Strategy CEO Phong Le on STRC's Recovery, Buybacks and MSTR's Future

I think Jamie Dimon is a Bitcoiner behind the scenes. I think everyone is a Bitcoiner privately once they learn and understand Bitcoin.

95% of my compensation is through the performance of the stock and that's true with our executive team. We all want the common stock to work well over time.

We did not expect the amount of leverage that came into the system.

Yeah. So,

Thanks for having us, Natalie, or for having me. And yes, we've been busy.

Yeah. So, you know, I've said for a while that Bitcoin and AI are the two most important technologies of the 21st century and we at Strategy are quite fortunate to sit at the intersection of those because of our Bitcoin business but our software business. So, I spent a lot of time on this subject. And you know, I can't help but think AI could learn a lot from Bitcoin, right? AI could use a Satoshi Nakamoto right about now. If you think about what Bitcoin has done, right, Bitcoin has created a decentralized, non-sovereign asset class that has the potential not just to disrupt the financial markets but to significantly improve the financial markets. And I, you know, I think about things in terms of capital markets and you know, if you think big picture, the global public markets capital markets is about $150 trillion, right? And financial services is the second largest industry in the global public capital markets and I think it's around $25 trillion, right? So a pretty big chunk of the 150 trillion are financial services. And of course at the middle of those are companies like JP Morgan, Bank of America, Wells Fargo, Citibank, Morgan Stanley, etc., etc. They represent, you know, the second largest industry in the world. And what Bitcoin does, it solves all of the existing problems of the traditional capital markets, right? Whether it be money transfers, whether it be yield generation, whether it be a US dollar standard, inflation, Bitcoin solves that. And it solves it because it is a decentralized non-sovereign commodity. And it's been determined that by the US government, the SEC, CFTC, governments all around the world, right? And so we've created an asset class that's 18 years old and over the course of the next 5 years will completely progress and improve the financial markets as exist today. That's exciting. Now let's move to AI. So I said the second largest industry in the world is financial markets. Do you know what the first largest is?

It's technology. Right. So it's the Microsofts, it's the Googles, it's the Metas, and I think it roughly represents about $45 trillion of capital of the 150 trillion. So think about the Mag 7, right? Think about the SaaS companies and the SaaS apocalypse. AI has the potential to disrupt that entire industry like Bitcoin financial services. And that's just I'll call it virtual AI. Now, let's talk about what people really aren't thinking about quite yet. Physical AI, right? Think about humanoid robots, self-driving cars, right? Machines that fix themselves. And then you go from it's going to disrupt the technology sector. Bitcoin is going to disrupt financial services. The next biggest sector is global manufacturing, right? And beyond that you have retail, right? So think about every single sector in the world now, right? Whether it be oil production and exploration, whether it be consumer packaged goods and factories making corn flakes, whether it be how do you pick cotton, create t-shirts, sell them all around the world, AI is going to disrupt all of that, right? Which is exciting to me. This is not a threat, this is a very exciting thing. So what does AI need? AI needs the equivalent of Bitcoin. AI should be decentralized, right? It should be non-sovereign and it should be a commodity, right? Which was what was the original intention of OpenAI was to create an open AI protocol that's a commodity. Decentralized compute which Bitcoin has solved AI should also try to solve, right? Rather than have all the GPUs and amass them, how about have AI run over decentralized compute all around the world, right? So, I think this is actually where AI will go is to become a global commodity that is open-source because if you're going to take capital and you can do what Bitcoin did for capital, why can't you do the same thing with AI? You know, I joked AI needs the Satoshi Nakamoto, right? And it's too late for that, but I do see folks like Jensen Huang and Elon Musk talking about really we want AI to be open source. We don't want it to be ultimately controlled by a set of companies. Do you need the government to make that happen? I'm not sure we do need regulation for that, just like we don't need regulation for Bitcoin to make it survive. I do think naturally market forces will move AI even at the frontier to be more open-source. We already have models that are out there. So, that's where I see this all going. And it's a very exciting space right now. I'm not worried about AI destroying the world. I'm much more optimistic about AI making everything we interact with in life better and making humans more intelligent.

