Strategy is Trapped & in Crisis — "It's Basically a Hedge Fund Now" | Jeff Dorman & Matt Walsh

TRANSCRIPT

David Hoffman:
[0:04] Bankless Nation, I'm here with Jeff Dorman. He is the CIO at ARCA.

David Hoffman:
[0:08] We've had Jeff on the podcast a number of times, but not recently. Jeff, welcome back to the podcast.

Jeff Dorman:
[0:12] Great. Thanks for having me. And quick disclaimer, this is my own information and not investment advice.

David Hoffman:
[0:18] We also have Matt Walsh, founding partner at Castle Island Ventures. Also, we've had Matt on the podcast plenty of times, but not recently. Matt, welcome back.

Matt Walsh:
[0:26] Good to see you, David. Good to see you, Jeff.

David Hoffman:
[0:29] All right. So Michael Saylor and Strategy are in a bit of a predicament. They might have bought themselves some time, but I don't know if they're really out of the predicament. I want to go through with you guys exactly the nature of this predicament. Maybe just to really start this question off, I think the question that I would like to know is, Will Stretch ever trade back at $100 ever again? Maybe, Jeff, I'll just throw that one to you and just see what you think about that.

Jeff Dorman:
[0:57] I think it can. I mean, actually, I'll caution everything I'm about to say throughout this entire discussion is that you can't really talk in absolutes with strategy. Everything has probabilities. So I would say the probability is very low, probably single digits that it gets back to 100, but it can. I mean, you know, ultimately, there's two cohorts of people who buy something like stretch, right? One is sort of uninformed retail, kind of like your mom and pops who all they care about is every month did the dividend get paid? And if so, they're happy, because they're living on a fixed income and don't even look at the monthly statements or the actual capital. And two are people who are probably doing the probability math of well how many months of runway do we have and is it worth getting 12 points of interest every year relative to a chance that it might fall 40 or 50 points if they ever cut the dividend so I think it's going to be a less than useful tool for strategy going forward in terms of issuance I don't think it'll ever get above 100 in a meaningful way where they can actually sell a ton of it to buy more bitcoin But I wouldn't rule it out that it gets back to the, you know, mid to high 90s eventually as, you know, the story kind of calms down and people recognize that they've got two years of dividend coverage.

David Hoffman:
[2:16] Now, I've watched both of your guys' takes, both on Matt, listen to your podcast, and I read all of your guys' tweets. And so I think you guys are directionally aligned. So if there is any dislocation

David Hoffman:
[2:26] in your guys' opinions, I would like to have you guys flag that. But Matt, what do you think about the idea of Stretch trading a backup at $200?

Matt Walsh:
[2:36] I mean, I guess anything's possible. If you look at what they announced yesterday, I mean, talk about complicated capital structure here. Um, number one is they announced a new U S dollar reserve policy. So it looks like they're up to 17.4 months of coverage. Um, that's just service the preferreds and the indebtedness, uh, across the cap table. Number two is the stretch dividends. So they increased it to 12, clearly trying to make a play to have people stay in that product. Um, the third thing they announced is a digital credit repurchase program. So they allocate up to $1 billion in repurchases across the preferred stack. So yeah, could they repurchase it? Could they drive the, you know, closer to 100? I could see that. They also announced a common equity repurchase program for another billion dollars. And they announced a Bitcoin monetization plan for 1.25 billion that they could sell into US dollars. So could some combination of that push the prefers up? Sure. Now, is it going to be a useful issuance platform in the future? I highly doubt that.

David Hoffman:
[3:42] The thing about what they announced, they announced a framework, a digital credit capital framework. It was not in plain speak. Can we just say in plain speak, what was that? In simple, explain like I'm five years old terms. Like, I don't want to hear digital credit capital framework. What did they announce, Matt?

Matt Walsh:
[4:03] Look, so they had about, what, nine months of cash to service the preferreds. Markets freaking out. They need to either sell equity or they need to sell Bitcoin. They sold common equity in size last week, over a billion dollars of common equity. And what they basically announced is that we're going to actively manage this balance sheet. We're going to seek to keep the preferreds in the game. We're not going to sacrifice the preferreds. I think Jeff's had some good takes around this trilemma here between Bitcoin, the common equity and the preferreds. And I think it's really difficult to find an outcome that is beneficial to all three cohorts there. But they basically announced, look, we're going to try to manage these three constituents.

David Hoffman:
[4:43] Jeff, do you think that that is even a stable equilibrium for strategy? The three different investor bases, the MSTR, equity investors, the stretch preferred investors, and then Bitcoin itself. Is it possible to balance between these things?

Jeff Dorman:
[4:57] No. I mean, I think that that's 100% the problem with this company. I mean, it's not, there's no trigger for it to go bankrupt here, right? There's no forced liquidations of Bitcoin coming up or anything like that. The problem with this company going forward is simply that each part of the cap structure is in a war with the other parts of the cap structure, right? Everything that is good for one part or is going to be negative for other parts. Like there's just, there's no way short of Bitcoin just mooning to 200,000 that all parts of the capital structure, and really there's a fourth part, which Matt didn't even mention, which is the debt holders, which are fully covered, but that's come and due at some point in the next four years as well,

Jeff Dorman:
[5:35] With about a billion dollars of maturities and puts coming every year. So there's four parts of the cap structure. And there's just no way to satisfy all of them. What I would say in layman's term, you know, what they announced yesterday in layman terms is basically we are now an actively man of tech fund. We are going to actively, you know, it used to be all we do is sell stock to buy Bitcoin, right? That was a simple story four years ago. Then it was, oh, we sell all kinds of things to buy Bitcoin. We sell preferreds, we sell debt, we sell equity to buy Bitcoin. Then it was, well, sometimes we might have to sell some Bitcoin. And now it's basically everything we can sell or buy, right? So it's like every single part of their cap structure, we may sell or buy. We may sell more debt. We may buy back the debt like they've already done. We may sell more equity. We might buy back the equity. We may sell the preferreds. We may buy back the preferreds. We may buy Bitcoin. We may sell Bitcoin, right? They're basically saying we are now an actively managed hedge fund. And all we're going to do is look at the fact that all four parts of this capital structure are literally at war with each other. And we're going to take advantage of that and try to monetize that volatility that they created for no reason.

