You've been at MicroStrategy for quite a long time. I'd love to hear about your journey and how far behind or leading Michael you were in terms of understanding Bitcoin, and just a quick personal bit about your journey with it.
I'll take you back a little bit farther than just MicroStrategy, Parker. I started my career as an engineering undergrad and spent a lot of time in the data analytics and software space. Right out of college in 2000, I first came upon using MicroStrategy analytics and became a big fan of the company, the software, and of Michael. I lived in the Northern Virginia area, so that all came together. I wandered off and got into finance pretty deep, went and got my MBA, and started to understand the financial side of the world. I really combined those things, technology and finance, and I ended up as CFO at Strategy in 2015. That's when I formally started working with and for Michael. We had a great time together. I think we saw eye to eye on many things. We disagreed on a few things, and when we disagreed, he typically showed me the way. In 2020, many have heard the story of why we got into Bitcoin, so I won't repeat that. But Michael had come and said, 'I have something really important to talk to you about, Phong.' This was post-COVID. We sat down and he said, 'I don't want you to react. I just want you to think about this.' He said, 'What do you know about Bitcoin? I suggest you look at these, read these things, listen to these videos, podcasts, whatever it was.' There wasn't as much back then to source from. But from that point, I went down, like many people have, the rabbit hole. To me, it was not hard to convince me that it made sense for us to put our balance sheet into Bitcoin because of my background in technology and finance. We went through the journey of figuring exactly how to do that with a public company over the next multiple months. I haven't looked back since. I've told folks Bitcoin was one of those things where I truly discovered it in 2020. I was familiar with it. I had not bought any. But it's one of those things when you truly discover it, you realize it was the thing you had wanted and had prepared your whole life for. Call it maybe love at first sight kind of a thing.
Yeah, for sure. Totally get that. That part of it mirrors my story a little bit with Bitcoin, as well. I'd love to hear a little bit about, as you guys think about this transition from the converts and getting debt exposure that way to moving over to the preferreds and obviously STRC, the variable rate non-convertible. One of the things that is pretty shocking to me is, we talk to a lot of dot teams. Obviously, ourselves running DFDV, there's a lot of dot. But we talked to a lot of different folks. We talked to Tom Lee. We talked to the guys at Sats, some other guys in the Bitcoin side. A lot of people don't, even that should understand what's going on here with these preferreds and digital credit, they don't understand it. Not to mention all the people kind of outside the dot world that certainly don't understand it and deride it a lot. Looking at your background, traditional background, MBA, finance, all that, what do you think are some of the big hang-ups or mental hurdles that people stumble upon when trying to understand digital credit and why do they just write it off so quickly?
I think the term digital credit justifies some background and explanation. People think of a preferred itself as digital credit. But digital credit is an entire industry. Let's start with traditional credit. What is traditional credit? Think about banks as driving the traditional credit industry. How does it work? A bank builds a balance sheet of capital. What is bank capital? It has its equity base. For the most part, banks don't issue a lot more equity like we do. They do issue preferreds, which add to that capital base and their ability to lend. But the largest part of a bank's capital base is the debt. And I don't mean typical secured debt. The large part of their capital base and debt is people's deposits. Most people don't think about that as debt. But when you deposit money into a bank, it shows up as a liability on their balance sheet as something at some point they have to pay back to an individual. So, that's the capital base of a bank: equity, preferreds, debt, and deposits. What do they do then with that capital base? That capital base allows them to enable the traditional credit market. They go and lend against that capital base. Banks provide many different kinds. They might provide home mortgages, credit loans, auto loans, corporate loans, and they're basically loaning against that capital base. It's an amazing thing, really, the traditional credit world because in a world where people's incomes are rising and corporations' incomes are rising, they become very creditworthy. Where I would have to wait 20 years to buy a house, typically, I'm able to get a loan against it and buy a house right away and I pay that off over time. That's traditional credit. It's an amazing thing. It's what's driven the growth of the world and especially the United States for the last 200 years. Digital credit is, of course, the digital transformation of traditional credit. Now, what is Strategy in the digital credit world? We have our common equity, MSTR. We have preferreds, STRC, which enables digital credit, just like a bank might have a preferred. It just happens to be that it has become one of the largest parts of our balance sheet. And then we have debt. We don't take people's deposits, but we have debt in the form of convertible notes. We used to have secured notes. We try to keep our debt levels pretty low. What do we do in digital credit? We loan money out to Bitcoin. We're essentially taking our capital, putting it into Bitcoin as a loan into Bitcoin, and we have created the digital credit world, similar to how banks have created the traditional credit world. Now, why is digital credit better than traditional credit? Traditional credit, as sophisticated and complex as that system is, those loans often happen to be very opaque. You saw that happen during the 2008 financial crisis, loans into mortgage-backed securities as an example. It became very opaque. And there's gamesmanship in the system. Some of those loans, by the way, are often maybe not the best quality in terms of, you can get a consumer high-yield car loan. It might be 20 to 30%. And then you go into private credit and it's a very opaque space. We loan our money into Bitcoin. People might complain about the volatility of Bitcoin and that being where the money goes into, goes on our balance sheet. But for the most part, Bitcoin is transparent. You know exactly how much we have every single day. There's nothing opaque about that structure in the digital credit side. I explain those two things because that can help somebody understand that STRC is a major component of digital credit. But we created this ecosystem around Bitcoin as the driver of digital credit. And it's quite phenomenal what has become of it. And we're just getting started.
