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

Sorry. Me or Chris, come first.

Well, why don't I go first? Yes. So, Phong, thank you for hosting us. It's an honor and a pleasure to be speaking at this conference and to have had the privilege of having MicroStrategy as a client. I'm Alex Iversky, managing director, head of the financial institutions banking group based in New York. Been with the firm for over a decade, and within the financial institutions group, I cover what we call the market structure and technology sector, which really is everything from exchanges to brokers to anything that touches capital markets, the infrastructure, the trading, the post-trade settlement, asset management, and the like.

I'm Chris Yonan. I head up the power, utility, and infrastructure group at Jefferies. And I'd say about 24 months ago, a lot of my clients in the power sector have been increasingly investing and becoming involved in the crypto and blockchain space. So I've spent most of my time with respect to that on the mining and infrastructure kind of relating to that. I've been at Jefferies for a few years now. Before that, I was at Morgan Stanley. I've been doing banking and had a previous legal career for a little over 20 years now.

Sure. Sure. We cover the broader industry from investment banking. This includes the complete vertical chain of blockchain, cryptocurrency. So we look at it from a technology and software standpoint, mining and infrastructure, and exchanges, financial products, and the like. Today with Phong, you've got kind of two legs of that stool with Alex and I. We've got a colleague, Tim Reppy, who's in our technology group who rounds out that effort. And as it relates to, obviously, we're in investment banking, we're very focused on mergers and acquisitions, both public and private capital raising. That would include equities, debt, leveraged finance, private placements. And we're also, interestingly, working with crypto-native companies to bring institutional investors into the space. Some of this includes creative structures like BTC margin loans, securitization of equipment financing loans, and other creative ideas, really with the goal of working closely with our fixed income side of the house to bring down the cost of capital and actually create a lot more liquidity, I would say, out there for people that are investing in the space.

From my standpoint, it's evolved quite dramatically, particularly as it relates to mining. You know, we've seen, I would say, at first there has been...

Yeah, I'll pick up because I think our experience is very similar. In any case, we have a kind of crypto-central team that, you know, Chris, Tim, and I are a part of, and we coordinate on everything, even if some of it is more mining versus market infrastructure. So I would say, really, you know, as you could probably tell, we're a traditional finance firm, and, you know, we still cling to some of the accoutrements of that in terms of how we dress. But, you know, as most investment banks, you go back 16 months ago, we were sort of on the outside looking in, being curious about crypto, following it either personally or from a research standpoint. And then really our advent into the space has been, as I said before, working with you guys and learning from you in terms of some of the capital markets offerings that you guys did. And then, you know, late 2020 and very much over the course of last year, we've done, you know, it's, we've gone from a standing start into being, I would like to think, you know, a major, major participant, if not the largest, from a banking standpoint, having done, you know, three deals with exchanges, you know, SPAC transactions, you know, M&A transactions for the likes of Bakkt, Bullish, LMAX, a number of deals in the brokerage space, in the related kind of capital works technology that, you know, supports kind of a blockchain-native ability for trades to take place and settle. And then hopefully we get Chris to join us here momentarily or rejoin us, but also some capital markets offerings, both primary as well as kind of in a secondary market, what's called ATM, at-the-market offerings for some mining companies. So alongside that, again, this is, you know, M&A and capital raising, so traditional banking. Alongside that, we've been expanding our, you know, macro commentary or company-specific research as it relates to crypto, both as an asset class and as specific companies. And, you know, we have a number of efforts, for example, in our fixed income business where we, you know, facilitate, you know, secondary liquidity. So, you know, some trading, lending, and actually, perfect segue. I was just, Chris, I was just talking about some of our activities, you know, within fixed income that you've been working with our colleagues there on some crypto initiatives over the last year.

Some of the things we've done in banking.

Yeah, I mean, I'll start again from, I think it's sector-specific. So it varies, and it's also obviously bank-specific. At large, crypto or companies that play in the crypto ecosystem have, without doubt, become a highly bankable space, right? So where, you know, six months ago, certainly 12 months ago, in order to take on a, you know, a crypto client, you had to go through all the same processes that you would with any client, you know, committing process, you know, onboarding, KYC, AML. There was also significant sort of, I mean, I'll just be upfront with you, reputational kind of filter that, you know, is this something that, you know, looking back at it, you know, a month later or reading a headline in the newspaper, you know, we may or may not wish that we had done this. And I think, you know, we thank you for noticing. We are, I think, as it relates to crypto and generally, a much more nimble institution. And so we took that same question very, very seriously, but we came to a well-considered and early decision that, yes, it is bankable, and you've got to understand it for starters, because otherwise, you know, you're not coming to an informed answer. And it's company-specific, but at large, it's bankable. And I would say that, you know, much of Wall Street has, I think, come to the same conclusion. We definitely see, I don't want to, you know, I mean, to be fair, I'll point out that, yes, there are a number of other banks that are out there soliciting this business and trying to get it done. You know, that's as it relates to banking. I mean, it's a little bit of a different answer as it relates to things like custody and brokerage and dealing, particularly on the retail side of things. But as it relates to banking, I think that the Rubicon has been crossed, and I think very much to the benefit of the continued evolution and growth of the industry.

