Michael Saylor: 'We Tripped Over' the World's Most Efficient Tax-Deferred Income

Thank you for allowing me to speak with you today. I'm going to talk about merging TradFi and DeFi. I'm going to talk about Bitcoin and crypto merging. I'm going to talk about yield coins coming to stable coins. This is my first time at Consensus, so I wanted to wait till I had something interesting to say. But I do today. So, thank you for allowing me. First, I want to talk about digital credit. Digital credit is based on digital capital. And so, we wanted to create the best credit in the world. How do you create the best credit, the highest yielding credit? Well, you need the best performing asset. So, you see Bitcoin's been outperforming the S&P and gold and Nasdaq for quite a while. And we started thinking, can we carve a credit instrument out of Bitcoin? Now, it turns out the volatility of all these assets is quite high. And so, the impediment to spreading Bitcoin to the world is 40 vol is too much for most investors. And without the cash flows and with the vol, it's a difficult sell. Believe me, I know. I've spent thousands and thousands of hours doing this. So, what's the idea of digital credit? The idea is you use a capital gain to fund a credit dividend. We strip a certain amount of yield out of the capital gain. And so, if you think you're getting 30%, you can extract 11. If you think you're getting 6% from real estate, you can pay a dividend of three. And so, as you can see, Bitcoin's the highest performing capital. And so, we can pay the highest dividend. What else do you need to create asset-backed credit? Well, you need a lot of assets. And so, you need a lot of equity capital. And the thing about strategy my company is, we've got about $68 billion worth of capital. And we've got an $85 billion enterprise. So, when you have a tower of equity, the question becomes, how are you going to get yield on it? What are you going to do with all that capital? And what we realize is, the killer app for Bitcoin is digital credit. That is, we don't borrow against it in a conventional way. We sell the credit into the tradfi, the traditional capital market, and we offer a yield. And for every dollar of capital, you can probably sell 20 cents of credit a year. So, you want to create $20 of credit, you want to start with a 80 or $100 of capital. The big advantage we have is we have a big equity capital market. We have $3 of trading in the equity market. We have a massive derivative market. Some people don't know, but MSTR trades more than IBIT. Our open interest is more than IBIT's open interest. So, we've got the equity capital traders and the derivative traders supporting this security. And then we wanted to use this to create credit. What's credit? Well, we take a block of capital, we strip the currency risk, we strip the credit risk, we strip the duration risk. We damp the volatility. And then we distill a yield. So, think of it as taking a barrel of crude oil, putting it through a reactor, and coming out with kerosene. Right? Digital credit is like monetary fuel. If you have a volatile capital asset, you know, it's a 30 or 40 ball. You've got this crazy roller coaster. What we're doing is we're extracting that first 11%. And most people, they want to compound their wealth comfortably. They don't want to risk their principal. They just kind of want to compound their wealth progressively without a massive drawdown. So, what happens if you actually process that signal and you create 11%? Well, you have excess energy. Excess volatility. Where does it go? It goes to the equity. And so, when we the very act of creating the credit actually creates a digital equity that is actually more volatile and higher performance than the capital asset. Hence, MSTR is amplified Bitcoin. STRC is Bitcoin credit. Does it work? I show you the theory. This is the actual result. This is five 5.75 years of data. You can see since August of 2020, Bitcoin's up 40%. MSTR is up 60%. Notice where STRC is. That's your credit. So, what we're doing is we're straddling both sides of a capital asset. There's a set of people that want leverage and performance in the roller coaster, like strap on the rocket, pull the Gs. And there's another set of people that just want to live happily ever after comfortably, and they'll give up the excess performance, and we're giving them both. So, what is it? Well, we're really just combining things that have been around. A listed public stock, a listed digital capital Bitcoin that you can trade, a listed preferred stock, a variable monthly dividend on a preferred, a return of capital treatment. It's a 100-year-old tax code and an actively managed ETF. If you put them all together in one instrument, you can create digital credit. What is it? It's double digit returns, tax deferral. It's all the benefits of equity. It's low volatility and capital preservation, all the benefits of credit. All in one instrument. If you don't need your money for 4 years, I would say buy Bitcoin and hold it forever. But if you need the money in the next 4 months to pay your kids tuition or if you need working capital or to pay taxes, you can't afford to take that risk. You're going to want a credit instrument. So, STRC is like short-term money. BTC is long-term commodity. And then if you're an equity investor and you want amplification, you would buy the common stock. What's unique here we discovered is that if you actually use unrealized capital gains to pay a credit dividend, the dividend becomes tax deferred. That's called return of capital. We inadvertently created the most efficient scalable generator of tax deferred fixed income in the world. We weren't trying. We just tripped over this. How's it working? STRC has got $375 million of liquidity a day. We got the vol from 40 down to three. It has grown to 8 and a half billion dollars of AUM. It's growing at 340% a year. It's hyper growth. It's the most successful financial instrument of the year. Why is it growing? And how is it growing? Well, it's growing because it's powered by the crypto economy and by the volatility of 24/7 365 digital assets. It's now