Phong Le, CEO of Strategy: "STRC to $100 and MSTR in S&P 500!" | GG Bitcoin Podcast

Jerry, thanks for having me.

Yeah, we had our earnings call last Thursday and we rolled out and provided more detail on our digital credit capital framework. And my view is we executed on what we said we would do, right? We sold some Bitcoin. We bought back some stretch. We increased our US dollar reserve. Those are the things that we said we would do to ultimately make our digital credit and stretch stronger.

Yeah. Last time we did this, we got to $2.25 billion in, I believe it was, the month of November and December and January of last year, or January of this year, we got to 2.7 years. And that's what we felt was necessary to get Stretch investors to believe that the dividend would pay out for a long period of time, up to 3 years, and it caused Stretch to start working and the dollar inflows to start coming in. We bought Bitcoin with it. So somewhere between 2 and 3 years seems like the right range to be able to get Stretch investors once again to believe that the dividends are likely to be paid out. So somewhere in that range. And I think the message we got from the market is that the US dollar reserve is pretty important and that they see US dollar liquidity much differently than Bitcoin liquidity.

Yeah. I'll give you two extremes, right? The one extreme is a public company that provides updated information to the market on its performance once a quarter, which was what we used to be. And I guess I could go to even further extreme, which is a private company that doesn't provide anything to the market but does to its investors. But in the public market, you know, we used to do this. We would come out every quarter and be an event, and you see that with some of the public equities today. The earnings is the event, and it causes these wild swings in the stock, whether they hit their revenue number or their earnings number, and a stock might go up 20% or down 20%. And I would think if I'm investing in a public company, I really don't want to be sitting there predicting what the earnings is or requesting a meeting with the management team to determine if I can see when I ask them a question if they flinch, in which way their eyes blink, in which way their head turns to decide what's going to happen to the stock because they have insider information that they can't provide. That is a very inefficient way for the public markets to work, right? Inefficient. And I don't even talk, let's not even get into the trading dynamics and all that piece. The more efficient way for a public company to work, if it can, is to provide real-time information. Now, they don't because what is going to be the sale of a vehicle or AI software has to be audited before it can be provided out to the public markets. Well, our business is incredibly simple, right? We have Bitcoin on our balance sheet. Bitcoin price, you know, is one of the easiest things to find now, right? It wasn't 10, 15 years ago. So there's liquid markets for Bitcoin. The amount of Bitcoin we buy, the amount of MST or shares we issue, the amount of STRC we buy back, what all of those things are very easily identified information because it's out there in the public market. We have the good fortune of being able to update that as often as we want, right? Like weekly in some cases, every 15 seconds in others. And I think that's the way a public company and a public market should work. There's just a lot of friction to that. We remove the friction. And so, we recognize the shareholders ultimately are the owners of the company. Shouldn't they get the information whenever they want?

Now, to your point there, there's a bit of a downside to that, right? And the downside is people provide information and opinions, etc. And on X, those opinions waver between vitriol and admiration and adoration, and so you have to filter some of that out. But there's also a bunch of great feedback. Like there are folks out there who are saying, 'Your KPIs, you might want to consider metrics, you might consider this, you might do this to your website.' So I think it's on balance it's fantastic compared to the way certain public companies operate today, not because they don't want to, but because there are rules in place around what metrics they can provide or GAAP measures they can provide and who needs to review it and who needs to audit it. So, long answer to your question, but I think providing regular information to the market, especially if you're an investor, is a good thing. And that's why we created the website. And I'll finish it with especially when we're doing something that's innovative and new, right? Like we put Bitcoin on our balance sheet in 2020. We were the first company to really make it our strategic reserve for our treasury. And two, we invented a new asset class that is a combination of multiple things, which is perpetual preferred digital credit or perpetual preferred equity that is based on Bitcoin. And we knew that that was a new thing, a combination of existing things but a new thing as a whole new innovation. And to create trust in the market, we wanted to do it in a way that everybody saw what we were doing and they felt 100% transparency, which is our objective.

We have one common equity, that's MSTR. We have six convertibles. But, you know, let's put those aside because those aren't retail instruments. Those are institutional instruments that are sold over the counter. So they're not accessible by your normal retail investor. But we do have those. And then we have five preferred equities, preferred securities, and that's Strike, Stride, Strife, Stream, and Stride. And so that's what we have. I guess you can call it 12 different products. We said that our convertibles will go from six to five next year and next couple years and then down to eventually zero, right? And that could take five or six years for the convertibles to ultimately be retired or equitized or whatever we decide to do with them at that point in time. The reason we have five prefers is, you know, Stretch was the one we wanted to issue, but it took the fourth iteration because before we could issue it, right? If we had started with Stretch, which is a perpetual preferred where the dividend floats and the price we try to get as close to par as possible, it would not have been easily sold out in the market, right? Because to launch an IPO, you need banks to work with you on that. And that's why we started with Strike, because it looked like a convertible and get the convertible investors in. Will we consolidate those over time? It probably makes sense, you know, we'll see. But clearly Stretch is the one that, to your point, was the most successful and the one that we want to focus on right now.

