Phong Le, CEO of Strategy | Natalie Brunell Chat About Bitcoin

Everybody, no matter how rich or poor, or whether you're Democrat or Republican, should have a good return for the money that they save. Good is not 0%. Good is not the rate of inflation. Good is above the rate of inflation. So, if it's 10 and 3/4%, so be it, right? Like, everybody should have access to that.

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You know, Bitcoin as a 50/50 ARR asset gets a lot of attention when it goes up. It seems like the world is beautiful, everybody's happy. And when Bitcoin goes down, even if it's 10% and stays at a certain level, the bottom is falling out. It's the beginning of the next four-year cycle, Bitcoin winter. So I'll start with it's very much sentiment driven. As a long-term investor, as someone who's buying and holding Bitcoin ideally for eternity, you have to have a long time horizon. And as I've told others, the fundamentals of the market this year for Bitcoin couldn't be better. So I try not to think too much in the short term. In fact, what you really want to do when you think about what to do with Bitcoin in the short term, you should be fairly methodical and mathematical about it, which is why we focus on things like MNAV, why we built the Bitcoin treasury, why we built the US dollar treasury. And in the long term, you think about the fundamentals of Bitcoin. And as you know, they really couldn't be better. We're sitting here 10 miles from Washington DC, and Washington DC is fully supportive of Bitcoin like it's never been before. Mike and I have been traveling to visit many different traditional finance banks. He was in the Middle East. I was all across the US. We were together in New York City. And traditional finance now is trying to figure out how do they catch up and keep their assets on platform, which means giving people access to Bitcoin on platform. So if you think about what's happening with traditional powers of the world, the US government, the US banking system, they are all getting on board with Bitcoin, and that's extremely bullish for this year and 2026. Why the price action does what it does is sometimes hard to explain, but when you're an investor, you think about the long term of the asset class.

There are multiple. If you start with they're all trying to catch up with just the base of customizing Bitcoin and providing exchange services for Bitcoin. They've seen Coinbase or Fidelity and what they're doing, and they want to be able to offer their customers native services with Bitcoin so they don't take the money off platform to somewhere else. So I'll just start that as a baseline, a checking account and a savings account for Bitcoin, right? And then on top of that, what do they want to do? Then they want to offer things like Bitcoin lending, which means you get loans against Bitcoin. And we know a lot of folks are doing that on a one-to-one private loan basis, but they should provide it in general. Perhaps offering instruments that give you yield off of Bitcoin, that would be the next step above that. And then a set of Bitcoin backed products, not too much different than what we do. An investment bank would want to be able to underwrite Bitcoin back securities like MSTR or like any of our preferreds. That would be a next step. And then you get into offering digital credit, right, which would be our preferreds or a bank preferred based off of Bitcoin. And then the last thing, which is what Mike talked about at Bitcoin Mena in the Middle East, which is digital money, right? How do you give somebody access to something that looks like money backed by Bitcoin that gives them a steady yield that's better than what they would get otherwise, 8 or 9%. So the entire stack of services and then you get into things like tokenization and stable coins and you move on and on. I think the largest banks in the world and the largest banks in the US are going to offer that entire stack of services in the next two to three years.

It varies dependent on the bank. What I'll say is three years ago, you would find the one person in the bank who has been designated as the head of digital assets, given no power, but they want to say they have somebody so when you come in you can speak to them, and they have access to nobody else. To this year, you get in a room of 15 people; five of them are positive, ten of them are very skeptical. You have a risk person in the room. More recently, they're building out products, and what do they want? We're the largest corporate holder of Bitcoin in the world. They like us as a customer, right? But they'd also like to know what we are looking for in the experience. Again, that varies based on the bank. Some of the banks are extremely early in the exploratory phase, and some are very far along and progressed. The other thing I would say is going from the one person who is designated as a digital assets person to talking to the most senior people in the banks, they all realize that this isn't going away, that Bitcoin is for everyone. People are asking for access to the asset class, and they're either going to get it from their bank or they're going to get it elsewhere.

Yeah, I'm not too worried about the competition from the banks. Just like I'm not worried about competition from digital asset treasury companies. We're at a phase in the life cycle of Bitcoin where access to the underlying asset is the most important thing. If somebody who's making $40,000 a year and has a Chase bank account and lives in Minneapolis or somewhere wants to be able to access Bitcoin, and the only way they would consider doing it is through their Chase account and being able to transfer money from a checking account to Bitcoin, they're not the ones who are likely going to go and buy MSTR or go and buy Stretch this month. And if we find a way for ordinary citizens in America and around the world to onboard to Bitcoin, it frankly one is great for Bitcoin, but I think it's great for the country and it's great for the individuals and it solves some of the issues we're seeing today, the income gap that we have, the lack of hope that you've talked about. So it seems like it would be very small-minded if I was like, well, I don't want to help the person making $40,000 a year with a JP Morgan Chase account living in Minneapolis because I'm worried about my own product.

