from the dead time and time again.

And here we are in 2025, nothing has changed. Yeah. Well, James, I appreciate it. I really enjoy these conversations. This is what we were talking about when we were in Seoul, right? Now we're just putting it on the airwaves. Thank you so much for coming on. Give people a hand off to your newsletter and anything else that you want to highlight. Thanks, mate. Head over to checkunchained.com. So our newsletter, we do two a week, written and video. And a lot of people, a lot of our subscribers have said that it's like having a second opinion because we all have our Bitcoin instinct.

And a lot of people go, you know what? I just got to see the worked example. Like, that's why I felt that way. Okay. Makes sense. So it helps people like really articulate their internal thoughts and feelings. Just give them the data and the evidence and sometimes a brand new opinion on how these things shape out. But also check out our charting website. We've got all the charts are free. We've got stuff for strategy, treasury companies, and pretty much any Bitcoin chart you could want. So head over there at checkonsharing.com. All right. Thank you, James. And we'll have to do it again soon. Good on you, mate. Thanks a lot.

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