Yeah. So, we put out a digital credit capital framework in early July that was meant to address the challenges that we saw with STRC late May through the month of June, which was your point. It dislocated from par down to about $75. It since recovered up to 98. It made it up to 99 a couple days ago. So, we're seeing it recover. And the reason it recovered was we went out and we said we're going to do a few things, right? One is we're going to create and maintain a US dollar reserve with at least one year's worth of dividends. Now it's up to 3 years worth of dividends, $5.1 billion roughly. Right. The second thing we said we would do is we would create a pool of money and authorization to buy back STRC and MSTR when we need to. The next thing that we said we would do is we would sell Bitcoin, right, and sell it when needed either to buy back MSTR, buy back STRC or fund dividends. And so the combination of those things and then we also created US dollar cash afterwards. And we said that the dividend, right, is not going to be our primary mechanism for getting STRC back to par, right? What we realized from observing the market, talking to investors, institutional retail is a 12% dividend is fine, is plenty, right? Like we saw going from 11%, 11 and a quarter, 11 and a half, 11 and three quarters to 12, that didn't really drive the price of STRC. What was driving the price of STRC was primarily the size of the US dollar reserve and now US dollar cash and the coverage of the dividend we had. And the other thing that was driving STRC was our buybacks. And I guess the third thing is Bitcoin price, right, which has a piece of sentiment and then also what it does to our balance sheet in terms of our asset coverage on the preferred outstanding. So I guess the net of it is, and look, we're all learning, right? Like I often want to remind ourselves and folks that STRC went into the market, it was July 30th of last year, July 30 or 31st that we launched it and so we're really 14 months into this thing and there's a lot of learning, right? We have other products now that are other companies that have built digital credit products both in the Bitcoin space and Ethereum with Bitmine and so we're learning. There's a lot of learning still happening.

Yeah. I mean, there's the asset coverage of Bitcoin, right, over how much STRC we had outstanding, right? We had about 12 billion outstanding. We have $50 billion of Bitcoin, right? And then we had 6.5 billion at that point, $8 billion of debt, notional outstanding, convertible debt, right? The asset coverage would indicate that STRC should have continued to trade at a high level. I think what ended up happening that we were, I was surprised by or did not expect was the amount of leverage that went into the system, right? One of our large shareholders, you know, that we talk to quite often calls this the Minsky effect, right? Which is the more you create an instrument that has a high yield, right? And STRC has that 10, 11, 12%. Right? And the more you are able to get that instrument to trade with low volatility, right? Which it did. It had at its best points a volatility of two, three, right? When that happens, it invites leverage, right? What are you going to do? If you believe you can get 12% with low volatility, you're going to go out and you being a retail investor are going to go out take out a loan against your Bitcoin for 6%. And you're going to buy STRC at 12%. And you're going to take that spread of 6%. And that in some cases could be a margin loan against your Bitcoin which means that if Bitcoin price falls you have no option other than to either add more Bitcoin which you don't have or you sell STRC and you unwind. That I think we did not expect the amount of leverage that came into the system that came in and so that's a lesson learned next time around, right? And so that's what caused STRC to get, you know, from 100 down to 75. But the flip side is when it started pricing down, you know, 90, 85, like people also were quite, I would say, intelligent traders who realize that you have a company that has been in this Bitcoin treasury company business now for 6 years that has still a strong balance sheet of 50, maybe it was $45 billion of Bitcoin or a balance sheet at that point in time that still had $800 million of cash. We built it back up and that wasn't really going to, as some of the doomsdayers said, we're going to completely unwind, get margin called. We have no margin to get margin called. We knew Bitcoin wasn't going to go to zero. And so some very smart investors came in and picked up STRC anywhere between 75 and 90. You know, I bought some and realized that this thing was going to come back, which it's done.

