Hello everyone. We are going to be doing a panel on digital credit and I think I have a new assignment. I'm going to be writing my next book. Digital credit is for everyone. Right, Fong?
Yes. And it's going to be amazing.
All right. Here with me today, CEO of Strategy, Fong Lee, CEO of Strive, Matt Cole, and CIO of Nakamoto, Tyler Evans. So, Fong, let's kick it off with you because Strategy launched this new asset class, digital credit. Why did Bitcoin need a credit market?
I'll start with, you know, when we launch a product, and Mike and I are technology product people, we don't ask what is the product we want to launch, we ask what is the product people want, right? This is sort of if you ever take like a product management class, product management 101, the first thing you have to understand is what is the market and do people want it? Not is it a cool product, not is it a cool technology? And so when we launched Stretch, we had already launched convertible bonds. We had MSTR, which is digital equity. And we said, what is it that people want based off of Bitcoin? They want these amazing return profiles, 30, 40, 50%, but they don't want the volatility. And so, how do we financially engineer a product that provides that? And that's why we went down to the digital credit world. You know, I sent a message on X and Natalie, you and I have talked about this a lot. There is a yield gap where people are not able to get access to yield in the world purely because of the amount of wealth they have. And that's really not how things should work. Everyone should have access to yield. Everyone should have access to income based on the merits. And so we knew that there would be a place for something that returned 10, 11%. That had stable principle. And so that's why we launched the product. Now why does Bitcoin need it? Bitcoin needs it because there are 90% of people in the world, 95% of there are a lot of people in the US who don't know about Bitcoin, but they know they want a good yield. And if we can create a product that everybody wants, right, and people don't realize they need until they see it and then they love it, and that's great for Bitcoin. So it helps everybody. It's good for Bitcoin. It's good for everyone. Stretch is for everyone.
Yeah, you explained it really well on our show, by the way. Hit a million views. So, if you haven't seen it with Fong, that was a great show. Matt, I want to go to you because you just announced your largest Bitcoin buy at Strive. Strive's SATA. It's not SATA, I learned it's SATA. The yield is currently 13%. You also bought $50 million worth of Stretch. So, talk to me a little bit about your strategy and when does it make sense to buy another company's Bitcoin credit rather than just Bitcoin.
Yeah. So, obviously for our common equity investor, we have a saying that Bitcoin is our hurdle rate. We're trying to outperform Bitcoin over the long run. But really, why buy Stretch when we're issuing SATA? It actually comes down to corporate balance sheet management 101. And so, I come from fixed income world and one of the things that we did there was we bought a lot of commercial paper. So this is short-term paper that an issuer like Apple or Google or Ford is issuing into the market. And what you'll find in traditional finance corporate balance sheet is that you'll have issuers like Apple and Google that will issue their own short-term paper and then they also buy the short-term paper of others. And so why do they do that? They do that for balance sheet management and liquidity and lowering the cost of capital of holding a cash-like instrument on your balance sheet. And so we have right now north of 18 months of reserves to cover the dividend obligations of SATA that can sit in cash, short-term treasuries earning 3 and a half, 4%, not very attractive, but you know, we do have quite a bit in those or it could sit in Stretch and it could earn 11, 12%. And it's really an emergency fund that if we as a company for whatever reason needed liquidity to meet dividend obligations, then we have something that's set aside where we don't have to dip into the Bitcoin for quite a while, right? We're trying to minimize the risk that we ever have to sell Bitcoin. And as a company, we've never had to sell a single Bitcoin. We've only bought them and that is because of balance sheet management like that and buying Stretch.
And it's so important to look at the management team when you're considering one of these treasury companies. Tyler, to you, your team just announced a digital credit fund through UTXO. What can you tell us about that?
So I wear a different hat than these guys at least today in terms of being really on the investor or the allocator side. And I think, you know, Fong, you made an important point that this is really about packaging Bitcoin for different types of investors. The stat I shared yesterday is really that 97% of institutional capital in the world floating around is allocated to equity and to credit markets. And there's only 3% that's allocated to commodities, alternatives, to the buckets where Bitcoin fits into that institutional lens or that institutional allocator's risk framework and in buckets today. And so that's the opportunity that Strategy and Strive have both jumped on is how do you package Bitcoin for the 97% of real capital out there. And so that's something that is kind of core to our mission at UTXO and Nakamoto, making Bitcoin investable. And so we announced a new fund yesterday at our investor day that's building on top of the products that these folks are issuing. That's a preferred perpetual income product that's really a structured credit product where we're taking the building blocks of these perpetual securities and then packaging it in different ways with different volatility profiles for different investors. And this is the oldest trick in Wall Street's playbook, taking things like mortgages or auto loans or commercial debt and packaging it into different tranches that pay different yields that have different risk or return profiles. And so we're taking that same concept and now applying it to digital credit, creating the first structured credit product for digital credit.
Fong, can you tell us a little bit about who is actually buying digital credit because I was surprised by one of your tweets that discussed how popular this is with retail. Who in this room owns digital credit or owns Stretch?