the biggest preferred stock in the world in 8 months. It's also the most liquid preferred stock in the world in a few months. It's also the highest turnover preferred stock in the world. So, we created something which turbocharged the entire economy of preferred. In the last 6 months, Bitcoin traded down 37%. If you're a capital investor, you get no yield and you take the 37% hit. If you're a credit investor, you got 6.4% in dividends and you hold par. So, if you're wondering why would you want to own it? Well, that chart illustrates exactly why you would want to own it. STRC is new. You can see it's seasoning and in the last 3 months, it's been in the trading range 100% of the time. So, it's really just the past 3 months that this thing is clicking and coming to life. The liquidity has grown 7X in 5 months. And it keeps building. Why? Well, because the money market pays you 3.5%. Private credit pays you 8.5%. STRC pays you 11.5%. If you're a retail investor, if you pay taxes in the US, that's a tax equivalent yield of 18% in Miami. How does it compare to the rest of the world? Well, STRC is like the risk-free rate in the crypto economy. If you're looking for the free market risk-free rate, it's 11.5% and it compares to nothing in yen or Swiss francs. But now, if you look at this chart, you see there's a mother of all arbitrage opportunities here. If you're looking for the carry trade, you borrow at 2% in euros and you invest in STRC, you catch the difference. If you're a DeFi trader, imagine looping 2% to 11.5% capturing 9.5% times 10. Now, 10% 10x leverage sounds dangerous on a 40 vol asset, but what if I give you a 2 vol asset? A 2 vol, you can 10x leverage it and the volatility is like the S&P index, but you captured 95% yield. Okay, so this is very interesting what's going on here. If you live in New York City, STRC is like a bank that pays you 24%. Why wouldn't you want that, right? Same in San Francisco. Now, if we look at risk-adjusted rates, the Sharpe ratio is you take the yield, you subtract the risk-free rate, you divide by the volatility. What you can see is STRC has the highest Sharpe ratio of any credit instrument in the world by an order of magnitude. Money markets have a negative Sharpe ratio. STRC has a higher Sharpe ratio than any equity you can buy. It's actually this is an asset than any asset you can buy like the S&P or Bitcoin. STRC outperforms Nvidia. Right? And finally, if you go to a hedge fund and you paid them two and 20, STRC outperforms every hedge fund strategy publicly disclosed by every hedge fund. And so, how is this interesting? It's interesting because the hedge funds lock up your money, charge you a fee, take a carry, and take heterogeneous risk. STRC is liquid, no fee, zero fee. You can get in and get out whenever you want. It's homogeneous. It's transparent. We update the risk every 15 seconds. So, digital credit is really attacking the credit markets, and there's no reason why it won't transform 1%, 2%, 10% of a $300 credit market because everything else compared to STRC is like return-free risk. Now, how does it impact the ecosystem? There's an explosion of interest. There's retail interest. There's corporate interest. There's institutional investors buying it. There's crypto native firms building on it. And there's tradfi innovators building on it. So, first of all, STRC is distributed through all retail brokers. It trades on NASDAQ. You can buy it on Schwab, Robinhood. Vanguard doesn't let you buy Bitcoin, but they let you buy STRC. And so, we've used it to get to every traditional conventional investor. 80% of STRC, out of the gate, is retail. Massive retail following. Just like crypto is retail, STRC is retail. It's going viral. Everybody tells their friends, their family, their parents. Because why wouldn't you? I mean, who doesn't want to retire and get paid 11% and not get taxed on it? Like, why wouldn't you want to do that? Corporations are using it as part of their corporate treasury. Instead of 3% taxable or 2% after tax, it's 11% tax deferred. It's number two in the credit indexes of BlackRock and VanEck in the first eight months. So, it's really crawling up and it's embedded in all of these other fixed income funds. There are a lot of ETF developers that are building on top of it. So, you're going to see it in public funds. But, now I get to the most interesting part of my presentation. Because I think the compelling thing about digital credit is it is the stepping stone to digital money and digital yield. And that's where everybody in this room ought to be interested because this is your business. What we've done is taken digital capital, which is too volatile with no yield. We've converted it into a three-ball, 11% yielding credit instrument by stabilizing it with billions of dollars, actually 60 billion dollars worth of equity capital. And now the opportunity is at layer three to create digital money or digital yield. And what do I mean by that? I mean money is zero volatility daily liquidity instruments with yield. And digital yield is maybe non-zero volatility or maybe a liquid staked yield. So how do you create this? You can create a token, a private fund, a public fund. You can offer it on a bank, you can offer it on a crypto exchange. You can program the volatility from zero to 10, you can program the yield from five to 25 or even more. You can program the liquidity and you can transform the currency. Lots of people might do it. You could do it as a bank, a Wall Street operator, or maybe most interesting a crypto entrepreneur or a startup or any innovator. If we give you three vol 11% credit, you can step it down to zero vol 5% money or six or eight or nine or you can step it up, leverage it three or four times and make it a 25% instrument. If you want it liquid every day, it'd probably be 25% instrument with eight vol, but if you want to make it a lockup for a month, it might very well be zero vol one-month liquidity 25% yield. Who needs it? The stablecoin market, right? It's 350 billion dollars. It's all starved for yield. How are you going to actually put yield on this? This crypto native yield, it's