So, when you think about digital credit, it's not just the STRC instrument. It's the entire preferred stack. It's the converts. And it's anything that you guys plan to do in the future, effectively. It's all the non-common equity capital stack, basically. Is that how you characterize it?
Yeah, it's the entire system and the entire ecosystem of a company that has built a capital base, is loaning it into Bitcoin. What happens there? This is digital credit again. Where does the yield come from? A loan into Bitcoin provides, let's just say, hypothetically, a 30% yield, a 30% ARR. And we turn back and give our depositors, our preferred owners, a portion of that. Just like in the traditional credit side, a bank goes and provides loans. They're getting yields of what, 5% for a mortgage, 30% for certain car loans, subprime car loans. And they're returning a percentage of that back to their creditors, which in that case are the people holding deposits. That entire ecosystem of a bank, and we're not a bank, but the ecosystem of a bank providing loans out, getting a percentage, and providing part of that back to a capital holder, that's what digital credit is. We're providing a loan to Bitcoin for 30%, I'm just using that number. And we're giving a portion back to our preferred holders at 7.5%. That is the digital credit ecosystem. That's how it works.
A lot of people will highlight that the preferreds are pretty high yield, great for investors, great for us, buying a lot of it. But on the other hand, as a company, an issuer, it seems kind of expensive. Now, sure, you don't have a maturity they have to pay back, so it's super long duration. As you think about the kind of digital credit stack, I know you guys, I think recently, got your first, was it S&P or Moody's rating? Since maybe withdrawing those, if my memory serves me correctly. Is there a future world where you guys are able to issue straight corporate bonds, as well? Or is kind of these variable rate non-convertible preferreds or maybe other preferreds kind of going to be the core credit instrument, long-term you think for Strategy?
We could issue corporate bonds. I think that would be more likely in a world where our corporate rating reflected the Bitcoin on our balance sheet. To get a corporate bond, you have to have a credit rating from one of the major ratings agencies. And to do that, you have to have a balance sheet that has characteristics of capital that they prefer. And as many know right now, and if that was the case, getting a secured loan might be much less expensive. There are other characteristics, of course, of that kind of debt that we don't like. One, it has a maturity, could be 3 years, could be 5 years, it could be 7 years. And two, it's debt on your balance sheet. We have to pay it back at some point in time. The positive aspects of a preferred, as many of you know pretty well, is it's equity on our balance sheet, just like a bank preferred is equity on their balance sheet, and therefore it's permanent capital to us. Now, of course, somebody can go sell their preferred and somebody else buys it, but we don't have to pay back that capital. So, there are a few reasons why we like the preferred. Now, why 11 and 1/2%? Again, we're getting a long-term return of potentially 30%, so we can afford the 11 and 1/2%. One. But two, this is pretty early on. It's a brand new instrument, STRC specifically, that released at the end of July last year, and it doesn't have a track record, doesn't have a lot of history. We think it's a great instrument, significantly overcollateralized, but it's early on as a product versus other banks and other companies have been providing preferreds for 30 years. Part of the reason the yield is high is it's just an early on instrument that needs to prove itself over time, which is now you're seeing it happen in real time. You have more than a front row seat, you have a backstage seat. That's the reason the yield is high. One, because we can because it's invested into Bitcoin, but two, it's an early on and I would say some would argue an immature product that needs seasoning before the rate starts to come down.