Matt Walsh:
[6:39] Jeff, you bring up the converts and they were silent on that front. I mean, how easy do you think it's going to be to get them to refinance these converts? $6.7 billion in maturities over the next couple of years.

Jeff Dorman:
[6:51] Yeah, I actually think it's pretty easy. As a former debt capital markets investment banker, the joke with all convertible bond buyers is they're not real debt investors, right? Real debt investors look at covenants, they look at the docs, they're very into the weeds in terms of what you're getting. Convertible bond investors, they don't care about the underlying company. They don't even care about the credit, really. They care about the volatility and are they able to ARB it, right? Is the stock liquid enough that they can short it? Are there options markets that you can take? Basically, it's just an ARB market. So a billion dollars of converts is actually very easy to roll, especially with a equity market cap the size. I mean, you're talking about 6 billion of debt on a, what, a $50 billion

Jeff Dorman:
[7:32] Equity market cap. it's not hard to do. Now, there's always timing considerations to it, meaning like it'll be harder to do, you know, this month, given all of the noise that they've created and all of the negative press around MSTR. But, you know, we talk six months from now, 12 months from now, things are calming down. The preferreds are back in the 90s. Nobody's really that concerned about it. Very easy to refinance these. Now, again, it's going to just continue to exacerbate the problem because the first time they did this, they could do all zero coupon converts, you know, that were, you know, up 25, up 30 type premiums, each time they have to do this, the terms are going to get a little more onerous. They're either going to come at 2% coupons or 3% coupons. And, you know, maybe the conversion ratio is slightly less in micro strategies favor and things like that, but they will be able to do it. The debt really is not a huge problem, especially when you look at the way they staggered the maturities where it's only, you know, basically one bond issuance every year. So in that regard, they did a pretty good job of staggering maturities and making this pretty refinanceable.

David Hoffman:
[8:32] Hmm. Hmm. So they raised, they had a USC reserve raise in this new framework announcement. They increased the reserve to 2.55 billion. I don't know how much they added, but it's substantial.

David Hoffman:
[8:44] A substantial amount of capital raised from selling the MSCR. MSCR is right now is trading at 1.04. So it's 4% above the actual value of the Bitcoin that they hold. Not terribly long ago, just like maybe a couple months ago, it was at 1.3. And now it's down to 1.04. For a moment last week, it got below one. It was at like 0.99, 0.98. Essentially, it is backed up against a wall as I see it. And I don't know if this is explicitly not allowed, but at least there's a social contract of not issuing MSTR below an MNAV of one because that invalidates the whole point of MSCR, holding MSCR as an equity investor. I want concentrated exposure to Bitcoin and that's why I buy MSCR. So that tool, that option, that strategy has is gone so long as MSCR trades essentially at one. To me, there is no other option other than to sell Bitcoin and that they are exercising that option or at least allowing them to exercise that option. But with MSCR at one, that's kind of like been their main source of padding, of adding months of dividend to the stretch facility. And so with MSCR at one, to me, there is always a bit of a predicament that strategy is in so long MSCR trades around one. That's my analysis. Matt, what do you think about that?

Matt Walsh:
[10:09] First of all, I just, I wish we had a common way to represent MNAV. It seems like every dad has a different way to calculate this. And so strategies MNAV is different. It's not a common equity market cap MNAV. It's an enterprise value MNAV. And so depending on where this is trading, you know, it's higher. If you use another methodology here, they would actually look a lot lower on an MNAV basis. But, you know, bigger point is, I think you're right. I think you're either selling common equity or you're selling Bitcoin. Now, are there out-of-the-box ideas that they could do? Could they sell the software business? Could they explore other types of instruments to raise credit? Yes. I'm sure he's talking to ChatGPT about this all day long right now. Give me a few more ideas. And, you know, they're out there. I think there's some esoteric things they potentially could do. And they are wizards from a capital markets perspective. But,

Matt Walsh:
[11:00] yeah, I think this boils down to are you selling Bitcoin or are you selling common equity? I think it's really interesting to think about this from a fiduciary perspective. You know, what is the right lever to pull here? And those have got to be some difficult conversations at the board.

David Hoffman:
[11:15] Isn't the whole idea here that strategy, they have MSTR, they have their Bitcoin holdings, they have their, you know, their stretch investors, they have their convertible notes. You know, Jeff, you called this strategy is now just an actively managed hedge fund. Well, they've built up all of these tools, all these options, all these doors that they can choose to walk in. They've built up optionality for themselves. Is that a correct framing or how would you amend that illustration?

Jeff Dorman:
[11:44] Well, yeah, I mean, again, I think they have done a very good job over the years with capital markets to build up that optionality, as you said, but it doesn't change the fact that most people who originally invested in this wanted to get some sort of levered Bitcoin. And that's just not exactly what they're doing anymore right now that they're talking about all these different levers they can pull and trying to be, you know, make creative decisions here and there. Not to mention, they're not very good at it, right? They continue to top last Bitcoin at high levels, and then have to be forced to sell it at lower levels. Even look at what they just did with the convert, right? They bought back a $1.5 billion convert with the cash on their balance sheet.

Jeff Dorman:
[12:18] That cost them $40 billion in enterprise value. I mean, just a horrific unforced error, right? I mean, just like it made no sense why they did that with the cash while not also finding a way to replenish the cash at the same time because that's what started this whole downward spiral in the first place is they at one point had $2 billion of cash on the balance sheet, preferred holders felt like they were okay. And then all of a sudden, they removed all the cash to buy back the debt. People freaked out. People started hammering the stock. And literally, they lost $40 billion in enterprise value because of a terrible trading decision. So, you know, one, I don't think they're that good at it, even if they have a lot of options. And two, even if they are good at it, it's not exactly what their original investor base signed up for. And I would go even further that, you know, we've never been bulls per se on MSTR, but I often defended it up until nine months ago because I thought that most of the takes on MSTR were outlandish and wrong, meaning most people were like, oh, they're going to get liquidated, not understanding that that isn't going to happen. Or, you know, they're going to be forced to sell the debt, not understanding that there was nothing in the debt covenants that were going to force it, or they're going to go bankrupt. And it's like, well, that's not going to happen because, again, there was no covenants in the debt to form a bank. So I was often defending them because it was a pretty simple story that most people were misinterpreting.

Jeff Dorman:
[13:28] But once they layered on all of that debt and ultimately really just the preferreds with that cash interest, that's when it just became indefensible anymore because, you know, there's still not really a risk of bankruptcy, but there is a real risk to certain parts of their holder base. And quite frankly, they do a terrible, if not fraudulent job of explaining that, right? I mean, marketing the preferreds as a money market is, you know, ridiculous. You know, for those who have invested in distressed in credit markets for a long time, know that there's lots of companies out there that have cumulative preferreds that they just shut off the dividend and they just sit there forever trading at 30 or 40 cents on the dollar with no real hopes of repayment. Like if you own the preferreds, there's two really good outcomes, right? One is that they continue to sell a bunch of Bitcoin or stock and pay you forever. Two is that they actually go bankrupt because you'll get your money back in a bankruptcy because they're fully covered. The worst outcome is they stop paying the dividend, but there's no triggers to force them to do anything. And it just languishes at 30 or 40 cents on the dollar forever, which is most likely what will happen eventually, right? So again, it's sort

David Hoffman:
[14:35] Of- That's your most likely case for a stretch.

Jeff Dorman:
[14:37] Not necessarily today, but eventually for sure. I mean, you already have a billion seven of cash dividends that's probably growing over time, as we said, with higher interest expense on the debt that they're going to have to roll, plus who knows if they come up with other things. But it's just not feasible to pay that every year in a business that generates no cash flow. So at some point, the most likely probability at some point is that they come out and say, we now own all of the Bitcoin that we ever wanted to own. Let's say it's a 5% or some magic threshold. And they're like, we own 5% of all outstanding Bitcoin. We never want to buy any more ever again. We're now just going to sit there and wait for Bitcoin to go higher like it should. And therefore, there makes no sense for us to pay the dividends anymore because what do we care? You know, as long as we're not accessing the capital markets anymore, we don't care about the dividends. So that has to be, you know, the end game at some point, you're not going to just pay these dividends forever. You know, the only reason to pay them is to keep the capital markets open to you so that you can refinance and do other things, you know, in the future.

Matt Walsh:
[15:37] I think it's a really good point on the legal exposure. I think there's three things that I would really worry about here in terms of what could go wrong. One is the price of Bitcoin continues to go against them. They're in trouble there. Second would be just structural flows on the common equity side that go against them. And I think that would entail losing inclusion to the various indices that they're included in right now. And so if passive flows go away, I think you'd be looking at $5 to $10 billion of structural outflows in that type of situation. And the third is what Jeff mentioned around the legal exposure here. So I have never seen a company, well, we're in crypto, so I guess I have seen a few. This company is really pushing the edge in terms of marketing these products to retail. And, you know, as Jeff said, they are pitching this thing as a money market fund. And it is just definitely not a money market fund.

David Hoffman:
[16:30] I mean, when we say the F word, the fraud word, fraudulent, the image that comes to mind is that AI babe drinking the margarita by the poolside saying, how did I get this life? Oh, I just bought Stretch. And I cannot imagine that Saylor was going to tweet this out, at all seriously. Like that had to be like a joke, like rage bait, which Twitter just like absolutely got rage baited. But I don't know if that matters because now here we are and like now the thing is like 30% off of the peg. It's actually only 17% off today. And now that that is just, you could just see that as like exhibit A in a courtroom. That's what we're talking about, right?

Matt Walsh:
[17:13] Yeah, I think it's that. I think it's the podcast appearances. I think it's also just the, what's the bigger picture outcome here? And so Saylor talks about building this Bitcoin credit company. What does that actually mean? I mean, I'm kind of struggling to understand what does that actually mean in the future. Fast forward 10 years, you're a Bitcoin credit institution. You're just issuing more of these preferreds. I think it's not very clear what the actual roadmap is.

Jeff Dorman:
[17:37] Well, then I think, you know, when you constantly change the goalposts, which he's done multiple times in terms of when they're going to buy or sell the stock, what levels, when they constantly make up terms, which they have with, you know, their Bitcoin per share and all those others, but when you constantly make, put numbers on a website that have no real mathematical basis, like even the way he calculates sharp ratio makes no sense. As Matt already mentioned, you know, the MNAV is inconsistent with other ways. Like there's a lot of, not to mention the fact that, you know, he's sort of operating in a gray area anyway, just in the sense that he is using an instrument Bitcoin that there's not a lot of rules around, right? I mean, It's not like you can create a holding company like he has done and just buy NVIDIA stock in there because you'd be a RIC, a registered investment company. There's rules around that. But because you're buying this weird esoteric asset that doesn't really relate to any other asset in history, he's getting around a lot of rules. So it's hard not to use the F word in that sense because, again, the courts would ultimately decide that. But I mean, there's definitely, there's definitely a lot of, let's put it this way. If you were a lawyer in charge of a prosecution against MSTR, you'd certainly have a lot of things to use as evidence to try to prove your case. So it's bizarre that they had such a golden goose and decided to, you know, continue to fly that close to the sun on some things that I'm sure they were given legal advice not to do.

