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October 18, 2025 43 mins

Dan Hillery, fund manager and Bitcoin strategist, joins us to break down the next evolution of Bitcoin capital markets: the rise of Bitcoin-native treasury companies engineered to unlock financial leverage with BTC as a base layer. This isn’t just another MicroStrategy clone — it’s a deeper, more sophisticated play. From unsecured convertible notes to preferred shares and fixed-income arbitrage, Dan explains how these companies are disrupting traditional capital formation using Bitcoin as collateral. In this episode, we explore why buying spot Bitcoin is just the beginning — and how the next generation of firms are building scalable, creditworthy businesses around Bitcoin yield, durable capital structures, and strategic issuance. We unpack the mechanics behind NAV premiums, debt leverage, risk profiles, and the shift from equity issuance to fixed-income instruments. Whether you’re a macro investor, a Bitcoiner seeking asymmetric upside, or a curious analyst trying to understand the future of Bitcoin in public markets, this episode maps the frontier of Bitcoin financialization.

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Episode Transcript

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Speaker 1 (00:00):
The more capital you have in your balance sheet, the
larger the percentage of your valuation is based on that
actual bitcoin capital asset, the more correlated directly you'll be
with bitcoin. If you only yield bitcoin by having demand
for your equity, it's really tough. If you can yield
bitcoin using issuing fixed income products that are overcoloralized, you
can still have bitcoin yielding a bear. I think strategy
transition from a meaningful software business to a meaningless software

(00:23):
business in terms of its overall evaluation. Now they're wholly
dependent on Bitcoin's content and growth rate for the success.

Speaker 2 (00:29):
If you want to scale the company, you want to
issue the preferreds. I want to make sure I have
enough Bitcoin on my books to be credit worthy, but
not necessarily back those because if I back those as
a collateral assets and that actually damages my credit worthiness.

Speaker 1 (00:42):
It has to be unsecurity.

Speaker 2 (00:45):
Dan, I want to start with the big picture here,
because we're seeing an explosion of bitcoin treasury companies and
there's a lot of different differences there, but a lot
of people trying to copy the micro strategy playbook. But
you've said that most people fundamentally miss understand how these
companies actually work. And what makes them valuable. So what
is it that you think everyone's getting wrong in this space?

Speaker 1 (01:08):
I think the main thing that people are misunderstanding is
this idea of bitcoin is collateral. And if bitcoin is
a pristine capital asset, if it's something that you can
borrow against, that you can leverage, or that you can
issue fixed income against, then bitcoin yield is great. But
yielding bitcoin from ten bitcoin to twenty bitcoin on your

(01:28):
balance sheet does not give you that next level unlock
of using the bitcoin in productive ways as a collateral asset,
whether that be in ten years, acquiring different cash flowing businesses.
Whatever the landscape may look like for business, may be
their bitcoin yield via productive products or issuing these fixed
income giant capital market arbitrages. You need that collateral to

(01:49):
enable those activities.

Speaker 2 (01:50):
So when you're saying bitcoin yield, you're meaning at the
rate at which they're acquiring new bitcoin under their balance
you or the rate of their bitcoin balance is growing,
not earning yield on the bitcoin, but at the rate
that they're growing there they're bitcoin. So you're saying that
it's really irrelevant how fast you're growing it. It's really
the total size of it. And so it's cool if
you're growing it at fifty percent, but if you're still
only fifty bitcoin, it doesn't really matter. I guess that's

(02:12):
what you're.

Speaker 1 (02:13):
Saying, and I think it's not as black and white
as I make it made it out to sound. But
for an investor, if you're in at one bitcoin and
they're bitcoin yield or the number of bitcoin you own
per share, So bitcoin yield is a function of both
the amount of bitcoin and the balance sheet and the
number of fully diluted outstanding shares. So in that equation,
as a shareholder your site, you have a lot more

(02:33):
bitcoin per share. But from a company perspective and a strength,
durability and longevity perspective, the more bitcoin they own, the
more optionality they have moving into the future with these
different products. So I think those are the kind of
the two factors you have to weigh when looking at
one of these companies. And then when you think about
like reaching critical mass, issuing equity becomes less and less

(02:55):
attractive as the size of the company grows. So I
think all these bitcoin treasuries need a play to move
into beyond just issuing equity and yielding bitcoin because of
the nav the m nav arbitrage.

Speaker 2 (03:07):
Yeah, I want to dig into all the mechanics of that,
but let's just zoom out a little bit before we
digged super deep into this. Are you a bitcoiner, were
you hold were you holding bitcoin in deep cold storage
before jumping into this, or are you sort of like
an equities guy that have moved into this.

Speaker 1 (03:27):
Prior to being a So I was a bitcoiner in
twenty twenty one. I was a twenty twenty one bitcoiner,
and I found my conviction during the FTX collapse just
out of pure luck. I was reading all the material
and it happened to be very long price at the time.
So I feel very lucky because of that. But prior
to that, I was an index investor. So you know,
all through my younger years, I was dumping all my
money in the S and P and so I've always

(03:47):
I've always really thought the idea of just long term
compound growth on your money is very, very powerful, and
that's why I've kind of been attracted to bitcoin. But
I found bitcoin through kind of an option's lens. I
studied a lot of quanticy to finance through college and
graduate school, and I've always found it really interesting that
for an acid like bitcoin, if you believe it's growing
out a roughly a power log growth rate or just

(04:09):
a steady high compound growth, you can make a lot
of money with long term options on an asset like that.
So that's why I was really attracted to it.

Speaker 2 (04:16):
So you kind of were attracted, I mean obviously by
the growth rate number one in gu as we call it,
right number go up. And then because of your background,
you saw the ability to do options against it, which
then increases that. And then you saw the treasuries, and
then they're even increasing the options if you will, almost
on that, Yeah, exactly.