Yeah. And just to finish on learning about Stretch, right? Like you see this happen in all industries when somebody launches a product that is more successful than expected. And so what do we do in that case, right? Like somebody sells a retail product, a piece of jewelry or purse or whatever it is, and it's just, you know, the sales go way beyond what it expects. Can't fulfill the inventory. It takes too long to deliver. You can't support it on the back end. And the market reacts, right? The sales go down, you have time to adjust. And the question is ultimately how fast do you react and adjust, right? And going back to the point around us providing information, us having a presence on X and social media, because we are so transparent, because we talk to our investors frequently, because we're on X and we get tens of thousands of responses, we're able to look at all that and say, what is the right thing to do? Right? And going back to it's a new product. It's like launching a new physical product into the retail space or a new technical product. One, do you have a great product, right? And we think we have a great product with great product-market fit. Two, do you listen to your customers? And three, do you adjust? And that's this entire digital credit capital framework was us listening to our institutional investors, our retail investors, our X community and social media, and that is important, right? And us talking to our bank, buy-side analyst, and doing conversations like this. This entire digital credit capital framework was our response. And we were able to do it quickly because we engaged quickly, because we have for the last six years engaged with our audience. And hopefully that builds trust over time, right? In something that's a new category.

Yeah, social media is interesting, right? Like, what would I say? I think you know, there's this great book, 'Thinking Fast and Slow' by Daniel Kahneman, that sort of talks about the types of decisions that you know should take a short period of time and a type that take a long period of time, the types of inputs that come in and what humans are good at and where you should make those types of decisions. In this particular case, we think fast in processing the information that's coming at us. But we also have to have the maturity, and a lot of that just comes with gray hair and experience, of then making the actual decision focused on the long-term outcome, right? And look, I've said this to a lot of folks. You know, there are a lot of companies out there, public companies, private companies, Bitcoin treasury companies, and ultimately you have to ask who are leading those companies, right? Michael Saylor has been leading MicroStrategy, then Strategy now, for what, 30, 38 years? 37 years. I've been CFO, now CEO at this company for 12 years. We've made enough mistakes in our lives. I made more than I have, but like we've made enough mistakes and done enough things that we know when we process information, how do you make a long-term decision? And of course, X is useful for its ups and downs and for a lot of feedback. And I respect a lot of what people do out there, right? You know, there are some great citizen analysts out on the X column, right? But we'll process all that information quickly and then we'll make a decision quickly that's focused on the long-term success of the company.

So to your point, the long-term success of the next five years is amplifying our common shares. And the way we do that is by buying Bitcoin with a low cost of capital. And Stretch has proven to be a very low cost of capital, right? Even if we have to set up a US dollar reserve which increases the cost of capital a little bit, and then whether that be 12, 13, 14%. Right now it's, with the US dollar reserve, it's around 12%. And then buying Bitcoin that goes up 30, 40%, so that makes more sense than issuing MSTR, right, at the current MNAV level to buy Bitcoin, right? So issuing MSTR to add to the US dollar reserve when MSTR is at a premium in the short term makes less sense than issuing MSTR at a premium to buy Bitcoin. But in the medium term, it means Stretch gets back to par. We issue more Stretch, right? And then we buy Bitcoin with that, which is more creative. So as a package, that makes more sense over the next 6 months. Even though the decision to issue MSTR at 1.05 MNAV just to buy Bitcoin makes sense in the next week. And of course, we're making 5-10 year decisions, not even six-month decisions, not even one week decisions. And that's what's important. So this entire digital credit capital framework is getting Stretch to work so that we can buy more Bitcoin, increase Bitcoin per share, increase the amplification of the common, right? Issue the common to pay the dividend so that there's more confidence in Stretch, so it can issue more Stretch, and as you go through that flywheel and Bitcoin goes up, then everything starts to work quite magically for the entire system that we have here.

Yeah. The healthiest thing for Stretch is to attract long-term holders of Stretch who want to buy, hold the instrument, and collect the dividends, right? And I think what we learned is when Stretch became more attractive in certain ways, the volatility went down, the dividend went up, we started to attract, I'll call it, short-term shareholders, and those who are putting into a substitute for their checking account, right? Like short-term money, one month, three month, six month money, or maybe call it one or three months. And then they were levering up on top of that, right? And that, for the long-term success of Stretch, means that when Stretch starts to drop, it creates bigger drawdowns. And we saw that, you know, it went from 100 to 75 because of some of those things. Whereas, if you have a long-term holder, and I'm a long-term holder of Stretch, right? I bought Stretch at 100 and I'm collecting 12% so I can pay set of bills, right? Like it just sort of makes sense. And if Stretch goes to 75, I'm still getting the same dividend, right? And I'm still paying the bills. And when Stretch goes back up to 100, you know, it doesn't really matter that much. And then there's institutional holders who are looking at the same thing. That's what we want, right? Those holders, whether it's 12%, 12.5%, or 11.5%, it isn't that important to them, right? Whether the volatility is 1 or 2 or 3, it's not that important to them. And so that's what we start to realize. When we increase the dividend, it really didn't change the characteristics of Stretch. Those long-term holders just want to make sure they don't lose their money in six months or a year or two years. So the US dollar reserve was much more important to them than the 12% versus 11.5% dividend, which is why we said we're going to defocus on that. We initially said, 'Hey, this is going to be targeted at 99 to $100, and we'll let the dividend float.' I think what we realize is to keep that thing close to 100, much more important is the US dollar reserve. More important is the ability to buy back, which is the digital credit repurchase program, right? More important is that people know that the Bitcoin we have on our balance sheet can be used, right? Like if you're a long-term holder, you want to know that if the three years isn't enough or two years isn't enough, that you're willing to sell Bitcoin to pay dividends, right? And that's why we did that. And ultimately, I think we've now trained the market. It was a little bit painful the first training, right? The first inoculation, but we've inoculated the market and so they realize that our willingness to sell Bitcoin or willingness to hold a US dollar reserve is more important than the dividend rate itself. Paying the dividend, knowing that the dividend is bulletproof, is more important than the rate itself.