David Hoffman:
[19:03] So with the details of their digital credit capital framework that came out Monday, the big takeaway that I think the discourse was going around on Twitter was that, oh, they are going to try to get stretched back to 100. They're going to try and keep the capital markets open. It seems far-fetched, but they're going for it. And now talking to you guys and seeing the potential legal action that they might be up against, that seems to be perhaps a motivating factor as to why they want to do their best right-by stretch and stretch holders. Because the opposite of that seems to be being taken to court. Is that a fair assessment?

Matt Walsh:
[19:43] I think they just needed to buy some time here. And that's what this announcement was this week. So you kick the can down the road a little bit. But you come out with some actions that theoretically will benefit the preferreds. And it's at least a little bit more clear what they're doing than it was this time last week. One of the things I found very interesting was right around the time they were pivoting to being this digital credit instrument, the narrative was kind of changing. They started to issue the preferreds. Pete Brigger joined the board. It was July of last year, one of the foremost investors in the credit space, founder of Fortress Group. He quietly left the board I think it was in June of this month actually June this month June 8th I believe I mean that's a tell to me it's like you get someone like that on the board you're making this pivot into credit and all of a sudden he's not on the board anymore very quietly in a proxy statement so not a great sign but

David Hoffman:
[20:39] The idea is that the guy with all the smarts and the experience who is on the board is just said, I don't want to be a part of this mess.

Matt Walsh:
[20:48] That's, I mean, haven't talked to him, but you'd have to read between the lines. As a director of a public company, you would be considering whether or not you want to be involved in something like this.

Jeff Dorman:
[20:59] Or just not having their ideas to listen to, right? I mean, again, there's not that many people in the world who are super close to Saylor, but this guy owns the whole company. He is basically, what, 42% of the voting rights on the board. Like, you know, it is all, for all intents and purposes, this is basically a monarchy, right? So, you know, you come in with thoughts and ways to help and you might just be like, don't care, right? This is the way I'm doing it. So, you know, I think that's just as likely of a possibility that this is just what is the point, right, when you have no real influence over what they're doing.

David Hoffman:
[21:31] Jeff, we read your tweet on the weekly rollup me and Ryan did last week or maybe two weeks ago about your scenario, your probability for three different scenarios moving forward. And this was before the announcement. So I want to get your take on the updated scenarios. But just to recap, said 70% chance that strategy continues just to sell MSTR. MSTR premium gets hammered, but Stretch gets some breathing room and Bitcoin's fine. You give a 25% chance that SayLearn strategy does the right thing by just making a very large Bitcoin sale, which just clears their runway for a very long time, puts a lot of cash in the balance, gives up a bunch of, coughs up a bunch of Bitcoin, or a 5% chance that they just kill the dividends, stretch, crashes, distressed asset, dividends are just four gone, and that thing's more or less abandoned. You only give a 5% chance. Now that we have the details of their digital credit capital framework, we're going to get a lot of money, Has anything changed? Or is that still your analysis, but now we just punt it down like nine to 12 months?

Jeff Dorman:
[22:33] Yeah. And again, that's why I said earlier, it's hard to talk in absolutes. Everything's probability with it. But I think that 70% scenario that I said is basically what he did, right? Which is just continue doing what we're doing, which is sacrificing MSTR at the expense of everything else.

Jeff Dorman:
[22:47] You know that's essentially what they did right they sold an enormous amount of stock they pushed it all the way down to that one m nav level and now they're essentially saying they're probably not going to sell stock again anytime soon and and they have this you know year and a half cash buffer um i still think the right thing would have been to just rip the band-aid off and do an enormous enormous bitcoin sale like even you can go back what four or five weeks ago when they sold the two and a half million dollars of bitcoin to be cute or funny or whatever they were trying to do like just again it just was nonsense right if you're going to do it anyway you should have done a huge number, gotten it over with, ripped the Band-Aid off and removed that overhang. So, you know, in terms of like crypto in general has been weak for a lot of reasons.

Jeff Dorman:
[23:25] But for whatever part of the story has been directly related to Saylor and this overhang, the clearest way to have removed that overhang would have been to do a giant Bitcoin sale. The fact that they did instead a giant equity sale and then tease that they have a billion and a quarter more of Bitcoin to sell, it just keeps that overhang a little bit on top of Bitcoin that didn't need to be there. So I would say, you know, in terms of probabilities right now, you know, I still say less than five, five or less than 5% chance that they do the nuclear option of cutting the dividends, right? Both for legal purposes and because they just, you know, lost $40 billion in enterprise value to raise the couple billion to keep that alive for the time being. So I think that's very low likelihood that they're going to do that in the near term.

Jeff Dorman:
[24:06] You know, short term, truthfully, at this point, the right thing to do is just do nothing, right? They cleared the deck for a year and a half. They bought time. You just do nothing, right? Stop being the main attraction for a year. Stop tweeting so much. Stop doing anything. Just let the market play out for a while and don't do anything. I think that's the right move right now, but probably the lowest probability, just because we've learned over the years that he's somewhat of a narcissist and a lunatic. Um so you know even though that would be my suggestion but i don't think they'll do that the most likely path at this point um is that

Jeff Dorman:
[24:41] Uh you know the the the authorization to sell the billion and a quarter bitcoin probably keeps a lid on bitcoin until he actually sells it at some point he has to sell that and be like now we are actually done for a while and that's when i think bitcoin probably bottoms and and and you know msdr probably bottoms as well uh when they actually finally stop teasing the market with sales and just do it, hold the cash in the balance sheet and then do nothing. So, you know, my stance is that there was all kinds of capital structure trades to do over the last few weeks. I think it's largely over right now. I think, you know, at least for the time being until, you know, another unforced error or the market forces, you know, force something else. I think this is just sort of a boring story for the foreseeable future.

David Hoffman:
[25:22] Does that resonate with you, Matt?

Matt Walsh:
[25:24] Yeah, I think clearly what he's going to do is just sell the $1.25 billion of Bitcoin and kind of sit tight for six to 12 months. Another option here would have been to just sell a much bigger amount of Bitcoin. That's probably what I would have recommended if I was on board of a company like this, is just sell a big chunk, like 75,000 Bitcoin up to 100,000 Bitcoin, something like that. Give yourself a huge runway. I mean, another option would be to not sell any Bitcoin and just hope the price of Bitcoin goes up. If you think about what's weighing on Bitcoin right now, I think you have the micro strategy question. I think you have a big interest rate question. And I think you have the quantum question. So will the price of Bitcoin be up in six months? Who knows? It's anyone's guess. But I could also see Saylor just taking that bet and just

Matt Walsh:
[26:10] hoping that the price of Bitcoin goes up in six months. Doing something then.

David Hoffman:
[26:14] Yeah. Obviously, I don't know this but it doesn't feel like that works to me uh, like there there's something about sailor is a large enough player strategy is a large enough player he's got, 850 000 bitcoins so sell selling the number that you said like 70 to 100 000 bitcoins is a very meaningful chunk of their bitcoin holdings, and it would have to represent sailor just eating some humble pie and, it would also be an admission that he got over his ski tips, he issued a little bit too much stretch, he just got too bold. And I think that's what the market wants, but the selling the minimum amount of Bitcoin to buy himself the minimum amount of time in the hopes that the market just goes up. Will actually cause the market just to not get clarity. Saylor will still be in the hole. And to whatever degree that strategy is actually determining Bitcoin price, I think the market is just like, I'm calling your bluff and I'm going to make you cough up Bitcoin. And I'm not going to Bitcoin price and I'm not going up until you eat some humble pie and you cough up enough Bitcoin to satisfy the market. Like that's kind of my attitude.

Jeff Dorman:
[27:30] Well, that's the thing that's always been true with investing in general is that markets can handle bad news better than they can handle uncertainty. The faster you get bad news, it's like any new CEO that comes into a company, right? What's the first thing they do? They just have the worst earnings ever, blame everything on the outgoing CEO and then get all the bad news out of the way and then start fresh, right? When all you do is constantly create an overhang and uncertainty, that's what markets hate the most, right? And that's what he has done and will likely continue to do, which, like you said, is weighing on Bitcoin and probably prevents the outcome that he needs the most, which is him getting out of the way and Bitcoin going higher. But I will say there is another option for him and for strategy, which we haven't discussed yet, which I talked about even a You know, he could very easily create the Berkshire Hathaway of crypto and just start making acquisitions with the Bitcoin, right? If Bitcoin really is the scarce asset that he's telling everyone it is and that, you know, a large cohort of the world thinks it is, then there would probably be scenarios where he could buy companies with the Bitcoin, where the company would be willing to even take a discount to fair value in order to get the Bitcoin, in which case he can actually build some cashflow generating entities under

Jeff Dorman:
[28:47] His umbrella that not only help satisfy the dividends and the interest rate on the debt, but also ultimately, you know, diversify the company a little bit more. You know, old school micro strategy bulls might say, that's not why we want to own MSCR. We just want to own the Bitcoin leverage. But again, he's already ruined that narrative by turning it into a capital markets hedge fund anyway. So at this point, you might as well go full on, you know, build a real company with the Bitcoin stack that you have, you know, you look at some of the success stories, like even look at what Galaxy has done by buying distressed mining assets. And, you know, now the Galaxy stock is probably the most undervalued stock on the planet because of the fact that they own this distressed Bitcoin mining facility that they turned into an HPC AI data center, right? Even the Celsius did the same thing, you know, in bankruptcy, right? There's all kinds of things they can do with this Bitcoin stack now that could actually turn this into a real company. Again, I don't know I wouldn't put a high probability on that today But to me, if I were an MSTR shareholder That's what I would be ultimately looking for

Matt Walsh:
[29:48] I think the M&A option is an interesting one. And are you suggesting you would actually pay Bitcoin or would you acquire these companies with common equity? Because I assume you'd try to buy them with common equity first if you could find a cash rich company.

Jeff Dorman:
[30:00] Yeah, maybe. I was thinking actually use the Bitcoin, right? That again, like we're not there yet, but if Bitcoin truly becomes a scarce asset and one company owns four or five percent of it all, like there is a world where people would, you know, companies would clamor for that Bitcoin and would might, you know, actually take a less than favorable deal in Bitcoin with Bitcoin as the asset. So, you know, but to your point, you know, doing a stock deal would be there as well. But ultimately, you know, that you get to a point where you just can't be the only buyer of Bitcoin in the market. You have to do something else, right? So either go buy some other assets or do something else or diversify the business in some way, shape or form. And again, you've created this massive overhang by being the Bitcoin buyer and potentially the Bitcoin seller. Get into some other businesses. Use that massive capital structure that you have and that massive balance sheet that you have to build a real business.

David Hoffman:
[30:51] Kind of to your point, Jeff, Saylor and Strategy are good, competent at building that capital structure, but they're just dogshit traders or dogshit at just making good execution prices for Bitcoin. What if they just don't have the talent for that? They seem to be very good at this one thing and not very good at anything else.

