BTC234: Bitcoin Torque, Saylor's Playbook w/ Andy Edstrom (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 this week's show, I bring back a good friend and traditional financial investing expert, Andy Edstrom. During the show, we cover a bunch of different topics and ideas, but primarily hone in on Michael Saylor's use of the term TORQ,

to describe his various different levels of capital structure within strategy and what that means for his ability to keep the MNAV on the stock above the value of Bitcoin. We get into why this is so important, why we're seeing so many different copycats starting the joint strategy. And this was a really interesting and candid chat between the two of us. And I can't wait for you guys to check it out. So without further delay, here's my chat with Andy.

Hey, everyone. Welcome to the show. I'm here with the one and only Andy Edstrom. Welcome back, sir. Preston, it's always a great time with you. Great to see you, buddy. Great to see you too. I love chatting with you. There's just so much going on. I mean, we could literally start anywhere.

Just as an example of how much is going on, an hour before we started recording this, I see a tweet from the OCC. This is the Office of the Comptroller of the Currency. This is underneath the Treasury Department. And the tweet is,

"Regulated banks may buy and sell assets held in custody and are permitted to outsource banking permissioned crypto asset activities, including custody and executive services," is the tweet from their official government account. This is huge. This is like a really, really big deal. And it seems like in this space,

Like, it's just another blip on the radar of things happening. I took this and I was like, I'm reading it. I'm like, this is a really, really big deal. I pop it into Grok and I was like, hey, on like a scale from one to ten, like how big of a deal is this if you're a Bitcoin or somebody that's tracking this space pretty closely?

And it comes back, it's like, ah, it's like an eight or a nine in it being a big deal. What are your thoughts? It could be on this OCC thing. It could be on anything, but just what are your thoughts, Andy? So we live in interesting times, first of all, fact one. Fact two, as you know, from experience over the long years, time loses meaning in Bitcoin because there are periods when very little happens. And then there are periods when everything happens at once and everything in between. I think obviously...

We've been living in this sort of interregnum between the election and a pro-Bitcoin administration coming to power, but this sort of time lag between getting into office and then things actually getting done, right? So right now, there's also a kerfuffle in Congress. I don't know if we're going to get into that with respect to legislation, but right

Price went up rapidly. I'm talking about BTC spot. Then we had this lull recently, and now we're getting big news and things are sort of falling into place. Obviously, the banking system being able to participate in Bitcoin is huge. Every existing financial intermediary in the world getting involved with Bitcoin, whether it's banks, whether it's exchanges, whether it's microstrategy, whether it's the

various new public entities that are popping into the public markets by SPAC deals, acquisitions. I mean, there's just so much going on. So- We got to cover that in depth. Yeah, but yes. Yeah. So every one of these factors that are going on at the same time are impactful. They're all meaningful. They're all steps on the

the path of Bitcoin reaching its potential and integrating with the existing financial system. And that, of course, is double-edged, but that's kind of my big picture view. Yes, it's a big deal, but also lots of other big deal events are occurring almost on a daily basis. Preston Pysh : I mean, literally you have two states now that have strategic reserves that have passed,

Yeah. I mean, it's totally crazy. On your point about the administration came in and then there was this pullback and now it seems like things are starting to catch hold. One of the things that I found really interesting is Elon Musk with Doge comes in, said that the bogey of what he was trying to cut was 2 trillion out of the budget. And I don't know, I was pretty vocal right from the get-go saying, even if he would cut the 2 trillion, let's just say he could do it.

they still got to come up with this cash to print, to offset the amount of just flow of funds that have to continue to go into the market. It's not like you can just extract 2 trillion out of it and act like there's not going to be contagion and impairment in the markets. And that was my whole thesis as soon as it started coming out. And lo and behold, here we are in May and

Musk and some others are running around saying, hey, we've cut 160 billion. And just for people to put that into terms, because these are really big numbers, that's only 8% of what he was going after with the 2 trillion. So the pittance of what they were really going after. And then what I find even more interesting is you have some independent

analysis out there saying that the number's more like 15 billion, not 160 billion. What is that? Nick Schifrin: Next smaller. We're talking about an order of magnitude smaller. So now we're not talking 8%, we're talking like 0.8% of what they were going after.

None of this is surprising to me. I think it's a great thing that they want to try to cut the fraud waste and abuse out of the system. Trust me, nobody wants that more than me. But I'm also looking at it and understanding how much of a scheme fiat is. And I'm just kind of rolling my eyes and saying, they can't possibly do that. They can't do it because of the math. It's impossible. I mean, they could do it. There'd just be massive ramifications if they did, which then they would just have to print a bunch of money anyway to offset. So any

Any thoughts on that and how it kind of works into, it almost seems like they've kind of come to that realization that there's no way we can solve this deficit issue. Therefore, we need to just turn on the floodgates and really lean into Bitcoin. And that's why you're seeing these OCC announcements. And it just seems like they realize there's no way they can get it under control. So they're just going to go straight at this Bitcoin. Preston Pysh :

Is that kind of your read or is it me? That's a really interesting perspective. So first of all, hats off for calling the fact that, yeah, there's no way that we're going to get anywhere near $2 trillion in cuts from the budget. I'm surprised that they came in that low, to be honest. You'd think that having the smartest guy we know in business trying to cut fat here. Known for cutting fat. Yeah, right. Yeah, exactly. Done it before, done it with Twitter. You'd think actually that he'd get better results with his crew of genius hoodie-wearing guys.

