Jack Mallers Reveals What's Really Going On With Bitcoin & MicroStrategy Right now

Stretch got a boost of confidence because they added to their dollar reserve. Bitcoin got a boost of confidence because Sailor's buying more than he's selling. Who lost? MSTR shareholders lost. So again, you have these four classes of people. You have Bitcoin, debt, preferred, and common equity. And the question is with such a complex capital structure, can everybody win, especially in a Bitcoin bear market? Because obviously there's one thing that can solve strategy's problems right this second. If Bitcoin rips to 200,000, if you're not confident Bitcoin is going to go up to new all-time highs relatively soon, then you're going to have this overhang of a problem: every single week you're going to owe money, a lot of money, and someone in the capital structure is going to have to pay the price to fulfill the obligation, obviously.

But they sold 32, which is obviously a tiny number in the grand scheme of things. But the point was to warm the market up and to start to change the narrative. The narrative went from never sell to buy more than you sell, which is fine, but it's a narrative shift because the buy more than you sell depends on the duration. Is that buy more than you sell every week, every month? If it's buy more than you sell every 5 years, then Strategy could sell 800,000 Bitcoin this year and still have bought more than they sold over the last 5 years. But I don't think people would be super happy if they dumped 800,000 Bitcoin. So, it's the narrative. They did this to start to change the narrative a little bit, which again is fine. To be clear, they don't have a choice. They owe the money. So, you have to pay the money. It is what it is. And yeah, obviously if they end up with millions of Bitcoin and they only sold thousands of Bitcoin, I would consider that an awesome trade. But the question is, sure, buy more than you sell. Over what duration though? Are there specifics to that guidance or is it just general and the market needs to interpret their meaning on their own? But they did this little teaser sell. And then they announced that they did two things. One, they bought 1550 Bitcoin for a little over 100 million bucks. And then they also increased their dollar reserve by 100 million to a billion. And if you look on the right, you can see they did this entirely by issuing new stock, by selling common stock, raising the cash, and performing what Sailor announced on the left. Now, I will say usually Sailor announces, and again, we're friends. It's not anything I wouldn't say to his face. Usually he announces the BTC yield metric or the BTC per share. It is a little convenient. He left it out on this one because this was dilutive. So, the point, the only reason I'm saying this is because it goes back to the initial point, which is why did he do this? He did this for two reasons. One, he wants to show people he can still buy Bitcoin and he can buy more than he sells. It's a signal to the market telling everyone, "Shut up. You guys shut the f*** up." He added $100 million to the dollar reserve because he's trying to tell the market, "I know why you're scared. You're scared because you don't think I can come up with the money. I can come up with the money." Now, how did he come up with the money? MSTR shareholders paid the price. So, Stretch got a boost of confidence because they added to their dollar reserve. Bitcoin got a boost of confidence because Sailor is buying more than he's selling. Who lost? MSTR shareholders lost. So again, you have these four classes of people. You have Bitcoin, debt, preferred, and common equity. And the question is with such a complex capital structure, can everybody win, especially in a Bitcoin bear market? Because obviously there's one thing that can solve strategy's problems right this second: if Bitcoin rips to 200,000. And you see people online saying Sailor must be acting this way because he knows something that we don't. And maybe he does. I have no idea. He definitely knows. He's been in rooms that I've never been in. There's no doubt about that. So maybe he does. But people are saying that because they're trying to rationalize how the company is building their balance sheet and building their capital structure. If you're not confident Bitcoin is going to go up to new all-time highs relatively soon, then you're going to have this overhang of a problem: every single week you're going to owe money, a lot of money, and someone in the capital structure is going to have to pay the price to fulfill the obligation, obviously. And that's kind of the lay of the land. And there's a bull case and a bear case. The bull case is Bitcoin's going to rip soon. Who cares? There are MSTR shareholders that don't mind paying the price. I don't know why. I don't know the logic there. Again, I don't own MSTR. This is one of the reasons. I just don't want to carry this brunt, but people do and that's fine. And now obviously the bear case is why would you own MSTR? It has a lot of obligations to fulfill and it seems like it is the vehicle to raise the cash. Now, there are people out there that are saying why would you own Bitcoin if this company needs to raise so much money and they might sell the Bitcoin? Now I'm not worried about that. That's why my DCAs are on. I've survived many bear whales as they say, many large sellers. Doesn't matter. Why would I own Bitcoin because someone has to sell? Stupid question for me. And then there are other people saying, why would you own any of these preferreds? Clearly, they're not scalable. They're going to fail at some point and you're going to be caught holding the bag. And so it depends on who you ask and who you talk to. There are MSTR bulls. There are bears of the certain