And just on that, Jerry, because I didn't quite address your question around semi-monthly, you know, we did that exactly for the reason you mentioned. One, it decreases the volatility, but two, there are people out there who are used to getting paid semi-monthly or they have monthly bills, etc. Now, do I think there's a lot of gain in going to weekly or daily? Not necessarily. But we'll look at what the market thinks, right? We have an example of somebody out there doing daily, which is Seda. They have a very different audience that they're going after, a different scale, but very respectful of their product. I think your point is exactly right. If you're a retiree, right, and you have $500,000 and you have $60,000 of annual expenses, right, and that $500,000 you're not, you don't want to tap the principal. You're going to let that sort of live for the rest of your life. And you want to live off of a fixed income of $60,000, right? This is an instrument that would make sense. Now, if you're 25 years old, right, and you have $10,000 in your bank account, and that's short-term money to pay your bills, this may not make a lot of sense for that, right? Like, and so with that retiree, especially to the extent that you're getting the $60,000 and you don't have to pay taxes on it. And then if you pass away in 10 years, you can take that instrument that's return of capital that is now on your balance sheet of zero and you pass it over to your heir and it starts back up at $500,000. I think that makes a ton of sense. And then they get 10 years of return of capital treatment. And you know, my parents have done that. They put money in the Stretch and my brother who's, you know, so others who have done that, and then they can live off the fixed income. I think that makes a lot of sense.

We have 1500 employees, the majority of which work in our software business, which is a very healthy, thriving software business. About half a billion dollars of revenue, about 400 million of that is ARR. And so that's where the majority of the 1500 employees work. But you're right, embedded in there is a legal team, a finance team, marketing capabilities, and we have engineering team. We have folks in there who have been working for a scaled enterprise software company for 20, 30 years. And so when I need expertise, I don't have to call in a consultant or phone a friend. They all sit here and we have the ready-to-go infrastructure to run this business, right? The website that we develop takes advantage of our top-tier engineering and AI talent, right? So, yeah, I think having that operating business is a major advantage to being a Bitcoin treasury company, especially a scale operating business.

Yeah, we have a roughly 100-person finance team, right? A legal team of about 40 people. So when we came up with this idea in, call it, the second quarter of 2020, the execution of the idea didn't require us building out a finance and a legal infrastructure. It required us working with external advisors to make sure what we were doing met all of the compliance requirements related to the SEC and CFTC and all that. We needed to get external, but the execution we did fairly seamlessly with the team that we had on the ground.

I think it gives us the opportunity if MSTR trades below 1x NAV, then in theory selling Bitcoin to buy back MSTR would be accretive to Bitcoin per share, right? Just like issuing MSTR above 1x NAV to buy Bitcoin or US dollars is accretive. Then the opposite would be true under 1x NAV. And frankly, we put that out there so that people realize that, and for the market, if shorts say, 'Hey, we're going to short you down,' then we can jump in and just buy those shares back and bring the price back up. So that's why we did it, is to show that we're willing to keep the market honest, and because it would be in some cases the right financial thing to do.

Yeah, and the Bitcoin monetization is the same thing, right? I recognize there was some short-term pain when we sold $2 million worth of Bitcoin, right? 1% of 1% of our Bitcoin. But it didn't make sense for us to run a business over the next 20 years where we have $55 billion of Bitcoin now and maybe one day we'll have a trillion dollars of Bitcoin if the asset is impaired, in that we are unwilling to sell it, right? And so that decision, and it was more painful than I expected, although we did it in a backdrop of Bitcoin going down, right? That decision was a 10-year decision or a 20-year decision, not a one-week decision.

And so we're seeing the market move back. And the second time we sold Bitcoin, and we sold $20 million worth, you know, there was no reaction to it, or $200 million worth, there was no real market reaction to it. So it's the same idea, right? All of these options we wanted to put out there so people realize that our company is able to utilize all of the assets we have and all the optionality we have.

One, you know, I don't think my objective is to respond to the ups and downs of the market and of sentiment in the short term. I don't think we ever were irrational actors. I think, as you know, if you zoom out, we've been quite rational. We said we're going to buy and hold Bitcoin. Then we're going to lever up to hold to acquire Bitcoin, and then we're going to amplify through digital credit to acquire Bitcoin. And none of that has changed, right? We tend to be considered more irrational when Bitcoin goes through a bear cycle, and we tend to be considered brilliant when Bitcoin goes through a bull cycle, right? And so, yeah, you know, Bitcoin goes from 125 to 100 to 80 to 60 because we're the largest holder of Bitcoin in the world, it's our fault. Now, when Bitcoin marches up from 60 to 80 to 100 to 150 to 200, we'll get the credit for it, right? Regardless of everything else that happens around it, I think everything is driven by Bitcoin price ultimately. And that's why, you know, and you go back to, do you believe Bitcoin is a truly transformative long-term store of value? So, sure, I guess now people can say we're more rational because we communicated this plan. I don't think much has changed other than Bitcoin price and people realizing that we're a big player and that we have pretty steady hands and we're here for the long term.

