And so my question to Michael was exactly that, which was...
I woke up this morning, gold down, Bitcoin down. We're approaching some type of liquidity crisis because AI's taking the jobs. People are less in abundance financially, and that's going to crash this whole thing down. If BlackRock makes 22 million IBIT, we know that there is hypothecation and fraud and paperness going on over there because there's only 21 million Bitcoin. There is no one that owns 50, 60, 70%. You cannot corner a market. Where's the supply? The supply is distributed within the people. How the heck did Satoshi get away with that? And by the time Wall Street and everyone figured it out, the supply is gone. There already over 20 million Bitcoin issued. It's gone. I find it contradictory that people are like, 'Yeah, Bitcoin's for all. It's decentralized. It's freedom. Except for Larry Fink. Screw that guy.' It's like, well, who elected you the president of Bitcoin? What I consider to be critically important is, and if you don't pay taxes, will someone with a weapon on their hip will show up to your front door and put you in a box with no windows for the rest of your life? I don't know who's going to lose. I'm not going to pretend like I know. Hell, I'm the guy getting shit on Twitter for asking questions. I know one thing, though.
All right, we are live here at Bitcoin Prague with the man, the myth, the legend, Jack Mallers. Needs no introduction, but Jack, you and Saylor had a big discussion the other day when it came down to digital credit, MNAV, all that kind of stuff. I want to hear from you. What do you think of the new digital credit market and everything that's being built on top of Bitcoin?
It's a loaded question, huh? What's going on, man? Thanks for having me. My question first and foremost, people split the clips on the internet and I think in bear markets everyone's emotional. I have a keynote on Saturday and one of my slides is consumer sentiment has never been lower in the history of recording the metric. So lower than 2008, lower than the dotcom bubble crash, lower than the 1980s, lowest ever of how people are feeling about their lives and their future. So I think everyone's emotional. I'll just preface before I get in and also say that I want Bitcoin to succeed and everyone that is working on Bitcoin becoming successful I'm a fan of. I told Michael that. I told everyone that. So, I'm a fan of public discourse, being honest. A lot of what I bring to the world is hopefully authenticity. With that being said, my question to Michael, I asked two. One was what's MNAV? What's the definition of MNAV? Because it seems to be an increasingly important metric. There's seemingly multiple different ways to calculate it. It's almost like depending on the company or the person it changes definition and obviously if something is so fluid in definition it's hard to have conversation. And what I consider to be critically important is what is called out of the money securities. I'll give you an example. 21, we raised a convertible bond in our note. So when our stock was at $10, we raised this note and we raised it at what's called an up30, which means a 30% premium it converts to equity. I'm going to slow all this down. So if our stock's at 10, a 30% premium, 30% of 10 is three. So that'd be it converts at $13 a share when our stock's at $10 a share. Does that make sense so far? So we raised an up30. Right now our stock is around five. So that's what we call an out-of-the-money security is the conversion is so far away from 13 because the stock's at five. And so if someone wanted to buy 21, they wouldn't consider that equity because it's so far from converting into equity. Does that make sense? Because the stock's at five. And so you wouldn't factor that in to something like the market cap or the MNAV. That would be classified as debt because it's not converting into equity anytime soon. And so my question to Michael was exactly that, which was, do you agree with classifying out of the money securities as equity, which obviously that would inflate the equity value, which would make an MNAV metric more attractive. It wasn't a bad or good thing. I like if someone asked what's 21's MNAV, I would not include that convert. I would think that that would be not right. And by the way, if someone wanted to buy my business, no banker or no analyst or no one like the buyer of the company also wouldn't include it. So one that was the question which is like can we define this thing and if not that's information for me but I'm just trying to learn and then the other was about dilution which was and what they're both related which is like well when you sell common equity so when you create new shares and sell it at the market obviously the MNAV is really important metric to figure out if it's dilutive or accretive or if it's pro BTC per share. All these metrics which I'm you obviously a fan of. And Michael had made a comment and said even if I sell shares for cash and don't convert it into Bitcoin that's not dilutive. And I was like well you know if I start a company I raise $100,000 for 10% which implies a million dollar valuation. Previously I had 100% of the company. Now I have 90% of the company and this new investor that gave me 100 grand owns 10%. Just by definition, we call that a dilutive transaction because my ownership in the business went down. I got cash for it, but it's still dilution. And if that's not dilution, what would be dilution? Like if you're just exchanging equity for anything, then theoretically there's no such thing as a dilutive, which is also fine. But then again it's hard to have a conversation when there's no definition of MNAV and we also there's no example of a dilutive transaction. Well then what's the point of having when people ask me was that dilutive or accretive or do you think that the MNAV is proper? If there's no definitions to any of these things, then I can't. The context as well is I was on a panel before that. I was on the panel and people were asking me questions and bringing up things and I'm like guys, if we don't know the definition of these things, I can't we can't have a conversation. And then anyway, I was in getting in my Uber and someone texted me and said, 'Michael wants you to come back and ask the questions to him directly.' And that's what happened. So, I don't know if you have any thoughts on any of that, but that's basically where I'm coming from amongst other things. I'm happy to get into digital credit as well, but I'll stop there.
