Michael Saylor on Bitcoin, the Bear Market and What Happens Next | Xapo Bank Summit

When I wake up, I feel invigorated by the mission, right? Fix the money, fix the world. And I feel quite blessed, actually, fortunate to have discovered a mission that is meaningful. And, you know, my focus is, if you look at the 21st century, all of the great things that have happened are all digital transformations. Digital intelligence, digital messaging, digital video, you know, digital retail, a lot of digital stuff. And now we're on the verge of a digital monetary revolution. So, if I look at Bitcoin, I think it's the dominant digital capital network of the world. That was what we observed in 2020. It hasn't changed. If anything, over the past year, its Bitcoin dominance has increased. People used to debate whether the protocol was well suited to be a capital network. You know, there was the block size wars, there was that China controls it, China doesn't control it, it uses not enough energy, it uses too much energy, it doesn't have enough functionality, it has too much functionality, Ethereum is going to flip it, Solana is going to flip it, Bitcoin Cash is going to do this thing or the other thing, it's going to be banned by the government. None of that happened. Right now, Bitcoin dominance is approaching 69, 70%. No one talks about the flipping anymore. The monetary proposition of every other crypto network has collapsed. Bitcoin's the winner.

Normally, if you look at these dominant networks, there's a winner and you can see it 10 years before the consensus forms. In 2010, it was pretty clear that Amazon was the winner, but consensus didn't form that we needed a company like Amazon until 2020 when everybody got locked down and then every teenager was buying Amazon stock in 2020. And in 2010, the consensus was Amazon's a crappy company and it never makes money and it makes no sense whatsoever. And the same was true with Apple. In 2010, I literally met with Wall Street analysts and Wall Street hedge funds. I said, 'What do you do?' They said, 'Well, our job is we sell half of the Apple stock every time it doubles and we diversify you into the other computer companies.' You know, it's like, 'What?' They said, 'Well, you know, Apple's going up too fast, so we have to keep selling it to keep our clients diversified.' And I said, 'The other 20,000 companies are going to fail, just like the companies where we're selling Amazon so we can diversify into every other retailer.' So, the consensus was against all of these monopolies or all of these dominant networks for a decade. I think right now, the most important thing is that the world needs a digital capital network. The smart, rich, powerful people in the world have picked Bitcoin as the winner. There had to be a winner. And now, the question is how do we commercialize this and how do we deliver it to a billion people? And I think our conclusion is we're going to have to do it by creating another layer on top of Bitcoin. If Bitcoin is digital capital, we're going to create digital credit. And then another layer on top of that, which will be digital money.

And so, I get up in the morning and I'm invigorated. I'm like, you know, is Bitcoin Cash going to replace us as the global capital network in the world? Right? Is PayPal going to replace us? Is the Fed wire going to replace us? You know, no. It's pretty obvious there's a winner. There's a winning protocol. The world's spoken. And now, the fact that the conventional view is, you know, in favor or out of favor, doesn't matter. Every single hedge fund guy on Wall Street told us we're stupid to buy Apple and Amazon in 2011. And you can go look at the record there and everyone that got insanely rich held all the Mag Seven big tech monopolies from 2010 to 2020, and then everybody realized it. So, if you look at the chart of Bitcoin right now over the course of 15 years, it looks like this. And you say where we are, it looks exactly like the way you would expect it to look. I've seen five drawdowns in five years. So, we're in the middle of the bottom of a bear cycle. We've just crossed below the 200-week moving average. We've fallen below the book value of the bank in Bitcoin. It's like the book value is about $62,000 a coin. We're a little bit at a discount. I think the market's going to find its bottom at some point, will turn around, will rally, and it just doesn't matter because what really matters is do we have a global protocol for moving capital from New York to Tokyo without an intermediary? If so, the debate is only is this going to be 1% of the world's money or 10% of the world's money? Because right now it's a tenth of a percent of the world's money. And we've all got work to do.