Yeah. So, I guess there's two different data points, right? I'll get to this one a second. When we sold $2 million worth of Bitcoin, which is 1% of 1% of the Bitcoin that we held, the week in which we sold it, Bitcoin went down 4%. The week after we sold it, Bitcoin went down 11%. And so someone might say, 'Ah, those guys caused a 15% drawdown in Bitcoin by selling $2 million of Bitcoin.' Right? One month later, we sold $216 million of Bitcoin. And that week where we sold it, Bitcoin went up 6% and the following week after we announced it went down 1%. And that was 0.1% of the Bitcoin. I don't think it matters, right? Like that's two data points that tell you the exact opposite thing. I don't think it matters. And this slide that you're showing now is more proof of that, which is at the point where this was in November December 2024 after the election, we were at points in time where we bought $1.5 billion of Bitcoin in a week. And in that particular week, right, where the average purchase was $363 million, right, even then that was only 1.5% of the total liquidity of Bitcoin, $26 billion. And actually, we're comparing against $26 billion. That was back when Bitcoin was actually 40 to 50 billion of liquidity. So we were actually about 0.7% of the liquidity of Bitcoin in that particular week, right? That's the most. People like, 'Wow, $1.5 billion, that's a lot.' I get it. That's a lot. But when Bitcoin is trading $50 billion, one half billion is not a lot. Normally when you're at sort of the 5% level of trading liquidity or above, that's when you can start to see how you're moving the market, right? And then on average, we're 2.2%. Definitely not moving the market, right? You know, you could say, okay, but what if you guys are buying, right, like $150 million of Bitcoin on a weekend on a Sunday evening, then you can really move the price. And we probably could. We're not doing that. That's like we never intend to move the price up or down. We don't intend to move the price up or down when we buy Bitcoin or we sell Bitcoin. And this is the point: Bitcoin doesn't need us. I get we cumulatively own 4% of Bitcoin. That's a lot, right? But we're here and we've been the success that we are because of Bitcoin, not the other way around.

Yeah. So, you're seeing us do this now. We're increasing the US dollar reserve. We said we're going to keep the rate roughly at 12%. And we're buying back Stretch. And those actions methodically over time should cause Stretch to trade back up to $100, right? The market knows that that is our intent. We stated that intent. So, at some point in time, it's not much different than when you get in on an IPO, right? Like we IPOed Stretch at $90 and we told the market, we told our institutional investors and our retail investors, our goal is to get it to 100. So people will come in for, you know, they're not coming in for the dividend necessarily, although that's the cherry on top, they're going in for the pop from 90 to 100. So today, let's say Stretch is trading at 94.50. If they believe that we have the right instruments to get Stretch to par, somebody buys in and whatever it is, a month, Stretch goes back up to par, you've basically made a 6-7% gain. Right? That's the, I'll call it the IQ test of would somebody buy Stretch today or not? Is do they believe that the company has a track record of doing what it says it would do and making the commitments through adjusting US dollar reserve, maintaining the Stretch rate, buying back Stretch to get to par? Now the second piece is even more interesting: what have we learned about when it gets to 100, how do we keep it at 100? And what have we done in the past? We've issued the ATM, we've adjusted the Stretch rate, we have added Bitcoin. We haven't really managed the US dollar reserve in the past, right? So, someone might say, right, hypothetically, if we issue a billion dollars of Stretch, we should take 360 million and put that into a US dollar reserve. I'm not saying that's what we would do, but we didn't do that in the past. Now we understand the importance of the US dollar reserve. Maybe that's something we consider doing. That's what means managing the US dollar reserve.

Well, the capital markets policy. So for example, our policy, our board-approved policy is that we maintain a minimum of one year's dividends in Stretch, right? Another capital markets policy is that we spend no more than a billion dollars worth of Bitcoin to buy back our preferred, right? And so those policies that we put out in place and we've communicated to the market, it may be that we want to change some of those policies like maybe we'll state that the minimum US dollar reserve is a year. Maybe it should be a year and a half, right? So those are ideas and things. Not saying we would do any of those, right? The capital structure might be that as we approach a put date on a convertible note that we use some Stretch proceeds to buy back a convert, right? Like and I get the reaction. When we took down $1.5 billion of convert, I felt like that was good risk management, right? Like rather than having $5 billion of converts come due in 2028, now we have $3.5 billion come due with a put date in 2028. So those are the things that we think about ultimately to drive confidence in Stretch which will allow us to issue more, manage the Stretch rate, like that would be another interesting one. So for example, let's say Stretch is we're able to issue more than we wanted to, 2, 3, 4 billion and get to a level of amplification in our cap structure that's higher than we want, right? Then we would manage the rate down. Back to the example of a product that is just flying off the shelves. You might increase the price of that product to bring down the demand. Here, we might reduce the rate to bring down demand to have an appropriate level of amplification.

Yeah, 1.5 billion notional. So it cost us about 1.4 billion in cash.

Yeah, I think those are all the options when we get to $100 is to be more thoughtful about all the things you mentioned, being more formulaic about it, right? Like more how the US government might manage its reserves, how a bank might manage its reserves and its instruments and its debt levels. And so yeah, I think we now know that there are a lot more options to play with. We understand better what the market cares about. We understand better who our investors are, right? And appealing to a certain type of investors over another is important for the longevity of the instrument. And look, we're now officially in year two of Stretch. It just turned one, right? And so I think year two, we can learn everything that we learned in year one. Incredibly successful, right? Stretch has grown more than we ever would have expected and we've learned a lot through that growth. And to your point, for sure, we can be more formulaic while still adjusting based on market conditions.