It's not winners and losers. Everybody can win. So I don't think it's a TradFi versus DeFi debate. We sit at the intersection of the two. That's what we've done successfully. And I think the more the traditional finance system, which runs 99% of the money in the US, the more they open up to Bitcoin, the more individual citizens will have access to Bitcoin and the better it is for the country.

It's 10 and 3/4% now paid monthly in cash. I'll start with what is Stretch. It's the fourth of the five preferred securities that we've offered this year. But in layman's language, it's a security. It's an equity that you can buy on the NASDAQ, four-letter ticker STRC. When you buy it, our objective is designed to be price stable. So unlike most securities you buy where the price is quite volatile, right? If it's MSTR, it can be extremely volatile. If it's Tesla, it's pretty volatile, or Nvidia. Even if it's AT&T or whatever, it's still a pretty volatile stock. The price goes up and down. We've designed a security to be price stable, and the volatility right now is 5%. We want to take it down to 1%. So first, the idea of a security with a stable price is quite unique. It's a major innovation in the capital markets if you're able to take a security and make it price stable, take the vol down to zero, and we're able to pay 10 and 3/4%. The Sharpe ratio, the risk-adjusted return goes to infinity because the volatility is the denominator, and if the volatility gets to zero, then the Sharpe ratio goes to infinity, which is a cool concept. It's a risk-adjusted return. So we pay 10 and 3/4%, and we can vary that. What you end up getting if you buy STRC is something that's designed to take volatility to zero, and you get paid monthly into whatever brokerage account you use. So if you have a Schwab account, or an E-Trade account, or a Robinhood account, you buy it at $100, and over the course of the year you get $10.75 paid back into your account monthly, tax-deferred. Think about other preferred securities, but think about a dividend. Think about a dividend on a stock. You get a stock that pays a dividend quarterly or annually. But the issue with that dividend is the stock price goes like this, right? And the dividend can be flat, but really if you want something where you put short-term money somewhere, you want the dividend to change a little bit, and you want the price to be flat. It looks a lot like a money market. It's not a money market, but it looks a lot like that because you can put short-term money into it and get a yield that is two to three to four times better than what you would get otherwise. And let's go back for a minute to that person in Minnesota, making $40,000 a year and has $10,000 if they're lucky in a JP Morgan Chase checking account. They're not getting 3 and a half percent. They're getting zero. And when you get zero and inflation's 3 or 4%, if I'm getting paid nothing, you know what you do? You spend the money right away. Because the longer you take to spend the money, the less the purchasing power. Exactly. If you get 4% and inflation's 2.5%, you might still spend the money right away. If you get 10 and 3/4 percent, you are more likely to save money.

It's distribution. It's marketing. Like any product, the distribution channel of money today is the traditional finance system. I'd love to say that it's new applications, it's online, the Coinbases, the Robinhoods, the Square Cash apps, PayPal, Venmo, etc. Those are certainly a burgeoning trend. PayPal now is getting a bank license. But it's the traditional finance system where people are making decisions with their short-term money. So that's why it's important for us to work with the traditional finance system, and they want the same thing. They also want to be able to provide better outcomes to their customers because if they're not providing 10% or 8%, somebody else is going to. Ultimately, the best product wins. The challenge for a lot of people when you think about money, money is such an important asset and for many people the financial system is such an esoteric concept. I think about the food system. There's this movement towards farm to table eating. You go, you plant the cucumber seed in the ground, you see the plant come up, you pick the cucumber, you peel it, you eat it. That's the purest sense of farm to table. Over the course of the last 50 to 80 years, the industrialization of the food system from where the seed goes into the ground to the cucumber at the grocery store to in your mouth, you have no idea what's happening in between. I feel like that is our financial system today. As a software technology innovator, when I started to understand how the financial system works, the money that you get to the money that you spend is cycled through wholesalers, distributors, and I won't call it washing of the money, but the money doesn't look like it does at the end. You have the banks, you have the asset managers, you have the fund managers. And now we're figuring out you have all these indices, the ratings agencies, and all the government regulation around it. Bitcoin is farm to table money. The best thing you had before that was gold. You could go mine gold, you get your flake of gold, you hold it in your hand. That's your gold. Bitcoin is farm to table money because the monetary system now nobody knows how it works. I think Bitcoin solves that problem, but it will solve the problem of the traditional finance system too. People will get back to this idea of I earned, I put in an hour's worth of work, I made $20, I convert it into Bitcoin, it sits there and grows over time. Or I work, I get $20, I put it into Stretch, I get 10 and three quarters percent, and I know how it works over time.