Well, I think there's a few things, right? Like one, keep the US dollar reserve strong, right? Because that really backs up STRC and makes everybody realize that this thing isn't going to unwind. We're not going to stop paying the dividend, which would cause the other preferred to struggle and could cause the common struggle. So, keep the US dollar reserve at a strong level. So that's one, right? Have a buyback policy that states and that we're able and willing to buy back STRC. So when shorts come in and you know want to short it down to 99, 98, realize that we can just go out and buy it right back and bring it back up to par, right? And those are two things that we, I would say, consciously knew were options but didn't publicly declare as part of our strategy. And now that we've done that, I think that is one way. The other is to really continue to focus on attracting long-term holders of STRC, primarily institutions, right? And that's a long process, right? Like I'd say in the past we had about 80/20 retail institutional ownership of STRC. We saw the institutions come in as the price came down and now we're at 70/30 and so 70% retail 30% institutional which by the way doesn't mean that retail reduced their holdings. Institutions increased their holdings and increased in size. So, they're starting to come in. And the long-term institutional holders are the ones that aren't going to buy STRC on leverage and they're not going to sell just because it goes down to 95 bucks or 90 bucks. And so, that'll be helpful. But, of course, attracting the institutions is a long-term effort. This isn't like a hey, you know, call somebody up and they put $500 million in tomorrow. This is a longer term effort, but we're starting to do that. And what's interesting about a lot of the institutions that we talk to and holders in general, you know, what do they really want to see in a credit instrument? They want to see one that's been through a crisis, right? Like so the silver lining if I may is that because we've gone through a drawdown to 75 and a build back up to 99. They're like okay here's a company that's weathered a storm and has proven that they can recover the instrument which we've done. And I think that is actually an institution will look at that and say okay this is no longer unproven. It's proven and it'll still take more time.

I think we'll get there back there soon. I think one dynamic that is still out there are people who bought in at 75 to 90, call it, who were not buying STRC because they wanted a 12% dividend and a low volatility preferred instrument. They just wanted principal appreciation, right? And in fact, you know, these are funds that are basically buying public equities for the purposes of principal appreciation. And once it gets to 98, 99, 100 they're out not because they don't believe in the instrument. They were in it to go from 75 to 99. They weren't in it for it to sit at 100 and get 12%. And so I think we're seeing some of that come out of the system.

I don't think it matters. I really don't think and that's what we saw when we raised it from 11 to 12%. It doesn't matter. And in addition to that, one, I don't think it matters. I don't think that's what the market's asking for. And two, raising the dividend means that we have more cash that we have to pay on a semi-monthly basis. And that provides a drag on the US dollar reserve, the US dollar cash, and it also provides a drag on the common equity because we have a higher dividend obligation. So in fact, part of the positive outcome of buying back STRC is not only are we able to slowly credibly increase the price, but we also lower our dividend obligations.

I think so. Look, it's in the traditional credit world, obviously having cash or having other assets that back up the ability to pay your dividend is important. In the digital credit world, having, in my opinion, Bitcoin, is important. And I think Bitcoiners realize, hey, they have 845,000 Bitcoin. They're okay. They'll be able to pay the dividend. Except the Bitcoiners didn't want us to sell the Bitcoin. We've inoculated that and done that. I think back to we're trying to attract institutions. The institutions who just want the 12% yield, high collateral coverage, low volatility don't care so much about Bitcoin, right? And they care about cash. And so that's sort of what we've learned throughout this process. And maybe it was an obvious learning but you know when we work in sort of this digital capital world and Bitcoin world it's something that's a good reminder.

Yeah. So we have about $6.5, 6.7 billion notional outstanding of our convertible notes and we had about $6.7, I think it's $6.4 billion of cash, part of that is USD reserve $5.1 billion and that can only be used to pay interest and dividends on our preferred, right? And on our convertibles. That's what it's there for. That's what we've agreed with the board and it would require a change with the board if we're to use it for other purposes.

It cannot be used to buy the converts. Not at this point in time, right? And so then we built up what we call USD cash, right? That has a lot more flexibility. We can use it to buy back STRC. We can use it to buy back converts, etc. Okay. But the USD reserve is there to pay interest and dividends on our debt and on our preferreds.

No, I don't. Not right now. Like first of all I think what Seda has done and what Michael and his team have done in the Bitcoin treasury space has been pretty impeccable, right? At a different level of scale than we are, they have built up a Bitcoin treasury company the way it should be done and I have a ton of respect. And they've created now SATA which is 13%, right? In terms of a dividend yield, it's a daily dividend which I find to be an incredible innovation. And on top of that they have collateral coverage which is a little bit smaller than ours, right? So they don't have as much liquidity, they don't have as much scale but they have built a very innovative product, awesome, right? MetaPlanet's looking to do the same thing, Smarter Web is looking to do the same thing. In the Ethereum world Bitmine has already done the same thing, right? And so my view right now is we're in a world where the pie is growing for digital credit. Like we said this is a $300 trillion opportunity. We're at $15 billion. The more the merrier. And what's good about this is some are going to be able to innovate with ideas that we haven't thought of, right? Like I don't pretend to sit here and say every single Bitcoin treasury company innovation must come from Strategy, right? So I think it's early, it's good, and there's plenty of room for everybody in this space.