Speaker 1 (04:35):
And the treasure is so interesting because there were no
I that called you couldn't buy options on ib when
I was buying options on mstr you know, So like
I was forced into bitcoin treasuries because I was interested
in options, and then I had to learn about bitcoin
judges along the way.

Speaker 2 (04:47):
Yeah. So twenty twenty one, Class of twenty twenty one,
I want to ask about our reference. But so far
we've seen you know, in the last year, Meta Planet
being the second company or really the first company I
should say, that's actually been able to duplicate what micro
strategy and now strategy has done their stocks up like
seven thousand percent in like a year. And now we're
seeing ones like Blockchain Group in France They're up like

(05:09):
three thousand percent in six months. And then we see
like the Smarter Web companies up like eight thousand percent
in like two months. Those are insane numbers. I mean,
you're an index investor, like, those are insane numbers. But
it it it's very similar to what we saw back
in like twenty seventeen in the cryptocurrency ico boom. So
they weren't IPOs like kind of what we're seeing now.
They were icos, And so you hear a lot about

(05:31):
some of the differences there. I mean, have you gone
back and sort of studied what happened there to see
if there's any kind of common parallels there.

Speaker 1 (05:38):
Yeah, And I'm not extremely familiar with the ico boom
and bus cycle. I mean I studied alt coins for
a bit in twenty twenty two, just looking at different projects,
understanding the tokenomics and stuff, and I mean I wasn't
all that attracted to it. And I think, what's I compare?
I think this bitcoin treasury craze more to the spack

(05:59):
craze of twenty one, so in twenty twenty. So that's
kind of my mental comparison. So there's people more knowledgeable
about the icos and they yeah, yeah.

Speaker 2 (06:09):
I would, I would say that. I mean I think
both of very similar. I mean a SPAC was also
sort of like, hey, we're gonna raise a bunch of money.
We'll tell you what we're gonna do with it afterwards, right,
and then a lot of times they didn't have any
value there. ICO is sort of similar, like we raise
a bunch of money and then there's really just vapor
where there's nothing there, whereas these these treasury companies at
least they're buying bitcoin, so as there is that, yeah.

Speaker 1 (06:30):
And there's fear greed, like I think icos and SPACs are.
You have to understand the fear greed aspect of any
of this, like trading behavior. So that's where they're helpful.
But ultimately, I think raising capital and putting into bitcoin
is actually a good faith, good hearted move. So we're
in a different sort of environment I think long term.

Speaker 2 (06:47):
Okay, now, as we kind of dig into this, I
mean I want to get into the details, but we're
just kind of warming the audience here. But so you know.
I think you've said there's like two types of companies.
There's the tesla who holds a bitcoin on the balance sheet,
and then there's companies doing it as a strategy. But
would you also say that maybe within that, maybe there's
three companies. So there's the test let's put another balance sheet.
Then there's ones that are like a hybrid company that's

(07:09):
also running a strategy, and then there's peer play strategy companies.

Speaker 1 (07:14):
I think absolutely yeah. I mean it can be. It's
it's kind of like a slider, right, you can adjust
how aggressive if you want to be with the bitcoin
capital market's arbitrage, or maybe you don't want to use
the capital markets at all to raise the bitcoin. You
just sweep your cash flows. And I think the most
important thing is in a falling bitcoin environment, which we
haven't really seen for three years, how do you navigate?

(07:36):
And that's going to be the real question. And I
actually think the strongest contenders in that environment are those
who sweep their cash flows into bitcoin.

Speaker 2 (07:46):
So that means the strongest contenders would be ones that
actually have a business model that's making cash flow outside
of bitcoin.

Speaker 1 (07:54):
I think it's a huge leg up. I think it's
a huge leg up for a bitcoin treasury, just even
if it's you know, five million dollars a year of
free cash flow, because you have so much optionality to
issue to to secure a debt and buy bitcoin in
market where the bitcoin price is suppressed.

Speaker 2 (08:09):
Okay, but what do you think happens when a company
you have, like a similar scientific who's running like a
medical company, And like, as an investor, what do I
know about medical companies? And I don't know they're facing
a DOJ lawsuit and what could happen with that? And
oh what if they have a new patent and that's good,
but I don't know about that. But then they're also
running the strategy over here, so like how do I

(08:30):
value them? And so then maybe there's like this miscommunication
in the market. Whereas like Sailor he talks about I mean,
he made it very clear. I got to have dinner
with him in Prague and he said, if bitcoin goes up,
the market wants the strategy to go up twice as much,
and if bitcoin goes down, they want it to go
down twice as much because they the market needs to
know how to price around it. He's like, they don't

(08:51):
want me to lower the volatility, they'll just lower their position.
And so you know, he said, like he made the
funny case. He said, they've got game and spoke to
me tonight and told me the market was going to
crash tomorrow, and I hedged my position and the market crashed,
but we didn't. That's not what the market wants because
then they then they don't know what to expect, right,

(09:12):
And so then I start thinking about a similar scientific
and not to throw them under the bus or whatever,
but just as an example, like, how do I know
what to expect from that stock based off of bitcoin?
In that example?

Speaker 1 (09:25):
And I think that's a really good question and something
I can't I can't answer directly because it's going to
be so diversified. There's going to be companies that exist
in so many different parts of the spectrum. But the
more capital you have in your balance sheet, the larger
the percentage of your valuation is based on that actual
bitcoin capital asset, the more correlated directly you will be
with bitcoin. That's all I can say.

Speaker 2 (09:47):
Yeah, and then and then maybe that would only matter
for the common shares of the main company, But then
if you wanted to tap into Preford preferred shares or something.
Then that's a whole different piece, that's.