That's awesome, by the way. Yeah, it's 80% retail. So, our common MSTR is about 40% retail, 60% institutional on a dollar basis. And Stretch has flipped that. It's 80% retail, and 20% institutional. And I've actually just recently looked at the actual distribution of who those folks are because I had a hypothesis, you know, when we talk about retail, retail includes family offices, right, high net worth individuals who might have, you know, call it 10 million, 100 million assets under management buying large chunks of Stretch. And so my hypothesis that even within the 80% was it would be highly distributed to all of you, right, like you have over 10 million, 100 million dollars in assets, but it's actually not the case. It gets very small very fast in terms of that ownership of the 80%. Meaning we have folks who own, you know, call it $1,000, $10,000 of Stretch making up the majority of the ownership structure. And this was interesting to us because, you know, we're going out and we made proposals on modifications to Stretch. So, we need to know who's going to show up to vote. And getting a lot of people to show up to vote is harder than getting a small number of people. I say all of this because the ownership of Stretch is largely populated both on a number of shareholders and a distribution of dollars by medium and small size retail owners which is actually quite fascinating and I would say quite heartwarming too because the product from my point of view, right, Mike just wants it to be big. I want it to be big, too. But I also wanted it to serve people who were yield starved. And it's actually doing that. And we're just getting started, right? We're at $8.5 billion, but the people who are buying into it are the people who would otherwise not have access to this level of yield. And I get all the points around this isn't, you know, this is a preferred equity, right? This is not a typical credit instrument, right? And so you have to be careful when you're buying into an instrument like this. But it's doing what we're hoping for, which is it's democratizing yield and it's democratizing Bitcoin. And for those here who like Bitcoin, what it's doing is it's putting a product in the hands of people who are not necessarily Bitcoin native and giving them exposure to all the cool things about Bitcoin. It's a bit of a Trojan horse into Bitcoin, which is very exciting, too. So, thanks for asking that. But I get really excited about seeing a product launch and go into the hands of really the millions of people who need it.
This question is for all three of you. We know that Bitcoin's price is down and the Bitcoin Treasury stocks got hit even harder. In a real credit stress test, which digital credit structures can actually hold up and which ones could break?
So I think the biggest question before this Bitcoin crash after Stretch launch was how will digital credit do in a Bitcoin bear market and this is about building a track record, right, which grows institutional flows over time. And pretty quickly after Stretch launched and then SATA launched, Bitcoin dropped 50%. And digital credit probably held up better than I think almost anyone would have imagined. And so what that is showing is the power of these balance sheets. When you know Stretch has 70, 80 years of dividend flow and Strive is just under 20 years and this is after a massive Bitcoin drop, that's showing people that these are very credit-worthy instruments. And you look at the rating agencies and the reality is that they won't even look at the Bitcoin. And so you can go out and tell a story to people of look at this balance sheet of unencumbered Bitcoin and these are really credit-strong instruments and then you're finding that I think you get more comfort from people as they see these not have volatility in Bitcoin down markets.
Yeah. I mean to that point, Matt, I think they've passed the stress test phenomenally so far. And I think, you know, what we're really seeing is that these digital credit products kind of becoming a buffer on that volatility. And even from the retail investor standpoint, you know, if you are holding Bitcoin and Bitcoin starts falling and you start to get nervous, you want to go somewhere less risky, less volatile, you want to sit in cash on the sidelines, well, you could sit in cash, you could sit in Stretch and earn a yield while you wait for the Bitcoin market to settle down. And so we see some of those natural investor flows actually going for people that don't have diamond hands like Fong and Mike, selling Bitcoin actually buying digital credit to let's call it wait out the bear market, weather the storm and that has driven demand for these digital credit products and helped them keep their par value and then critically let Strategy and Strive go out there and keep buying Bitcoin.
You know, when investing in an equity, right, MSTR or any common equity, everybody walks into it knowing you could make a ton of money, you could lose all your money and there are disclosures and there are quarterly reports and there are annual reports. The same thing is with credit especially in the form of a perpetual preferred or preferred which is an equity instrument. But when you invest in credit you have to understand what the underlying is, right? When you, you know, mortgage-backed securities, people lost sight of what were the mortgages and were they subprime or not, right? High yield consumer car loans you might get a 29% return but people might not pay back their loans. You have to understand what's behind it. And so what I encourage people with Stretch or with SATA or any of these other products is you have to look at what's behind it, right? And what's behind Stretch is, you know, $2.25 billion of cash and 820,000 Bitcoin and a stack senior to it of about $6 billion of net debt in convertible notes. We are, if you take everything more senior out, about four to 5x over-collateralized which in the digital credit world or the credit world is non-existent. So there is a, you know, people very quickly say is 11, 12% or 12% too good to be true. Do the work, do the homework. Do the math and look underneath it because we've been very thoughtful about managing and running a very conservative balance sheet, a very transparent balance sheet. If you've ever been to strategy.com, you get every single KPI real time out there. And then you look at the management team and, you know, that's why Mike and I are out there because you have to know what you're getting in a digital credit product and it's part of inventing a new category. We've been very thoughtful and responsible. So, just, you know, to answer your question, Natalie, there's yeah, bear market, bull cycle, whatever. You have to know what you're getting into. And this is the part that irks me when people throw shade at Stretch or at SATA as the other credit products, right? Private credit is a good example, right? And running an enterprise SaaS software business, which is what I do, you know, with the rest of my time, right? Like that is a tough business right now and there's disruption left and right that's being created by AI. We internally at the company are replacing all of our SaaS software platform relationships with AI-built software and we're a pretty big software company, right? And so like it just, to compare Stretch and say that it is not a credible product when people are out there selling private credit overpopulated with enterprise software companies whose cash flows are going to start to diminish over time. I think that is a concern. And so, you know, I think understanding what's behind the product is quite important. I would encourage you all to do that.
And especially when it comes to that private credit market, like when you look at the alternatives for allocators, those are loans that are not over-collateralized, are typically under-collateralized. And the collateral is in the form of real estate and an auto that has high transaction costs that you have to go track down and seize that has, you know, uncertain liquidity or recovery. And you compare that to Strategy's balance sheet where you know exactly how much Bitcoin they have and what the value of that Bitcoin is in real time and how much Bitcoin is traded 24/7 around the world every single day. You can actually measure the true liquidation value of that collateral.