I think the important point there, Gary, is because we have over 840,000 Bitcoin, right, with a market value over $50 billion versus the $15 billion of preferred, $10 billion of Stretch, because we've managed our amplification pretty well, right? We have the ability to work with Stretch using our Bitcoin reserve versus if Stretch was $40 billion and we had a $50 billion Bitcoin reserve, that would be much harder to do.

Yeah, I think the interesting thing that will occur is when Stretch starts to trade back at $100 and we're able to issue more Stretch than we may want to, or same amount of Stretch that we might want to, or if the Fed starts to do things with interest rates, right? Like that's when we'll start playing with the rate of Stretch and perhaps if the Fed cuts the short-term rate by 50 basis points, we might cut Stretch by 50 basis points, right? If Stretch is growing 50% a month, then we might cut the Stretch rate by 100 basis points. So those are the things that we could do and we can be much more thoughtful about. In that case, you asked about sort of formulaic decision-making. We had sort of set a formula that allows Stretch to grow but didn't allow it to get smaller, the rate that is. And so I think now we're saying that it's not just a single-variable formula. It's a multivariate thought process.

Yeah. So let's start with MSTR. About 60% of our investors are institutional, right? And of the 60% that are institutional, there are some that are the passives, right? They hold the NASDAQ 100 or whatever it is. And so those are like the Vanguards and the BlackRocks, etc., right? Who are just basically buying in because they're part of an index. And then we have our actives like the Capital Groups and the Morgan Stanleys and the Fidelities, etc., right? So those are, and they're both, you know, they're long-term holders of the instrument and they create great stability in the price, right? Because they're not coming in and out. Maybe they'll buy up a little bit, right? Which makes MSTR less volatile, right? And also highly performing over time. And then you have people who are hedge funds, people coming out and shorting the stock, longing the stock, all different options on top of that. And then you have the retail investors. That's what MSTR looks like. What Stretch looked like when we launched the instrument, right, at $90, it was 70% institutional, 30% retail, right? What Stretch then started to look like 6 to 8 months in... And so you got a perfect graph here, was it became 80% retail. As the institutionals who bought in at $90, went up to 100, they sold, they got the 10%, right? They sold, retail started to come in because they saw the attractiveness of the instrument and it flipped from 30% retail to 80% retail, right? And then what's happened over the course of the last 2-3 months is the institutions, which are longer-term decision makers, they took some time. They come back in. So now we're from 80% retail down to 30%. 20% institutional up to 30%. So that's what Stretch looks like. And some of that institutional inflows to your point are these ETFs, right? What's most interesting is number one, these ETFs are not small, right? You see here, right? Like the largest one is BlackRock, $13 billion of AUM, right? And we are the biggest ETF holding in all of them. And most of them cap out in terms of how much they can hold for a single name, MSTR, because we have four ETFs that trade in the US, right? So BlackRock owns all of them, right? PFFA is another one. This is Virtus and it's 2.4 billion AUM, you know? So this is all passive money. Somebody buys PFFA and they're owning STRC. Not much different than somebody buys a NASDAQ 100 ETF, they own MSTR, but the weighting here, you know, we're basically three and a half percent. So this is great. This is good because again, this is passive money. They're not buying in and out. They're just buying with market weights, right? So the more you see this, the better it is for the instrument's price stability and decreasing the volatility over time. And so that's good, too. And if you could even zoom out further, right? And I know you're passionate about this. I'm passionate about this. This is good money, right? Institutional big bank money coming into MSTR or coming into STRC means that then goes into Bitcoin, right? And these are like, BlackRock is not going to go buy Bitcoin for its PFFA ETF, right? Like if we didn't exist as Stretch, that money never would have gone into Bitcoin, right? And there are people who are out there buying PFFA could care less about Bitcoin, could care less about Stretch. They just want an income-generating preferred ETF. So that's good for Bitcoin when these institutions add to their weighting of Stretch because that adds to the Bitcoin sales, which adds to Bitcoin demand, which over time increases Bitcoin price.

