Bitcoin for Corporations 2022 Strategic Vendor - NYDIG (02/01/2022)

Michael, thank you so much for having us back, and thanks so much for putting on this event and for everything you do for the community. It's great to be here and great to be part of the show.

Sure thing. So first and foremost, NYDIG is a Bitcoin company that helps corporations and institutional investors access the Bitcoin network. There are really two relevant parts of our business for the discussion today. So the first is a set of corporate treasury and asset management solutions. The second, and perhaps more interestingly, is a software-as-a-service platform where we make our platform available via API for companies to integrate and build their own products and services. And I think the big theme here for today, relative to last year, is really a difference of what we're seeing in the market. Where last year we talked a lot about corporations skipping straight to big Bitcoin positions on the balance sheet, this year what we're hearing is much more companies asking, 'How do I use Bitcoin to attract and retain the best talent, new customers, existing customers?' And they may naturally accumulate a Bitcoin position on the back of the solutions we deliver to them. And that's when we really bring our corporate treasury solutions to bear. Big picture, NYDIG started because we had this problem ourselves. So we're a subsidiary of a larger financial technology holding company called Stone Ridge Holdings Group, which is committed to financial security for all. And we see Bitcoin as a fundamental piece of financial security for all over the coming decades. And you know, we've been Bitcoin weirdos at Stone Ridge for a long time, since before it was cool. And as we accumulated Bitcoin for our own balance sheet, we found some of the solutions in the market lacking. And so we ended up developing our own, and today we run everything off the descendant of that initial platform that we developed to buy and hold our own assets. It's a single, common, regulated, audited, and insured platform. We don't deal with retail end users. We only deal with institutions and companies. And we conduct ourselves in accordance with three principles in everything that we do. First and foremost, we do our best to be kind in all our dealings. Secondly, we do our best to be humble in all our dealings. We have many strong opinions but are not afraid to change our mind in the presence of new data. And finally, we do our best to conduct ourselves with focus. We pick a few things and we work really, really, really hard on them, like Bitcoin, for example.

Yeah, it's a great question. I mean, I think again, really, what we're seeing is companies more and more asking themselves, 'How do I use this network to grow my business, to enhance the P&L, to attract and retain the best talent, to attract and retain new customers or existing customers?' And so again, what we're able to do is really deliver a solution that's like Amazon Web Services. It's a raw set of components that let people build anything they want. There are certainly a number of patterns that we're seeing and some areas that we're focused on. So, for example, we have about 300 banks and credit unions set to go live with a white-labeled trading platform in the first half of 2022. And I actually expect that to grow because what we're seeing from the ones that are live today is if you have a banking customer, one customer that's enabled the Bitcoin functionality, one customer that hasn't, on average, the customer that's enabled the Bitcoin functionality has 40% higher engagement than the customer that hasn't. And the chief marketing officers love this because what they would have to do, what they would have to spend in marketing dollars or other efforts to have 40% higher engagement from a customer, is way, way, way more than the economics of rolling out the white-label trading platform. In terms of the fintech channel, like our partners at Affirm and Upgrade, we're seeing similarly high levels of engagement. So, for example, Upgrade has made public that one in ten of every new card that they're issuing is actually their Bitcoin rewards card powered by NYDIG. And we have other fintech integrations that are launching soon that we expect to have that level of engagement, if not more. And a final example I would give you is we recently went live with a partnership with Landry's, which is the largest privately owned restaurant chain in the US. And Landry's has a branded rewards program, the Landry's Select Club. And there are over four million users of the Landry's Select Club that now have the opportunity to convert their points into Bitcoin or earn Bitcoin going forward every time they dine at a Landry's property. And we're seeing dramatically higher take-up of the program than we planned, both from the customer side and actually from the server side. The servers are very excited about it. And dramatically higher engagement once a customer has opted into the program. And it's a really interesting dynamic. It works on both sides of the price movement. So what happens is, customer converts their points, their Landry's points into Bitcoin, price goes up, now they take their wife or husband out to two steak dinners rather than one because they have some extra assets. On the flip side, if Bitcoin price goes down, they may go eat extra at a Landry's property, earning more points than they would have otherwise with the price lower than what they think is kind of fair value. And so I would make a couple other interesting points about this because we are seeing this pattern across a lot of the integrations that we're doing, which is this idea that you can actually bring things out for customer engagement that don't require them to spend any money to start stacking sats. So the Landry's program is a perfect example. They were going to go out to Landry's or Bubba Gump or whatever it might be anyway. Now they just get some Bitcoin. And from a psychological perspective, from a consumer behavior perspective, that's very different than having to spend my hard-earned money to opt into stacking sats. So whether it's that or whether it's the Upgrade reward card or a few other things we have in the works, opportunities to earn Bitcoin by doing things consumers would do anyway is a big pattern that we're seeing for attracting and retaining new and interesting customers to these companies. And the final thing I would say about this is we were able to get Landry's live in 45 days from signing the contract to customers earning Bitcoin when they're dining out. 45 days. And I think that's a really interesting statistic potentially for the audience to take away. Even take none of these other stats away, is that at this point, because we've been doing this for so long, any legal, regulatory, compliance, security, technical, accounting, whatever it might be, we've asked and answered all these questions and we're prepared. Whatever, you know, most of our background is in working with highly regulated investors, whether those are insurance companies or banks. When it comes to a merchant loyalty solution like Landry's, in many ways that's a lot easier than a highly regulated industry, and that also sets us up well as we start to look at other regulated industries like gaming, for example.