programmers trying to rewire the government with software. Preston Pysh : Andy, it just shows you how big this blob and how massively disgusting this government blob is. I mean, it's just- Andy Cross : It is. It is. It's the thing that keeps on growing and entrenching itself and just digging deeper into its host. And yeah, it is what it is. The pivot to Bitcoin is a really interesting point. You look at Musk and you look at Tesla stock and you say, "Okay,

He gave it his best shot maybe at Doge. I don't doubt that he was focused and made every effort to try and reach his goal, but his stock got cut in half. That's not his only asset, of course, but it does tend to focus the mind if you're a capitalist when the value of your by far largest asset goes down by half. So anyway, yeah, I think that was just facing reality, I suppose. And the pivot to Bitcoin, my suspicion is that Bitcoin...

is sniffing out liquidity coming. I think you've been ahead of that. And I think that my suspicion is, yes, the treasury will find sneaky ways, whether it's managing the curve, whether it's the SLR ratio, maybe they'll work with the Fed. I do think there are levers that they can pull to keep the train on the tracks. And so I guess I'm going to agree with you and say, yes, my sense is that Bitcoin price is sniffing out what's

what's coming, yeah, which is more cowbell, more stimulus, more printing, which is the opposite of, yeah, cutting $2 trillion out of the budget. Preston Pysh : I didn't realize Tesla was down as much as 50% from just the, what month is this? From the high in December, 18th of December was the high. It went down, I didn't realize it was down that much. It's still down 40% from that high. Wow, yeah, he took a massive hit, huh? David Collum : That's it. Preston Pysh : Yeah, I didn't even know that.

The market is in part a pain inflicting mechanism. Yeah. Nothing focuses the mind like your biggest asset going down by half. And we've all been there, haven't we, Preston? Our biggest asset is Bitcoin. Custom to this. Sometimes it goes down by more than half. Yeah. Well, it seems like it's really getting some footing. And yeah, we're back over 100,000 and...

it's getting really fascinating. One of the things that I've just been blown away with this past week was Michael Saylor, his strategy conference there in Orlando, some of the speeches, also the shareholders meeting, which happened like a week before this Orlando conference. And the thing that I just love

like absolutely loved was his terminology of calling these four different buckets that he's able to tap the yacht. And he gave them torque ratios, you know, as an aerospace engineer and a person who did mechanical engineering and all that kind of stuff. Like as soon as he called it torque and he was showing the different ratio, I was like, Oh my God, he's building a transmission. This is freaking crazy. And like the transmission is for a pump that's,

that's literally extracting fiat dollars out of these different mezzanines and straight onto his balance sheet that he can transmute into Bitcoin. And I don't know, it's like when I'm listening to this and I'm listening to him show these ratios, hold on, I made a chart for this. This is just wild, man. I'm putting it up on- Math for us here? Yeah, it was just, I don't know. As an engineer, I got really excited when I saw this. Okay. Okay.

So, here's the... And I had ChatGPT basically take the slides from the deck that he was briefing. This was during the shareholders meeting. And what he was saying is, I've got these four different ways to raise a bunch of cash. I can just sell the equity, which is the top row there. Then he has convertible notes. And then he has the two different preferred stocks, the one that's an 8% convertible and the other one's a 10%. And

He said that the torque on these different things are this if his MNAV is one. So the MNAV, just for people to kind of wrap their head around MNAV, if he has $50 billion worth of Bitcoin on his balance sheet and the stock is trading for $50 billion, that would be an MNAV of one. If he has $50 billion of Bitcoin and the stock is trading for $100 billion, then that would be an MNAV of two. And then you can see the third one there.

And what he's saying is, let's just take the common stock there, which is the top row. If he has an MNAV of two and he goes out and he issues more stock, let's say he issues $1 worth of, well, I guess a better one would be- You can use 50 million. I think in the presentation, the CEO, Fong Lee, was using as an example, issue 50 million of XMN.

equity, but buy 100 million of Bitcoin, right? I think that was the math he was using. Preston Pyshenko Yes. So what's so fascinating, because people don't think about that, if you can go out and you can raise $50 million by just issuing common stock, and let's say you have an MNAV of two, which is higher than what it is right now, just for reference for people, he can go out there and it's not just...

that he's able to buy this much, basically getting Bitcoin at half off. It's actually way more profound than that. And he's showing that the ratio is 3.9X, is how much more Bitcoin he's able to put on the balance sheet. We'd have to go back and kind of play the clip on how he's saying that he's getting a 3.9 as opposed to just twice as much Bitcoin. But

But then you go to an MNav of three, and he's saying that he's getting 9.2X every dollar that he's raising through selling that common stock. And so this is crazy. This is crazy. And so when you think about gears in a transmission, and I'm sorry I'm talking so much. I'm just like gushing over at this idea. I think that this is the neatest thing ever. Keep going. Keep it going. Yeah.

So when I'm looking at these ratios, what's really fascinating is when you're at an MNAV of one, meaning the common stock is at parity with the Bitcoin on the balance sheet, he has these other mechanisms that are transmuting the dollars that are raised into a lot more value of Bitcoin just because of the type of vehicle that he's using.