In the last five years, there's a lot we've stumbled upon. This is like Bitcoin too. I've told people that if I look back at my life, I can find steps of the way from being a child to going to college to my career. It was all set up for Bitcoin, and you realize it looking at it in retrospect but not as you go along. That's how I felt with Stretch and a lot of the things we've done in the last five years. If I look back, it's extremely clear, thoughtful. You might even say, 'Hey, Fong, you and Mike and the board sat down and planned it all out almost perfectly.' Not really. We can go back and pretend it was perfect, but it was a set of innovations found because we were very focused on providing innovations to our shareholders and ultimately trying to increase Bitcoin per share. What happened with Stretch, and with our first four or all five of the preferreds we did this year, is we structured them in a way that they were sitting as part of our overall cap structure, our corporation, which has negative taxable earnings and profits. This is different from negative accounting GAAP earnings and profits. Taxable income is different from your GAAP income. As an individual, you might understand this. You have your W2, the money you take home, you put in your bank account. Then when you do your tax return, the numbers all change a little bit for a variety of reasons. Certain investments are deductible, some are not. We as a company, because of our software business, have negative earnings and profits. A lot of that is because of what we pay out in stock-based compensation on an actual cash basis, which is negated against our earnings and profits. Because our equity has been growing, our stock-based comp payouts have been growing, which counts against the earnings of the software business, causing us to have negative earnings and profits. When you have negative earnings and profits, the dividend paid out of the preferred can't be paid as a return on capital because there is no return. There is nothing to pay out of earnings and profits. You're actually paying out of the capital itself, which makes it a return of capital. So if you have $100 in Stretch and you get paid $10 in dividend, the instrument itself goes down to $90, and we've paid you $10. Because of that, the cost basis decreases and you're not taxed on it until you sell the underlying. It makes logical sense, return of versus return on capital, but tax sometimes doesn't make logical sense to a lot of people. In this particular case, it is tax-deferred until you sell the underlying.

There are multiple factors. One key factor is the quality of our credit. We want the credit to ultimately go from having no rating to what we now have, which is considered a high yield rating, to being investment grade. From a rating agency perspective, one way you increase the rating is to have cash to cover the dividend. That was one input, not the primary driver, but one input. Another, which is related, is for people to get more confident to buy into our preferred, which causes the preferreds to increase in price, which allows us to issue more preferred, which ultimately increases the amplification in the company. We realized that by putting together a US dollar reserve, that would help the amplification of the preferred and the quality of the company. There are two factors that work in contrast there. One is issuing equity at a premium to build up a US dollar base is accretive in terms of US dollar gain but dilutive in terms of Bitcoin per share. So if you look at it purely on math, you wouldn't put together a US dollar reserve. But if a US dollar reserve allows you to improve the credit quality of your preferred issue, issue more preferreds, that's accretive to Bitcoin per share. So you put those two things together, one that on a math basis is dilutive to Bitcoin per share, one which as you build the preferred base increases Bitcoin per share. They actually work together properly. The third reason is this FUD about we're going to sell our Bitcoin. There was a concern that if the company operates below 1x MNAV for a sustained period of time, we would have to sell our Bitcoin to pay our dividends. We would do that if we had to. Above that, we would sell Bitcoin derivatives to pay our dividends, and above that we have our equity. But we wanted to create a cushion so that negative sentiment and narrative goes away. Those are reasons we did it. We had great advice from some of our board members and some of our shareholders, and I'm happy we did it. It was the right thing, but it required a lot of strategic thinking.

I think if we ever were in a situation where we would have to choose between defaulting on our credit, not paying our dividends, and not doing what's right for our shareholders, we sell our Bitcoin. Ultimately, our responsibility is to our shareholders. That's our primary responsibility one, and then a responsibility to the Bitcoin community, but that's number two. Number one is a responsibility to our shareholders and all classes of shareholders: common, our preferred, and our convertibles. So that's our primary responsibility. You can satisfy both, which is why we issued the US dollar dividend, putting ourselves in a situation where we cover 21 months of dividends with cash, and 72 years of dividends with our Bitcoin, which takes us to 2100. If Bitcoin goes down by half, it takes us to 2065. Stating that we're willing to sell our Bitcoin is respectful to our shareholders. It's the right thing to state. Stating that we don't think we'll ever have to sell them is also respectful to our shareholders and the Bitcoin community. You can have two truths: one is we'll sell our Bitcoin if we need to, and two, we do not expect to ever have to sell our Bitcoin. That's how we'll run our business.

We're a Bitcoin treasury company. We're an operating company. It's not too different than a technology company. You wouldn't want a technology company to say, 'I created this product 10 years ago, and I'm just not going to change it at all, no matter what happens with competition or the price of inputs.' Right. We are an innovative Bitcoin treasury company and a technology company. You have to adapt. Adapt or die. A human being has to adapt over time. I love when Larry Fink said, 'Hey, you know what? I thought Bitcoin was bad. Now I think it's good.' If he was so stuck in his ways that he never adapted, then BlackRock wouldn't be as successful as it is. You have to adapt. It's okay to say one thing five years ago and something different five years later. In fact, I think that's a sign of strength in leadership, the willingness to admit that you have to adapt and change over time.