Live from Bloomberg World Headquarters, I'm Carol Massar.
Welcome to a special edition of Bloomberg Crypto. Carol Massar in for Scarlett Fu.
She is my co-anchor of Bloomberg Businessweek Daily each week on Bloomberg TV. I'm so glad you're joining today because it's a really fascinating time when it comes to crypto. Carol:
The crypto companies have lived through becoming teenagers. A preview of the Wall Street establishment increasingly looking at crypto and tokenization. Tim:
That's our backdrop for this special edition. Carol:
Let's get to what is at stake today. Our exclusive conversation with Michael Saylor. We will talk buying Bitcoin, digital credit inclusion in indices, and the failure of the Clarity Act. Tim:
Joining us live from D.C. Fintech Week, we speak with other guests from that conference as business leaders and regulators meet in the nation's capital. Carol:
We are at the height of the MLB postseason, with new stakes. Live viewers putting their money increasingly into prediction markets, many betting heavily.
First though, a check of where things stand with digital asset prices today. Bitcoin up just about half a percentage point, hovering at 83,424. Ethereum up ever so slightly, hovering around $2,500. Right now down about seven-tenths of 1%.
The big picture though, we have to zoom out because we are pretty much a year out from crypto's historic rout in October that crashed just about a year ago. The market still hasn't fully healed. Bitcoin remains well below that record high. Leverage is lower and traders are taking less risk.
Corporate Bitcoin buying is growing. Michael Saylor's company just added another $21 million in Bitcoin, extending renewed buying, and more companies move crypto back onto their balance sheets. Strategy now holds $70 billion in Bitcoin, and that's about 4% of total supply. Tim:
Joining us from D.C. Fintech Week at the World Bank for an exclusive interview is Michael Saylor, founder and executive chairman of Strategy. Michael, always good to see you. Thank you so much for joining us. Bitcoin had a great summer, still 30% below last year's all-time highs. What is your view on where Bitcoin goes from here? Michael:
We think we are at the beginning of a bull market. We would normally look at where Bitcoin is versus the average. We bounced slightly below it and now we are moving up, 25% premium.
The headwinds were restrictive trade policy, restrictive monetary policy. Now we are rotating into some tailwinds: a very favorable regulatory environment, banking options, and accelerating.
We have the digital asset space accelerating, we have the formation in the networks, and banking credit coming online. All of these are looking very auspicious for the asset. Carol: I feel like everybody is competing for capital against AI. So much money flowing into it. You see it squeezing out investments. How long do you think that continues, and what impact are you feeling in the crypto space as a result? Michael:
You can see that AI will de-monetize a lot of equities based upon labor and talent, especially across equities that are attempting to create the next product, or equities that are based upon tens of thousands of humans, and they are getting de-monetized and degraded.
On the other hand, this can be a rotation to scarce capital, whether it's Palm Beach real estate, more gold, or digital gold, or some trophy asset. Capital investors will look at things, and certainly the king of commodities right now is Bitcoin because it's digital capital. Tim:
The narrative you're explaining, let's say we see concerns about software companies when it comes to the AI trade. If the thesis you espouse comes true and people look for stuff with scarcity, why hasn't it materialized with Bitcoin yet? Michael:
If you look at when we started our first Bitcoin buy in August of 2020, Bitcoin dropped approximately 30% year-over-year. The digital equity, it's up 53%. The only stock we know of, every other Mag 7 stock and all the other major S&P stocks are underperforming that. Bitcoin is outperforming gold. Gold is outperforming the S&P index, and ultimately if you look at the complex, the strongest performing capital and digital credit like STRC is paying double to triple other conventional credit instruments, and the digital equities like MSTR, they are outperforming 98% of the publicly traded stocks. Carol: You know the debate that's been out there, crypto overall, is it a safe haven or is it a growth asset? How should investors be clarifying it or considering it? Michael:
Bitcoin is a block of digital capital. So you can carve that block of capital and step down in digital credit, STRC, with volatility less than 10. Or you can amplify it and step up and create an equity like MSTR.
And when you feed the high volatilities in the derivatives market, you get extremely valuable options. Think of Bitcoin as raw financial energy. Gold was showing 25, where is the S&P? 10 to 15.
If you're a derivative trader, you want to feed high volatility into the derivatives. If you're an equity investor, you either amplify Bitcoin, and that is up 40%. And the way you do that is you amplify the equity by using credit to drive an increase. There's something for every type of investor here, depending upon whether you are a short-duration credit investor, a long-duration credit investor, or you are an equity investor.