Speaker 1 (09:59):
A whole different ball game. I find it extremely interesting,
and I think that's where all of this is going,
especially for the treasuries.

Speaker 2 (10:04):
Yeah, for the peer play treasuries exactly.

Speaker 1 (10:07):
All right, So.

Speaker 2 (10:10):
We have we have a spectrum, and I guess probably
at some point, at what point does the bitcoin strategy
start to overtake the existing bitcoin So like strategy, for example,
you barely hear about the software business anymore, whereas like
kind of going back to a Tesla or if Apple
were to buy bitcoin on their balance sheet, it wouldn't
even really move the needle. But kind of going back
to like I mean, index investing, traditional equity investing, and

(10:32):
typically you don't really value companies as a multiple off
their nave, right, so it's really all about those discounted cashlows.
So then so I guess you have to get to
a point where that bitcoin overtakes the traditional business. I
guess that that's the way that you see it. And
then that's just it on a spectrum.

Speaker 1 (10:50):
Yeah, And I actually kind of have a metric I
use in my head for that, and so I think
strategy transition from a meaningful software business to a meaningless
offware business in terms of its overall evaluation, when the
free cash flow from the operating business has ceased to
be able to cover the annual liabilities of their debt.
So when the preferreds became started becoming issued, they no

(11:14):
longer can cover those preferreds by their free cash flow
from their operating business. Up until the end of twenty
twenty four, they were able to cover all the convertible
debt coupon payments through their operating cash flow. So that
was a fundamental shift in their strategy. And now they're
wholly dependent on bitcoin's compound annual growth rate for their success.

Speaker 2 (11:32):
Okay, now we talk about the underlying business model and
the point of having some sort of cash flow. Five
million dollars is good enough to sort of cover that.
But you've also talked about quite a bit about sort
of like the convertible bond problem, and it almost seems
like maybe Sailors sort of headfaked the industry almost, if
you will, because micro strategy came out with the convertible bonds,

(11:55):
and now there's strategy which is maybe like the two
point zero, which is like no more vertibles and now
it's like atm and preferreds. So what's this convertible bond
problem that you see that seemingly sort of headfake the
industry to like, now everybody's copying that part, but it
seems to be a big problem.

Speaker 1 (12:14):
Yeah. I can only speak to the risks associated with
a convert relative to it preferred, and that's when duration,
so converts come do and that term debt is very
problematic if Bitcoin has a sustained draw down. Two, it's
the pricing of his convertible notes and the delta hedging
where people will tend to short the exposure to MSTR

(12:37):
relative to the bond. So the bonds when they get
issued represent about fifty percent exposure to MSTR. And most
of the large players who buy these bonds these convertible notes,
they short the stock and they scalp the stock on
the way down. And that's very predatory for the common shareholders.
And so I don't think that's super advantageous for any
company who's looking to issue debt. And that's why I

(12:58):
think that prefers become more popular.

Speaker 2 (13:01):
So it's sort of like at the beginning, it was like,
oh my gosh, he's raising billions of dollars at like
zero point eight interest, Like that's amazing, Like why wouldn't
you want to be at billions of dollars at very
low rates? Which is why again sort of the headfake.
Now you see, you know, Swamp sequons, you know, raised
two hundred million of converts, and I think Pump's company
rais two hundred fty million of converts. And you see
that over and over and over. But I guess what

(13:23):
you're saying is the sort of that predatory nature or
really it's the function of that convert market is going
to want to short the stock and so even though
they're getting the bitcoin, then they have to face the
headwinds of the of the downward pressure against the equity price.

Speaker 1 (13:36):
Exactly. Yeah, I mean it's a good and a bad.
Like with everything, there's a negative. So it's a positive
they get all the bitcoin, it's a negative there's some
downre equity pressure. One point I think that's really important
to understand about those converts is you can have a
senior on secured convert or a senior secured convert. And
something to watch out for in these capital structures are
the secured nature of those converts because then there is
a margin call preference in the price of bitcoint whereas

(13:58):
with Strategy and most other bitcoin try it's unsecured, so
there's no margin call risk with those convertible notes.

Speaker 2 (14:04):
So the duration of that debt instrument, as well as
whether it's secured or not secure, is going to make
a big difference exactly.

Speaker 1 (14:11):
All those terms really really matter, and we're trying to
value the credit worthiness of any of these companies.

Speaker 2 (14:16):
Yeah, do you think there's like a ratio where, like,
you know, we could probably take twenty percent in converts
and that extra bitcoin will help our stock grow, but
it doesn't really hold our stock down that much. Is
there like some sort of a ratio that you think
might work or does it really come down to those
terms that you said?

Speaker 1 (14:37):
Yeah, I think it depends on whether or not you
can cover those converts with free cash flow. If you can,
I would go heavy on the converts because you have
maximum leverage with the lowest amount of risk as long
as it's not secured. But in terms of the short pressure,
I think bitcoin's price pushes. Bitcoin's price is really the
forcing function there, Like I wouldn't The shorts are predatory,

(14:58):
but they're not. They don't cripple stock price, so I
don't think they're a massive issue.

Speaker 2 (15:03):
So if you could get it on good terms with
potentially being unsecured where you're not basically forced to sell,
and bitcoin runs, we're making you all the time as
the time of recording, and I think we had one
thirteen today. If it runs the two hundred thousand, that
headwinds of the pressure of the short selling is probably
not going to matter exactly.

Speaker 1 (15:24):
And when those converts are really deep in the money,
so there's a strike on the convert where they can
convert the short delta arbing, the delta hedging that goes
on is pretty much negated at stock prices well above
the conversion price, So as you get higher and higher
as bitcoin runs, it matters less than us.