Yeah. No, I mean I think that's great context and breaking it all down. And I think the interesting part of what we're seeing right now in just the Bitcoin space as a whole is we're seeing a lot of what they're calling financial engineering, right? Saylor's talking about digital credit and I don't think that the market really knows how to respond to any of these things. So, do you think that that almost goes hand in hand with kind of what you're saying? Like this is all just a new market, you know, MNAV, whatever the definition might be, is just a newer term that's still kind of going through the early phases and the market doesn't understand enough to react.
Yeah. And it could be that the market matures and figures it out and everything is great. I just personally I don't know. I mean my I'm vocal about my stance being or my interest I would say in being trying to build businesses that have products and customers. Not that these preferred equities aren't technically products. Really trying to hedge myself here because I really mean no harm. But I like building software that has customers with cash flow and it's been a dream to found Strike and the relationship we have with our customers and the products that we've been able to build and turning that business from an idea to a profitable growing high margin machine. That is, because I come to Bitcoin from an Austrian lens, Austrian economics, which is, in order to make money in the market, you need to produce more value than you're consuming. And so that's more my I wouldn't consider myself necessarily a financial engineer more than an entrepreneur and a product builder and hopefully a value producer for my customers. So who knows how the space evolves and to your point if it's new and these things need time to get definitions and stuff.
Yeah, I mean the digital credit stuff is interesting because it's a very different model than what a Bitcoin treasury company was initially and it introduces an entirely new capital structure to the business and I haven't pursued it because I don't totally understand it yet. And that could be on me like meaning we could be potentially losing out or late to a trend. I think the risk-reward for my businesses is we have the blessing of watching others go first and if they do something great and I understand it, there's money to be made in copying and hopefully doing it our way and potentially better in certain ways. But I just don't totally understand it yet. And the difference is initially Bitcoin treasury companies were raising these convertible instruments. So there's two variables with a convertible instrument. One is what's called the coupon which is how much you pay. So is it a 1% coupon meaning you're paying 1% 2%. MicroStrategy in the post-COVID era was raising 0% coupons. Remember that when it was like this guy's borrowing billions of dollars he's not paying any interest. And then the second variable is when these things convert to equity or have the option to convert to equity. So when someone says they raised a one up 30, that's a 1% coupon, 1% interest on the capital raised and they convert at 30% premium to the equity. And that was a very interesting model because the coupon number was very low. These, you know, you weren't paying 10% to borrow money. You weren't paying 5%, 3%, 2%, even 1%. You were paying 50 basis points, 25 basis points, 0%. And then there was a conversion aspect where you weren't owing the money for a sustained period of time. Maybe it was a 5-year convertible bond, 0% coupon, and up 30, 40, 50. Meaning I'm at worst selling equity at a significant premium to where it is today. And that is massively accretive in buying Bitcoin. Does that make sense? Now the preferreds are very different structurally. Doesn't make them bad. But when you have a perpetual instrument that's what we call non-callable, non-convertible. It never turns into equity. Perpetual means forever. And so you're signing up to owe money forever. And that's just very different than something that says, 'I don't owe any coupon and I'm going to convert it all into equity to expunge of it and get rid of it off of my capital structure at a premium to where the equity is today.' That's saying it's never going to get out of my capital structure. It's going to be there forever. It's never going to convert into equity at a premium. And instead of having a 0% coupon, the coupon on something like Strategy is 11 and a half percent. Now, there's pros and cons. You don't owe the principal back, right? And so, you could say, well, this isn't debt because I don't owe the money back, but it's also not equity because it doesn't convert into equity. So, I personally don't really know what it is. But it's very different because you owe 11 and a half% forever. And so, the other point that I was making on my panel and the question I have is if you're a company that's sitting on a Bitcoin position that is in a loss currently, which is fine, low time preference, don't worry about it. They have to print the money. Bitcoin goes up if you can just hold it. But then depending on your definition of MNAV, the equity might not be in a position where you can accretively issue it. How do you pay this perpetual bill that you have forever? Because you can't expunge of it. You can't retire it. You can't it doesn't convert. That's what makes it so substantially different. And that was kind of my question which is like well you know that I did a podcast as well which is you have four categories in these