Jeff Dorman:
[31:13] Well, I think I read somewhere they have 1,000 employees. What do those 1,000 employees do? Are they just making AI?

David Hoffman:
[31:20] Some are part of the software business, right?

Matt Walsh:
[31:21] Yeah, they still have a software business, right? So I think they have 10 to 15 employees on the Bitcoin capital market side.

Jeff Dorman:
[31:27] Yeah, and the rest of them are just making AI social media videos. Like, I don't know what they do. But, you know, to your point, like not having that expertise doesn't mean that you can't either develop or acquire that expertise, right? I mean, you know, again, this is, you have to put your venture hat on for a second, right? Most venture capital investors will say at some point in their careers, we just bet on the founder. We just bet on the guy. Like, we don't know, you know, we just think that that, you know, guy or girl is amazing. Like, in some ways, shape or form, that's what MSCR shareholders or anybody who owns any part of the capital search that they're doing. They're betting on Saylor and they think that he's going to come up with something. But at some point, his playbook runs dry and he has to be humble enough, as Matt, you know, to use the word Matt said earlier, to basically say, okay, we're now beyond what I can do. Let me go get some real talent in here to run other parts of the business. So, you know, again, I'm not suggesting that that is a high probability outcome today, but it is, you know, reading through crypto Twitter and watching so many people just defend MSDR with just blatantly incorrect facts. You're going to defend it, you know, at least be creative with why you're defending it, that there are some other things they can do besides just, you know, killing one part of their capital structure to save another part. Yeah.

Matt Walsh:
[32:44] I think the M&A idea is a very interesting one. If you think about what he can do for Bitcoin, though, specifically, he has this quantum initiative, but it seems like he's poo-pooing the quantum threat in general. He was on stage at the Goldman Conference today in London, who was somewhat dismissive of the threat. I'd actually say that might be the one thing that he could do for the macro asset is to just really lean in and fund some development there, fund just a roadmap for Bitcoin Core and just speak more about it. I think that being de-risk could actually just help his balance sheet in a way that maybe the M&A wouldn't in the short term.

David Hoffman:
[33:24] So I kind of get the sense that this matter is simultaneously resolved and unresolved in the sense that the stretch is trading back up. It's up like 17% from the bottom. It's still about 17% off from the top. So it's like, it's not getting worse at the very least. MSDR is down. But hey, they've got like 26 months of runway if they sell the one and a quarter billion dollars of Bitcoin. And so 26 months of runway is a decent amount of time. And so like, it's a car crash in the future. So it's simultaneously resolved and unresolved. I kind of did just feel very unsatisfied about any sort of like local conclusion here. So like, I don't know, Maybe the story is I have you guys back on in 20 months and we have this conversation all over again and see what the hell strategy that they've done to mediate this thing.

Matt Walsh:
[34:21] This is the case in a lot of companies, by the way, though, that have huge debt loads. And so if you take a look at iHeartMedia, for instance, there's no way that business can be a going concern business three years in the future given their debt loads. So it's just a matter of when are they going to refinance. And, you know, the forcing function will come at some point in the future. I think the puts are really what would be the forcing function here. You know, there could be other interim forcing functions around getting dropped from indices, something like that. But yeah, I don't see this. This is not a company that's going bankrupt in the next six months. There's no forcing function there.

Jeff Dorman:
[34:56] I'd also add that even just the way you described that shows the brilliance and the craziness of the way MicroStrategy markets itself. The fact that you just included a billion and a quarter of Bitcoin sales that haven't happened yet on their balance sheet as cash to pay. That's no different than him saying, we have 30 years of dividend coverage. Well, yeah, if you sell a ton of Bitcoin, you know, you're just you're just automatically adding that because they said they might do it, which is what he's been doing. Right. It's all sort of sleight of hand, sleight of hand, you know, magician stuff that he's been doing just to convince the markets that that that, you know, he's covered in ways that he actually isn't until he actually does these actions.

Jeff Dorman:
[35:32] Um but i do think too a lot of people don't

Jeff Dorman:
[35:38] Um a lot of people are talking in extremes with this company like you know it's going to go you see some equity reports like benchmark coming out with a 500 price target and you know then there's someone else who says this thing's going bankrupt and going to zero like most likely as matt mentioned and i said like there is no there's no huge bull case here and there's also no bankruptcy case here it's most likely just going to be a slowly kind of melting ice cube for decades, very similar to like printing companies or yellow page companies, right? If you go back like 15, 20 years when the internet first started to kind of get going, everyone started calling for the demise of the yellow pages and the phone book companies and the printing companies like R. O'Donnelly and all that stuff. And instead, the debt was great instruments to own because these companies were just cash flow machines. Like 80-year-olds still get phone books, you know, and they still go to, you know, the printers. Like these businesses don't just go away overnight. It's very rare to see something just go away overnight unless, again, there's some sort of massive trigger that forces a bankruptcy. This is just going to be a slow bleed melting ice cube where, you know, you'd be hard pressed to find a real bull case for the stock right now. That isn't just why don't you just buy Bitcoin if you're bullish on the stock outside of him doing something crazy like we mentioned, which is the nuclear option of killing the dividends and or becoming pretty acquisitive in some M&A scenarios. So it's just going to be kind of dead and boring for a while until something happens, in which case you get us back on and we talk about the new things that are going on there.

David Hoffman:
[37:07] The thing that could happen, of course, is that Bitcoin just pumps and, you know, Sailor is saved. The reason why I have trouble seeing that is because Saylor has taken such a large amount of the oxygen out of the room when it comes to being bullish on Bitcoin.

David Hoffman:
[37:23] At least just because we haven't had, we don't have a larger figure than Saylor being bullish and buying Bitcoin in size. Like how do you have, Saylor's larger than life, that's kind of half the appeal of strategy. And so anything short of like the Bitcoin strategic reserve deciding to actually take tax money and buy Bitcoin, Like, Saylor needs somebody bigger than him to come and buy Bitcoin or needs a macro environment or some liquidity environment for other people to say Bitcoin is bullish rather than Saylor. And there's been such a limelight on Saylor. And he's just like, co-op is kind of a negative word, but he's just co-opted a bit of the Bitcoin narrative. And now it's the Saylor narrative. Bitcoin and Saylor are kind of the same thing. And he really needs somebody else to take the torch away from him and carry it forward and push the Bitcoin ball up the hill so he can be saved because he clearly can't do it all of himself. And so like one bear case I have for Bitcoin, not even strategy, is just that Saylor has the narrative. And Bitcoin holders and Michael Saylor need somebody else to kind of step in in order for Bitcoin to be bullish. So I don't really see Bitcoin just magically appreciating back to all time highs, with Saylor also being the core figurehead. Matt, what's your response to that?

Matt Walsh:
[38:45] So I agree with part of that. I mean, I agree that if you're a large buyer of Bitcoin, you probably would want to have a view on what is going to happen to MicroStrategy before you step in just from a flows perspective. So in the near term, I completely agree with that. However, on just the macro thesis for Bitcoin, sailors kind of know part of that, right? So what is Bitcoin? Bitcoin is competing to be a venture bet on the emergence of digital gold. It is a non-sovereign store of value. If we have an interest rate regime that is favorable over the next few years, I'm sure Bitcoin will become more interesting to a lot more people and you could definitely see it going up. If quantum roadmap is a good roadmap and there's an actual plan there, then I think a lot of the questions from the bigger allocators will be addressed. And I don't think Saylor will be as big of a piece of that market in terms of just the structural flows that could come into this market. I think the bigger question though is what is Saylor doing then? And so if Bitcoin is double, triple what it is right now, is he just running the same playbook again? And we're having this conversation five years from now and another bear market. I mean, where does he stop? He doesn't seem to be the type of guy that's going to stop.

David Hoffman:
[39:56] Yeah. You think he just finds himself back into at just another trap even bigger this time later.

Matt Walsh:
[40:02] I mean, I think he has ambitions to own a lot more Bitcoin.

Jeff Dorman:
[40:08] Yeah, I think it's, you know, it's probably no similar to like a sports team where, you know, you have one player who's got all these off the field distractions. And it's like, you know, you just want to you don't necessarily have to cut that player. You just need them to shut up for a while and get out of the press. Like, again, I think that's the best outcome for Bitcoin right now. I'm neither a Bitcoin bull nor a Bitcoin bear. I actually kind of think it's fairly boring asset now relative to a lot of things in blockchain, which I'll get into in a second. But like the, you know, just just getting out of the way, getting out of the press, getting out of the story, just letting this sort of die down. You know, again, they finally did something responsible after crushing 40 billion of enterprise value, which is build up that cash value on the balance sheet. Like they can just get out of the way for a long time, right? A year, year and a half and just sort of be quiet and let Bitcoin develop its own non-sailor narrative for a while, which, you know, very well may, you know, develop into something that helps them. But, you know, to your point, while he is the main story, while he's the ringleader, it just it's it's it can't be good for Bitcoin. And I think on top of that, and this is what I was saying about other areas, like the irony of this sort of Bitcoin bear market and the sailor bear market is that.

Jeff Dorman:
[41:17] In a lot of ways, blockchain is one of the hottest investment areas alongside AI and robotics right now. Like most investors will tell you, they want to find a way to get along the growth of blockchain because they're seeing this everywhere. The problem is the growth of blockchain is happening in three distinct areas. It's happening in stable coins and payments. You know, even another huge announcement today about a consortium of fintech companies and banks that are getting involved in OSAT or the new stable coin on different rails alongside like, you know, your Western unions and PayPal and all the other companies that are doing stuff in staples and payments. So that's a huge growth area for the market. DeFi, you know, another area that's just up and to the right. And then RWA tokenization, which is just every chart is up and to the right. There are three main areas of massive growth in blockchain right now that just don't happen to touch Bitcoin in any way, shape or form. Right. And that's sort of the other part of it is that while sailor, you know, Bitcoin is already struggling right now to even be part of the blockchain discussion, given how much is happening outside of Bitcoin. And then on top of it, you've got the sailor clown show like it's it's you know, it's it's not good. And I think he has to get out of the way one way or another to give Bitcoin at least a chance to fulfill the role of that kind of non-sovereign store of value that people want it to be. And at one point, it looked like it was headed towards.

David Hoffman:
[42:39] I'm not bullish on Saylor being quiet and going away.

Matt Walsh:
[42:45] Some people just like to be the main character. Yeah. It's tough.

David Hoffman:
[42:48] Yeah. He's been our biggest and most main character for a long time now. So I think he holds the title for that. Yeah. Hopefully I never have to hear the bad boys music on your podcast, Matt, when it comes to Michael Saylor.

Matt Walsh:
[43:01] I hope not, too. I hope not, too.

David Hoffman:
[43:04] Jeff, is there a price you would ever buy Stretch at?

Jeff Dorman:
[43:07] Well, I'd have to answer that in two ways. Well, first of all, there's a price for everything. So the answer is yes. But, you know, there's a difference between when I put it in my personal account with my own money versus when I put it in our funds. The you know i'll start with the funds probably not unless this thing gets to 30 or 40 cents in the dollar and you think that there's some sort of imminent bankruptcy uh it just the risk reward is just terrible when but you know you literally have an instrument that at any moment they could just turn the dividend off and it just goes down 60 points so you know even if i had a clear four year horizon before they do that at best i'm breaking even right i'm getting you know 48 points over four years of dividends to watch the thing fall 50 points as soon as they cut it, that's just bad risk reward for a fund. Now, in your personal account where it's your own money and you take risks and whatever, maybe that's a different story. I actually thought last week, I was telling people internally, in the low 70s, it's actually not a bad time to add because of everything we just said, which is that given all the potential lawsuits, given all the legal risk, there's no way he's cutting the dividend anytime soon. He's going to have to support this thing. So as a trading instrument or as a, you know, four or five months, you know, I think in the 60s and 70s area or even low 70s last week was not a terrible place to nibble. And I'd actually say the same thing for the MSTR stock. Like if it gets to 70 or 80 percent of NAV, that's the area you'd want to buy that stock to, you know, where there's clear value there.

David Hoffman:
[44:35] Mm-hmm. We've seen, there's also beyond strategy, there's also Strive and Strive has issued SATA, S-A-T-A, which is very similar to Stretch. Basically a carbon copy of strategy's strategy as a much smaller carbon copy of strategy. And like over in my mind, I'm like, okay, there's one thing if there's just one guy doing this thing and he's doing it all of himself. But when there's a second, like, and the second guy is like, oh, yeah, this is a real, again, no pun intended, this is a real strategy. And I'm going to do this for myself, too, because anyone can do this. And I was like, maybe Bitcoiners are just going to do it again. They're just going to mean this thing into existence. And if there's enough of them, they all make it more successful for each other. Now, in this particular moment, both stretches trading 17% off, like Seda is trading 10% off. It's not necessarily looking healthy.

David Hoffman:
[45:31] But I will always kind of wonder if there is a there there. And what I mean by that is this whole digital capital structure thing with the equity and the preferred instrument. It's like, is this thing a viable long-term business? I'm hearing from both of you guys that it's not. But I still kind of wonder if there's just a chance out there that this is actually genius. And so long as Bitcoin follows in the four-year cycles, like both of these people have bought way more Bitcoin than they could have ever bought because of their like equity-preferred instrument. Matt, what is your reaction to this?

Matt Walsh:
[46:11] I mean, I think you can extend that well beyond Bitcoin. Just look at how many DATs we have now. What do we have, 30 DATs at this point?

David Hoffman:
[46:17] And Tom Lee, he did an equity-preferred instrument at 9.5% yield.

Matt Walsh:
[46:22] Yeah, and so, I mean, I get the reason for people launching these things. First of all, there's phenomenal incentives just from a personal perspective. You have asset management agreements on a lot of these things, too. So I get why people are doing them. And I understand that it's levered exposure. But I think there is a question there. Are these things that interesting? These will end up probably looking like actively managed hedge funds unless they staple on operating businesses. So absent an operating business, I just don't think these things are that interesting.

Jeff Dorman:
[46:52] I actually don't think the prefers were the problem. I think like anything, it's not black and white. It's, you know, it's in moderation, right? You know, gambling, not necessarily a bad thing. Gambling too much, a very bad thing, right? Some debt, not a bad thing. Too much debt, very bad thing. Like having some prefers made sense. The problem was just the size and the scale because again, this guy is just, you know, known for just flying too close to the sun. Like the size and the scale of what he did relative to the cash flows of the business were just It's untenable. Whereas, you know, you mentioned Bitmine. Bitmine just did, I think, a $300 million preferred of their own. Independent of whether you like ETH versus Bitcoin, the asset, ETH is at least a productive asset. You can do things with ETH. You can stake it. You can lend it. There's actually some demand. Bitcoin is a pet rock. You can't do anything with it. There's no demand to borrow it. Even, you know, all these call overwriting strategies that have come about, like the vol has just gotten crushed. Like there's almost no way to generate yield with your Bitcoin, with your Ether is, which means that he can actually, Tom Lee can actually generate $300 million a year of real cash flows to be able to satisfy a small amount of preferreds on the balance sheet. So the instruments themselves, you know, again, I don't remember exactly when they started these preferreds and stretch specifically, but it was somewhere in the nine to 18 months. Like nobody was up in arms when he started this. It was the size and the scale that he got to that made this, you know, completely teeter in the wrong direction.

David Hoffman:
[48:18] Matt, Jeff, this has been immensely helpful for me understanding exactly what's going on. So I appreciate you guys coming on the show and just providing me some clarity and hopefully the Bankless listeners some clarity. Is there any other stone that I haven't turned over, any other component of this conversation that you think is worth elevating here?

Matt Walsh:
[48:35] No, I think we covered it.

David Hoffman:
[48:36] Matt, I listen to your podcast every Friday, you and Nick Carter. Listeners of Bankless probably know that by now, but tell people about your podcast and where can they go find it?

Matt Walsh:
[48:46] Sure, yeah, thank you. It's On the Brink with Castle Island. We do an episode every Friday. Speaking of On the Brink. We'll be talking about strategy this week.

David Hoffman:
[48:54] And Jeff, I've been following you for forever now. I really appreciate all of your takes. Where can people find you?

Jeff Dorman:
[49:00] Yeah, on Twitter or X, you can find me at jdorman81 or on our website, ar.ca, where we put out a weekly blog called That's Our Two Satoshis that I think has been running now for eight years every week.

David Hoffman:
[49:13] Eight years, man. We are some industry veterans at this point. Matt, Jeff, thank you guys for coming on the show. I really appreciate it.

Matt Walsh:
[49:21] Good to see you guys.

Jeff Dorman:
[49:21] Great, thanks, David. Good to see you, Matt.

David Hoffman:
[49:24] Bankless Nation, you guys know the deal. Crypto is risky and so are equity preferred instruments. You can lose what you put in. But nonetheless, this is the frontier. It's not for everyone. And we are glad you were with us on the Bankless Journey. Thanks a lot.