I think most of the market is focused on AI. They understand digital intelligence. When I say those investments are expensive and risky and complicated, most of the market doesn't understand digital capital, credit, or equity. Those investments aren't expensive and they're not that complicated. They are just contrary, and people don't think this way. They have a hard time getting their heads around these ideas. Carol: If there's something there for everything, why didn't you guys sell some Bitcoin back into it? Bitcoin was trading at around $73,000. It was contrary to your ideas to never part with Bitcoin. It was a tiny amount, but do you regret doing that? Why sell in the first place if you think it makes sense in multiple environments? Michael:
The way to think of our company is we're a structured finance company. On any day we might buy Bitcoin or sell Bitcoin, we might buy dollars or sell dollars, we might buy equity or sell equity, we might buy credit, STRC, we might sell it.
We swap equity for capital, for cash, for securities, then we can arbitrage any opportunity in equity, credit, or capital markets that benefit our shareholders. If we were to take the position that we would never sell the equity, or never sell the capital, or we would never sell the credit, we degrade the value of the company.
It is important for us to be able to trade any asset pair in any direction at any time. And what we established is the ability for the company to buy and sell the credit, equity, and Bitcoin. That was a big unlock for all of our investors in every asset class. Tim:
It spooked the crypto market specifically, some Bitcoin, and you saw that go lower as a result of that. A strategy selling something he said people should hold onto forever. Was that a mistake? Michael:
We were inoculating the market. The first move of 32 Bitcoin, people overreacted to it, but then later on we were able to sell thousands of Bitcoin without the market reacting to it at all. Later on we saw thousands of Bitcoin in the market trade up.
So the important thing is, for the first time, sometimes you get a cramp, but you have to condition all of your investors and the market in general that you will buy and sell depending upon what is in the best interest of the shareholders. If you can run the company and do the right thing for Bitcoin and for the credit investors, and the right thing for the equity investors, we are growing up. Tim:
Are you conditioning the market, investors, selling more Bitcoin in the next few months? Michael:
As a general rule, we are an acquirer. We've acquired quite a bit of Bitcoin. We've acquired more than any company in the world this year. You should expect that we will increase our Bitcoin holdings over time.
We are moving into a bull market, so I would expect we are probably acquiring Bitcoin and we will be issuing credit into the bull market. In a bear market, you would actually use dollars to pay the credit dividend, or you might raise dollars with Bitcoin. It depends on the market cycle. Carol: You said twice -- Tim: You've said twice we are in a bull market when it comes to Bitcoin. How high in this cycle do you see it going? Michael:
I think it should move back to the six figures, beyond $100,000. Our long-term forecast is Bitcoin grows 20% to 30% a year over the next few years. The last 12 months have been a contraction. I think we hit the bottom around slightly below $60,000. I think we bounced off of it. Now we're moving up into the 80s. I think we will march forward from here.
$100,000 by when, Michael?
I'm not a short-term trader.
But you understand this market, for you've seen the ups and downs. You've got conviction behind this number. I'm curious, by the end of the year. Michael:
What I would say is, if you need your money in the next three months, you should probably have it in the money market fund. If you want to make a decent return in the crypto economy and you need the money in three months to four years, you should buy the digital credit like STRC.
If you don't need money for the next four years and you're a capital investor, you want to buy Bitcoin and expect to get 20% to 30% ARR on that. If you are an equity investor and you want to outperform, you should buy the digital equity for a company like MSTR, and you can expect to outperform Bitcoin because we are able to amplify our Bitcoin per share with our digital credit. Carol: You said inoculating, introducing when you guys sold some, this idea of inoculating the market. So introducing an idea. Is it the idea that crypto will be something you are buying and selling, like I've been hearing, and you no longer hold to that idea that you hold it forever?
The idea is the company has something in excess of $70 billion of Bitcoin on any given day, and that's what backs the credit. So if the company is going to back billions of dollars in digital credit and pay billions of dollars of dividends in the future, then it is important to be able to monetize our primary asset when and if we need to.
We can do that by selling derivatives like MSTR, we can sell Bitcoin derivatives, but we can also sell the Bitcoin, and there are times we would sell any of those to back the credit. That's the big idea. Tim: It's fair to say Strategy is the original accumulator. It is the company that invented the digital asset treasury model. Since then, many others have emerged. ETFs as well. There's a lot of ways to own Bitcoin. Is Strategy still the best way? Michael:
You are getting 4% from a money market, 8% or 9% from private credit. It is illiquid. We are able to have credit that pays 10% to 12% as a return on capital, which you defer tax on. It is the highest-performing credit in the world.
That is a $300 trillion asset class. The reason you want to buy a company like Strategy is we are able to create credit, billions and billions of dollars of it.