Speaker 2 (15:41):
You've said that. I think you've said that their predatory
towards the stock and that strategy is frustrated with them.
I mean, wouldn't there be an opportunity when the price
a bitcoin runs up to maybe buy those out or
close those out.

Speaker 1 (15:55):
Yeah, strategy has the ability to convert call those for
conversion early as long as there's certain terms that are met,
and all of the duration terms have been met, but
it's not advantageous for Strategy or any Bitcoin treasury to
call them early because of the good faith with the
convertible note hedgers and purchasers, and because there's provisions that

(16:15):
make Strategy or any of these companies issue more shares
in the case the company itself calls the debt early,
so they're kind of just waiting until the delta hedges
are done hedging and they convert.

Speaker 2 (16:27):
Yeah, just kind of like write it out.

Speaker 1 (16:29):
I think it's their best best option.

Speaker 2 (16:32):
Yeah, at this point. What about something more another type
of instrument, like the Blockchain Group has done where they've
taken bitcoin that can convert into equity. What do you
think about those types of converts?

Speaker 1 (16:46):
So interesting, right, And the risk for the corporation is
exponentially lower when they take bitcoin downside, right because in
the case of Strategy convertible notes, they have a principal
payment due on a certain date in the future denominated
in USD. In the case of Blockchain Group, I mean,
it's denominated in bitcoin, So you're not going to face

(17:08):
a situation where you owe more bitcoin to creditors at
some point in the future, whereas if the price of
bitcoin plummets over the next four years, strategy will ultimately
owe those creditors more bitcoin as represented by the flat
US D value, so very very much so less risky
from a perspective.

Speaker 2 (17:28):
But you might also say that then they would have
to give the bitcoin back. So to your point, you
to give it back and the US dollar value would
be lower. But like, if the entire kind of strategy
is to kind of keep that yield growing, if they
had to give back a bunch of the bitcoin that
would work in reverse. Wouldn't it be catastrophic.

Speaker 1 (17:43):
It would be catastrophic, and I think for it would
be catastrophic. But the problem I think there is that
if those shares don't convert over a period of time,
it means the stock underperformed Bitcoin over that duration. And
so if the stock underperforms Bitcoin, that kind of it's

(18:03):
all it's all a mess. It's all bad, right.

Speaker 2 (18:06):
If the stock can't overperform Bitcoin.

Speaker 1 (18:09):
Exactly, then bitcoin yield wasn't effective and you lost money
as a convert holder.

Speaker 2 (18:14):
So let's talk about that for a minute. So you know,
that's what we see. I see a lot in the
bitcoin space. I'm sure you do as well as like
will these outperform Bitcoin, otherwise why don't I just hold Bitcoin?
And so you know, in the bitcoin community, we believe
one bitcoin's one bitcoin, that's the hurdle rate, you know,
et cetera, et cetera, And so I see that a lot.
But then, like you're an index investor, you used to be,

(18:35):
So it's like modern portfolio theory or just normal portfolio
theory would be sort of a diversified portfolio, right, I mean,
maybe some people might put five percent towards bitcoin or
ten percent towards bitcoin, and it doesn't seem that the
majority of people are on a bitcoin standard. So they're
trying to beat the S and P five hundred, they're
trying to beat the inflation rate, but not necessarily bitcoin's rate.

(18:58):
So what do you think think about that? Because, like
I said, in the bitcoin community to be thinking, well,
why would I buy that if it can't outperform bitcoin?
But I don't feel like the normal, the normy investor
thinks that way.

Speaker 1 (19:10):
Yeah, there's a lot of benefit and there was early
on for a bitcoin treasury company trading as a public equity,
the ability to margin and borrow at good rates against
that equity, the ability to sell calls the ability to
leverage that position and store it a broken's account. So
there are a lot of advantages to those public bitcoin
exposure equities. But the way I look at it is
like when I'm trying to value a bitcoin equity relative

(19:31):
to the bitcoin hurdle rate, is you can leverage bitcoin directly, right,
You can just take leverage on your bitcoin and tech
theory outperform it. So these companies have to have some
sort of debt instrument that you can't buy. They have
to have bitcoin yield in future expectations that you believe
will outpace bitcoin, And I think you have to look
long term and think about the durability of their own

(19:53):
bitcoin per share yield over a ten year period and
then decide for yourself whether or not they're going to outperform.

Speaker 2 (19:58):
Right. But what I'm saying is I don't know if
the majority of investors in the world are trying to
outperform bitcoin.

Speaker 1 (20:05):
Oh, I mean, great point.

Speaker 2 (20:07):
Yeah, that's what I'm saying. So like you and I
in the bitcoin space were like, hey, if it's not
going to beat bitcoin's return, why would I buy it?
But the majority of investors out there, they're just trying
to beat the S and P five hundred, Yeah, or
they're just trying to beat inflation. So if you know,
if micro Strategy stock or XYZ stock went up thirty
percent this year, they might be pretty excited about that,

(20:29):
even though it underperformed Bitcoin.

Speaker 1 (20:31):
Totally, totally. I think everyone has their own benchmark, right,
and if the SMP's the benchmark, a lot of anything
that has to do with bitcoin has performed quite well
relative to that benchmark.

Speaker 2 (20:41):
Do you think there's some sort of like launch launch
plan and then like maybe escape velocity where like most
of these companies maybe are sort of bootstrapping off the
backs of bitcoiners djen bitcoiners that are looking for a
more yield than what bitcoin can provide. But then eventually
they get big enough to where they get into mainstream finance,
and then they're being purchased by regular equity holders that

(21:02):
are not trying to beat bitcoin as a hurdle rate.