Yeah. I'm a big believer that Bitcoin solves social problems, economic problems, geopolitical problems, and financial problems all around the world. And therefore, access to Bitcoin is really the gap in getting Bitcoin to be bigger. It's not a product issue, right? Bitcoin is an amazing product, but the channel access to Bitcoin is where we have issues, we have challenges, right? And that's why I love that Coinbase does what it does and Robinhood and Block, and these are folks bridging that gap, right? And of course all of the Bitcoin OGs who do all the education, and of course you have ways to get there through self-custody and hardware wallets, despite all the challenges, recently that's a good way to access. But if you think about channels, right, how do you get people access to Bitcoin? Cold storage is about narrow a channel as you can get, right? Crypto exchanges are bigger than that. ETFs are bigger than that. Traditional banks are the biggest channel, right? That's where most people get access to the financial systems in America is through, you got the list here, the biggest banks in the world, right? Like and if we just start with retail banks, JP Morgan, Citi, Wells Fargo, Bank of America, right? That's how you get access to the system of people's money. And the more these banks adopt Bitcoin, the more people get access. Because I guarantee you, you walk down the street, you tap someone on their shoulder, I almost guarantee you, Gary, if you ask them, 'Hey, do you have Bitcoin?' They're going to either say, 'I don't know what Bitcoin is.' Or they're going to have some perhaps negative connotation associated with Bitcoin. Or they're going to say, 'It's a really cool idea, but sounds so hard.' Right? And then you say, 'Well, do you have a bank account?' I guarantee you they're going to say yes. And you can ask them who's it with? And they might say it's with Chase or Bank of America. And then if you're like, 'Hey, if I gave you a way to access an instrument that goes up 40% a year, with a lot of volatility, would you buy it through your bank?' They might say, 'That seems sketchy. That seems a little dangerous. 40%, I don't know.' And then if you say, 'Hey, what if I give you a way to get 12% return on your savings account that's meant for 6 months out? Would you do that?' They would probably say, 'Okay, I don't know who you are, but tell me a little bit more.' Right? And so what just happened there? Two things. One, you associated their money to their banking system, right? And you have to do that. If you told, 'Hey, would you open a Coinbase account?' They're like, 'Hey, what if I told you how to do self-custody and it involved having 72 dice that you have to roll?' Like, 'What the heck are you talking about?' Right. So, one, you gave them a banking system, something that they already have access to and they trust, and two, you gave them a product that they wanted, which was a 12% return. You give them those two things, all of a sudden they're like, 'Yeah, I'll give you $1,000 to put into this thing and that $1,000 spits out on the other side as Bitcoin.' Like that's what's going to close this gap. And I 100% agree with you, Gary. Like there's no way to do this other than to go to where people are, right? Like that's like sort of product 101. What's your channel? We talked about channel earlier. How do you sell the product? The internet has made that easier, right, to sell products. But a lot of people, you want to sell ice cream, what are you gonna do? Open your own ice cream shop? No. Food truck? No. Sell on Amazon? No. You're going to find a way to distribute it in all the supermarkets. And if you're the guy who's like, I am the pure ice cream and my ice cream is only worthy to those who are willing to come to my house, knock on the door, type in 18 passwords, come up with a 26-word seed phrase, and then you get to eat the best ice cream in the world. I guarantee you that ice cream's not going to sell. Right? So this is why we track this. And I spent a lot of time with the banking system because one, I understand as a CFO how to navigate the system, and two, I believe this is essential to the success of Bitcoin and I don't think any one person is above working with the existing system to make this work, right? This is not about destroy the banks, this is about work with the banks. This is not about destroy the government, this is about work with the government, right? And so I think that's what makes Bitcoin successful over the long term.

Yeah, we were conscious. Like again, I love Bitcoin. Mike said it and I agree with it. Like 99% of the people in the world are not going to buy Bitcoin, right? They're not going to put it in cold storage even though I think that's admirable and that solves a lot of the problems that Bitcoin is trying to solve, right? So, I have no problem with it. In fact, I think those who are willing to should. Although, you have to be pretty darn smart and pretty careful, as we've learned, to put your Bitcoin in cold storage yourself. Otherwise, you'll go to a custodian or you'll buy an ETF or you'll buy an equity, right? Or you'll buy a derivative of an equity, which is what STRC is. And I think those are all good things for the Bitcoin universe. There's no wrong or right. There are different people who buy different things, right? And so I think, you know, you take your UFC analogy one step further, right? There's UFC, there's boxing, there's wrestling, there's soccer, there's football, there's basketball, there's baseball. Like you have all these different ways for people to access sports. There's no wrong or right. They're all good things, right? And frankly I would say that's true with crypto too, right? Although I think Bitcoin is the most important of the cryptocurrencies, there are other ones. There's something different for everybody and that's the way the free market works.

Well, let me distinguish. There's two things here, right? The S&P Global is a pretty massive business and a part of their business is creating indices like the S&P 500. And a part of their business is providing ratings and they're actually two different businesses. What you saw in the previous slide is providing ratings to primarily credit or debt instruments, right? And so the reason they provide a rating is that then that means it was certified by the S&P or reviewed by the S&P. So if I'm an investor, I know what the risk profile of that debt instrument is. What is the likelihood that they're going to be able to pay their coupon? What is the likelihood that the instrument will retain its value? And what is the likelihood that the underlying company, in that case, doesn't go bankrupt, right? And so that's the B-minus rating that they gave us as a company. And a B-minus rating is right in the middle. It's like a junk bond, junk-rated rating. And the primary reason they gave us the B-minus rating above and beyond what you see here is they give us zero credit for the Bitcoin on our balance sheet. And the first thing I thought was, it doesn't matter, right? Like they look at Bitcoin as an impaired asset because they follow the Basel rules for banks, right? Capital rating rules, which means that Bitcoin gets a 1,250 risk weighting, which means it is worth zero on your balance sheet, which is a big issue that needs to be solved, right? And it needs to be solved by the banking system, needs to be solved by the US Treasury to either not use the Basel rating or change it. If the Basel rating framework was changed and we got one-for-one credit or even 50% credit for the Bitcoin on our balance sheet, we would have a rating in the A range, which would be investment grade, right? And we can make these changes too, which we will, but these ratings don't change fast over time, right? Like ever since the financial crisis of 2008, with regulations coming in place, the rating agencies are much more conservative and not meant to change things over time. So that's one side of the business. And why does the rating matter for us? Because some organizations, especially pension funds, insurance companies, rely on these ratings. They have rules that say they can only put X percentage of what they have into something that's investment grade or below investment grade. That's why the rating matters to us to get the institutional flows from insurance companies. We need to have a higher rating. Right? So that's sort of one, that it's not that they can't invest, but when they invest with this rating, they can't invest as much. That's one side of S&P's business. Completely unrelated, with a Chinese wall in between, is now their index business. And what does their index business do? They provide, back in I think it was the 1980s, it wasn't easy for anybody to get access to anything other than buying a single-name stock. I wanted to buy MSFT, Microsoft, that works. I could buy AT&T, I think it's T, that would work, right? But if anybody wanted to get a basket of stocks, right? This is sort of Warren Buffett stated this and this is what Vanguard did too, right? Like I want to get access to a basket of stocks is I want to get the 12% increase in the S&P 500. I couldn't do it. I would have to buy literally a share of every single stock and weight it. And so S&P came out and said, you know what, we're going to create an index that simulates exactly the top 500 stocks in the US, which basically means it simulates the entire equity market, right? And so they started that in the 1980s and they created that business and then they would sell that capability to Vanguard and Vanguard would say, 'Okay, I get it. I get your formula now. I can create an S&P 500 index and I can sell it to everybody.' And the ETFs sort of came to be. How do you get into the S&P 500? Well, what did they do when their business was selling a proprietary mix of equities? And when they sold that proprietary mix of equities, they're like, 'We're not going to tell you exactly how it works. All we're going to tell you is what's out on the other side is essentially a perfect reflection of the stock market.' Now, today that's fairly easy to do formulaically because you have AI, you have math, all this, but back in the 1980s that was very difficult to do. And so by design it was opaque. What went into it, who came out of it, all that. And in the 1980s, it didn't matter. Now it drives major, you know, the entire ETF market I think is like 10%, between that and mutual funds, 20% of all the investing public, right? And so now the S&P 500 drives major inflows and outflows, is why everyone's like, 'Hey, when are you going to get into the S&P 500? Don't you want to get in?' Of course we want to get in, right? That would be a good thing, right? And they do have rules for what you need to show, like last 12 months and last quarter of positive operating income, you have to have over, I think, $30 billion something like that market cap. They have a set of rules and then they have an opaque how do you actually get into it, right? And there's a lot of obsession about us getting into the S&P 500 because we drive all these passive inflows, which would be great. On the other hand, we're not going to, I can operate to try to get from a B-minus to a B-plus to an A. I can't really operate to try to get into the S&P 500.

Yeah. It's what's good for our digital credit shareholders is also good for rating increases, right? And that would make sense, right?

Yeah, that's right. But the banks, the major banks in America, and as a result, the ratings agencies, have decided to adopt the Basel risk framework. I think it's Basel 3. They're working on Basel 4, right? Basel 1 came out in the 2000s. Basel 2 was in the 2010s and Basel 3 later after that. And so these are rules that are created, Basel in Switzerland, a group, basically a consortium of banks and other groups that represent something like 27 countries around the world that are basically setting these rules, and the banks have chosen to adopt it. They don't have to. And as a result, the rating agencies have chosen to adopt it. They don't have to. And the US Treasury has supported the banks adopting it, right? These were basically how much capital you have to have on your balance sheet that came out of the 2008 financial crisis. They decided to use Basel. Now, the US Treasury could state, 'Hey, we're going to modify those rules.' And the banks would agree to follow along with the modifications, with the rules. And then what would happen is the rating agencies would follow along, right? And so it would make sense, you know, Secretary Bessent, who is very clearly very knowledgeable in the capital markets and the banking system, is a big Bitcoiner, right? Or I said he's very supportive of the asset class, right? If he was to work with the banks and say we're going to come up with a new set of standards and move off of Basel, or we go talk to Basel and change their standards, that would make sense, right? But as you know, Gary, the world right now, especially the banks, financial regulators, and some of these consortiums aren't exactly looking for ways to make it easier for Bitcoin to enter the banking system. And so all of the things I said about channel access makes sense. Now, the good thing is ultimately I believe in a free market and it's about supply and demand, right? Why do you think those banks are starting to adopt Bitcoin and getting to a 34%, based on our rating? It's because it's good for business. That's it, right? 32%. It's good for business. Why has Citibank announced that they're going to launch native custody services, right? It's not because somebody in the leadership, Jane Fraser, says, 'I love Bitcoin.' Maybe she does, maybe she doesn't. It doesn't really matter. It's because they're the second or third-largest custodian of assets in the world, right? And so if you want to custody assets and remain one of the largest in the world, what do you want to do? You want to make sure that people keep as many of their assets with you as possible. What's a major asset class? Bitcoin. And so you can either have a large high net worth customer institution like us custodying our US dollars with Citigroup and our Bitcoin with whatever Coinbase, or Citigroup can say, 'Well, I really just want to have all of your assets,' and they're like, 'Well, how do I do that?' Like, 'Well, custody Bitcoin.' So it's really just supply and demand in the end, right? Like I don't think that going down the regulatory route to get the Treasury to get Basel and everybody to change their rules works as well as we know that we have 50 million people that own Bitcoin in the US, right? Get them all to say to their banks, 'Hey, you know, JP, like do you think you're going to convince Jamie Dimon to create Bitcoin custody services and Bitcoin exchange services?' The best way to convince him is to get all of his Chase customers to say, 'I'd like this ability.' And of course, you should listen to your customers.

