Why MSTR's $1.7B Preferred Trap Is Forcing It to Sell Bitcoin

Transcript

Hi everyone. Welcome to Unchained, [music] your no hype resource for all things crypto. I'm your host, Laura Shin. Thanks for joining this live stream. Fidelity has been researching and investing in blockchain since 2014, long before it was a headline. And they're hiring crypto and DeFi professionals to join their team and discover what's next in finance. Fidelity is looking for people with fresh perspectives from different backgrounds, whether it's tech, UX, or product design. Whether you're crypto savvy or crypto curious, as long as you have the passion to make a real impact at a company striving to make finance accessible to all. Explore crypto careers at Fidelity today and make the decision that could change your

future for the better. Visit crypto.fidelitycareers.com to learn more. That's crypto.fidelitycareers.com. Fidelity is an equal opportunity employer. Today's topic is Strategy's dilemma and why it's begun selling some Bitcoin. Here to discuss is Jeff Dorman, Chief Investment Officer at Arca. Welcome, Jeff. >> Hi Laura. Thanks for having me. And as always, quick compliance, the views I express are my own and are provided for informational purposes only. Nothing I say should be construed as investment advice.

>> You wrote a tweet last week that was somewhat prophetic. You said, quote, "The MSTR story has gotten so out of hand. Excuse me. [clears throat] This is the first time that MSTR, BTC, and pref holders are really in a bind. Someone is going to lose badly here and it will happen in the next four months." And then of course, we heard on Monday that indeed Strategy had sold 32 Bitcoin at the end of May for $2.5 million. And you've written on your blog about how you used to be a fan of Strategy and would defend it against people's concerns that it would some someday have to sell Bitcoin.

But obviously, now your tune has changed um and you ascribe that to their new capital structure. So, what changed in the structure and why do you think it's a problem? >> Sure. Yeah, I guess I should have said within the next four days, not necessarily the next four months. Yeah, I mean to be fair, what I used to talk about MicroStrategy, I never really defended the MSTR stock per se. What I always said was that the fear of MicroStrategy and and and Saylor selling Bitcoin and as a result this company being a risk to the price of Bitcoin was always really low up until the end of last year. And and what really changed was that this used to be a pretty simple capital structure,

right? That first they were selling equity and using the proceeds of any equity raises to then buy Bitcoin. Then they layered on a little bit of debt, nothing crazy. I think in total they had about six or seven billion dollars of debt relative to a 40 or 50 billion billion dollar equity market cap. So, it was pretty nominal from a debt to cap standpoint. It wasn't really going to be a death sentence for a company like this, especially since most of them were, you know, zero or low coupon converts. So, there wasn't a big cash outlay. But at the end of last year, they started introducing the preferreds. And the growth of this preferred market, they have multiple preferreds in their capital structure now.

Most of you probably have heard of STRC, which is stretch, the one that they talk about all the time and has ballooned to I think 11 billion in assets. But there's others as well. There's about four different preferreds that they have in the balance sheet. And the problem with this preferred stock is that not these have ballooned to about 15 billion total and they have somewhere between 10 and 12% dividend rates, which means that MicroStrategy basically owes 1.7 billion dollars in annual dividends per year. So, that's what made me change my tune in the sense that he could have muddled along for, you know, decades.

Whether or not he ever was able to buy more Bitcoin was sort of irrelevant. He never was going to have to sell Bitcoin. There was no trigger to have to ever sell Bitcoin cuz there was no cash obligations other than when the debt came due and you could probably refinance the debt because it was a small part of the cap structure. Once you introduce this 1.7 billion dollars of cash dividends, now he has to come up with 1.7 billion dollars a year in order to satisfy those preferreds and it's a company that makes no money. So there's only so many avenues that you can come up with to come up with 1.7 billion dollars. Either you have to continue to sell more stock, which is becoming less and less accretive as the price goes down, or you have to sell the Bitcoin.

So really, you know, in tennis terms, this was a pretty unforced error. There was really no reason to do what he did in the last few months where he basically used all of the cash on the balance sheet that they had saved to pay down debt and now have 5 months left before they run out of cash unless they sell the Bitcoin. >> Yeah, let's kind of dive into that little piece a little bit more because you basically, I think it was in a blog post or a tweet, you talked about how they had raised 2 billion dollars in cash via stock sales and that initially, you know, that looked like a good move to you, but now you view that as problematic. So explain like, you know, what happened there and

why now you feel that complicates the picture for them. >> Yeah, so again, and this is a little hard to talk to quickly so I have to kind of back up, right? So again, the parts of the capital structure, there's basically four different stakeholders with MicroStrategy. First is obviously Bitcoin holders because, you know, anybody who owns Bitcoin is affected by what company of this size does since they own 4% of the outstanding Bitcoin. Second stakeholder is your MicroStrategy shareholders. Your third stakeholder now is the preferred shareholders and your fourth being the debt holders, right? So all of these different stakeholders are bullish in some way, shape, or form on MicroStrategy and Bitcoin.

But, they can't all be satisfied at the same time because there's different levers affecting everything. So, what we were saying is when these preferred and and for anyone who wants to follow along, it's actually they have a very good website, strategy.com. You can see all of the detail there. So, you can see exactly how much Bitcoin they own. Right now, it's about 56 billion. You can see the market cap of the equity, 48 billion. You can see how much debt they have, 6.7 billion. And the total of the preferred, which is about I believe 15 or 16 billion. Um so, all these parts of the capital structure, the preferred don't the dividends don't have to be paid, right? These are cumulative preferred, meaning if he decides not to pay the dividend, it

still accrues, but he doesn't have to pay the cash. But, once you do that to a preferred stock, that's the death sentence for the preferred. The preferred will go down 20 or 30%. Mostly, these are owned by retail investors looking for the yield. It's a it's a last resort thing. So, what happened is with these preferred as they as he started raising more and more of these preferred in order to buy more Bitcoin, um the market started to freak out a little bit about 3 months ago about whether or not they were going to ever have the cash to satisfy the dividends on these preferred. Um and if you look at a chart of STRC, which is the biggest one, for example, and you go back, you know, 6 months, this is an instrument that's designed to trade at 100, basically par, um and you

just get the dividend, but it was trading well below par because the market was worried that they weren't going to be able to satisfy the dividend. So, what did they do? They went out there and raised about $2 billion in a combination of more preferred and more stock and said, "Okay, now you don't at least don't have to worry about it for a year and a half because we have this $2 billion sitting on the balance sheet that's going to be used solely to pay dividends for the preferred." Everyone breathed a sigh of relief. Okay, these guys are you know, maybe there's no long-term solution, but at least the short-term solution is they have the money. And then what does he do? A month later, he turns around and takes 1.4 billion of that cash cushion and buys back uh some of his convertible debt at 92 cents on the dollar,

completely the opposite of what he said the cash was for. He retired 2029 maturity debt, which doesn't come due obviously for 3 more years. Um it it's just a complete balance sheet mismanagement. And now that, you know, 1 and 1/2 year cash cushion that he had to pay the preferreds, all of a sudden fell to 4 months. Uh so what happens? Market starts freaking out again. And then he comes out on Monday and says, "Okay, we're actually going to sell some Bitcoin." Even though it was a nominal amount, it's teasing the market that that's the only choice he has now is to sell Bitcoin. And that's why Bitcoin's imploding, that's why the stock is imploding, and that's why S- STRC is back down to 97. So it's really just there's there's just no there's no avenue here other than letting one part

of the capital structure die. >> And basically, um you know, just because of kind of how they handled that, it sort of seems now like raising more cash is not an option. Would you agree with that? >> No, so so again, this it's a it's interesting story here, right? Because this is not necessarily like an imminent death spiral in the sense that he still has somewhere between 4 and 5 months of cash on the balance sheet. I think it was like 6 or 700 million in cash that satisfies It's basically 150 million dollars a month he has to pay in these dividends. So it's not imminent in the sense that he has a little bit of time here to figure out how to what what to navigate next.

And there are options, right? Um it's just that none of the options are very good options. So option number one is he continues to sell Bitcoin to satisfy the dividends on the preferreds. Uh that's fine, but obviously the entire Bitcoin world is now being inundated with headlines in the last 24 hours that says, "MicroStrategy turns to be a Bitcoin seller." Right? And even again, even though he only sold two and a half million dollars just to kind of wet the whistle of the market to let them know it's possible, just that sentiment alone and the Zero Hedge articles and the Wall Street Journal articles and the Bloomberg articles that all come out and say MicroStrategy's now selling Bitcoin, that will spook the market and Bitcoin will trade down as a result, which is what we're seeing.

Um So, that was one avenue is you just sell Bitcoin. The other avenue is that you continue to sell stock. Um the problem with that is that, you know, again, if you're selling stock to buy an asset, you have a you have to decide whether or not it's more accretive to sell stock and buy the asset or sell asset and buy the stock. You're getting now to a level of MNAV, meaning the premium of the equity over the underlying assets, where it's no longer accretive to the stock to sell more stock to buy Bitcoin. So, he can still do that, right? The equity still trades enough. There's certainly no reason why he can't sell more stock uh in order to pay the dividends on the on the preferreds. But, the problem is that's going to be a death spiral for the stock. If you keep selling the stock

when there's less demand for it and at a low multiple, now you're going to crush the stock to save the preferred. Okay, so if you don't want to sell the Bitcoin and you don't Your option is uh you issue more debt. Um the problem with issuing more debt, of course, is that that hurts your credit rating, right? He's already a single B rated issuer. It's going to hurt his chances of getting the S&P 500. Plus, he just paid off debt for no reason, so why would you go back and issue more expensive debt? So, that's probably not a good option. Um The third op- the fourth option is you just stop paying the dividend on on the preferreds. Um which not only is that a death sentence for the preferreds because they're going to trade down 30 or 40% if he does that, um but he's also

going to get sued because they've been marketing this as like this you know, he's been marketing these preferreds as like a money market instrument to retail, you know, saying that this is the safest 12% yielding instrument on the planet and then he's going to turn around and cut the dividend. So, I think that's a last resort. But But you see where I'm getting here. It's not that he doesn't have access to money, it's that you can't support all four parts of the capital structure without hurting one of them. And that's just a decision he's going to have to make. And right now, in my opinion, he's kind of hurting everybody by teasing the market but not actually doing anything.

>> Yeah. Yeah, it's a little bit like a confidence game. One thing that I just wanted to also tease out for people is that what's a little confusing is that they also announced earlier in May that they had bought $2 billion worth of Bitcoin. So, basically, they're both buying and selling kind of at the same time. So, just explain why that's happening. >> Yeah, so you know, they're again, the annual nut that he has to pay is $1.7 billion, right? That's the that is the preferred dividends right now.

That doesn't So, if he again, as you said, it's a confidence game, right? It's a little bit of game theory. If you can basically convince the market that we will always sell $1.7 billion of something per year in order to pay our dividends, but at the same time, by doing so, you instill enough confidence in the market that your stock trades up and your preferred trades up, which allows you to issue more of those in order to buy more Bitcoin, there is a world where he can be a net buyer of Bitcoin even as he's a seller, right? All you have to do is be able to buy more than you sell. But that spigot runs dry really fast if you lose confidence. And that's what the market is telling you right now that you made three bad decisions in a row, right? You first loaded up on preferreds

that have a heavy hefty cash dividend, then you paid down zero coupon debt for no reason, and then you teased the market by selling your asset by saying you're a seller of 2 and 1/2 million Bitcoin. At the moment, he's lost the confidence of the market. It doesn't mean he can't get it back, but it's a very slippery slope, as you know, a confidence game when something is built on a house of straws like this. >> All right. So, now let's also dive into these various um stakeholders, which you kind of already did, but I wanted to to just kind of walk through um what you think, you know, how how each of them would fare in the different scenarios and how they would be, you know, negatively impacted in different scenarios. And basically,

which one you think is the most likely one that um strategy will pursue? >> Sure. So, let's start with the bull case. There There's There's really only two bull cases for any of this, right? Number one is that Bitcoin just goes way higher. If Bitcoin goes way higher, it solves all of his problems because if Bitcoin goes way higher, all of a sudden the equity starts to run higher, you're able to sell more equity. Also, it's more feasible for him to sell a little bit of Bitcoin every year, right? If you think about $1.7 billion of annual dividends on a $57 billion pile of Bitcoin, it basically means Bitcoin only has to go up like 2 and 1/2% every year in order for you to make enough money in capital gains to pay those dividends.

So, logically, there is a path there that if you're bullish, you're basically saying if Bitcoin goes higher, it bails him out and everything's fine. Um obviously, that's must be what MicroStrategy or what strategy and Saylor thought, otherwise you wouldn't have loaded up on as much as they did in the last few months with these preferreds. They They clearly saw something in the market that made them think that Bitcoin was about to explode higher. I don't know what he saw that made him think that, but that there was no other reason why you had it would have saddled your capital structure with so much debt and preferreds over the last 9 months unless you thought Bitcoin was about to go higher. So, clearly in this calculation, but that's one way. If Bitcoin goes higher, this stre- this this story can at least get the can kicked down the road a little bit longer

uh and then probably solves problems. Um the other thing he could do from a bullish standpoint is basically just say, "We're done buying Bitcoin." Right? Let Let's say that his magic number was, "I want to own 5% of the outstanding Bitcoin and once I get to that number, we're never going to buy more Bitcoin again. Well, once you get to that number, then you could just stop paying the dividend on the preferreds and say, you know, sorry, you guys knew the risks when you bought these. Preferreds don't have to be, you know, paid out, and, you know, we're just going to not pay you, and, you know, good luck. Um if he does that, he'll never be able to raise money again cuz the capital markets will shut down for him, but at that point, he doesn't need to raise more money cuz he already

owns all the Bitcoin that he's ever going to buy. So, that's those are kind of the two avenues where things can go mostly okay. Obviously, that wouldn't be great for the preferred holders, but it would be, you know, mostly okay for kind of Bitcoin and and MicroStrategy. On the other side, um again, as we already kind of talked about, every other scenario is is going to be bad for at least one part of the capital structure. So, let's start with what happens if he just sells a ton of MicroStrategy stock. So, when you talk about a digital asset treasury company, um you you you use the term MNAV, right? This is the the the premium to the net asset value. So, if uh the net asset value is the number of Bitcoins in the pot, which right now, according to MicroStrategy's website, is 57 billion

[clears throat] Bitcoin. If the enterprise value of the company is trading above that 57 billion, um then it is accretive to sell stock and buy more Bitcoin. If it's trading below that, then it's not accretive. The problem right now is that because they've layered on this debt and the preferreds um it's not actually as clean as just being above one or below one. It's actually about 1.2 uh six is what the company has said. Basically, it's not accretive for them to sell any more Bitcoin when it's below 1.26. Right now, it's trading at 1.23.

So, he can sell more equity, even though he's admitted that this is a not a level that's accretive. Um so, he can sell more stock, but it's not accretive. That would be good for Bitcoin because it'll create more demand for Bitcoin. That would be good for the preferreds because it'll raise him more money that he can use to pay the dividends on preferreds, but it's really bad for the MSTR stock. That stock is going to just continue to go lower and lower and lower if you continue to dilute it dilute the stock at levels that are not accretive. So, that's number one. It would be good for Bitcoin, good for preferreds, bad for MicroStrategy. Number two is he sells the Bitcoin.

Um you know, again, there's this is more of a confidence game. You have to kind of convince the market that you're selling just enough to pay the dividends, but not enough to tank Bitcoin, which he clearly hasn't gotten right yet you know, what that what that magic formula is to make everyone happy. But if he sells Bitcoin, um that's good for the preferreds again, because you're raising enough money to pay um the dividend, but it's bad for Bitcoin, because you know, again, when the biggest holder in the world of Bitcoin is openly selling, it's going to scare people, and Bitcoin is largely a sentiment game anyway. Um and it's going to be bad for the stock, because the whole point of the stock is that you're adding Bitcoin per share, and you're you know, you're growing um uh the Bitcoin yield. So, if you start to sell the underlying asset,

that's bad for the stock. So, that's that's you know, not a good option for the for anyone. Um then the third option, like I said, is issue more debt, but uh you know, I think that that's very difficult for them to do when they just bought back debt, um and you're trying to you know, he he has basically publicly said that we're we we don't want to have more debt, because it's killing our credit rating, and it's killing our ability to get included in the S&P 500. But that is an option, right? The convertible bond markets um are open to MicroStrategy, because convertible bond uh investors are not really credit investors, they're more like volatility investors. So, as long as they can arbit out and and and model out what the option value of the convert is, there's demand there. It they you could certainly do that. If you did that, it

would be good for Bitcoin, because again, you're raising enough money to be able to continue buying Bitcoin. It's good for the preferreds, because you'll be able to pay the dividend. It's probably bad for the stock, because you're not going to get S&P 500 inclusion, and you're uh uh going to continue to layer on um you know, debt that's senior to you in the capital structure. Um, and it's fairly neutral for the for the other debt holders. Um, and then the last option, like I said, is the nuclear option, which is you just stop paying the dividend on the preferreds. Uh, and and this is like I said, this is has to be a last resort because you are going to kill the preferreds, you're going to lose access to all of the capital markets, you're probably going to get sued. Um, and uh, you know, if he did

that, it's mildly good for um, uh, for Bitcoin and for the equity because it means you won't have to sell any more of that. But, it's so bad for the overall story that it might actually just kill everything. So, you know, you're just in a weird situation now, um, where again, that that's not like default is imminent here, but this flywheel that he's created over 6 years is just slowly dying dying and he and he's put he's put too many pieces in the puzzle that can't be serviced at the same time. >> Wow. Uh, first of all, that's an amazing explanation, um, but second, yes, extremely um, complicated. Um, so in a moment we're going to talk about where MicroStrategy Sorry, strategy will go from here, but first we'll take a quick

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subscribe so you don't miss an episode. [music] You can get links to all of the platforms on unchainedcrypto.com/bitsandbips. [music] Again, that's unchainedcrypto.com/bitsandbips, spelled b i p s. Back to my conversation with Jeff. So, just quickly on the stakeholders, I did want to ask if you were invested, you know in uh just pretty much any of the different instruments or a Bitcoin holder, whatever, like, you know, whichever of the stakeholders um you know, you want to look at, which would you prefer to be and which would you not want to be?

>> Well, again, and this is where it gets complicated is it's all probability analysis, right? Because all of those scenarios I just laid out, there is some probability that one or more of those choices are going to be made. And where you want to be in that capital structure depends on what how you rank those probabilities. Um in a worst-case, I'll just start backwards for a second. In a worst-case scenario, let's say that MicroStrategy actually does default and goes into bankruptcy, which again, is does not really an imminent threat for that, but let's say they do, well, then you'd want to own the debt first because the debt is the highest in the capital structure. And if you have 56 billion of Bitcoin backing 7 billion of debt, you're fully covered, right?

Your debt is not really at risk. I know a lot of the debt is trading at, you know, 70 or 80 cents on the dollar largely just because it's it it it uh uh the convertible is uh feature is so far out of the money and the and the coupon is zero, so it has to trade at a level where there's actually a yield. But those would rise to par immediately if you thought uh default was imminent. So, that's the safest place is the debt. Um the next safest place is the preferred, even though I just said that the preferreds are going to fall 30 or 40 cents on the dollar um if they cut the dividend. Again, there's only 15 billion of preferreds on top of the 7 billion of debt, so you have 22 billion now backed by the 57 billion of Bitcoin. So, again,

like, in a actual liquidation or a default, you will get your money back. Um that's not why people buy preferred. People buy them because they want the dividend and if you cut the dividend they're going to fall 30% or 40% and that's not going to feel good, but at the end of the at the end of the day you will eventually get your money back if they default. Um if um you don't think that they're going to default, which I don't think they will anytime soon, then you know, again the preferred are really risky cuz they're going to have to cut the dividend at some point, but if you think that that's 4 years out instead of 1 year out and you can get 12% per year while you wait, that might be worth it for some people, right?

Um the Bitcoin and MicroStrategy stock is probably the hardest one. Like I I don't see any scenario where you'd really want to own the MSTR stock right now given how dire the options are. Um you know, you could also make an argument that you don't really want to own Bitcoin right now given that the biggest owner is going to be a net seller, not necessarily a net seller, but be a seller for the foreseeable future. So, you know, I'll caveat all of this by saying that you know Saylor has pulled a rabbit out of the hat multiple times in his career with multiple companies um or multiple versions of the same company, I guess.

Um you know, it's entirely possible that he figures out a way to do it again. Don't forget it was only November of last year when I was saying MicroStrategy is not a risk to Bitcoin because that was before he decided to load up the balance sheet with 16 billion of preferreds, which I never expected anyone to do because you'd be absolutely out of your mind crazy to do that. Um but he did and here we are. So, you know, there are certainly some avenues that I'm potentially not considering here that that he might be able to pull a rabbit out of the hat and and and kick the can down the road, but it's uh it's tough. No matter what part of the capital structure you own here, there is higher risks today than there were 9 months ago.

>> Okay. So, I do then want to ask also about your tweet, which you referenced earlier where you said quote, "Tiny sales today just to prep the market for bigger sales to come." And that was, you know, in reference to the 32 Bitcoin that were sold. And you said SERC, MSTR, and BTC cannot all win together, just foreshadowing today that someone is going to lose here at the expense of the others. So, what do you foresee happening in terms of the sales? >> So, putting, you know, in a in a former life I was an investment banker and and a capital markets banker. So, all I did was work on um companies and how you issue debt and equity to to service uh you know, your funding needs.

If I were a capital If I were advising strategy, I would have never told them to sell the 2.5 Bitcoin. I would have ripped the band-aid off and sold 2 billion of Bitcoin and just said, "We already told you and teased you that we might do this at some point. We have a cash need of a billion seven every year um and we want to prove to the rating agencies that we're willing to sell it if we need to to keep our balance sheet intact and that's why we paid off the debt." I think ripping the band-aid off, doing a huge sale, but then saying you're done for a while would have been better than doing a nominal amount like he did just to tease the market. Like if I I I'm I'm not in uh Saylor's or or strategy's inner circle, but if I had to guess,

they probably said, "Well, we know we have to sell Bitcoin at some point, so let's just get it over with and rip the band-aid off and do a tiny amount just so those headlines get out of the way and then when we sell bigger size later, the market will already be desensitized to it." But that was really stupid because you see the reaction, right? Bitcoin just fell 5% on a 2.5 million-dollar sale. What do you think they're going to do when they sell 2 billion? So, I would have just ripped the band-aid off, sold it all, gotten it out of the way, and then put a press release out there and said, "You knew that this was possible at some point. We did it, but by doing so, we're going to make maintain the dividend on the preferreds uh and we're going to continue up to

opportunistically buy more Bitcoin than we sell." Um I think that would have actually calmed the markets a lot more more what he did. >> Okay, wow. That's super interesting. Yeah, because um yeah, the market definitely reacted to such a small sale. All right, let's talk about one other thing that is related to this that is um just also very sticky, which is um the contested market about whether MSTR was going to sell uh Bitcoin in May. And um that's on Polymarket. So, um basically it has it's resolving at the moment to know even though MSTR actually did sell the Bitcoin in May. Explain why that's happening.

>> Um yeah, this is one of the craziest things I've ever seen. Um so for those who don't know, uh if you're on Polymarket, there's um uh a couple of contracts that said, "Will um Strategy sell Bitcoin?" And it has a date that says, "Will they sell Bitcoin by May 31st or by July 31st or by December 31st?" And the contract pretty clearly says, um it's not will they announce it, it says, "Will they sell it?" And on the problem was May 31st was a Sunday.

And Strategy comes out with 8-Ks every Monday. So, on Monday, June 1st, um there was already hints that they were going to be that they would have already sold it. Um you know, myself and others uh uh you know, shout out to a Twitter account BTC Believer 21 who had a really really well uh researched article talking about why he already probably sold it on Monday. Um or sold sold it in May. But, there was a lot of hinting already that there was a good chance that that they had sold the Bitcoin. That contract was trading at about 12 cents on Sunday, meaning that if you bet uh uh you know, $12 on whether or not he sold Bitcoin in May, you'd either lose it all if he didn't sell or you'd make uh $88 if he did sell in May.

So, on Monday morning, the 8-K came out and confirmed that they did sell the two and a half million dollars between May 26th and May 31st. So, there was no dispute at all that the Bitcoin was in fact sold. The contract traded up to like 60 or 70 cents, but it didn't go immediately up to 100 because the way Polymarket works is if you dispute it, then it goes to a couple of UMA protocol validators who basically vote on whether or not there's a dispute or whether or not the dispute is real. So, it never actually got to 100, which is what you would have expected it to do since it was pretty clear that the you know, there's no there's nobody disputing the fact that he sold the Bitcoin. They're disputing whether or not that means the contract actually

settles at yes because the news came out on June 1st. And forget terms and conditions and anything else, just logically think about how insane that is. That's like, you know, betting on a the Super Bowl on Sunday, but because the box score in the newspaper doesn't come out on until Monday, you can say that the game didn't end on Sunday because we didn't have confirmation from the box score. Like it's insane. It's insanity. Like there is indisputable evidence that they sold Bitcoin in May and the contract was written on Polymarket that says, "Will Sailor will strategy sell Bitcoin in May?"

So, anyway, this goes to a dispute and it's a very kind of rigged insider baseball DAO process. Basically, a bunch of insiders, it looks like, started to say we're going to started to buy no and then they were the ones who then went into vote on the dispute and decided that no, he did not actually sell the Bitcoin in May because the news didn't come out until June 1st. Not only is that ridiculous, but the contracts are still trading. So, you basically have if you're going to say that the contract is invalid after May 31st, even if the news ultimately comes out and validates it. If you're going to say, "No, he didn't get the news out there in time," then why did the contract still trade?

So, forget anybody who may or may have may or may not have lost money prior to May 31st, there was tens if not hundreds of millions that were traded after May 31st once it was already clear and provable that he sold Bitcoin in May that are now losing money on the S contract because uh the validators decided to say that no was the legal answer. So, I I I'm just uh I'm a missed, quite frankly. Um I know skin on this. I just I've never seen anything that is so ridiculous.

Uh it looks bad on Polymarket. It looks bad on UMA and the validators. I don't know how anybody can take a market like this seriously when uh there is such indisputable evidence that the answer is yes and yet it's resolving at no right now. So, again, there's going to be a lot of legal battles on this one. >> Yeah, yeah. I agree with you. Um I did find a contrarian take that made sense to me though, so I want to run it by you to hear your response. Um Car on Polymarket had tweeted, "A key problem with allowing post-deadline evidence is that it creates hindsight resolution.

Traders are forced to wait indefinitely for future disclosures disclosures that may or may not emerge. A market that appears unresolved at the deadline can suddenly flip days, weeks, or even months later because new information is released. This is inconsistent with the principle that prediction markets should provide clear and timely outcomes." So, so let's just leave aside the fact that it was still trading on June 1st. Um what do you make of that point? >> So, I think there's some validity to that in the sense that uh you're right, you can't leave these things out indefinitely. There has to be a drop dead. Um but the counterpoint to that is uh somebody actually pulled the code uh and the drop dead on this one actually was July 1st, not May 31st, so it should have been honored through July 1st. But

second, if there is a drop dead, then that contract should specifically say that, right? It should say, "Did uh did Strategy sell Bitcoin in May and will it be revealed and provable by May 31st? Right? By leaving it open-ended, you're basically tricking your users on top of the fact that again, if you do think that it should have ended on May 31, then it immediately should stop trading on May 31 and not be available to trade thereafter. Right? So, I think I think there's some validity to that. I don't think you can leave these things open-ended forever and then you know, a year and a half later be like, "Actually, we just found proof that he did." So, there has to be an end date, but that end date has to be explicitly

defined. And it's you know, this is not the first time this has happened. So, you would have thought the people behind Polymarket and UMA would have already looked to fix this. You you know, putting your conspiracy hat on, you would say that they're purposely leaving this ambiguous because it allows insiders and friends to make money on things that are are in their own control to dictate the outcome. >> Mhm. Yeah, I I agree with you about how it should have should have been handled and I did see that there was a counterpoint to that tweet where somebody responded that for that one Khamenei, you know, the the quote-unquote death market, that at that time Polymarket did say, "Quote, in the case of ambiguity at

the time of resolution as to whether Khamenei was removed from power by February 28th, this market may remain open until a consensus of credible reporting can determine whether the resolution criteria was met." So, basically, you know, that goes against that same notion that it like needs to just always have a fixed date cut off time. Anyway, Jeff, thank you so much for explaining what is, you know, rather complicated and I just love how your mind can, you know, go through kind of each of the scenarios to play it all out and and explain it so beautifully for the audience. So, thank you so much for coming on Unchained.

>> Well, I appreciate you having me Anytime. >> And thanks to everyone for joining this livestream. We will catch you tomorrow with Unchained Money. Bye now. Nothing you hear on Unchained is investment advice. This show is for informational and entertainment purposes only. And I guess and I may hold assets discussed on the show. For more disclosures, visit unchainedcrypto.com. >> [music] [music] [music]