Speaker 1 (21:05):
Absolutely, and a lot of them do get included in
those passive equities passive indices in their you know, listing
exchange in their listing country, and that's a huge kind
of bitcoin trojan horse into the traditional capital markets. And
I think it's really really good for bitcoin. A lot
of people, a lot of hardcore bitcoiners, get upset with
the Bitcoin Treasury is saying it's paper bitcoin and this

(21:25):
is and the next thing. But I think what they
miss is that it's really an introduction of bitcoin into
capital markets in ways that you know, a lot of
investors holding these diversified portfolios don't even know they're holding
their beginning to hold these sorts of companies. I mean,
strategy was in the Russell to just got added to
the Russell two thousand a few months ago.

Speaker 2 (21:44):
Yeah. I put a post on X a week or
two ago that went kind of viral and I basically
said that you know, these these are not for bitcoiners.
These are not a replacement for cold storage, right. This
is really for trapped equity that doesn't have a way
to get exposure to get into it, and so it's
not a replacement for that. That's why kind of the
first question I asked you is if you were a
bitcoin or first, But I guess back to that escape velocity.

(22:06):
So then if the company can get big enough and
it can be looked at like additional equity, then as
a previous a reformed equity investor, I'm just kind of curious, right,
we would typically value those based off of potential future earnings,
just kind of cash flows, et cetera. Right, so they'd
sort of have like, well, you know, if Apple can
continue to expand its iPhone sales and its profit margins

(22:27):
stay about the same, how much will be worth in
three years or five years from now? Even maybe a
Warren Buffett who would never invest into bitcoin because it
doesn't produce anything, but he liked capital efficient businesses, right,
so they had him out. They needed very little capital
kind of keep going. So then I'm curious how you
might look at these from like more maybe more in
that lens, right, So, like take strategy for example, it

(22:49):
sells a product, it has three or four products, right,
it's got to strike stripe drive, right, it's got it preferreds.
It has a massive profit margin on those fifty percent.
It's very capital efficient. It doesn't take any really very
much capital to do that. And then if it just
holds the bitcoin, I mean, Sailor said, what's the worst

(23:09):
that can happen? We can't raise any more money, and
we're a sixty billion dollar company growing by sixty percent
a year. So if bitcoin gets to two hundred thousand
or gets to five hundred thousand, then how much is
strategy worth? So I'm curious do you look at it
like that trying to sort of take that traditional equity
lens and try to sort of project out that diskind
of cash flow model.

Speaker 1 (23:30):
I think you have to do those valuations on a
bitcoin standard because a traditional corporation's assets you can't personally
own and have them producing whatever they produce at a
rate of thirty percent annually. So I think it's difficult
to consider the bitcoin price appreciation as part of earnings.
I really like the metric bitcoin gain, which is the

(23:51):
new the US dollar value of the new bitcoin that's
added on a per share basis for any of these corporations,
because that's real new dollars in the door per share,
And so I really look at that metric try to
figure out how valuable that is moving forward, and that's
ever increasing because the price of bitcoin is also increasable.

Speaker 2 (24:09):
What happens if Bigwin goes down, then.

Speaker 1 (24:12):
Then you'd be looking at a scenario in which the
bitcoin gains still positive USD value, but it's not a
compounding positive USD value in the short term.

Speaker 2 (24:22):
Right, got it?

Speaker 1 (24:23):
So?

Speaker 2 (24:23):
I mean a lot of people seem to use the
m NAV metric as sort of like that multiple to
the nave, right, and then the multiple to the bitcoin
that they have. Do you think that's more of like
a leading indicator of where the potential price could be?
Or is that like a lagging indicator sort of telling
you where they're at.

Speaker 1 (24:41):
I think it's so hard and so complicated, and I
know we spend a lot of time thinking about this.
M NAV I originally believe was a function of the
leverage in the capital structure. Right, If you have one
hundred dollars a bitcoin and thirty percent of that is
on leverage, is borrowed ad zero percent debt, which was
originally how you know strategy the of the bitcoin leverage
equity capital stack existed. Then if you believe bitcoin's going

(25:05):
up over a long term time horizon, then the debt
will melt away in the value of the bitcoin will increase.
So there should be a theoretical premium on that leverage
if you believe bitcoin's going up. If you believe bitcoin's
going down over a long period of time, there should
be a discount on that leverage capital structure. So I
think one MNAV is function of the leverage. Now all

(25:25):
these companies are yielding bitcoin or increasing the bitcoin per share,
so a lot of times m NAV has become kind
of a function of the future expectations of on a
bitcoin each shareholder will have. And I think those work
in tangent and they ebb and flow, and there's just
market dynamics, you know. Index inclusion pushes up the MNAV,
fear push it down the m NAV. So it's not

(25:45):
just one kind of metric.

Speaker 2 (25:47):
Would you say it could almost be similar in a
way to like a pe ratio where it's like sort
of like hey, Metaplanet's at a five or a six
because the rate at their bitcoin yield, the rate at
which they're growing the bitcoin stack, they can cover that
in a short period of time, whereas Strategies is much
lower because as a percentage, they're growing their bitcoin yield slower.

(26:08):
So it's sort of like that is that it's like
a forward looking metric based off of how fast they're
growing into that I think.

Speaker 1 (26:15):
So I think that's a really good way to put it,
and that's definitely how the market's starting to price these things. Right.
We've seen really really high end navs for these smaller
companies that are yielding bitcoin quickly and lower end navs
for larger corporations that the base effect math kind of
inhibits their BDC yield for share.

Speaker 2 (26:30):
Yeah, Now, because you think that size matters, would you
say that right for the collateral base that you could have?

Speaker 1 (26:37):
Right?