companies where you have they have Bitcoin, they have common equity, they have preferred equity and they have debt. Those are the four. And can you make a move that benefits everyone? Because one way to cover, if you owe billions of dollars a year forever, one way to cover that is to just sell the Bitcoin. That'd be good for the preferred equity, good for the debt, good for the common equity, bad for Bitcoin. Another way is you can sell common equity even if it isn't accretive. Good for Bitcoin, right? No one's selling any Bitcoin. Good for the preferred equity, good for the debt, bad for common shareholder. You could just stop paying the preferred. Just be like, well, I can't afford it right now. Good for Bitcoin, good for common equity, bad for the preferred, fine for the debt, right? And so it's like the capital structure has gotten a little bit more complex. And so the question is, can you come up with a financial engineering strategy where everybody wins? And I don't know the answer to that. Not because I'm smarter than anybody. I just that's why I haven't pursued these strategies and why I want to build a business with cash flow is ideally if I have liabilities I can finance it with productive profit. That is the vision that I have for all of my businesses is you know we I love shorting fiat. I love longing Bitcoin. I love betting the best way to monetize chaos, monetize the destruction of the dollar, monetize debasement, monetize the deficit spending and the debt that governments have accrued. Like, how do I benefit from that? How do I drive value to my shareholders for that? That's betting on Bitcoin. I love doing that. I'm not against leverage in any respect. But, you know, signing myself up for these bills, these liabilities, ideally, I'm able to afford them with cash flow, or else, I'm presented the questions that I just went through and I personally don't totally understand the answers yet. But to your point, it's a new space and it's going to need time.
Yeah, I mean, there's a lot to unpack there, but you broke it down beautifully. I think I want to get into a little bit about the banks allowing people to borrow against Bitcoin and some of the potential of the big print that you alluded to. But before we get into that stuff, there's a lot of the paper markets that have been built up on gold, silver, some of the traditional hard money, so to speak. And it seems like a lot of that is starting to transfer over into Bitcoin. How do you think that that's affecting the market just as a whole and how that space is almost tangentially being built on similarly to like what the preferred and all the things that you just broke down?
I think one of Satoshi Nakamoto's greatest innovations, one of the most impressive feats Satoshi ever accomplished in my opinion or the most underrated is how he was able to distribute Bitcoin fairly to the people. Mind you, gold was able to the United States was able to say those IOUs are no longer backed by gold. Oh, you thought you had something in a vault? It's ours now. They were only able to say that because the level of physical concentration that the gold market had become. And mind you, this is because, Lyn Alden has a great book on this. It's because our ability to communicate outpaced our ability to physically settle value. When the telegraph was invented, I was all of a sudden able to instantly communicate with someone across the world, but I wasn't able to actually settle the physical value. So, I can get on the telegraph and say, I want to send you a bar of gold, but I couldn't physically settle that value. And so, what was the solution? And the solution was everyone deposit your gold to the governments and to the banks and they'll manage the IOUs and build things like Swift to settle. But the problem is that concentrated the physical supply of the actual asset to a point where all the governments could say actually let's just tell them that the gold they deposit is ours and those fiat notes are backed by full faith and credit in the government and our military. And if you don't pay taxes, someone with a weapon on their hip will show up to your front door and put you in a box with no windows for the rest of your life. That was able to happen because the physical commodity was so concentrated in their hands. Now, what's the difference with Bitcoin? We're sitting here debating if one company that owns 4% not 40% is like existential, everyone's freaking out. Where is Bitcoin? Where is the supply held? There is no one that owns 50, 60, 70%. You cannot corner a market. If a company that owns 4% or even 10% comes out and says we have all the Bitcoin like we don't care about your opinion whatsoever. Where's the supply? The supply is distributed within the people. How the heck did Satoshi get away with that? Through proof of work. Somehow was able to say because what's the fair way to distribute a brand new currency? Well, I'll give a bunch to my family. Well, my buddies I play pickleball with should get a little bit. What's the fair way? It's hard. Well, do we give everyone an equal amount? Well, that's highly inflationary if you do it all at once. The fair way was proof of work. Everyone has access to energy. I'm going to create this algorithm. It's going to optimize for 10 minutes on average and over time, that's the most fair way I can think of distributing the coins. And by the time Wall Street and everyone figured it out, the supply is gone. There's already over 20 million Bitcoin issued. It's gone. And where is it? It's with the people. So, I don't think that there is a risk of, and the other thing about gold is physically holding it. Like if I wanted to be like, 'Man, not your not your whatever, not your minerals, not your gold. I need to withdraw it and self-custody it.' How the heck would I self-custody $10 million of gold in my house? With Bitcoin, it's free to hold, easy to hold, free to receive, free to store. I could put it in my brain, and the people have it. So, I just don't think it's apples to apples that comparison. I don't buy that these paper markets have an ability to manipulate in the same way that they would physical commodities because all the physical commodity it's all sitting in Fort Knox, right?