parts of the capital structure. I would say the best and safest place to be right now is owning the debt because you get paid out first. There's really no way you can lose, but it doesn't really yield you much. Zero coupon and you're converting at a premium. So they're way out of the money. So I don't know. Anyway, that's when people say what's going on? Why are people talking about Strategy? Why is the Bitcoin market nervous about Strategy? Why is the MSTR price reacting to what they're doing? Why is Stretch trading down? Hopefully that should answer your questions in the most unbiased way I possibly could. I'm going to have opinions. The internet could agree or disagree with them. It is what it is. Now again, I'll just reiterate, every option that they have hurts somebody. So you sell more common stock, you're crushing the shareholders of MSTR. If you sell Bitcoin, then you're spooking the market and you're creating this really self-defeating recursive loop that you're going to have to raise cash by selling Bitcoin. You're no longer never sell. You're selling more than you're buying. And it really defeats this whole idea of Bitcoin per share, which is the whole point of owning the equity in the first place. You can cut the dividend or you could just stop paying it, but then the preferreds are going to cut in half. There'll be lawsuits surely because people were told it was a money market fund and access to the capital markets might shut down, which would be the worst because if you can't monetize the equity by allowing people to invest and sell it and issue more debt, then the whole thing kind of just stops. So you kind of have to just pick as long as Bitcoin's not ripping. Now, I'll say it again. I'm not predicting anything. I'm not saying anything's going to fail. I'm not bearish on anything. None of that. The thing that can fix everyone's problem here is Bitcoin rips to 200K tomorrow. That would solve everything. Now if it doesn't, these are the options which people should know that.

Strategy raised a US dollar reserve. They raised a $2 billion US dollar reserve by selling $2 billion of newly printed MSTR shares. And it was my interpretation that they raised this cash to show the market, hey, Bitcoin isn't doing so hot, so you must be asking how we're going to come up with all this money. Well, here's $2 billion worth of cash, which should give us a little bit of runway in case the market bleeds sideways. You guys won't have to panic because basically the market is like, "Holy f***, they have to come up with all this cash. Are they going to be sacrificing me?" The preferred holders are saying, "Are they going to suspend the dividends?" The MSTR holders are saying, "Are they going to dilute and inflate away the stock?" The Bitcoiners are saying, "Oh my god, are they going to dump a bunch of Bitcoin on our heads?" Right? And so everyone's asking who are they going to sacrifice to come up with the cash, and they raised the cash at the time and said this should put everyone at ease. We have enough cash. Okay. Now at the time I think it was 2 years, then it became 18 months because they issued more Stretch, which again the more successful Stretches, the higher the burden becomes on how much cash they need. But the point was everyone can breathe a sigh of relief. Now, this was painful for MSTR shareholders because they got diluted, but it was helpful for Stretch because it put everyone's mind at ease. But again, I keep highlighting this because there's a tug of war going on. Every time it's beneficial for one group, it's detrimental to the other group. And unless Bitcoin is in a raging bull market, it's unclear to the market. I think what the market is trying to figure out right now is how the entire capital structure can be happy at the same time. So, what happened over the last few weeks is MicroStrategy spent that cash reserve. So, they actually paid off a 2029 convertible debt early at 92 cents on the dollar. And the market freaked out because they went from having enough runway for the market not to have to freak out about how they're going to come up with the cash anytime soon to needing to come up with cash soon. And everyone was like, why did you pay off a debt instrument that converted by 2029? That's so far out. Meanwhile, you owe all this cash and you don't make any money. And so now we all have to start panicking and figuring out who you're going to burden to come up with the money. Which again, it depends on who you are and if you think this is a good strategy or bad strategy. I'm just reporting. But that is when obviously the market started to freak out a bit. And then there was obviously if you look at the prediction markets of is Sailor going to sell Bitcoin, they started to spike because again you have to come up with the cash before the preferred. You didn't have to come up with the cash. Now that you have these preferreds, which might be the most genius invention in human history. I personally don't think so. Obviously I could do this strategy at my company if I wanted to. I don't. So, I'm personally not a fan, but I'm not saying Sailor has defied all the haters before. Who knows if he will again? It's totally possible. But when you introduce this to your capital structure, you owe a lot of money forever. And so now the market starts to freak out and say, "How are you going to come up with the money? Are you going to just tell all of the Stretch holders, sorry, this thing's going to sit in the low 90s for a while? It's not a money market." And then they start dumping it. MSTR shareholders start to get nervous like, "Oh man, what if he starts issuing a ton and diluting the stock even though it's not above NAV?" Again, the actual NAV is not 1.0. I'll explain that later. And then the Bitcoin holders start to