endogenous. When activity explodes, it expands and when activity contracts, it contracts. There's also exogenous yield and here digital credit competes with treasuries. The challenge with endogenous yields is they're reflective. So, in a bull market, you'll get good yields, but in a bear market, the yields compress. On the other hand, the benefit of treasuries is it's external, but the problem is if your cost of capital is 3% and then the asset pays 3%, then their net yield is zero, and then so if you lever up 10 to one on zero, it's 10 times 0, it's just zero, right? There's nothing there. What you want to do is start with 3 and a half% money and then lever on 11 and a half% yield. Now you get a net 800 basis points, lever that five to one, and you can actually create a 40% yielding instrument. And that's what STRC represents. It's an external source of power, right? This is financial fuel for DeFi and financial fuel for digital assets, like kerosene. You figure out what to do with it. Now, we're already equity backed. We've got nearly $5 of capital for every dollar of STRC, so it's way over collateralized. So, we're giving you an equity buffer. And our company is managing to keep STRC trading around 100, and that means raising billions of equity capital, buying billions of cash, raising the dividend, adjusting the ATM. So, that's what we do. What happens next, though, is what you do, what anybody else does. We're offering this transparent, institutional, highly liquid yield instrument. You go to our website, we update it every 15 seconds. So, you can see exactly how much capital we have. We make SEC filings every Monday morning. You can see when we've raised more capital. You can calculate and see the Sharpe ratio. You can see the price and where it settles. We've even published our credit models. You can actually go here and estimate the credit risk of these instruments and it's updated every 15 seconds. You put in all your forward expectations of Bitcoin and vol and the like. What's the upshot of this? Well, capital's going to flow to the superior yield and so DeFi is better than TradFi, but digital yield backed by STRC is going to be better than DeFi yield with endogenous sources. We've got transparency. You can see that as a public company. And who's doing this now? There's an explosion of innovation in the DeFi economy right now. You can see Apex, Hermetica, Kraken, Ondo, Pendle, Rock Some, Saturn, that spread strata. They're all doing very interesting things. They're moving faster than TradFi innovators. There are a lot of TradFi innovators, but in my experience, the DeFi innovators seem to go about 10 times faster and they're a little bit more sophisticated. So, in 8 weeks, we've gone from nothing to 270 million just in the DeFi space. STRC was 1.2 billion in sales and a 1.5 billion in sales in March, 3.2 billion in April. So, you can see this entire thing is exploding. Why am I excited? Because I think digital credit's the bridge between Bitcoin and crypto, between TradFi and DeFi. It solves a lot of problems in the crypto space and the DeFi space, but it also leverages all of our TradFi assets as well. And so now you can see Bitcoin is the digital capital layer, STRC is the digital credit layer. You've got a layer three, and then if you take these tokens and put them into applications, you create all sorts of interesting things. So, the way we see it is STRC is a platform to create apps, digital money and digital yield are some of the apps. Lots of people are building them now. And I would submit stable coins are zero vol, zero-yielding instruments. They're good for a medium of exchange, but they're not a good store of value. They don't really make you want to have that collateral tied up for a year in a prediction market or in a DeFi or futures trade. Yield coins are zero vol, 8% yielding, 7 or 9% yielding. You can build them in dollars, euros, yen. But wouldn't you like a yield coin that looks like a stable coin that pays you, that's backed by Bitcoin? And that's what we've done. STRC creates yield coins. And right now, you already see Apex creating it. You already see Saturn creating it. You see an explosion in enthusiasm to tokenize this. But there's a lot left to be built. You know, who's going to build the 8% yield coin in yen? Or in Swiss francs? And who's going to build the 24% yield coin, either with five or 10 vol, or you stake it for 90 days and pay 24%? All of these things are out there to be done. They're not that complicated ideas. What you needed was a mountain of equity to create the credit, then you need the equity investors in MSTR to support that. You need the credit investors to support the credit. Then once you've got that intermediate layer, the sky's the limit. You can create all sorts of incredible digital money, digital yield instruments in every currency, and then you can take them to every chain, and you can put whatever functionality you want on it. Our company's focus is to make STRC this hundred billion-dollar AUM, multi-billion-dollar liquidity instrument, and get the volatility below two into the ones like a money market. And then we stop, because that's enough for us. What we offer to all of you is you can create the hundreds of digital money and digital yield apps, and plug them into all the cool crypto and DeFi applications. And maybe you keep 200, 300 basis points of it, right? You could offer eight, keep 350 basis points, get paid 11, and it would be a huge value added that you're offering. And instead of getting 15 basis points on an ETF, why don't you get 150 or 250 on a proprietary product that you create? It'll be easier to sell, it'll be worth doing, it'll be better for you. I think the people in this room is how we take digital credit to the entire world and to every part of the ecosystem. I think that this represents the merging of the interest of Bitcoin and the interest of crypto and DeFi and TradFi, and it should power the entire digital assets industry to the next 10x or 100x development. I've been really excited working with all of you so far, and I look forward to what's to come. Thank you for your time today.