If we sell $10 billion of digital credit next year, the hurdle rate is 10%. It typically performs more than 10%, which just made $10 billion in net income. If it appreciates 20%, we make $20 billion. The company is a money machine. Bitcoin has been appreciating 38% a year for the past six years.
We think Bitcoin will exceed our hurdle rate. We think our credit sales generate pure cash flow. We think we have the best product in the world, which is credit. Who does not want a bank account that accrues 10% without getting taxed? The only way to create the product, which is high-performance credit, is to have the highest-performance capital, which is Bitcoin.
We are holding the largest volume of capital in the world, and that gives us a massive advantage in the financial markets. Carol: We want to switch gears and talk about what we expect to hear from MSCI on Friday. It is considering rules that could exclude you from its global equity indices. What decision do you expect, and how important is it to you? Michael:
It is not that important to us. It's a fairly de minimis amount of capital they control. We think their position has been disappointing because they are imposing prejudicial values on digital assets.
Deciding that oil or natural gas or land or machinery is capital, but Bitcoin is not capital, is a value judgment, and they are acting like an unregistered financial advisor. I think it's a bad precedent for them and for the industry. I hope they reconsider it.
Having said that, digital assets are smarter, faster, stronger. They are the future. MSCI may not want to share in that future, but I think the investors will disagree. The nation disagrees. Carol: Do you expect to be excluded? Michael: I don't have any particular expectation right now. Carol: Would you be happy if you were included? Michael:
I think it would be good for them and for the industry if they drop their initiative. That's above my pay grade. Tim: At issue is the question of whether you are or are not an operating business rather than engaged in accumulating assets. Where do you view Strategy? Michael:
Insurance companies and banks -- it is a silly notion. They have assets that are operating businesses. If MSCI decided insurance company financial assets were non-operating, or the banks' assets were non-operating, they would exclude every insurance company and every bank. Tim: Insurance companies provide a service other than accumulating assets, in the case of making a payout. They provide a service to customers. Michael:
The product is the insurance policy, and banks sell credit. Our product is digital credit. It pays a 10% to 12% dividend yield. The insurance company sells an insurance policy or an annuity. All of these are finance companies and are selling financial products. They are operating companies in the index.
The thing that many people miss is that digital credit is the product, and you need an operating business that is actively managing its capital to create a product. Nobody doubts that J.P. Morgan is an operating company and they do stuff. Nobody doubts AIG is an operating company and they do stuff. Nobody doubts any finance company is an operating company. You have to do things with the capital.
We are not a holding company. We do things with the capital. If you went into detail about how people are having apoplectic fits about us doing things with 32 Bitcoin, the thing we were doing was backing the credit. The credit is the product.
We found a way to create the world's best credit and do it with the world's best capital. We are an operating company. That is not really a debate in the accounting profession. The accountants agree in the SEC filings, under SEC law, that is very clear. MSCI is out on their own on this one. I don't know why, but it's not my decision. Carol: We want to get your view on the regulatory backdrop. What do you make of it following the Senate's failure to advance the Clarity Act? It got a lot of coverage on Bloomberg. Also the efforts of both the SEC and the CFTC? Michael:
We have pro-digital-asset regulators. Within a week of Clarity stalling, we got positive guidance from Treasury, from the CFTC, and the SEC. The CFTC gave good guidance for crypto derivatives. The SEC gave good guidance for tokenized securities. Treasury gave good guidance for digital currencies.
The Clarity Act had 600 pages of restrictions in it. While it would have legitimized the industry, it did it with 600 pages of restrictions. Once Clarity stalled, the restrictions went away, and the guidance that came out is much better for the industry.
The reason the industry is rallying, and Bitcoin is rallying, is because Bitcoin does not need the law, and the rules coming out of the administration are actually progressive, pro-digital-asset. I think they will catalyze a wave of growth in the industry, and I think Clarity stalling was the best thing that could have happened to our industry. Tim: That is surprising to hear from you. I don't know of a lot of people who necessarily think that. Is there a risk that all this changes after the midterms, or even in a new administration in a couple of years? Michael:
The key to durability is to create a magic product. If you sell a billion robots that everybody loves, and a billion cars that drive themselves, and you give everybody bank accounts that pay 10% instead of 4%, or you get the digital assets that empower them and delight them, you will pry the magic product from people's cold, dead fingers.
Give 100 million people a product they want, it doesn't matter who gets elected in 2028. They are not taking away people's Teslas or Starlinks or Uber or iPhones or AI because people love it and they see the value in it. The key is product excellence.
Michael Saylor of Strategy, thank you so much. This is Bloomberg.
Welcome back to Bloomberg Crypto. Tim:
