Is Strategy's Credit Machine Starting to Crack?

Transcript

I definitely think that the market is testing the MicroStrategy thesis. [music] >> If you look at this drop, right? It dumps and it's continued to dump since they sold. >> If you look at the options market, what is being priced right now is first, there is demand for MSTR, but there's definitely no panic, no oh, let's get out of the door, let's price some sort of uninterrupted crisis at the MSTR level. >> Is strategy rebranding from a leveraged Bitcoin proxy to a Bitcoin backed credit issuer? What do you think the yield will have to be on stretch for it to hit par again?

>> There was a sale this week and they built cash reserves and bought Bitcoin. Should they buy stretch to bring it back to par? >> Nothing said on Inflection Point is a recommendation to buy or sell securities, tokens, or any other assets, nor does it constitute a solicitation or offer to invest in any fund, product, or financial instrument. This podcast is for informational purposes only. The views and opinions expressed by hosts

and guests are their own and do not necessarily reflect the official positions or views of their respective employers or affiliates. Hosts and guests may hold positions in companies, funds, tokens, or projects discussed. Everyone, welcome back to Inflection Point. I'm joined as always by Michael Marcantonio and David Lawant. Guys, how we feeling? >> How's it going? >> World Cup going for whose team? >> I'm happy. >> The vibes are so good in the United States right now from this World Cup. I mean, I'm going to be seriously, I'm going to have like seasonal depression when it ends. I want this World Cup to go on forever. Uh Just the amount of I don't know if you

guys have been following this, but the amount of positive news and virality Europeans coming to the United States and Japanese and South Koreans coming to the United States and just loving America is just so nice to see. Um, and it just it makes me proud to be an American, but also makes me realize how close we are with our fellow our fellow humans throughout the world. And um, if it wasn't for our one could say corrupt or self-interested politicians globally, not just the United States, but globally, I think most of the world world's issues

could be worked out through sports. >> Yeah, I'm really getting that that vibe as well. Just I mean, this is what the World Cup is supposed to be about minus the corruption of also FIFA. But this is what the World Cup is supposed to be about and I love it. I love seeing the videos. There was one of the Japanese fans after the game cleaning up the stadium. They brought their own trash bags. And then what was really funny was that, you know, you know, we in the West love satire. So, somebody posted that video, but in reverse making it look like they were looting the stadium and then that became viral in Japan and they didn't get the joke and they became kind of upset. So, it was kind of like a culture mismatch, but also funny and also very sweet.

I mean, that's typical Japanese, yeah. >> Now, I love it. The the and and it's about to get more exciting, right? We're now in the final round of the group stage and now we're going to get into the winner-go-home matches and it's going to get more and more exciting. I think we're going to see some very big games. Uh, for those who cannot see it, I'm wearing my Brazil black-on-black jersey. >> There we go. >> It's the number three jersey that Nike makes. They don't use it on games, but yeah, more discreet. So I thought it was a good one to wear today.

>> I like it. I like it. I I do think the World Cup is somewhat relevant to crypto in the sense that crypto has always been a global movement. And it has always been uniting people from all around the world through decentralized mechanisms. And the World Cup I think just shows that as technology advances and the world becomes smaller, um you're going to need to shift from national rails to global infrastructure.

Um and I do think that one noteworthy story um is that Polymarket is doing quite well um on the betting for World Cup. Much better than typical sports betting, um which is usually dominated by Calشی. And some viewers and some observers link this to the fact that Polymarket is more of an international brand and Cal شی which is more of a US brand. >> Yeah. >> So I think that's just very interesting um and I think that the the World Cup um is definitely improving the image of the United States globally.

Um and I think uh we're you know, with that I think institutions really need to um to look take a hard look at crypto and reflect that this could be the best possible technology to expand uh US reach throughout the world. >> It's funny that you brought that up, Michael. I actually have this chart here. This is um it's it's unlabeled, but this is the breakdown of Polymarket's um open interest by category. Can you guess which one the pink is?

>> I would I would have to say it would be FIFA World Cup. >> It's sports betting. Yeah, mostly sports betting. It's dominating the platform right now, so it's a more crypto more crypto than we even thought. Sorry, David. >> So, the biggest one is sports? >> Yes. >> Is the second one crypto? >> The second one, let me let me just double check before before I say anything wrong here. The second one >> Cuz I know these like one-day five-minute crypto markets are huge on Polymarket.

>> It's actually politics. >> Politics, okay. Yeah, no that makes sense. >> The third one in gray is crypto. So, yeah. >> Okay, yeah. Okay, so >> I mean, I'm I'm measuring it by by open interest, but then there's also volume which I don't really like as much cuz you can fake volumes, but volumes is even starker, but then crypto becomes second place in in the volumes. So, yeah. >> Wow. Yeah, I mean, so what explains that? I mean, as far as I know, Kalshi has always been more of a hub for sports betting, prediction markets for sports.

The fact that World Cup comes to town and Polymarket is taking off, I think reflects the fact that the global audience is turning to Polymarket first. And and that's probably in part because it's easier to trade on Polymarket for international traders than it is Kalshi. >> Yeah. >> Is it just me Is it just me or all of your friends now suddenly sports gamblers as well? >> Oh, yeah. >> [laughter] >> 100%. I have to say that in Brazil, it's the world there's always been a lot of gambling around the World Cup. It's just now a lot more organized, I think, because now you can make So, in Brazil,

they used to make these bolões, which was We're actually very very well organized, but kind of over-the-counter informal markets that got really really big. Um especially during the World Cup. Now, I think prediction markets are making these um a lot smoother and and more efficient. >> I mean, I think this is a trend um that is broader than just sports betting. Um and give me a second to explain this. So, sports betting historically was confined to local communities, right? Local bookies.