Well, you know, there's, I mean, I think many of those start, understandably, from a lack of understanding of what crypto is, who is it used by, why, why is it needed, you know, how, you know, this, the, you know, regulation is a whole separate topic of it. And some, perhaps many, might argue that the whole concept of regulation is somewhat antithetical to the promise and the very nature of crypto. That's a separate discussion and a debate that, you know, rages on as we speak. But I think as it relates to Wall Street, you know, we're highly regulated financial institutions, something that has a regulatory regime that is in flux or in some areas non-existent, I think, you know, creates a greater degree of opacity and potential risk. So it's for starters an educational exercise, really making sure people understand you shouldn't do business that you don't understand. You shouldn't have for a client a company that you don't understand what they do, and especially if you're taking that company to the capital markets and raising capital. And so it starts with that, and I think we've very much built a degree of expertise that allows us to be as active as we have been. And then it's understanding what the risks are, as it in particular relates to the evolving regulatory and, shall we say, cybersecurity landscape underpinning the industry.

Sure, Phong. It's been a pretty exciting time. I think if you look back a couple years ago, there was five public companies that were pretty thinly traded. Now you can say there's actually over 20 companies either public or going public in the mining space. We've seen, I think, a tremendous amount of growth, and the business models for these companies, I think, continues to evolve. I think you have a collection of, you know, pure miners who are looking simply at hash rate and getting as much hash rate as possible. You've got hosters who are looking to provide third-party infrastructure for people to plug in their machines. You've got hybrids that are looking to do both and potentially build for themselves, and even some that are requiring power plants, renewable energy, and the like to actually vertically integrate the whole infrastructure along with mining. And it's not to say that one is better than the other. But what it does offer, I think, the investment community is a variety of ways to invest in the industry across a different risk spectrum, some having higher beta than the others. I think more in terms of the fundamentals of the industry, I mean, we all are very aware of some of the global events that have happened. The US is quickly becoming the epicenter of the industry, of the mining industry. And, you know, I would say, you know, it's state to state, but we're seeing a lot of support at the state level for miners to come in and really produce, you know, it's the backbone, obviously, of the Bitcoin economy, to produce these bitcoins and have mining there. And in addition to that, they're actually being very welcomed by even the power companies and utility companies in the space. We've even seen some of my more traditional power clients actually look to invest in the space directly. A lot of hash rate is expected to come online. I think we ended 2021 around, call it, 200 terahash per second. Some are saying that could even double this year. And with that coming online, you need the infrastructure to support it. And all these miners are going to need a home and a place to be to really come home. And we do see some risk, I would say, in 2022 for the infrastructure, maybe they're not there to be able to support all of it. So some differentiation between the miners, infrastructure definitely could be a bottleneck today. But coupled with all those investments in miners, and this ties back to a couple of the themes and what we think is exciting from a banking perspective, is with all this investment in infrastructure and machines, there's a tremendous need to raise, I would say, billions and billions of capital to help support the space. And that's created a lot of opportunity, a lot of opportunity for companies, a lot of opportunities for investors. And it's not as straightforward as a traditional power company, as a traditional tech. The KPIs are different, understanding the fundamentals, and that's what's exciting and really, I think, creating a little bit of evolution of the capital markets to support a lot of these companies.

Sure. And I was talking a little bit of that before my iPad shut down. Sorry about that. As I was saying, look, private market is healthy. I won't repeat what I said earlier. It's growing. We're seeing actually sector-specific crypto funds being formed to help support debt and equity investments, which, to be honest, has been a great bridge because not all of these companies are ready to access the public markets. And like any high-growth market, you need capital providers that are willing to look earlier stage, see the vision, and that's kind of been more robust. With respect to the public markets, you know, look, there's been a significant amount of education around it. You know, we've been very, very fortunate enough to work with MicroStrategy around its capital raises. And to be honest, you know, Phong, and it's really created, I think, a platform for people to help understand broadly Bitcoin and the industry. Since then, you know, we've led IPOs for Argo. We did a very large convertible note offering for Marathon where we saw significant oversubscription of demand. And this is all public, I would say, market capital market investors and institutional investors. And that's what we really want to see from a capital standpoint to help support the industry because it just gets, I'd say, a lot more firmer footing for follow-on capital to help kind of support it kind of along the way. Research has increased substantially. That helps educate the market. And, you know, the point that you just said has been the most intriguing for me is to see my traditional, I would say, power clients who really aren't tech-savvy, aren't really high growth. Not only is it one thing to say, okay, you want to provide power to these companies and that's pretty obvious, but no, they're actually investing in the infrastructure, actually putting dollars in, getting Bitcoin exposure through mining operations now. And I think you're going to see more and more public announcements along those lines of seeing traditional regulated utilities looking to actually invest and get exposure directly to Bitcoin, which is pretty exciting, I think, for all of us.