And what's so fascinating is on these preferred deals, a lot of these people that have a mandate for preferred stock, they just want some type of performance. They're basically like dividend investors. They are dividend investors. They just want the highest yield without there being a lot of risk. And when you look at the financial health of MicroStrategy and how much Bitcoin, liquid Bitcoin they have on the balance sheet to raise and offset these dividends that they got to pay out, it's insane.

insanely healthy. That's what I think is lost for a person that's not in finance or is looking at this from the outside. They're saying, oh my God, they have to be right on the cusp of failure is what I think the common talking point is for somebody that just doesn't understand corporate finance. But for anybody who does understand corporate finance, and I'm curious if you agree with this, Andy, they look at this and be like, this is totally nuts. This is like a masterclass PhD four times over on

on ideas that I think most in business school are not even yet beginning to grasp how profound some of this is. I think there's a couple of things here. First of all is the underlying, and that's sort of the underlying as that's magical piece number one, which is if Bitcoin price goes up in the long run, then yes, micro strategy by buying more through whatever form of capital issuance

I agree with you. I like the physical analogy here. You got to love it. You're an engineer. He's an engineer. It takes the physicality and applies to financial engineering. It's not a perfect analog, but it's pretty good. I think it really just is interesting because it illustrates how the more types of capital, microstrategy issues, the more classes, the more the fluctuations in relative valuations of those pieces of capital, like with the equity, obviously, it's the multiple of MNAV, the more flexibility there

management has in pulling levers to minimize dilution, maximize really return on invested capital. Not to digress too far into that concept, but all businesses in the long run, you've probably talked about this on other of your pods, the return to shareholders approaches the return on invested capital, regardless of the valuation on day one. Because if you're a business and you're taking, you have some capital to start, and then your business generates

profits or cash flows, and then you reinvest, the rate of return that you invest each incremental dollar at is what drives your rate of return as a business and as an equity holder in the long run. And so I think what this table illustrates is the number of levers and the sensitivities of those different levers that can be pulled

based on current valuations, obviously the stock, but also of the various pieces of capital and the rates of return embedded therein, result in multiples of return on invested capital, depending on those valuation levels. So I'm still kind of absorbing it. There's lots of... I'm sure all the MicroStrategy fans will be running their spreadsheets, pulling those levers, thinking about how fast can this pump

suck capital up into different parts of the capital structure in order to deliver a return to shareholders and still early days. It's only accelerating. Let's take a quick break and hear from today's sponsors.

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All right, back to the show. For the two of us, we look at it and it's like, am I going to own this preferred stock? And it's borderline laughable. Of course, I'm not. I don't want to own that. I want to own the common stock. But for people that maybe aren't really dialed in on corporate finance, help them understand why you and I would look at...

If we were dividend investors and we were just trying to... We had a mandate to own preferred stock and we're looking at getting the highest yield that we can get in a very low vol kind of way. Explain all of that to the listener who might be very confused by a lot of this and they're trying to understand, well, what should I own when most of them should probably... Well, I don't want to... I'm going to let you take the right here. We'll start with... Yeah, we'll start with corporate finance and balance sheet 101. So...

In the world of finance, there are enterprises and they do different things and they are capitalized in different ways. And so whatever business you're talking about, whether it's a hotel or a bed and breakfast, or it's a car manufacturer, or it's an entity that's accumulating Bitcoin, it issues capital. So it either sells pieces of ownership in the business, that's the equity, or it borrows money, usually at a fixed rate, but sometimes at a floating rate.

And that piece of capital is senior to the equity, but it doesn't participate in the upside like the equity ownership does. And then there are various slices and flavors of capital that can be issued in the structure. And they're essentially a spectrum between the equity, which is the riskiest, sits at the bottom, is the first to lose out if things go bad, but also stands to make

the majority of the gains if things go well for the enterprise. And then at the top being secured debt, very low risk, but doesn't deliver much return to the investor. And different investors have different appetites. Individuals had different appetites for risk. Institutions have different appetites for risk. Different investors have different appetites for risk depending on the particular enterprise they're investing in. So forget about all the financial engineering back up to square one.

If the basis of this enterprise, MicroStrategy, now Strategy, is Bitcoin, that's where you start. That's the unengineered, unlevered asset. And you and I are probably bullish on Bitcoin. There's other reasons to own actual coins in self-custody. We'll leave that aside. Let's just talk about price now, or let's talk about financial return. MicroStrategy, now Strategy, is delivering all levels of the capital structure practically that have been created, known

known to man, dreamed up by Wall Street practitioners over decades and decades. And he's delivering to various classes of shareholders the right amount of risk return, the right balance of risk return. So yeah, if you're a preferred shareholder, you get upside participation, but it's married with a fixed rate. I remember back in, gosh, it was years ago now, he actually did a secured, I think a secured bank loan that was actually collateralized by some of the coins.