And the market was opaque and it was less liquid. Um when you globalize those localized markets historically, you get better liquidity, you get better pricing, you get more fair markets. Um this is obvious for sports betting, but it's also equally obvious for a host of other markets that have yet to really see a similar shift, but I think it over time will. So, for example, um you have pawn shops all throughout the United States where people go to to borrow against their their belongings, their assets, or to sell their assets,

right? Um you you could easily have a global pawn shop, if you will, where you need a short-term loan, you you have a nice watch, you can go to a bank and try to get, you know, borrow against the bank, um but again, even with the bank, you're still in this sort of uh you're in this localized small markets. Um you instead could tokenize the watch, you could borrow against it online on on a blockchain and have the entire global liquidity pool liquid liquidity supply actually compete to provide liquidity to provide a loan against that collateral. And you can

start to see that for a lot of things that big institutions and um and high finance, they don't they kind of overlook, right? Like pawn shops and and and you know, small retail loans doesn't seem to be like a huge piece of anyone it takes up a huge piece of anyone's mind share, but that's how really interesting new markets form. They usually form in these small corners of the market and then expand outwards because in the small corner, you have a really inefficient market that once is made efficient, you start to see um that you can apply those market structures to a broader class of assets.

The best example is how Amazon started as just a bookstore. And now it is this everything store. Um Spotify started as like a place you go to to listen to really esoteric sort of niche music. And now it is where everyone listens to music. Airbnb started as like couch surfing because like there was this niche community of people who like to couch surf. Um and now it is a huge behemoth. So, I do think that um the ability to build a global brand and a global business has never been better than it is right now on blockchains.

>> I like it. You're very philosophical today, Michael. I like it. >> Thank you. Thank you. It's got to be the World Cup spring it out of me. >> I love it. Anything else going Sorry, go ahead, David. >> No, I was just going to say very strong analogies from Mike today. >> Um any analogies for us, Michael? Any markets? Anything you're seeing there? >> I'm really focused on South Korea um and dump that it took yesterday, uh, or last night, um, and what that says about, is it just a local, uh, phenomenon that's taking place in South Korea, or is this a broader, uh, market impact, um, and is this going to change the dynamics? I

believe that when the news first broke, I got it like 2:00 a.m. last night, um, South Korea was dumping hard on, uh, fear that, uh, ship stocks had been overbought. Um, I said, "Oh, man, if that's happening in South Korea, you know, uh, you know, strap in for, uh, US markets today." But I haven't really seen much, I mean, there's been a little bleeding, but it hasn't been nearly as bad as what we saw in South Korea. So, you know, I've been looking at that, and I'm trying to really surmise, um, and I don't think anyone really has a good answer to this. Like, what is go What is the trajectory in the short term of the AI markets, or some would say AI bubble, and how that's

going to impact crypto markets, um, in the short term? >> Yeah, definitely interesting times. Um, my view on these things is, we we were talking a little bit about this before, uh, we we started to record, but the South Korea market is usually very specific, and this is true for crypto, this has been true for NFTs, this also true for stocks in that country. Uh, it is a very speculative market, a lot of assets within there, they trade a little bit like meme coins, and it's a very active market. And and I think South Korean stocks have been on a tear for quite a few weeks now, and

you kind of have these kind of speculative bubble bursts every once in a while. Um, and and also the South Korea market is not as connected to global markets as a lot of the others. So, I I'm I think it's very important to watch, especially because I think we are seeing some similar behavior here in the US, right? With regards to certain markets and maybe certain sectors. So, it's always interesting to see what's going on in in other markets. But in terms of contagion risks and things like that, I I think it's mostly contained over there. Having that said, we are definitely in a little bit more of a risk-off mood over the past many days, right? I'm sure you guys are

following SpaceX stock, which I think IPO'd at 135. It rallied all the way to 200. Last I saw it was trading at I think 140. So, so it's been a little bit off off and up and down here. So, we're seeing a risk-off environment across risk assets. That has been translating into crypto. As we record now, Bitcoin is again trying to brush the 60K level. It spent most of the past week in the 63-64K range. Now it's back a little bit to the 60K level. So, we'll see how how we go from here. I still feel like it's a range trading type of environment. We're

still liking these ups and downs, but still trading within a narrow range. But let's see. I fully agree with you, Mike. Nobody knows what's going on. It's a very uncertain environment. You can actually read that in the options market. The Bitcoin options market has been inversed, meaning that volatility has been higher in the short term than in the long term, more than it has always been than it has been in many many years. So, the market is pricing a lot of uncertainty in the short term. It's kind of this near-term anxiety mood. And and and you can see that, for example, in the options market. So, I don't know. These are obviously very hard environments to read. We'll see where we go.

>> Yeah, and it's worth noting also that um I think the market has cooled off a little bit on the prospect of the Clarity Act passing. I think on Polymarket, it's gone down to about a 43% chance as of today, um which is obviously low uh relative to the last 2 months. Um you know, I don't Without the Clarity Act passing, the standard uh goal posts that we have been looking for um and the standard catalyst that we have been looking for or we have been talking about goes away. Um and you know, that could that could be what

is cooling uh crypto markets as well. >> I think we also saw some cooling in the AI crypto markets trades like Near and some of the other AI associates at VVV, even though Venice ramped up again when Feab Methuselah was banned. But there's there's this question, you know, AI has been sucking liquidity out. I don't think that's a question. How much of that liquidity has it sucked out from crypto? I think that's uncertain. And then if this if AI starts to crack, if the bubble starts to pop, I don't know if I would I don't know. I I don't like calling things bubbles even though technically they are, but you know, anyway.