Speaker 2 (26:39):
Do you think the bitcoin yield is maybe used too
much and it's not really as important as people make
it out to seem because back to Smarter Web company
or even Metaplanet, they have a pretty incredible yield, but
micro strategy or strategy or you know, adds more bitcoin
in one purchase than Metaplant even has for example. So
I mean, how is that? Is that a metric that

(27:01):
you that you use a lot?

Speaker 1 (27:04):
I think about it in a couple different ways, And
the main way I think about is durability of bitcoin
yield because the real question is how for looking are
the is in equity? Right? All equities are forward looking,
whether that be the price, the PD ratio, et cetera.
But with a bitcoin treasury company, then the question you're
asking is how far looking is the future expectation of

(27:26):
bitcoin per share? And so if the company has a
really fast bitcoin yield, but it can won't be able
to sustain bitcoin yield in five years or during a drawdown.
You can't look out that far. If you have a
company that can issue you know, eight percent fixed debt
against their massive capital stack and continue to yield bitcoin
into perpetuity, maybe that is a more durable, you know,

(27:47):
business structure. But where yet to see that, you know,
practice in the market.

Speaker 2 (27:50):
Yeah, well at Prague there was video Sailor did with
Adam Back and Alexander from the Blockchain Group, and I
think he actually called it a durable business model, which
was issuing the preferred to add the bitcoin, and that
was the durable model. So going back to the size matters,
and you talked about like the credit worthiness and so
I'm guessing what do you mean by credit worthiness and

(28:11):
why is that important?

Speaker 1 (28:15):
Credit worthiness? And for a bitcoin treasury company is really
comes down to the different tranches of debt in the
capital stack and how over collateralized they are by the
bitcoin and the track record of the company in bitcoin
acquisition and not messing up the strategy quite frankly, so
do they take do they borrow against their bitcoin for

(28:35):
other purposes that harm the bitcoin itself, that jeopardize the bitcoin,
Do they do things with the bitcoin, do they lend
it out that could jeopardize the bitcoin on the balance sheet.
All those things will hurt the credit rating of a corporation.

Speaker 2 (28:47):
Then and issuing issuing converts that were recourse or had
term on them, right.

Speaker 1 (28:51):
Exactly secure debt, I mean, that would really hurt the
credit worthiness of any security issued below it in the
capital stack, got it. And so these are the things
you're looking at, and people say the credit worthiness of
the company, I think the real question here is the
credit worthiness of the instrument, and the company kind of
defines that credit worthiness because in Strategies capital stack, or
in Semilar's capital stack, I mean, the similar converts are

(29:13):
credit worthy because of what Semilar has done in the past,
and their bitcoin stack is overclateralized by you know, x
amount percent. With Strategy, they have four different products, so
each of those it's a different credit rating rating relative
to each other. And there'll be more and more of that,
in my opinion.

Speaker 2 (29:27):
But those preferreds, the four that you mentioned for Strategy,
they're not actually collateralized though, right, so they're sort of
backed by the credit rating of Strategy, but not actually
collateralize themselves.

Speaker 1 (29:39):
They're not secured, but they do have a liquidation preference.
So in the case of strategies dissolution or if they're
also cumulative dividends other than stride, So the dividends if
they're ever missed for Striper Strife, they compound against Strategy,
and the shareholders have different provisions where they can put
a board member onto Strategy and make sure those difidence

(30:00):
get paid. In the case of the dividends aren't paid
over a long enough period of time, they're owe the
liquidation preference, which moves to meet the value of both
crecord strife. So there's protections in place that that protect
those shareholders.

Speaker 2 (30:13):
So the same so they're backed by the credit worthiness
of micro Strategy, but not necessarily the bitcoin is the.

Speaker 1 (30:19):
Collateral exactly, Yeah, exactly, And so then argue that worthiness
is a function of the bitcoin is collateral. But you're
totally right, it's not secured. It's not directly bitcoin collateralized.

Speaker 2 (30:32):
Right, So then if you want to issue, if you
want to scale the company, you want to issue the preferreds.
I want to make sure I have enough bitcoin on
my books to be credit worthy, but not necessarily back
those because if I back those as a collateral asset,
then that actually damages my credit worthiness.

Speaker 1 (30:49):
It has to be unsecured debt. That's yeah, that's the
only way I would put it. Yea. If it's if
you have secure debt anywhere in your sheet on your
balance sheet that's secured by the bitcoin, it really jeopardizes
the credit worthiness of the institution.

Speaker 2 (31:00):
Got it. Okay, So you've got a new fund going.
Congratulations on that. Just for everybody that wants to know,
smart guy running a fund to obviously see the opportunity
in space, what is Can you give us your framework
that you're looking for to try to identify which are
going to be the outliers and where a good valuation
is today in the future, et cetera.

Speaker 1 (31:23):
Absolutely, We only invest a small portion of the fund
in bitcoin treasuries. Specifically, our main focus is on preferred
coming to the market, So I guess that's a form
of bitcoin treasuries and the options chain. So I got
my start trading options on both IBIT, MSTR MSTR during
the bear and that's where I see a lot of

(31:44):
value is pricing bitcoin in decaying fiat options. I think
you can't price you can't price a bitcoin option in
decaying FIAT is what I've always believed, and I think
that will continue to be the case, especially as more
of these treasury companies have an options market, you can
express different bath in ways you can't with just a
traditional equity. So we're a leverage bitcoin alpha fund, and

(32:06):
we combine options on large stable bitcoin jrudgery companies and
small allocations to investments like you may.

Speaker 2 (32:15):
Work, okay, so you're not like long any of these companies. Necessarily,
you're taking sort of your experience, your background with the
options market, and sort of leveraging up maybe more like
trading positions around these yep.