That had a much lower return, but it was also a much safer instrument. And also, by the way, at that time, I digress. That particular instrument gave me some heartache, some concern, because it looked like it could be margin called. It looked like an instrument that if Bitcoin price went down very rapidly in great magnitude, then he could be subject to a margin call. So he tried that kind of flavor of capital. The market didn't like it as much. That's okay. They're experimenting and they are delivering...

different balances of risk and return to different classes of investors. And yes, I suspect that the true believers, Bitcoin mostly by the equity, but also there are tens of trillions of dollars of capital that want modest exposure to Bitcoin, but with some downside protection. And that's the tapping of those markets. That's the pump that's sucking capital from the bond market

and also the preferred stock market and all these major markets for capital in the world. I know whenever I was trying to figure out how much is the interest expense that they have for all their convertible debt, which is very small relative to the amount that they've raised, and then how much is the new dividend payments as they're paying that out? And I remember it kind of coming close to, and these numbers might be a little bit off. I remember being around like

100 million annualized in the ballpark, maybe 120 million annualized is what I think I came up with. What I think is lost on the market is when you put this into perspective of, well, how much do they make every year to pay that cost, the capital? The company makes about 75 to 100 million a year. But what I think is, and so people would be like, whoa, well, that's not good. At first, I was kind of looking at it this way as well.

Hey, they might have overextended themselves on what they got to pay out every year versus how much they're making operationally as a business. And that was their profit. 75 million is about the profit of the operational business. But then I'm looking at it and I'm like, well, how much Bitcoin do they have on their balance sheet? And how much is that if they just had to transmute that into cash to meet these obligations? How much is that? And then really importantly, how liquid is the common stock?

for them to just raise 20 million bucks or 30 million bucks to cover the difference. Because it really comes down to the liquidity of the common stock that they can just tap to pay these versus the pace at which Bitcoin has been performing. And I think that's the big assumption that's really hard for traditional finance to get around is they're saying, yeah, that last piece is where I just can't get my head around this. And I think there's a ton of risk.

is because you don't know Bitcoin's going to go up. You don't know that it's going to go up at 30% to 50% annualized. But I think you can really look at it very closely and all the stuff that we've been talking about for years, Andy, and say, well, why won't it go up?

when you have all this fiat printing, you have more trust in the network growing exponentially, you have a hard cap of 21 million coins, like all the things that we talk about, right? And I'm looking at him saying, well, if that assumption is what's holding you back from getting your head around this math and the fact that he has, what is it? Let's say the delta between what his obligations are and what he's making operationally in the business is, let's just say it's a cool 50 million, just to kind of

I'll come up with the numbers, right? I would guess it's around 50 million is the delta. He has 10, 100. He has a thousand times more liquid value buying power on his balance sheet in the Bitcoin alone. These are annualized numbers, right? So he basically has a thousand years worth of buying power stored on his balance sheet to offset that. That's insane.

It's incredibly, incredibly well capitalized. I agree with you that drawing on that ability to raise capital via common stock in order to feed the beast, so to speak, for the other parts of the capital structure is key. And that's the inherent leverage that's embedded in this enterprise. And it's not continuously growing. It's getting rebalanced over time so that when BTC spot price goes up,

the holdings go up, that effectively de-levers the balance sheet that increases his ability to raise stock, the enterprise's ability to raise stock and feed these other pieces of capital of which then they issue more of those pieces of capital and rebalance toward their target. And I think we're sort of learning in real time what their target level ratio is, what their comfort level is with leverage.

And also, the market is talking back to them, right, with respect to how the enterprise is being valued, what multiple of them now, if you want to look at it that way. And yeah, it's just a fascinating case study. I mean, I have my popcorn and I'm ching and anticipating. Well, I think the other thing that's lost on traditional finance Wall Streeters is the

Okay. So his treasury is sitting there at 50 billion. Is that where the Bitcoin's worth right now? I think that's about right. Yeah. Let's just say it's 50 billion. Yeah, it's 550,000 coins and we're at like 100K. So yeah, it's 55 billion. $55 billion worth of liquid, probably the most liquid asset on the planet.

which is a really big deal. People don't understand how important that is. Preston Pysh : 24/7, that's right. The balance sheet asset trades 24/7, $2 trillion of market cap, billions and billions of liquidity every day. Yes, agreed. Robert Leonard : This is huge. But what I think is lost is just five years ago, what was the value of his liquid marketable securities on his balance sheet? It was $500 million. It was 100X

lower than what it is today in five years. Be amazing. Has this ever, has anything grown this much in liquid buying power on a balance sheet? Because normally when you have these types of 100X growth, it's all in market cap, right? It's not actual liquidity on your balance sheet. This is unprecedented, right?

Right? I mean, they haven't hurt. I can't think of an example. I think of cycles of rapid capital raising. I mean, you think about like, I don't know, the dot-com bubble or something when all these companies raised outlandish amounts of money to go invest in fiber telecom assets, but those aren't liquid at all. So yeah, no, I've never, and I can't think of financial institution, a bank. I mean, obviously in fiat land, balance sheets can grow pretty quickly.

But I've never seen anything like this that I can think of. I'm just looking up the raw numbers for the assets, liabilities, and equity, just so we can put that out to the audience as well, because I think that's important to kind of look at. One of the things that I wanted to just talk about on these torque ratios to maybe help people just kind of wrap their head around it. Okay, so here's the numbers. Assets, this doesn't look right. So I'm just going to back... Oh, it's numbers from...

December 31, 2024, which is basically eons ago. Old news. Yeah. The numbers were basically half of the amount of the numbers we're talking now. Okay. So on the torque ratios, let me share this same chart we had up earlier. When people think about a transmission, I think the easiest way for anybody to just really kind of wrap their head around it. Imagine you're on a 21-speed bike.