freak out and the Bitcoin market starts to freak out because it's like, okay, this guy owes a ton of money forever and he seemingly can't pay it without selling something. What if it's the Bitcoin? Then you've got Iran. And then you've got these IPOs and Bitcoin starts to sell off. So that's kind of what happened. Strategy owns about 4% of all the Bitcoin that will ever exist. Okay. They have about 845,000 Bitcoin. That Bitcoin is valued at about 57 billion. Now these things change. So let's pull up the actual data. Okay. So this number needs to come down a bit. The Bitcoin as I'm talking to you is at $53.4 billion. Their debt plus preferred is at about $22 billion. So this is kind of the company in a nutshell. They've got about $6 billion of debt. They've got about $16 billion, I believe, of preferred equities that they've issued. So that gets you to this $22 billion number. That's against $53 billion worth of Bitcoin. And that $53 billion worth of Bitcoin, $845,000 units. And that implies the price of whatever, 63,000. Fair enough. Okay. So for the beginning of Strategy's journey, it was a fairly simple idea. They would raise cash via two ways. They would sell equity via what's called an ATM. And that is them selling their common equity shares at the market. That's what ATM stands for. And so if a share of Strategy costs $127, they would create a new one. So they would inflate the supply by one and they would sell it into the market. And if someone would buy it at the price they were looking for, then the buyer got a new share of MSTR. And MSTR Strategy, the company got $127 worth of cash. And that was one way for them to raise it. Now, that's obviously dilutive to the equity because you're inflating the supply, right? In the same way that when the Fed prints dollars, they create new dollars. They're making all the existing dollars weaker. Same thing with a company. When a company prints new shares, they're making all the existing shares weaker. But the question is, what does the company do with the proceeds of the cash? And so the theory for this company is that they would raise the cash by selling new shares into the market and they would take the cash and they would buy Bitcoin and they would do it in an accretive way where if the economics worked out to where they could sell equity and use the cash proceeds to buy Bitcoin and it would increase what they call Bitcoin per share, then it's accretive in Bitcoin terms. The other way that they raised money is with these convertible debt instruments. So they would raise this debt and they were very famous at the time for this zero coupon, which means 0% interest they would have to pay. So they could raise a convertible bond that converts in 5 years at a certain premium. Let me give you guys an example. Sorry if this is repetitive to some of you, but again just trying to keep things simple on the show. So, let's say an equity is trading at $10 a share and they raise a convertible bond that is a zero coupon up 30. What does that mean? That sounds like a bunch of gibberish. That means that zero coupon means 0% interest. So, how much money do you have to pay? This is a convertible bond. So, what's the bond? What's the coupon? What's the yield? There's 0%. So, you don't actually have to pay the holder anything. And then the up30 means that the holder of this bond converts into equity at a 30% premium. So if the stock's at $10, they convert at $13. Now, the reason that this was an interesting instrument is because effectively you're selling these guys equity at $13 a share when your equity is at $10. So you're selling them expensive equity. You're selling them equity at a 30% premium to where the equity is today. So, if I sell a billion dollar zero coupon convertible bond at UP30, that means I'm selling a billion dollars of my equity 30% higher than what it's trading today. And I can take the billion dollars right now and buy Bitcoin. So, I'm effectively selling a billion dollars of my equity at 13 bucks and buying Bitcoin with it. And I'm kind of capturing the spread. It's creating an arbitrage against the future my equity, a premium to my equity and the current value of Bitcoin. Does that make sense? And it was very cheap because there was no cash obligation on these instruments. And if there was, MicroStrategy was paying 0% interest or 0.5% interest, very very cheap interest payments for large sums of money that inevitably converted into equity, but at a premium. And so they raised a bunch of these debt instruments and they bought a ton of Bitcoin with the combination of selling their common equity at a premium to the asset value on the balance sheet and using these convertible debts to raise a ton of money that converted at 30% above, 40% above, 50% above the stock price and buying Bitcoin. The point at the bottom is they didn't really have any cash obligations. So the company doesn't make any money. And it's not like a Facebook or a Microsoft or an Amazon. It's not a big company that makes a lot of cash flow, has a lot of customers, produces a lot of new products. Its actual operations is fairly small. Hasn't displayed tons of growth and doesn't make any money. And so it was important in the beginning they didn't have any cash obligations. So again, there was no interest on selling equity. And when they sold these convertible bonds, there was rarely a large coupon, if any coupon at all. Make sense, you guys. I cut out grime my gear so you guys can ask questions. So, please write questions in the chat. Dylan can jot them down and we'll answer them later. So, that was a very simple idea. And in this world, by the way, there was no scenario in my opinion that they'd ever have to sell Bitcoin ever. Just to be clear, I think their need to sell Bitcoin came later after the preferred.