That's right. I mean, price moves more. There's more, there's more action.

We'll bring that back to Landry's. I like that.

Thank you. I appreciate it.

Sure. Hypothetically speaking, for example,

Yeah, and I think sort of to close out and transition to this, it really is the case that we're seeing. So, for example, in the loyalty program, so every time a customer stacks a pancake to stack a sat, the corporate turns around and buys the Bitcoin on their balance sheet to fund their liability because at some point the customer will redeem that point to buy more pancakes. And so that's really where this is an example of the natural accumulation of Bitcoin that we're seeing that results from these kinds of customer engagement strategies, rather than going out and saying, as a matter of result, I want to develop a billion-dollar Bitcoin position. So, but let's say these programs are running for a long time, or you just happen to have a billion dollars of Bitcoin. There are really four things that we're seeing in the corporate treasury part of our business. And again, we have all the raw building blocks. Like, we can do any financial service, any product, any service that you would on any traditional asset class. We have the regulatory structure and the expertise in-house to do it. But again, there are some specific patterns that we're seeing. So the yield pattern, the search for yield using an overwriting that I'll talk about. Second is how to lower volatility or cap downside. We have some solutions for that. The third is how to borrow against the position to get some cash out or liquidity without necessarily a taxable event. And then finally, especially for these companies that are accumulating as part of their business rather than deliberately setting out to establish a position, sometimes they do get orange-pilled and want to accumulate more. And so we have some specific execution strategies that we run to help people accumulate large positions. So, for example, to give you some stats around the earning yield use case, this is one of the most common things that we do. This was very big for us in 2021 and looks set to grow more in 2022. So our customer base tends to be fairly modest in their yield goals in the grand scheme of the crypto landscape. So we tend to see people targeting a 10 to 20% annualized yield, and you can consider that modest in the crypto landscape, where sometimes you see people saying, 'I want 30, 40% annualized yield.' Certainly in the broader scheme of what's available in traditional financial markets, one of the things that's exciting about a Bitcoin balance sheet position is dollar yields like that are available in a safe, audited, insured, regulated way using strategies that are transparent to the end user.

So let me put some numbers on that for you. So, if you started 2021 with a billion dollars of Bitcoin, and we had about this much in the strategy in 2021, let's say you want to target this yield. You sell a one-month call option 30% out of the money. So, for example, let's say the Bitcoin price level is 40,000. That means you have upside up to 52,000 for the next month. If you did that every month in 2021, your $1 billion would have grown to something like 1.8 billion. So, 80% appreciation, 800 million of profit, with about 260 million of that being cash yield from option premium minus anything that you had to pay to settle the option. So, you would have ended up 80% and gotten $260 million out of your position to reinvest in your business or deploy however you saw fit. And again, we think so, and our clients certainly think so. And I think it's worth saying out loud. This is a very common strategy in equities, for example. It's just more attractive in Bitcoin because implied volatility levels are higher, because realized volatility levels are higher. And that's actually a good transition into a second strategy that we did a lot of in 2021 and are setting up to do more of in 2022, which is people looking to cap downside. And so again, especially for these corporates where owning the Bitcoin and the volatility is not a core part of their balance sheet strategy, it's something that falls out of a customer retention or an employee retention strategy. They say, 'Okay, I actually want to have the Bitcoin. I want to have some of the upside, but I want to cap my downside.' And so for them, we do something that industry jargon calls a costless collar. So, for example, in 2021, the trade we were able to put people in for most of the year was we were able to cap their downside at 20%. So, the most you could lose was 20%, or retain 80% of your initial asset value on the day of the strike. And for that 20% loss cap, you're able to retain 100% of the upside. And so that was something in particular that we found very compelling. The market has flattened out a little bit today, but in terms of