And, you know, you're starting off and the last thing you want to do is go to the 21st speed and try to start moving. It's really hard. There's a lot of momentum or the moment that you've got to move the lever of your pedals is pretty significant because of the gearing. And it's very difficult to get the thing moving. But whenever you're going really fast, or let's say you're going down a hill and you have an environmental factor as a tailwind effect.

Maybe you even have a tailwind along with the hill going down. You want to change your gear and you want to move out, right? And I've been trying to think through like which one of these would be the low gear and which one would be the high gear based on these ratios. And for me, I'm looking at the common stock issuance. And when he has the high MNAP of a three, that's when he really wants to be laying into the common stock.

Anytime he has a pretty significant MNAV, that's when it's like, hey, let's load up. Let's load our bags into the common stock. It's very easy for them to tap that, go straight into the market. And then it's just being converted at these crazy ratios into Bitcoin on his balance sheet. Let's say that you're at the standstill and you have no momentum or anything and your MNAV is close to one. That's when he wants to tap these other products.

preferred stock offerings because he's able to get way bigger ratios for every dollar he puts in. He's basically extracting, if you go to the 10% non-convert,

That's a 12.8X. So he'd be basically getting $12.80 worth of Bitcoin on the balance sheet by tapping that. Now, similar to a bike, right? When you're in gear one, it's really easy to turn, but you go super slow. And that's exactly how I would look at this is he can't raise a lot of capital this way because...

it comes with the consequence of a dividend that he has to pay, and he's probably going to have to sell stock in the future in order to do that. So he's pushing off all that cash that he has to generate. He's pushing that into the future, but the advantage is that he gets all of this cash upfront right now today that he can transmute into Bitcoin. And it doesn't dilute the shareholders at

at that moment. It will most likely delete them later on as he has to generate more cash to pay it off. And so these trade-offs are so similar for a person that's really trying to wrap their head around these different buckets and how he's able to tap them and try to keep his... Because the whole goal here is to keep the MNav above one. And if he can do that, if he can do that, which I think he can, he's going to outperform Bitcoin long-term for somebody that's holding for 10 or 20 years. Preston Pyshenko Yep.

And so, yeah, that's how I would encourage people to think about what this is and why he's calling it Torque is he's literally looking at this transmission that he built to suck as much liquidity out of. And for people that are looking at this, and I think this is, I want to get your thoughts on this, Andy. People that are looking at this and they're saying, I just don't understand how this is possible. Like, how can this hack be possible? This is Preston Pish's reason of like, why is it possible?

Because for four decades plus, I mean, since the Bretton Woods all broke down, the Fiat global standard where nobody had a peg, in fact, everybody was incentivized to print as much as they can. The consequence of that is you overcapped everything into the stratosphere, fixed income, equities, everything was getting priced as if nothing could ever fail and that nothing was going wrong.

Everything was priced at 2%, 3% everywhere on the planet, fixed income, equities, everything. And so the consequence and how that unravels and how that starts spinning the other way is you have some really smart people that understand all of this that are basically sticking a soda straw into all these markets that are overcapped and they're just letting the liquidity just gush out of this overcapped global fixed

fixed income equity market. And it's going straight onto his balance sheet and straight into Bitcoin. It's freaking crazy. I love that framing. And this is why I think about the pump, the capital pump. And as I think about it, it makes me think more like it doesn't require energy really to suck this excess capitalization out of every other asset. It's like you said, you put the straw in. It's actually more like just puncturing and opening a channel and then letting...

the existing potential energy flow out of that giant overinflated balloon, letting that balloon that got so overinflated such that when you put a hole in it, it deflates very, very quickly and the air, the fluid goes somewhere else. And if you can channel that fluid exiting that overinflated capital balloon into another balance sheet, magical things start to happen. So the

The nub of it is, I agree that a big question still is how much capital demand or capital flow is going to come out of these various asset classes. Different levels of appetite coming out of various parts of the fixed income market, preferred stock market, as well as obviously the common stock market, common stock investors. And if you wind back the clock five years, people will...

would have said, yes, there might be some demand for that, but maybe not all that much. And Michael Saylor has just been proving step by step that there's more and more demand. And those channels of capital seem to be getting wider and wider. He is opening them up ever wider. Now he's starting to get, you

on the scene. I don't know if you want to get into that. Yeah, I do want to get into that. It's a beautiful thing. It's a fascinating thing and it's playing out in real time. Let's take a quick break and hear from today's sponsors.

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That's shopify.com slash WSB. All right, back to the show. On this point, because I've heard people bring this up. Well, once you start getting all these other people doing it, he's not going to be able to keep the MNAV up because the others are going to basically be sucking out of that same soda straw of liquidity. And I'm like, yeah, I agree. But at what timeline? Because it all comes down to the timing of how long can this persist?

how much does that appetite grow? Let's say Bitcoin goes to 200,000. What does that do for anybody that bought any of this fixed income or preferred stock? These are going to be the best performing fixed income and preferred stock maybe to exist in the last 40, 50 years, hands down. Preston Pysh : No argument. Trey Lockerbie : There's nobody that can even compete to this for the financial health of the company. When you get these kinds of dividend yields and you get these types of numbers,

It's because the companies happen to pay. It's like somebody that has really bad credit, then they have to pay 20% on their credit card bill.