Speaker 1 (32:27):
We take multi month, multi year directional positions on mostly
strategy and IBIT, but then we also go long for
long periods of time in these bitcoin truatury companies as well.
So it's kind of a hodgepodge of all.

Speaker 2 (32:40):
Of that, got it. So then you're not really trying
to determine if it's cheap or expensive, or what the
valuation is today or potential future valuation. You're just more
looking for a dislocation in the market that you could
take advantage of exactly. Yeah, Yeah, which I guess would
still require you to somewhat understand where that fair market
value is.

Speaker 1 (33:00):
So yep, it does, and so we are really focused
on trying to value the bitcoin treasury companies, and I
think valuing a bitcoin treasury company changes during every phase
of a market cycle.

Speaker 2 (33:10):
So can you walk us through that? And can you
walk us through that?

Speaker 1 (33:13):
Absolutely, as we enter kind of a euphoric phase, one
saying one old trading saying is two times crazy is
still just crazy. So as the cycle heats up, there
will be a lot of crazy things happening in the
market in dislocations. But I think the real money's made
on the backside, and who doesn't lose their shirt when

(33:34):
this is all over. So we're just very conscious of
not forward. We don't like to project out past historical
bitcoin yield for bitcoin treasuries, and that's something I'm really
really feel very strongly about. A lot of people see
the exponential growth in bitcoin treasuries and then assume that
will continue forward, that they'll own all the bitcoin in

(33:55):
like three months, And I think that's no way to
value one of these companies because a lot of it
has to do with liquidity, and so we try to
be pretty honest about that.

Speaker 2 (34:02):
So Metaplan has been able to maintain this one percent
for quite a while. They've been pretty consistent about that.
But then you have a small company, like a smarter
web company who has like some crazy yeld that I
don't know if I saw it right the other day
it was like twenty four thousand percent or something like that.
I don't know. Gosh, obviously that's not sustainable, right, they'd
have the whole bitcoin supply in a year or whatever.

(34:22):
So what do you think happens to a company that
comes out of the gate hot with a really high
bitcoin yield that's obviously non sustainable, is going to have
to slow that down at some point.

Speaker 1 (34:33):
It's going to be a function of the demand for
the equity. Right, if you're yielding bitcoin by issuing equity,
which a lot of these are doing via different mechanisms,
whether moving strike warrants or atm then there has to
be a sustained demand for the equity, which in a
lot of markets there are. Obviously Japan has been extremely
receptive and that's why it's performed so well. In other
markets that liquidity may drive up. Look at Strategy for example,

(34:53):
they had they had like three hundred percent annualized bitcoin
yield yield for three weeks last November. So it's all
liquidity in the market and kind of euphoria demand for
the equity, and I think that comes and goes.

Speaker 2 (35:04):
Yeah, But I mean if that if that yield dramatically
slows down, I mean that could dramatically break the price,
the price of the equity down with it, right, because
if they're looking at sort of that growth and trying
to project out like the days to cover that whatever
potential projected high MNAB is, it seems like that could
be a catastrophic event as well.

Speaker 1 (35:25):
Yeah, And that's one metric I don't use, is day's
color MNAB. I know a lot. It's been popular for
a lot of folks, but I think you have to
look at it from a risk reward framework. And if
you're treading at a twenty m NAV, your downsides your
downsides ninety five percent, and so that's something to really
really consider when you take these bets.

Speaker 2 (35:41):
So what would be your key metrics that you're looking at.

Speaker 1 (35:43):
Then it's the risk reward profile of potential bitcoin acquisition
realistically based on kind of liquidity and that specific market.
The downside of the enav compressing to the fair value
value of the leverage rate show, So that's not necessarily one.
That maybe be one point three, one point four, depending
how much leverage there is in the capital stack, and

(36:06):
then also kind of the market conditions for that specific equity.
So in the case amount of planet, obviously there's a
premium for the nuances of the Japanese market.

Speaker 2 (36:17):
Because of the fixed income markets that they're sort of
trapped in that market, got it? So I like how
you said this. So the m NAB based off of
the leverage they have in the stack, because for a
well run bitcoin treasury strategy company, they're using leverage and
they're tapping into cheap, cheap debt cheap leverage in the
debt equity markets, So they should always be higher than

(36:38):
one if it's a good company, if it's a well
run company. And so you're looking at bitcoin' what's that
and Bitcoin's going up over a long period of time, right, Yeah,
but yeah, I mean if they can apply some leverage
and yeah, assuming right if bitcoin drop that leverage works
against them obviously to your point.

Speaker 1 (36:54):
Exactly, I believe bitgoin's going yourself.

Speaker 2 (36:56):
Yeah, well, over a long period of time, I mean,
you know, I still think the four year cycles in play.
Until proven otherwise, maybe that happens next year. We don't
know how high it'll go and how far to pull back.
I don't advise people waiting for a dip could go
to two fifty and pull back to one fifty if
we don't know. But until proven otherwise, there's there's there's

(37:17):
probably a bear market. Maybe it's only a thirty percent
drove down, we don't know, but it is going to
put these companies into that position. So you think, really
the ones that are going to sink or swim are
really the ones that use this leverage properly. I think
that's what you're saying right now.

Speaker 1 (37:33):
And to have a way to use bitcoin in a
bear market, right, like we talked about earlier, if you
only yield bitcoin by having demand for your equity, it's
really tough. If you can yield bitcoin using issuing fixed
income products that are overcollateralized, you could still have bitcoin
yielding a bear and I think that's really that's a
big differentiator.

Speaker 2 (37:50):
Yeah, because you're able to add when when it's when
it's cheap, which is good you're buying, you're buying the dip.
Theoretically you could just sort of hunker down and down
the hatches, you don't lose any bitcoin, and you wait
six or nine months and it comes back up again
and you're back off to the races again.