If you're holding raw Bitcoin, it's the commodity, it's the capital asset, you need a four-year time horizon, you need to be able to handle 40 vol with no cash flows. And everybody in this room has embarked on that journey. Everybody here bought into that idea and they accepted high... By the way, 40 vol is now... it was 80 vol in 2020 when we got in the space. And probably you guys, if you're in this room, you remember when it was 150 vol, right? Or something. So, the capital asset is a high-vol capital investment and a long duration. Our business is to expand the market by attracting equity capital investors, derivative investors, long-duration credit investors, short-duration credit investors, and money investors. And so there are a lot of other forms of capital, right? The Susquehannas, the Citadels, the Millenniums, they have a different type of capital. And I think at this point we've now attracted 64, 65 billion dollars of capital that we have directly put into the network. And we can't do it ourselves. So, we basically are balancing the interests of equity capital markets, the regulated derivatives markets, the credit markets. And all of those are investors that have a totally different agenda than Bitcoin investors. They're not long-duration, high-volatility, convicted capital investors. The only ones that look almost close are some of the equity capital markets investors. Some of them, but everybody else has a different need, and our job is to serve their needs. So, we're balancing the company. We're creating products that will appeal to credit investors that, in fact, don't even care about Bitcoin. Right? They just want fixed income of different flavors. And then derivative investors that actually want more volatility. They want to actually trade 200, 300, 400 vol. And we've created an equity which at first was a Bitcoin proxy. And we allowed people that could... we actually created a bridge for stranded capital. There are a lot of people that bought MSTR and they literally say to me, I meet them all the time. They're like, 'I had money locked up in a retirement account in the UK and I wasn't allowed to buy Bitcoin, so I was able to actually buy your stock.' And so we were a compliant regulatory path for a set of Bitcoin capital investors with stranded capital initially, but now I think our vol is trading at implied vol 90. It got to 100 last week. And by the end of last week, we were the most volatile equity in the S&P 500 universe. So, we created volatility for people that wanted to trade it, you know, one way or the other. And then we're creating fixed income for credit investors. So, interestingly, we're kind of straddling two worlds. If you're a vol investor, we have the most volatile equity and the most liquid, the highest open interest, the most volatile equity in the S&P universe on one end of the equation. And on the other end, we have the highest effective yield of all the credits, right? Like, we've got instruments that are paying 11% to 18% effective yield in the credit markets, and we're doing that by straddling Bitcoin, which is the capital asset in the middle, stripping and extracting yield and stripping vol and compressing risk on one side, and then enhancing it on the other side. And so our role really is the institutional gateway for every type of investor in order to create the products that they need to apply that capital, which eventually flows into Bitcoin. That's how we managed to get to the point where we could buy 4% of the entire outstanding Bitcoin supply, and we'll just continue to do that.