That's why you get typically in preferred issuance, that's why you have such a high yield. In this case, if Bitcoin rips to 200,000 and he's paying out at 10%, the person who's buying is saying like, "Where's the risk? Where's the risk for this yield?" And then it's going to be so laughable relative to everything else on the market. So the appetite to buy more of this stuff and his ability to issue more of it, I mean, which I don't think he has much of an incentive unless the MNAV starts dropping down lower,

because he doesn't want to go into that gear. I don't know. I don't think the world's ready for the performance on these other view. Everybody can see the common stock and it just makes sense. It's like, oh yeah, it just keeps going higher and higher. But I think it's a little bit more nuanced for people that aren't preferred buyers or convertible debt buyers. But for people that are in that space in traditional finance, this is like dang freight train running you over. Yeah.

Yeah. You know, one of the things it makes me think about the old saw, the institutions are coming, right? The institutions are coming for Bitcoin. And I actually, at times in the past and prior years,

thought things would happen faster. I'm talking about in general, I'm not talking about micro strategy specifically. And so I've been kind of watching and observing and occasionally talking with investors, talking with institutional fund managers. Imagine you're like a closed end fund, like a high yield sort of risky debt closed end fund, $300 million market cap. You're a portfolio manager. You buy high yield bonds. You

You buy various classes of credit instruments. You have a basket for preferreds capped at like 10% of your portfolio. You can mess around and hopefully earn a little bit higher return with that part of the portfolio. And yeah, you see this microstrategy phenomenon, which is basically all parts of the capital structure outperforming their benchmarks for the given level of capital, right? The converts outperform, obviously the stock outperforms.

And so, yeah, you just have to ask yourself, well, if I'm getting benchmarked against the high yield index or from a pure preferred stock manager, am I getting benchmarked against that index? Do I need to have some of the hot sauce, which is on a risk adjusted basis outperforming? Because if I don't have that, I'm going to underperform my benchmark and then I get fired or I don't get paid as much or I lose money.

because money flows out of my fund, which is underperforming, into the funds that are participating in the MSTR capital structure. So, yeah, it's an amazing thing to see. I used to think it would all happen at once or all very quickly or be really disruptive. I've gotten sort of, I guess, more optimistic that it's going to be orderly. It seems to be orderly so far. I mean, as the orders of magnitude unfold,

on the MSTR balance sheet have gone up from, as you said, half a billion to 10x that to 100x that. Nothing's broken yet, but- It's gotten stronger. Yeah. So it's all playing out. It's an amazing thing to watch. And then you have the copycats that are running the exact same book, MetaPlanet to name one, that was literally the best performing equity on the planet last year.

And when you look at what they're doing operationally, it's no offense to the team there because I love these guys. They're super great guys. But their operations are just smirk worthy as to what they're doing. But when you look at how much buying power they're able to attract onto their balance sheet just since they've been running this playbook, it's insane. It's insane. And it goes back to, well, why? How are they able to do this?

Again, they're just allowing gravity. They're poking a hole in the liquidity of the overcapped everything market of the world because of all the fiat printing. They're poking up a soda straw in it, and they're just allowing everything to flow onto their balance sheet. And that in and of itself is the asset.

And I don't think people are not getting their head around this. And I'm here to tell you, they better figure it out because this puppy's just getting started, man. And the corollary, which you pointed out in the past, very astutely, is what does that mean for valuations of enterprises, of companies that aren't tapping into the Bitcoin situation? Right. So are equities...

in the US going to get repriced from over 20 times earnings to 10 times earnings? Or what's fair value in a hard money world for stock of a company that's not participating in Bitcoin? I don't know, but it might not be 20 plus times earnings. Maybe it's five times earnings. Maybe it's somewhere in between. And that logic about valuation is the direct corollary of the actual capital

flowing out of institutionally managed money and individually managed money out of those legacy assets and into Bitcoin related assets, Bitcoin treasury assets. Preston Pyshenko What I think, going back to the core question, which is, well, even when you get all these copycats and you let them all start running this playbook,

How much potential energy is jammed into this water balloon that they're tapping into and letting it flow onto their balance sheet? At the conference, Michael was on stage. His quote was 99.9% of capital is still stuck in fiat assets. And he's exactly right. It's all just crammed into this old legacy mothball smelling...

cesspool of lack of return, right? Slap some more adjectives in there. Yeah, this is our friend Jesse Myers' total potential Bitcoin valuation. All the assets in the world call it roughly a quadrillion dollars. And there's little Bitcoin sitting at a couple trillion. And

MicroStrategy and Michael Saylor and others are building those channels to just allow the capital to flow out of the quadrillion dollar land into the $2 trillion land such that that, what is that? 500X is the amount of capital in fiat terms that are outside the Bitcoin system. And so, yeah, invert that.

And Bitcoin is 1 500th. So yes, I like the 99.9% number that that's the right order of magnitude. That sounds about right to me. I just, I guess for me, I'm like, I'm fired up right now, but I think it's because I'm seeing you're at a moment in time where you're

he has put on such a clinic. And before it was cute, it was like, "Oh, look at this guy with his company that's worth a couple billion dollars in market cap." And, "Oh, look at him, he's buying Bitcoin." He rode the 80% downturn and just kept buying more, which by the way, it turns out that if you go down 80% and come back right to the number you were at, and you were dollar cost averaging a position through all that, you're up massively, massively

Okay? Which Wall Street doesn't seem to understand, even though you go to any investor deck, they all put that in there. But I think that at this point in time, like right now,

You literally have Michael going up. It's the meme where the guy pushes the eyes open and is forcing the person to look at this. And you literally have Michael doing this to everybody on Wall Street. He's pushing their eyes open. He's like, no, no, look. I outperformed Nvidia over the last five years by a lot. And all I did with my company banging out 75 mil a year is buy Bitcoin. Wake up.