Speaker 1 (38:07):
Exactly.

Speaker 2 (38:07):
Yep, that's not the worst case.

Speaker 1 (38:10):
That's a pretty good case.

Speaker 2 (38:11):
The worst case is becoming a force seller.

Speaker 1 (38:15):
Exactly. Ye do you see poor compression? Right, Like, if
there's a future expectation of bitcoin yield that doesn't manifest
and it's trading out of twenty m NAV, you may
never recover that.

Speaker 2 (38:28):
You may never recover the twenty m NAV exactly right,
So you might get back down to a two or three.
But yeah, and obviously there's there's plenty of parallels in
history that shows that with certain tech stocks and stuff
that are still trading today is still really good companies
like Oracle for example, but never reclaimed it's like twenty
two thousand high. So we've seen that happen before. So

(38:48):
when you talk about defending the m NAV regardless of
market condition, what would that look like?

Speaker 1 (38:54):
Defending the m NAV is really really important, especially with
senior claim over the bitcoin, so something like that. It's
been brought to my attention about the predatory shorting is
in a bear market, all these convertible note arbitragers press
the stock, They lay on the stock and push it lower,
push it lower, And when an en NAV goes lower

(39:16):
and lower and lower, the company can't issue equity and
yield bitcoin, so their m NAV drops, the bitcoin yield drops.
It gives the short sellers more reason to short the
stock because there's no bitcoin yield. So it's kind of
a self perpetuating downward cycle. Right. There needs to be
some sort of instrument that they can issue in such
a market condition such that they can get bitcoin yield

(39:38):
back up and running, they can add leverage to the
capital stack and force the shorts to lay off the
stock and take it potentially below one MNAV. That instrument
for strategy is strived.

Speaker 2 (39:49):
So that's why you're so bullish on it.

Speaker 1 (39:51):
Our ferds, Yeah, I think they're a really necessary component
of an LBE.

Speaker 2 (39:55):
Yeah. So it's a necessary component. It's a race to
get there, but the company has to be credit worthy
enough to get there, So then you need size, and
you need some sort of longevity or some sort of
reputation to prove that you can do what you said,
you did, I.

Speaker 1 (40:12):
Think all those things are extremely necessary.

Speaker 2 (40:14):
Yeah, yeah, okay, Well, I mean that's kind of what
I see as well. That's kind of how I'm thinking
about it. What about I mean, how do you think
about it? I mean, I guess you're more of a
sort of I hate to use the word trader, but
you know you're doing a different strategy with your option
strategy and the fund. But how do you think the
average investor would think about allocating across these.

Speaker 1 (40:36):
Well, I think you start with Bitcoin first. You understand
that you believe in that, and you look at it
what you expect to be it's terminal or long term
growth rate, and that's very high, and you can't really
expect to beat that unless you're a professional or are
very good working off that. You have to find something
that has a good risk adjusted return relative to bitcoin,

(40:57):
and most of these ledees they may have massive turns,
but risk adjusted it's difficult because it's so unknown and
so new. So I think you have to think really,
really hard, really really in depth about what happens in
a worst case scenario. In a bad scenario, how much
do you lose without allocation? How much do you make
in a really positive scenario and then decide how you

(41:18):
allocate two different whether it be an options contract, an
lbe a you know something else. So that's the way
the kind of mental framework I use.

Speaker 2 (41:28):
Yeah, good, good, Okay. So basically what you're saying is
allocate based on risk.

Speaker 1 (41:33):
Alocate based on risk. Yeah, and don't listen to any
mode about risk. Whoever is running the company, whoever, don't
listen to them. Everyone's talking their book. Think hard about yourself.
You have to protect yourself first and foremost. What is
the risk I am taking on based on my knowledge
of the prospectus, the capital structure, and everything I know
to be true about the company. You have to rely
on yourself because if anything goes south on any sort

(41:56):
of investment, no one will hold your hand. It's just
you in an empty brokerage account.

Speaker 2 (42:00):
Nice. Give me a final thought. So we've obviously we're
talking about the treasury thing. It's the hottest subject going
right now, as we've seen it all the big conferences.
If someone walked away from this conversation with one key
insight about the future of these bitcoin treasury companies, what
is that? What does the future hold?

Speaker 1 (42:18):
It's very easy to compare the bitcoin treasury companies to
a spack craze or ico craze. But if you believe
in bitcoin long term, there will be relevance for a
bitcoin treasury strategy. The part of the bitcoin treasure strategy
I don't know will exist in five years is issuing equity.
The demand for equity in the market to yield bitcoin.

(42:39):
That's been a massive capital market's arbitrage that has existed.
I don't think it will exist into perpetuity. So people
have to understand that all these bitcoin treasuries will have
to evolve over time, and I don't know what that
looks like right now. It seems to be preferred and
fixed income debt issuance, So that's kind of where I
think people should be looking.

Speaker 2 (42:58):
So the opportunities now don't it's going to look like
in a couple of years is they don't let it
pass you by exactly? All right, Dan, you guys do
a great job on the True North podcast. I want
to shout that out. We'll link to that down below. Dan,
you do amazing contribution there. Anything else people should be
paying attention to for you?

Speaker 1 (43:15):
No, all my works on my Twitter, my Twitter feed
at Hillary Underscore, Dan h I L l e r Y.
I'm running a small private place and fund that will
be a combination of auctions and bitcoin treasury strategies. It
won't be a complete swing, you know, home run, it
will be steady outperformance of bitcoin ideally. Other than that,

(43:35):
thanks for everything to do Mark, This has been awesome.

Speaker 2 (43:37):
Yeah, thanks all, ich Stan
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