The big idea of STRC is, can I create asset-backed credit if I have a capital asset which I expect to appreciate 30% a year? And let's just say any capital asset that outperforms the S&P index. Then I ought to be able to sell a credit instrument that provides a fraction of the expected capital gain as a credit dividend. So, in our case, we take Bitcoin and we expect it to be 30-40 vol and we expect it to pay 30% ARR, and so we extract the first 12%. And then we over-collateralize it. STRC has got a BTC rating of 3.1 right now, which means that every dollar of STRC has $3 of Bitcoin collateralizing it. So, we're over-collateralizing the credit. We're creating a liquidation preference, then we're actively managing the dividend and actively managing the reserves backing it, and actively managing the policies behind it in order to be par-seeking, right? We're targeting a $100 par value on the credit instrument. By the way, you could create asset-backed credit on the S&P index. JP Morgan, Morgan Stanley create structured products. And so, if the S&P is yielding 12 and you want to be guaranteed two-thirds of the upside, but only 10% of the downside, they'll do an option trade, structure the product, and they'll give you 8% in a structured note. It doesn't have the upside performance, but they strip out the vol, and they guarantee you some kind of dividend yield. You could also do it on real estate. Real estate's going up 7% a year, but the issue is if your real estate's appreciating 6 or 7% a year, how do you pay more than 7% in dividend? You could do it on gold. You can create gold-backed credit. If gold goes up 10% a year, you could pay 6% in a gold dividend. Why is it that no one does it on real estate or gold? Well, REITs kind of do it on real estate, but the problem is gold and real estate underperform the S&P, so why would you bother? Why is it that no public company ever did this on the S&P index? Because the Investment Company Act of 1940 prohibits publicly traded companies, operating companies, from capitalizing more than 40% of their liquid portfolio on securities. So, there's a regulatory prohibition which gave the banks a monopoly on structured credit based on securities. That's why private credit and structured credit and structured instruments are a providence of a bank, but no public company could create it. The big breakthrough of Stretch is we said, what if we take a preferred stock? What if we take a public company? What if we take a commodity that outperforms the S&P? What if we take that public? And what if we do it with a business model where the company monetizes an unrealized capital gain to pay a credit dividend? And it turns out that if you monetize an unrealized capital gain to pay a credit dividend, the company has no tax. It becomes a triple tax-deferred business model. We raised $16 billion this year. No tax. We can generate billions of dollars of GAAP income, no tax. And then we can pay billions of dollars of dividends tax-deferred to the recipient. So, it's a triple tax-deferred business model. And that means that when we're paying a 12% dividend on STRC, you receive the dividend and you don't pay any tax on it. You reduce the basis in the instrument every year. So, you could receive eight years of dividends without paying a dollar of tax to the city of New York, the state of New York, the state of California, the country you're in. So, who cares about that? Not the insurance companies. They don't pay tax. Guess what? Insurance companies, endowments, and nonprofits, they all don't have to pay tax. You have to pay tax. You know, operating companies have to pay tax, individuals have to pay tax. A lot of the institutions, they just don't pay tax, right? So, great. If you actually can find a way to get the government to not make you pay tax, then you have a different agenda. You might buy conventional credit. But if you actually do pay taxes, then we've created an instrument that gives you a huge amount of fixed income tax-deferred. You could collect that income for nearly a decade. If you die and you give the instrument to your heirs, they get a step-up basis. They don't pay tax for a decade. So, by the time you work this out, you realize that this is insanely better. Your option right now is you buy credit instruments to pay you 150 basis points after tax. Or if you bought Stretch right now, you get paid 14% effective yield tax-deferred. So, the big idea of Stretch is let's create digital credit on digital capital. What do you need? Well, we have $50 of equity capital. So, if you have a dollar of equity capital, you can create 10 to 20 cents of credit per year. If you have $50, you might be able to create an AI. If you have $50, you might be able to create a transcontinental jet. If you have $50, you might create a fab to create your own chips. Right? There are certain barriers to entry in the marketplace that require massive amounts of capital. And we have been inadvertently, we walked backwards into this one over the last five years, but we've discovered that the killer app of $50 worth of Bitcoin is to create Bitcoin-backed credit. Now, digital credit is an alloy of capital and currency. Remember the Bronze Age, the Iron Age, the Age of Steel? Well, we've created an alloy. We take Bitcoin and we alloy it with currency, we create credit. We're in the process of finding the perfect mix of currency and capital to create the credit. The downstream idea, the bigger idea is if I can create digital credit which strips 80 to 90% of the vol off of Bitcoin and extract a 10% or 12% yield, then you can create digital money. Digital money would be zero vol, pegged to the dollar, pegged to the euro, pegged to the yen. Zero vol, 6, 7, 8% yielding monetary asset. And digital money is an alloy of credit and currency. So, we basically create the middle step. The downstream step is just take some, you know, take 60% credit, 40% currency, and create a Bitcoin-backed stablecoin that pays 7%. And right now stablecoins pay 0%. And right now money market funds, fiat money markets pay you 320 basis points in the US, 200 basis points in Europe, less than 100 basis points in Japan. So, I think we're most enthusiastic about this idea of creating the Holy Trinity: digital capital, digital credit, digital money. And the people that want the money, they need the money over the next year. They want a medium of exchange, a store of value, a unit of account, right? That has no volatility to the currency frame of reference. The people that want the credit, they need the money back in one year to four years. And by the way, there's some people that will never accept 40 vol, even if they don't need the money in a decade, they have to mark to market in their head, and they will never buy that. So, credit probably finds a home from one year to 10 years amongst conventional investors. And then, the people that want capital, they're going to allocate some percentage of their capital to BTC, and if they're BTC maxis, a lot. And if they're more conventional credit investors, 1 to 2%, which would be a victory, and I think that's where we are right now with Stretch.

The company is way over-collateralized right now. So, the risk in the company, I would tranche it like this. I think we have about $4 of net debt and $52 of assets right now, or maybe 50. So, if Bitcoin were to fall 90, 92%, then that's very bad for the equity. We'd have to refinance the debt, right? And it probably causes the credit to trade weak at 90%. But I don't think we would default on anything. If Bitcoin falls 100%, then we have a problem.