Yeah. And when's the last time Fort Knox has been audited?
Right? And the president of the United States talks about auditing it all the time, but auditing Fort Knox takes 18 to 24 months. It takes about two seconds. I mean, 21 has proof of reserves. You could go look on whatever blockchain explorer and see if our Bitcoin is sitting there. And so I just don't agree with the premise that those are comparable markets and that Bitcoin is susceptible to that level of market manipulation. Not to say that people can't try, but I think the market is far too free and far too distributed. And people have tried. I think SBF is serving a lifetime sentence for trying, right?
You could try. Fuck around, find out.
Yeah, exactly. I mean, I agree with you there. And I think, you know, another thing about maybe not necessarily the parallels or how I'm trying to frame this, but we are starting to see banks start to come into the Bitcoin space. We obviously got the ETFs launched and now, Morgan Stanley, all the big ones, you could just go down the list. They're all allowing you to borrow against that. Borrow against your Bitcoin holdings in an ETF or whatever it is now. And they're starting to really try to tell their clients they should allocate a 1 to 5% allocation in their overall portfolio. So, how do you see that market coming in and developing with the TradFi world? And just essentially almost borrowing against a paper note as well.
Well, I think borrowing against Bitcoin, it's the most successful product I've ever launched. We have the product at Strike. We think it's the best product in the market and it's the most successful thing we've ever launched. And it's pretty obvious as to why. You have something that's the best performing asset in human history. And it is the cornerstone of everyone's savings for our customers. I mean, every customer story of ours is the same. Sure, you start allocating 1% of your net worth to Bitcoin when you first got into it. And then somehow someway that's quickly become 90% of your net worth, whether your conviction grew or the price grew. If something goes up 10,000%, either you are getting like a LeBron James salary or that's going to dominate your net worth, right? And so you have wealth that you don't want to sell because it appreciates so much and there's tax consequences to selling it. But it is how you are saving. And so how do you get liquidity and how do you live your life with this newfound savings account that has changed your life without departing and paying taxes and being able to reliably safely borrow against it? Different credit products like we have a line of credit which is more like a HELOC, we have fixed-term loans coming out with all new products as well. So that's been massively successful. I think it will continue to be massively successful. I mean, I estimate the Bitcoin-backed lending market to be anywhere between 20 to 30 billion in size against a $1 to 2 trillion asset. Tiny. I think that'll only grow. And it makes sense that Morgan Stanley. I mean, Bitcoin is for everyone. I find it contradictory that people are like, 'Yeah, Bitcoin's for all. It's decentralized. It's freedom.' Except for Larry Fink. Screw that guy. It's like, well, who elected you the president of Bitcoin? That's kind of the whole point. Yes, it's for enemies at war to settle trade through the Strait of Hormuz. It's for your neighbor that cheers for the opposing football club. It's for everyone. That's the whole point. And so, is it for BlackRock and Morgan Stanley? Yeah, it is. And if they have good products, then customers will use them. And if I have better products, customers will use mine. I don't see a problem with that. And I think that the Bitcoin-backed lending market is good. It also, by the way, it takes sellers off the market, too. If you need to raise liquidity, then you don't have to sell. So anyway. And in regards to your question kind of implied that they're borrowing against paper. What did you mean by that? I mean the ETFs I think are I mean I don't know how I mean obviously it's SEC regulated right they have to go through all this but it is also a new industry when it comes to the SEC trying to track and figure out everything that comes down through just tracking Bitcoin and actually buying it. Obviously BlackRock has a couple custodians Coinbase being one of them and a lot of these ETFs they don't custody their own Bitcoin except for maybe Fidelity. So, it just is there seems to be a lot of almost like a trail to try to be able to find and prove that this ETF is actually holding Bitcoin. And then, they're working on the 9 to 5 schedule instead of the whole 24/7. So, it's just I think I don't know. I feel like there is some sort of way that it can get a little hairy when it comes down to breaking it all.