Yeah, we do think about it. Look, let's talk about the long term and then we'll talk about the short term. Long-term, Bitcoin's won. Bitcoin was declared in 2014 as a digital commodity by the US government, by the SEC, agreed to by the CFTC. So whether something is a digital commodity or a digital security or digital token is quite important. Bitcoin's already won. All the other coins and tokens is uncertain, right? So one thing that Clarity does is it creates market structure. And it will say that Bitcoin, Ethereum, Solana, whatever, a set of coins are digital commodities and are then therefore overseen by the CFTC. But Bitcoin's already won. With the Clarity Act, another big piece of the Clarity Act is furthering what was done with stablecoins in the GENIUS Act and making it clear, right, who can have stablecoins, who can own stablecoins, what has to back stablecoins, whether yield can be paid on stablecoins. And the banks are sitting on the sidelines from issuing stablecoins for the most part, these banks, because and you see the column here, Fidelity has it, right? JP Morgan Chase has a version of a stablecoin, but nobody really has a true US dollar stablecoin other than Circle and Tether, which is outside of the US. And so seeing these banks issue stablecoins would be good for the space. Is it good for Bitcoin? Less so. Is it good for improving, reducing the friction of the financial system? Absolutely. So it paves the way for banks to adopt stablecoins. What's another thing? Tokenization of real-world assets. The tokenization of securities. Right now, if you want to buy tokenized STRC or tokenized MSTR, MicroStrategy, you can buy it outside the US, right? Like xStocks on Kraken. You can buy those outside the US, right? Who wouldn't want a market, a system, where I can buy and sell securities 24/7 with access to the underlying security on a public blockchain, and Gary, you can sell me a share of SpaceX, right? Immediate settlement by tapping my phone, right? Like that would be a very low-friction system and tokenization of securities would allow that and that would be passed with the Clarity Act to move that forward. Right? So these are just examples of things that help Bitcoin a little bit. They help cryptocurrency a lot and the halo effect of helping cryptocurrency will help Bitcoin. Now what happens with the Clarity Act? With the Clarity Act, there are a set of rules and directives that the CFTC, and the SEC, and to a certain extent Treasury, can go forward and issue, right? They can issue innovation exemptions that says that Coinbase now can turn on their tokenization of securities in the US for the next 6 months or a year. Everybody can watch it and then it'll get approved by the SEC to do it live in a year from now and everybody's happy. Right now, Coinbase can't do that because they're waiting for the rules to be issued. Now, the interesting thing is the rules are ready to go and if the Clarity Act gets passed, the rules now have the power of law of Congress behind them and then Coinbase can go do what it does. Kraken can do what they do. Charles Schwab can do what they want to do. SoFi can do what they want to do. JP Morgan and they can all go forward and they have the power of the law behind them to allow them to provide tokenized securities, stablecoins, and all these kinds of things. Now the interesting thing is let's say Congress says no, we're not going to vote on this or we're going to vote it down. It doesn't mean those rules can't get passed. They will, right? Atkins will still pass his SEC rules, but it'll be the power of the executive branch. So, it's not the power of law. It'll be the executive branch and executive orders and the banks will still. So, the outcome is largely the same. Now, the banks might not dive head first. So, this number might not go from 32 to 50 to 60 in a year. It might go from 32 to 45 in a year, right? Because they're worried that when the administration changes to whatever it is in two years that the executive orders get pulled back, right? But it's not going to, at the moment, Gary, you and I can trade securities by tapping our phone 24/7. It's never going to go backwards, right? Like what are they going to do? New administration is going to say, 'You can't do that anymore?' Because it's back to the power of the people. Right. The people are going to say, 'Hey, this is what I want. Everybody wants it.' And ultimately the government is the power of the people. The banks are the power of the people. Bitcoin is the power of the people. Right? And so these are things that everybody wants. Some people don't know they want it. Right? The guy that you tapped on his back when you walk down the street, if you ask him, 'Do you want this thing?' Just like you ask him if you want Bitcoin, he goes, 'I don't know.' But once he gets it, he's going to want it. And we're good to go. So what do we need? We need Clarity to either pass or not pass. Look, if it passes, everybody's happy in the short term. Bitcoin price goes up, Ethereum price goes up, all the banks dive in head first. This goes from 32 to 50 in 6 months to a year. Everybody's happy, right? If it doesn't pass, Bitcoin price will go down. Ethereum price goes down. Solana price goes down. This thing drags from 32 to 40 in the next 6 months. And everyone's like, there goes Congress not able to get his job done. But it doesn't matter in the long term, Gary. In the long term, this is all happening. It's just what happens in the next three months or six months.

In the end, it doesn't matter. In the end, it doesn't matter because ultimately the financial system is the power of the people and people want these things, right? But it's just how fast and in the end, you know, you're a Canadian, so in the end, the US government and the US banking system for the sake of innovation needs to be winning in this area for the US to stay the dominant capital market. That's why it matters that these things move fast because you mentioned Russia, you mentioned Japan. Let's not forget about the UAE, right? They're all moving fast. Europe's not moving fast. Canada's not moving fast, so I'm not worried about them. But if this doesn't get passed into law, things will still move, just not as fast. And what happens when we wake up 50 years from now and the best capital market is sitting outside the US or outside North America?