We cannot unsee this fact, right? That's the- You cannot see this. And Andy, where it's going next, right? Where this is going next, you think he's got their eyes peeled looking into the light right now. I can't even imagine because remember when he broke into the S&P 500 and how we were all cheering like, "Oh, wow, look at this." He's already at 80 now or something like that. He's under 100.

And at the pace that I think we're going to see into the end of the year, like he might be like, he'll break through the top 50. And if you're in Wall Street and you're looking at this and it's not just the common, it's all these other mezzanines of capital. Like, dude, I don't know. I think this is going to be such a massive moment because everybody in Wall Street has been laughing at this stuff for years. I mean, I know I can see it in my Twitter feed and it's kind of like this. I don't know. I can just kind of feel that the change happens.

in the current and in the tide. And like, I think everybody on Wall Street is like, oh, my God, what are we like? What is this? This is a really good point, because when you talk about Wall Street, much of Wall Street is sell side rather than buy side.

So it's one thing to say, okay, there's a bunch of fund managers out there. They're managing pools of capital. They have a benchmark. They want to outperform their benchmark. So they want to own pieces of the strategy capital structure, which could help them outperform their benchmark. We already talked about that. But the other piece of this is every dollar of capital that the company raises, investment bankers get paid fees, right? The iBankers...

I haven't gone through the filings. When I was back at the business, you make a couple points of fees, percentage points for every dollar of capital that you as an investment banker help a company raise. Well, the sheer amount of fees that are payable to Wall Street bankers who help this company and other companies, frankly, raise money to

to suck up Bitcoin. That's more money that the street makes and the street is all about making money. So they're happy to obviously support the buy side, support the funds, support the guys that actually manage the money. But they get paid all along the way the faster this rocket ship or the higher this rocket ship rides because the bigger it gets, the more deals there are to be done, the more fees there are to be paid to the street of

Of course, this is something Larry Fink figured out a while ago, but it's all sort of this, I don't want to call it virtuous cycle. Some will call it a vicious cycle, but look, this is how Wall Street works. This is how the money machine works, and we're watching it in action.

You know, this might be a controversial take, but when I'm looking at the miners and I'm looking at how capital intensive it is to be a publicly traded miner and then all of the overhead that they got to pay to be a publicly traded company, it's cutthroat. You have to have the cheapest energy, like buy a large margin to remain competitive.

When I'm looking at this and I'm looking at how much Bitcoin they can mine operationally, and then I look at what Michael's doing and just tapping into the overcapitalized public markets across all different types of investment vehicles, whether it's fixed income, convertible debt, the preferred stock, and just issuing more common stock. I'm looking at this and I'm saying, if I was one of these CEOs of these companies,

I would ratchet down operations significantly, especially for locations that have higher energy costs. And I would just tap the public markets because I'm going to make more Bitcoin that way. And they have been doing that to some degree. I remember Mara, I think, has done a couple of convert deals. I want to say Riot did one. Don't quote me. So yes, I think you're right. Number one, you're right. Number two...

They're figuring out a little bit. Obviously, it's a more complicated story from an investor point of view, right? So you've got your mining business and then you got your capital raising business. Strategy is a pure play on the capital raising side. If you're a miner, you're bundled, right? One thing that Wall Street generally kind of hates is conglomerates or multiple businesses

bundled in one, the market would rather, investors would rather have the pure play, generally speaking, and usually they're more willing to pay a higher multiple, a higher valuation, a premium for the pure play. So I agree with you. And look, realistically speaking, first of all, let's just say that the stocks of these companies also agree with you, right? The public Bitcoin miners have been struggling with respect to a stock price recently. Obviously, strategy has far, far outperformed

those companies, at least since I've been watching them lately. And it stands to reason because now we're in the era of strategic interest in transacting on Bitcoin. And what I mean is, it was great when you had sort of these wildcat private mining operations. It was early days. It wasn't that competitive. They could make money and it was still highly competitive and cutthroat business.

But now fast forward to today, you still have one dominant provider of ASICs, right? That's Bitmain. Okay. So if you're a mining company, you're buying from a dominant vendor, right? That's never a good dynamic in terms of creating equity value. That's one. And then two is now you're competing globally with, I don't know, entities in the Middle East, entities in Asia. Some of these are actual governments. Some of these are...

companies that are funded by governments who are realizing now that they confiscated Russia's $300 billion and didn't give it back, now that the global order is in recession, is receding, now that China is buying tons of gold for obvious reasons, gee, I need to own the outside money, these governments are saying, and the outside money

is gold historically, but now it's also Bitcoin. And I got to make sure that I can transact and settle in the Bitcoin market, just like I got to make sure I can transact and settle in the gold market if I can't trust the dollar as much anymore. And so, yeah, I'm probably willing to fund mining at a loss. Okay. So that's what these guys are competing with. They're competing with entities that have uneconomic strategic interests. And

And so, yeah, you're a Bitcoin public company who's trying to make a net profit in this business, competing against guys that are willing to lose money in the long run. That's just a tough strategic position. Yeah, because they want to just have the infrastructure play. 100%. Yeah. Exactly. They want to be able to mine blocks whenever necessary in case they got to move big amounts of money and they can't access the dollar system. Yeah, it's wild. Hey, one of the things that Michael had brought up

at the conference is this idea that AI is the tool of the Goliaths and BTC is the lifeline for everybody else. What are your thoughts on the relationship between Bitcoin and AI? Wow. Big question. I kind of like Peter Thiel's framework, which is Bitcoin is libertarian and AI is authoritarian. As far as it goes, it's not a perfect analogy. But look, today, AI, as a matter of fact...

tools are concentrated in a handful of providers, right? I mean, there's, I don't know, five major hyperscalers, roughly. Those are mostly American companies. There's a couple of Chinese enterprises that are scaling up. Europe is kind of behind. So I do think that these entities, companies, whether it's Google, Microsoft, anybody else, they feel like Goliath, right? These are giant

Oh, by the way, some of these companies are basically controlled by one person. All companies have a CEO, but some of these guys have founder CEOs or a couple of founder CEOs that it's like the business card that Mark Zuckerberg gets printed off. I don't know if this is a real story, but I saw this in the movie, The Social Network says, I'm CEO, like you can't fire me. Anyway, these guys have a lot of power.

And it's really hard for anyone to take it away from them. So I do think that power is concentrated like Goliath, big, powerful entities. And Bitcoin is kind of the opposite. It is decentralized. Anyone can use the network in the world. Nobody controls it, as our friend Jeff Booth caveats, as long as it remains decentralized and secure, which it seems to have done so far. And so it allows anyone in the world...

little David with a sling standing against giant-sized Goliath in his armor, the ability to transact safely and securely without the control of governments or large corporations. So yeah, David versus Goliath, I like that framing in general. Now, your question was broader, like what's the relationship between AI and Bitcoin? Now, the real interesting question is, yeah, will the AIs, as they start to transact as agents,

economic agents get deployed in the form of these AI model driven entities, will they use Bitcoin? I mean, I feel like I would. I'm not an AI agent. I'm just a regular intelligence. But I feel like Bitcoin is the safest thing. It's the most liquid thing. It's most transacted. I mean, it's by far the largest, most secure, most valuable internet native asset, period.

And so if AI is fundamentally internet native, and if AI agents are going to start being a larger, a growing part of the economy, I think it's a pretty good bet that those AIs are going to demand Bitcoin. Preston Pysh : They just need a humanoid robot to bury their private keys on their behalf for the agents, right? Back to the physical world? Paper?

How would the AI secure the keys? I mean, I think the AI is smart enough to understand that it's got to secure it in physical reality somewhere where nobody's going to find it. So they need the humanoid robot and an encrypted handoff from the agent to the humanoid robot. Are we going back to printing off paper keys and putting them in jars and burying them in national parks? Is that what's going to happen? I don't know how the AI could secure the keys any better than that. Yeah.

Yeah, look, air-gapped key management tools are as valuable to entities on the internet as they are to physical meat puppets like you and me. I'm literally going to ask AI right now what it would do. Okay, you're an AI of the future. Bitcoin is now the dominant currency or money. This is real time. This is real time. How do you secure the keys?

Oh, this is hilarious. Are we going to get air-gapped multi-sig? Oh, okay. Yeah, it said one with you, a business or...

Oh, it's given me a, it's given some pretty good answers here actually, but it's not what we were saying. It's not going to reveal its secrets to you. You're a human. It's already thought of. Slime ball human. None of us thought of yet. Better ways to secure private key material. Oh, look at this. It says satellite orbital off planet backups. Something with global signal resistance. Oh, this is pretty interesting anyway. Well, people want to, you know, dig into some fascinating information.

I like that one, Preston. I mean, I like the idea of having some of my Bitcoin key material far up out of the gravity well of Earth. Very hard to access. I bet Elon's got something going on with respect to SpaceX and the satellite swarm. Maybe there'll be key material orbiting or getting sent farther and farther out into space, farther and farther from the reaches of the robots. I love how he even talks.

talks about the electromagnetic spectrum and how you got to protect against an earthbound attack that would be like, yeah, this is what we're up against, dude. This is what we're up against. Thank God for Bitcoin. I like the idea of having, you know, one of three or one of five air gaps somewhere on the moon. There's not so much latency. It's not so far that there's

too much latency, right? We need to get to... It drew Bonsall into this conversation to talk about interplanetary Bitcoin. Andy, I love chatting with you, sir. We need to do this more often. Thank you for making time and coming on. Anything you want to highlight or throw out there for the audience? Preston, it's always a pleasure talking with you, man. I'm wide-eyed, mouth open, watching what's happening in Bitcoin land. And so...

Always a joy talking with you about it. Just being a witness and a participant in this space, it's an honor and a privilege and a pleasure. So thanks for all you do and keep up the good work. Amen, man. Doesn't it feel like this thing's like kind of growing into a whole nother species at this point? Like just it's going in a different direction, but I feel the same about you, man. So thanks for making time and coming on and looking forward to our next chat. You too, Preston. Pleasure's all mine. Cheers. Thank you for listening to TIP.

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