Yeah. Obviously you guys have the physical Bitcoin, right?
Yeah. So I would say what I'm a fan of and what I offer customers and what I think is the most pristine version of the product is you buy physical Bitcoin. We let you even DCA for no fees, withdraw to cold storage for no fees. If you're like, 'Hey, I want 10 grand of liquidity against this physical property that I own or a million dollars liquidity or a billion dollars.' You deposit it. I say, 'Cool. I'm going to put it right here.' And we even offering and rolling out a new product on an ad hoc basis of like we'll segregate your collateral so you could see it sitting right there. Wake up every day like you're cuddling your baby like refresh the Oh, there it is. We have quarterly proof of reserves now for a lending product and you get the cash and that's it. And it's the most beautiful product in the world because I'll give a loan to anyone in the world where regulators allow me to. I don't need to know your eye color, where you went to school, who your parents were, what your credit score is. I don't care, right? It's perfect. And obviously the rates that we offer are substantially lower than the expected appreciation of the asset or another way to say that how much they are expected to debase the thing you're borrowing. So that to me is the gold standard. That's what's been successful for us. That's what I use personally. That's how I live. As far as ETFs, yeah, I mean listen, I think that BlackRock wants, the fact that they want in-kind redemptions, for example. I think that's a great thing that people can literally withdraw physical Bitcoin in exchange for the security the IBIT security. I think that the way that the market is acting as any free market if you want to continue to compete and win customers you have to innovate. You have to respond. There's some measly tiny little ETF that applied for in-kind redemptions and IBIT customers saying hey I want that. I want to make sure my Bitcoin is there. I want the ability to withdraw physical Bitcoin. And so then you see Larry Fink compete. And so I think yeah, would I in the years to come would I want to use an ETF product that goes out of their way to reduce transparency has no filing and working on or feature of redemptions that are physical and in-kind? I wouldn't use it. So, I'm not gonna sit here on the podcast and say, 'Oh, because it's BlackRock and because it's Coinbase and because it's Morgan Stanley, I fully trust it.' Absolutely not. And by the way again the really cool thing I'll just bring it back to the earlier conversation we had is if BlackRock makes 22 million IBIT or it's not one to one Bitcoin but 22 million Bitcoin worth of IBIT we know that there is hypothecation and fraud and paperness going on over there because there's only 21 million bitcoin. And again what we can see where the bitcoin is on chain there's transparency there's auditability in this protocol. And so we relatively know how much Bitcoin's at Coinbase. So we relatively know the size and scale of these products as well. And so we relatively know the ability of like if Morgan Stanley is issuing a bunch of loans that greatly exceed any form of collateral that is not like what is on the blockchain, then we know they're swimming naked and that's their risk to manage. So again, I think like there's no gold blockchain. There's no nothing I can go look on the internet and be like, 'Oh, there's the gold in Fort Knox. Okay, now let me do the math on how the United States has been settling trade with China.' There's none of that. And so this is just I don't think it's an apples to oranges with this asset class. I really don't have I think it's a bit fear-mongering to say like, 'Oh, well, what happened in 1971?' It's like, yeah, it's like a analog rock. So, I don't know, maybe I'm an optimist, but...