But it How how much how much is it going to benefit crypto? It That's that's the real question because people are saying people are saying it's, you know, let's look at the accounting of AI, you know, we saw that I think it was Uber spent the entire AI budget in the first 4 months and some company spent half a half a billion dollars already for the year and then I think there's this narrative going around that oh, actually AI is more expensive than humans, right? Which is the reverse narrative of what we were were told in the past few years. And so, I mean, and you you brought up, Michael, examples of Uber and I mean, Airbnb used to be coaching thing. Those stuff got successful because they were subsidized by VCs and then entrenched and then we're starting to see the same

thing here, but because maybe because the financials, like the GPUs that these companies are buying, they amortize over 5 to 7 years, whereas the CAPEX is the CAPEX that some of like Nvidia gets is recognized as revenue now. So, there's like a duration mismatch in between that. And so, there's pressure for these from the VCs, from investors to stop this subsidizing more quickly than we saw with the Ubers and the Airbnbs of the world. And and that's just becoming a little bit more in front of light, so to speak. And I I think it's really going to be I think a good marker will be how and if the Anthropic and OpenAI IPOs perform

this year. I think that will be a good marker where we are in the where we are in this AI, let's just call it life cycle. Yeah, did you see the news uh last week about um OpenAI's balance sheet was leaked or their cash flows? And um surprise, they're losing money. Um I think everyone knew that, but um seeing it um actually I think did raise some questions. I'm not particularly worried about that as much because they are I mean, they're bleeding cash, but um at the same time they feel like they need to keep sinking money into uh GPUs and on compute in order to keep

up because I think what's worse than not making money for OpenAI is not being able to keep up with Anthropic's models or God forbid a model. I I just saw that Japan has now entered the AI race with a with a recent model. Um I think you know, once you lose the narrative that your model is just so far behind uh Anthropic's or OpenAI, um you sort of you you sort of take a big hit um in public perception and usage, right? So, there was a time when, you know, everyone talked about the big three, Anthropic, OpenAI, and Google, and lately people have been sort of

uh saying Google's just not not even close to Anthropic right now. Um and when that happens, you know, I never count Google out, but um it does seem like Anthropic is taking a big lead here, um which obviously uh you know, when you compound that with the fact that uh OpenAI doesn't seem to be managing its balance sheet as well as somewhat of hoped, um I think it's a big a big question. >> Yeah, uh these are all excellent points. Um I saw someone speaking this week and saying something a little bit along these lines, Michael, saying that the the AI trade until now has been about finding the next bottleneck, right? So, it was

first models and then compute and then memory or energy. And and I think it was an interesting observation that this trade is probably now coming to an end. And now the the main thing that people will start looking for is who has traction, who has an enduring moat, uh which are the companies that will will be around for the for for for the long run here. Um and this is this is a hard question to answer right now, right? When you when your capex bill is running at tens of billions, if not hundreds of billions of dollars, you don't give yourself too much room for error. So, yeah, it's going to be very interesting. It does feel like right now Anthropic is on the

lead. It all It also does feel like a lot of the companies are becoming a lot much more aware of the their AI and token budget. So, yeah, things seem to be changing. But, the thing that for crypto has been calling my attention is that I I do see a lot of folks starting to delineate what the next crypto bull cycle could look like. And and and I think it makes sense. It's obviously very early, so we're in kind of very broad brush territory here for now, but it does feel like there's going to be a time and and this is nothing against AI as a technology. AI as a technology is obviously very real and it's going to be around but these investment cycles, they tend to

run a little bit ahead of themselves, right? So, stock valuations also can run a little bit ahead of themselves. So, whenever that crash happens, so Mark, the word I'm using instead of bubble is kind of more of a frenzy. We saw that in the dot-com bubble, right? The internet was very real. That didn't preclude the market from attributing insane valuations to a bunch of companies, companies misallocating capital, raising too much capital, and and and and wasting a lot of that. So, we might see something similar here in the AI race. It doesn't mean the technology is not going to be around. It of course will, but we can have these kind of Carlota Perez cycles. For those

who read that book, financial Oh man, I forgot the name of of the book now, the financial on financial financial technology cycles. And it feels like this will probably be the time when especially Bitcoin will start to emerge again as a topic of interest. It does feel like right now we are not in scarcity territory, right? Everybody's like just thinking about the infinite and about pushing these technologies to the limit, but the world always has a way of imposing scarcity uh to us and this can come in in a number of ways uh including um financial um adjustments here and and I think these are the times

maybe when we'll start remembering Bitcoin again. I see Pierre Rochard, Arthur Hayes, I think even uh some of the folks from BlockWorks kind of mentioning that maybe when we start to see this AI peak, we'll see how things go, but maybe attention will start shifting at least to these scar- scarcity denominated assets, right? So, like the cash flow generating assets, the hyper liquids of the world, this is probably a different story. Uh but yeah, I'm I'm very interested in seeing and I do think that the next narrative is going to be somewhere around that and we're probably 6 to 9 months away from it. Uh I don't want to call it too too early, but that's that's how it's feeling like for me.

>> [snorts] >> That's in line that's in line with where the four-year cycle has us as well. I think Q4 this year the four-year cycle has has up only from then on and I mean I was I was one of those individuals saying, "Oh, the four-year cycle is dead. We have ETFs now. We have external factors." And you know, I was looking at the data and actually in when it when it becomes out when when Bitcoin price is going up, the ETF flows tend to like match just like slightly behind. And when Bitcoin prices are going down, the ETFs are actually lagging even further. So, they're adding more sell pressure to to Bitcoin's price. So, ETFs have won I

mean but that's just in net outflows in in that period of time. Obviously, there are some ETF investors who hold for the long term, but ETFs on in this downturn haven't actually cushioned the blanket as as much as I as I thought it would have prior to their launch. Um but again, ETFs, you know, ETFs are what, 2 years old now? Bitcoin's 18, so you know, I think it's going to take some time for the even the ETFs um like behaviors to mature as well. >> And and I would say that makes sense, right? Because if you think about where would the AI capital drain uh effect impact crypto the most, it would probably be in the ETF complex, right?

So these are the folks who already have their uh Schwab or E*TRADE accounts and they're just selling their IBIT to enter into the SpaceX or whatever the new shiny thing is. I feel like the uh let's say the non-crypto native crowd is a lot more impacted by that. Uh in the more crypto native side, I honestly feel like a lot of the selling has already happened. Uh of course, there's always more potential to come. Uh but I think that's where the new kind of wave of selling is coming from. This more mainstream audience that is probably moving from Bitcoin, from crypto into the new shiny thing. Uh this is a cycle, right? We're in and out of favor, now we're out of favor. It's

happened in the past and I'm sure it's going to come back. >> So speaking of out of favor and Bitcoin, I'm going to pull up a chart here and show you stretches strategies preferred year-to-date performance. Um you know, some one blip in Feb, but pretty stable and then recently it's just been a massive downturn. I mean, obviously there's some there's some concerns over, I don't know, strategies liquidity, about it being Terra Luna 2.0.

Um you know, a lot of people in crypto and I mean, for the record, this product is 80% held by retail. Um so it's these aren't necessarily all by long-term investors. I just want my yield. I'm adding it as a small part of an of an income-generating portfolio. It's I think it's more of a reactionary base. Um, I think this is what prompted Strategy's last move. I think it was uh last week or either yesterday. Um, Strategy actually, you know, did their at-the-money market offering for common shareholders, um, MSTR. And instead of using all of those funds to purchase Bitcoin, they actually took about 300 350 mil, something around

there, of of cash and added that to their reserves um to kind of help, I don't know, alleviate some of the fears of of their reducing cash balance. And so now, since that latest, uh, sale, they actually have closer to 10 months of dividend coverage. I mean, this was I mean, a few months ago this was over 2 years. Um, so, I mean, even 10 months is less than half, but I think I think it was a good move from Strategy. Um, I think they maybe realized that at like repurchasing their convertible debt this early with this at this timing with this new stretch product was

possibly a mistake and I mean, Saylor isn't infallible. We all you know, we all make mistakes and I think they're realizing that and I think right now they're building up their cash position while also still buying Bitcoin on the side. I mean, I think their last purchase wasn't that much, a couple hundred mil, but it still it still shows that they still have that longer goal of be not being a net seller of Bitcoin, still increasing the Bitcoin per yield and then adding to that cash balance to alleviate some of the fears while also having sold Bitcoin so far twice in its life cycle, which can also help with the credit rating agencies. And as as Michael Saylor said, to inoculate the market.

Um, what what do you guys thinking about this product? I know Michael Michael's still are you still not a fan? >> Go back to the previous slide. >> Okay. >> So like if you look at this drop, right? It's right around May 26th when they sold. >> Yeah. >> Right? They're or or June 1st even when they sold when they disclosed that they sold their 32 Bitcoin. Now let's just put put some pieces together here. So it dumps and it's continued to dump since they sold. Now they bought back Bitcoin since then but it did in fact dump and it has not recovered.

You just said Mark that a majority of holders of uh of MicroStrategy are retail. Um >> A stretch, yeah. >> A stretch, okay. Um and retail you know, they in my judgment care a lot about the narrative. And any inconsistencies to the narrative that Saylor has been very eloquently promoting for you know, since 2020 2021 um any inconsistencies there I think are going to be particularly impacted on the retail side. So my my view is that retail sort of sold because they feel

like any sales from um MicroStrategy are a total a total violation of the sort of pact that he had uh in you know, he had signed with the public that he that strategy was going to be an accumulation vehicle only and not and not a selling uh selling uh vehicle. Now in fairness, that might not be totally the most uh the the most fair take to Saylor. Might not be. Um and you know, you can sell Bitcoin. We've already talked about this on this pod, but you can sell Bitcoin in order to accumulate more Bitcoin. I get all of that.

Um but again, I don't I haven't seen, and I'd love to hear what David thinks, but I have not seen a real full court press narrative shift um from Saylor clarifying their decision and doing a good job of cleaning that mess up that that happened at the end at the beginning of June. >> Yeah, I I definitely think that the market is testing the MicroStrategy thesis as it's probably haven't have never before. Um I would I I would say a few things about this. Um number one, um Mark, your your chart is very clear.

When Stretch is trading at $87, what the market is saying is that we don't want an 11.5% uh coupon rate or a 11.5% uh interest rate to hold Stretch. The the number is probably more like 12.5% right? So, that's exactly what it means to see Stretch trading at the 87 or or below 90 uh level that we're seeing here. The interesting thing, and I brought this already in previous episodes, is that Theta, which is a similar instrument is issued by Strive, is actually trading very close to par.

It's at 96 or 97. Not at par, but it's it's also not that far. And if you look at Strive's uh Bitcoin reserves as a percentage of the amount of uh perpetual preferred that they're issued, that number is a lot smaller than MicroStrategy's. Um so, I think you can argue that there might be something specific happening with MicroStrategy here because the spread between the yield that investors are are asking for Stretch versus the yield that investors are asking for SEBA, which I would argue is is riskier and should should be higher, this is actually a very narrow spread. So, it

does seem like there's something specific to to stretch happening here. And and and the thing is probably what what Michael just said, right? So, there's probably a little bit of a retail exodus. Um I think that maybe a lot of folks bought stretch without knowing exactly what they were buying and maybe they get scared with the volatility. I think it's dangerous to think of stretch as a stable coin. This is an instrument that doesn't have a bag. It can oscillate as as it has been oscillating. And maybe maybe this has scared a little bit off that especially retail audience.

I've also heard especially on Twitter and I don't know to what extent this is true, that there has been a bunch of leveraged products built on top of stretch. So, again, it's this idea that stretch is a stable coin and that you can build a leveraged kind of structured product on top of stretch. And then whenever we have these volatility dislocations, some of these trades get to to to unwind. So, it's probably a combination of these things. I think it's a transition. I I do think that stretch will will normalize, but I agree that right now there's probably a little bit of a an exodus happening on the retail side.

So, that's one thing on stretch. The the other thing I've been looking at is what folks are pricing for MicroStrategy itself because in theory, MSTR equity, right? Which is the the actual amplification mechanism, right? So, this is the lower priority place in the stack. This is where you're going to reap most of the benefits if the MicroStrategy does well and if the Bitcoin prices go up, but this is we're probably going to endure most of the pain when the reverse is true, which is the case right now, right? So, that's why we're seeing MSTR equity trading now, I think at 1.1 NAV or something like that. And the interesting thing

about MSTR equity is that uh they they actually have a very active options market. MSTR is probably a top 20 uh options market in the US in terms of activity. So, so there's a lot of signals that you can extract from that. Uh one that I was paying attention to is the risk reversal at the wings, uh which is basically just trying to see how much asymmetric downside the market is pricing. So, basically, what you do here is you look at very out of the money, right? Very far from from the current price uh options and you see how expensive the puts are versus the calls.

And that will give you an idea of how much investors are willing to uh hedge their downside versus how much they're willing to bet on asymmetric upside. And that's kind of a little bit of a risk metric just to try to see um how much of actual tail risk is being priced in the market. And if you look at that number, what you're going to see is that what MSTR the MSTR options market is pricing is it's definitely pricing downside hedge. So, I mean, this this ratio is like 10 volatility points higher than it used to be. So, it definitely has expanded, meaning puts are more expensive than calls versus they are used to be. So, the market is

is is pricing downside protection. It's willing to pay for downside protection on MSTR. But, it's it's pricing this uh let's say premium at a much lower ratio than it used to in in all the other Bitcoin corrections. It's It's actually less than half of it. So, this is all to say that if you look at the options market, what is being priced right now is first, there is demand for MSTR, but there's definitely no panic, no oh, let's get out of the door, let's price some sort of like uh an interrupted crisis at the MSTR level. And given that MSTR is the most uh I would say exposed or probably the

the the part of the capital stack here that will bear more most of the brunt, I think that's actually a a good signal that things will eventually normalize. So, of course, we don't know when that's going to happen. Uh stretch is trading an insane amount. Um I think stretch has been trading multiple hundreds of millions of dollars a day, which is an insane amount for a perpetual preferred instrument. So, we just don't know how much of that transition has already happened. Uh once MicroStrategy announced the 8-K that Mark mentioned, and increased their fiat reserves by $300 million. I think at that point stretch was trading at the low 80s range, and now it's in the high 80s. So, it has

already recovered um some of that confidence in the market. Uh we'll see what else is needed. We'll see how how many more folks need to leave, but I still believe that it's definitely a market that is in dislocation, but that it will eventually normalize. >> Yeah. I mean, I'm very interested in the identity shift um that MicroStrategy is taking from, you know, when when they first sold the Bitcoin, right? Uh I think it was on June 1st, Saylor's remarks were our goal is to make stretch the best credit instrument in the world. You know, that was like his first comment after selling the Bitcoin, and he highlighted the preferred, not the Bitcoin. So, is the

strategy rebranding from a leveraged Bitcoin proxy to a Bitcoin back credit issuer? Right, that that's my big question. And um if it is, I'm curious to know, you know, Mark and David, why that would be the case. Why they would think that a Bitcoin back credit issuer would be better than a Bitcoin accumulation vehicle. >> That's a good I actually it's a I wanted to make a comment to David and I was going to say that I don't I I'm in like a spot to me between yeah there's a mark there's a market pricing these things. The market is saying we have higher yields as a competing products that are closer to par and they have, you know, so it shows proof of

that. But then on the also on the other end and I don't know how correct this is to assume, but given that the majority of the holder base, 80% according to the CEO as of last week, uh retail then how much of these calculations actually being done? Is this like an official official capital allocation? I'm going to lean towards no and then on on top of it we have these on-chain products, David, that you mentioned, that add additional leverage and I'm going to assume again that is retail doing doing that as um doing that as well. And some on-chain analytics lean towards that. From the marketing perspective here's what I didn't like, Michael, about Stretch. It it they they kind of made it seem like it was a savings product. And and this is my interpretation of it,

right? And even on even on the website right now, it still reads as though it's a savings product, right? And and you you think something is safe and then you because you read it as such and then after it has this volatility and then you of course you're going to exit it because you you have no idea what's going on. You maybe you feel you've been lied to, you didn't understand how the instrument worked. And what what I like them and then to your final point, Michael, to what I like them to become like a credit issue of BTC. I think what I want is not that, but an element of that. And what I mean is we've talked about on the show a few times that uh strategy has many levels to pull.

And I think that this should just be one of the levels, not what not necessarily what maybe Michael Saylor is saying as their flagship product. Maybe not That shouldn't be it. I mean, MSTR probably should be. Um but I I would like to see as many levels. And one of the levels I think that they need to have on top of it is is selling puts. Because my strategy is a buyer of BTC at any price. They say they don't try to time the market. They just try to be consistent. So, if you're selling puts, you're generating income without adding any leverage. And then if the price were to ever hit those strike those strike calls, you were going to be a buyer anyway. So, that is just one leverage I'd like to see. So, my answer to your

question was no. I would not like strategy to become all in combat. I mean, Stretch to become all in combat and become associated with strategy as a whole. I don't want a a credit backed Bitcoin Bitcoin back credit credit issuer. I I want more what I would see to as the largest Bitcoin accumulator {slash} hedge fund ask entity. And I don't know yet if strategy has the you know, the team to execute this. But, you know, we're we're we're only comparing to Stretch after a four maybe a multi-year track record. Stretch is still a toddler. It's like 1 year's old.

It's still in its infancy. So, I I'm still going to give management some time, especially because of their thus far successful track record. >> Yeah, 100% and I think MicroStrategy or strategies I I say this again. 100% strategies capital structure is becoming more sophisticated, right? So, you have not only MSTR equity, but also you have the converts, you have the preferreds, and let's say the perpetual preferreds, which is stretch. A lot of these things have complex interactions within themselves. I think Saylor had said in the past that if he could, if I mean, knowing everything he knows until today, uh my uh strategies capital structure

would be basically only equity and stretch, uh which which I think makes sense, which wouldn't preclude them to do some sort of synthetic yield strategy uh on top of options, for example. Mark, I I fully agree with that. Uh there are other large Bitcoin holders who have been implementing uh these um strategies uh quite intensively, and I think it makes a ton of sense. As long as I actually wrote a paper about this, for those who are interested, as long as you do very tight risk management, right? So, synthetic uh yield through options is is a complex active management strategy. So, so so it is a little bit of a different beast compared to like

just managing more passively your capital structure. Maybe that's where the difficulty lies. I mean, it is a little bit of a different different realm here. Uh but yeah, I think it it would make a make a ton of sense. >> Mark, what do you think the yield will have to be on stretch for it to hit par again? >> So, I don't 11 >> it even possible? >> 11 and a half. I I think I think the yield needs to be 11 and a half. I say this because I don't I think it would more recover on two things. One, cash cash reserves going back up, as well as BTC price going back up.

Um Saylor, I think strategy has said that for June, for this month they're going to keep uh rates steady. And I mean, Michael, at this point I feel like I feel like a strategy watcher in the same way like there's a Fed watcher. You know, I I feel like I'm I'm I'm listening to the CEO, I'm listening to Saylor. Are they going to increase rates? Are they going to do balance sheet control? You know, like this is how I feel kind of feel right now. But I I I do think I do think 11 and 1/2 would be would be enough. I mean, I I cuz it's kind of counterintuitive.

Because a lot of people had issues with stretch because it was becoming prioritized. And then if you increase your rates, doesn't that mean more of the uh the dividend coverage has to go to what stretch? Um and and but so it's kind of counterintuitive, but at the end of the day I still think a Bitcoin recovery price and a cash reserve upping or topping will help uh close close the gap between par. >> So you think at a lot you think 11 and 1/2 and it will go back to par? >> I only say 11 and 1/2 because that's what it is right now. And I, you know, if if Bitcoin were to move from 60-something K this week to 90-something

K next week, I it would probably hit par. >> But why though? I mean, shouldn't I mean, just to play devil's advocate here. Shouldn't this product sort of be it shouldn't Bitcoin be almost irrelevant to the price of Bitcoin be irrelevant to this product as it's supposed to hold its peg at 100? >> Shouldn't but I I think on on this show before, even before this most recent crash, I you know, the instrument debuted somewhere last year, end of August. And there were multiple dips off of par. Apart, you know, there's some small ones after the ex-dividend date, but there were geopolitical concerns that made it to cause it to dip. There were Bitcoin two Bitcoin now

three Bitcoin price crashes that caused the dip. So, yeah, in theory it should, but I don't think that with such a large retail holder base that it's necessarily rational decisions going on. >> Right. >> And then also, you know, this this is the first of its kind product. There's like there's nothing else like it from any other issuer. And there was an I mean Michael Saylor even admitted that he used um many of our own period of hours, he used AI to help him design this product. >> Um >> So, yeah.

>> But I think there's an interesting mechanism at play here because if the Bitcoin price goes up the amount of strategies Bitcoin reserves, which is ultimately what backs the stretch, it gets more more comfortable. So, so so stretch gets less risky if the Bitcoin price goes up. I I I think in Mark's scenario, so let's say that Bitcoin magically goes back to the 90k level, what would happen is that MSTR's BTC reserves would go up significantly, stretch would start to be seen as safer than it is today, and the market would probably start to demand a lower yield. So, basically what would happen at that time is that I I

think the price of the the face value price of stretch would need to go up, eventually even above 100. And then when it gets to above 100, then MSTR has two choices. They can either sell more stretch, so give more supply to the market, that will help put the price down, or they can lower the yield. But the Bitcoin price going up helps the perception that stretch is a safer instrument. Does it Does that make sense? >> It makes sense, except technically, stretch is not backed by the Bitcoin reserves, right? It is not collateralized by Bitcoin. Um you know, so so while the perception I think the the mechanism that you're you're

suggesting which I I think is fair is if Bitcoin goes up strategy as a whole as an institution is a safer institution. It's on sure footing. Um and if Bitcoin the price goes up higher I think the implicit assumption here is that um strategy will be able to pay its obligations better. But the mechanism by which it does that is not at all clear, right? At least under stretch. So >> Yeah. >> if the capital markets if the capital markets are closed to strategy selling Bitcoin.

Um which I think markets right now are saying based on their small sale on June 1st that it sort of is then it becomes interesting and an open question as to how stretch continues to fund its its interest payments. And so that I think is why stretch has dipped. Um and technically a a price price appreciation of Bitcoin should not necessarily impact stretch although of course I agree it would. >> I I I agree that yeah there's no peg here. There's no automatic mechanism that translates the Bitcoin reserve into the the dividend payment. Uh but yeah that's that's basically how does MSTR

pays the stretch dividend? Right now in two ways. Either by issuing MSTR equity when they're trading above NAV which is what they did just last week. Um and then they raised their fiat reserve or sell Bitcoin which is something that they haven't been willing to do until the small sale that they did just a few weeks ago. So the price of Bitcoin going up gives them more leeway. And I don't know. Um >> I see I see that. Okay. >> I I would be interested in seeing um whether MSTR would be willing to sell more Bitcoin and what the impact there on the market would be. Um because there's been

a lot of compounding factors, right? There's been the MSTR sale, but there's this whole risk-off market environment, the AI capital drain. So there's I think there's a lot more factors playing into this Bitcoin price decline than than just the strategy sale. But yeah, I don't know. Right now everything is very tangled. It's very hard to read. >> So said another way, David, I like I like that last point. Said another way, if the price of Bitcoin goes up then strategy has a greater chance to hit a positive MNAV. And if it has a greater chance of hitting a positive MNAV, if Bitcoin, let's say, goes up to 90k and uh strategy's cost basis in Bitcoin is about 75k, um and it hits a positive MNAV, then it has more of an ability to

pay dividends with strategy stock. >> Yes. >> Um and therefore it Okay, that actually makes sense as a mechanism by which Stretch um could uh could appreciate with uh an appreciating uh Bitcoin. That makes sense. >> Do you all I was asked this question if Strategy should, you know, there was this sale this week and they built cash reserves and bought Bitcoin, should they buy Stretch to bring it back to par? >> That's that's a great question. So right now when Strategy sells equity, right, on the ATM they I I think they have probably a few

options, right? So the one thing one thing they could do with that is buy Bitcoin, which they continue to do with very small amounts right now. I think the last purchase was like $15 million. The other thing they can do is increase their fiat reserve, right? So, increase their cash cushion, which is what they are doing more aggressively. And then the third thing is retire existing debt. And they could do it at a discount, right? Imagine that if strategy is trading at $85, they could repurchase whatever they issued at 100 for $85, so that's a 15% discount. Um they could do this with other instruments, too.

So, so so they have a lot of flexibility to do. I think it's right for them right now to focus on the fiat reserve and increase this cash cushion. Remember that a lot of this happened when the reason the the the cash reserves were 2 years of dividend, and then they they shrank to I think something like 7 months, is that strategy decided to use a a big part of that cash to retire some preferreds. These are kind of more expensive debt, but it was maturing later on. It didn't carry that much of of a cost right now, but they decided to retire some of their debt at

at a discount. So, long-term probably very accretive for for shareholders, but it kind of restrains a little bit your cash cushion on the short term. So, I don't know. I think what they're doing right now is right. Uh continue to issue MSTR, increase aggressively the fiat reserve, maybe every once in a while buy some Bitcoin, but I think the increasing fiat reserve part of the strategy should be the focus right now, as they have been what they have been doing.

>> Yeah, agreed. And and and if it's any credit towards them, Bitmain, and for the audience who's who are not familiar with them, they are the Ethereum, the ETH version of strategy. They are the largest known public holder of of ETH. Um they're looking to get close to 5%. They have around 4.7% of outstanding ETH. And they actually just announced the launch of their preferred perpetual stock um starting at $80 per share and and and will have a dividend yield of 9 and 1/2, which I thought was interesting. Um a lower dividend yield for a more volatile instrument with less less annual compounded Kager, you know? So I I I

don't know. I I'm not going I'm not super interested in this product, but does it does it help validate strategies thesis that another institution is launching it? >> Yeah, definitely very interesting timing, right, to launch a similar product when the perpetual preferreds are facing their toughest tests. Um I don't know. I I I think the rationale behind Bitmain's lower yield is that they are able to extract yield opportunities uh in ways that strategy cannot, right?

So for example, staking yield. Uh Bitmain I think is the largest staker in the market and they have a big ETH position. So just from the the interest that they can collect from the staked ETH, they would probably be able to fund I would assume a big part of those dividends if not all of them. So maybe that's where the risk profile is is different. But yeah, I'm very very interested in seeing how that instrument prices and how it trades. >> Yeah, I think the interesting part of Bitmain is that they skipped the convertible note stage. They just went right to the preferred.

I had actually assumed they were going to go in the same trajectory as strategy and hit the convert market first. I think the fact that they didn't reflects two things. First is that the volatility in Bitmain stock is already sufficient so that they don't need to issue issue converts at all. But secondly, and maybe the primary reason is that it's always better for an issuer to issue a preferred that may or may not pay a dividend in the future rather than issue a convert with binding obligations. Um so if the market would will buy the the preferred, you know,

issuers are going to issue that all day. Um and so in in some ways, I don't know if it validates Strategy's thesis, but it does is it gets cover. Bitmain gets cover from Strategy's thesis, right? Um in it opened the door for Bitmain to issue more favorable instruments to raise capital um than a convert for the issuer. >> Yeah, I I I think that makes sense.

Um I think it gets to that point again, Michael Saylor saying, "Hey, if if I were to design my capital structure today knowing everything I knew I know today from scratch, I would probably have just equity and scratch and all these things in the middle they they were kind of building blocks towards figuring out the scratch instrument." But there's there's another interesting aspect here that I think would, if not preclude, probably limit Bitmain's ability to issue a convert, which is the fact that they don't have as much of an options chain or an active options chain as Strategy does. This is very important because these convert

buyers, they are they are not credit buyers. They are basically off volatility arbitrageurs. So So, what they're doing is uh uh arbitrageing the volatility embedded in the convert with the volatility that they can extract in the listed options market. And And this market, I don't think it exists in Bitmain as much as it does with uh MSTR. So, maybe that's one limiting factor, but I fully agree with you. Even if that fact even if that was not an issue, I think going straight from equity to the preferred instrument is probably the the the right step.

>> Yeah, sometimes it helps not to be the first mover. >> Right. >> Yeah, I mean, like you're you're always going as an issue, you're always going to prefer to issue preferred over debt. Um and so, to the extent that this works, um you know, it's good for Bitmain. I will I I think a very interesting piece, and it's a long topic that we should probably table, but just to comment on what David just said is the development of or lack thereof of a a options market for Bitmain uh comparable to strategy, I think it's still in a story that fascinates me.

Um and I think you know, it it's if Bitmain can't develop one as as much as uh as strategy has, no one can besides strategy. >> [snorts] >> I I think it's also a matter of market timing. I mean, these things are just so much easier to do in the bull market cuz you need all this retail flow, right? So, and And these things are sometimes hard to harness uh during bear markets. Um if we came back to like a bull market stance, I I think we would see a much more active options market around uh BM and R, and and and things would flow from there. But, I don't know. We'll see. We'll see once the bull market

catches on again. >> Yeah, I mean maybe just requires more time, you know? >> Um we're coming up on time there. So, I'm I'm I'm I'm going to call it an end. I want to I want some predictions at the end from both of you all, but before that um for the audience listening, uh you know, please we have a guest next week, our first Inflection Point guest, and it's going to be Hester Peirce from the SEC. Uh reign, so to speak, is coming to an end.

So, it will be one of her last podcast and our first with a guest. So, definitely follow and subscribe to stay tuned to that. And for my predictions that I wanted to ask both of you all. You know, I I don't like I don't like asking or performing price predictions on on on any on any show, but I wanted to ask you all about World Cup predictions. So, um I'm going to ask each of you Argentina's next game, Michael, and Brazil's next game, David. What do you think the scores are going to be? >> Um so, Brazil's next game is Brazil versus Scotland, yeah, which is but which is tomorrow. And and this might be before this gets released. So, I I might look

like a little bit of a clown here. But, the the the interesting thing is that Brazil's team is going to be very different from the ones that we saw in the first couple of games because Neymar apparently is coming back. He's playing a position that is not his traditional position. Um I don't know. I I'm actually excited. I think Brazil can do very well against Scotland. So, I'm going to call it a 3-0. We'll We'll see. >> Nice. >> So, Argentina's playing Jordan, right? >> Yeah.

>> So, I think Messi's going to score at least two more goals. Uh maybe three. Um listen, Jordan played a hell of a game last night, but um you can just tell a couple of things. One, that that team has a lot more development uh left to do. Um two is Jordan's out of the knockout round, so you know, I don't know how much >> The motivation. >> I don't know how two things. One, I don't know how much uh I don't know how much uh incentive they have to win. Maybe they do just for pride. But secondly, I don't know how much incentive uh Argentina has to play Messi or to play their stars. Um

>> True. >> And so, my my prediction um is couched in the caveat that if Messi plays the whole game um uh or at least starts the game, um I think it's going to be a blowout, but we'll see. >> Okay, lovely. >> Thanks, guys. >> No, no, no. Mark, you guys [laughter] are for Ghana, which is starting in 3 hours. >> 3 hours? 2 and 1/2? Okay. >> They'll be already out when this podcast is published. Give me your >> Yeah, definitely. Um I'm going to go with 3-1. Um Harry Kane's on the scoreboard, obviously.

>> [laughter] >> Are you are you are you a I guess you have to say you're an England fan. >> I would just because I live in I live in this country, I would love it if they won. It would be a nicer place to be during the summer if England won won the World Cup, and it's coming home. So, that's that's all I'll say on that. Um but >> If Brazil and the US uh drop off, I will I will cheer for England. I think it's time. It's been almost 50 years, 60 years since you won. >> There's almost nothing There's almost nothing that could get me to cheer for England.

It was funny. I I was listening to a bunch of uh a bunch of uh commentators ask Scottish fans, uh you know, if you if you could win this year's World Cup but the next three World Cups would be won by England. Would you take that trade? And majority of them said no. They would rather [laughter] lose this World Cup as long as England does not win the next three. So, I think that was pretty funny. >> It is. Sign of the times. And yeah, and so if you want to Fine. If you don't watch football and you want to find out if all we were right, tune in to next week's special episode with Hester Beth. But I'm going to leave it there for now.

Um take it easy and I'll see you all next week.