Coffeezilla: Today, we have Jeff Walton as our guest, whose company's product is quite similar to the Strategy. I did a video on this topic before, and the comments section was in an uproar. Some people said, "Yes, this thing is basically a time bomb," while others in the Bitcoin community said, "Stevie, you are completely wrong. You need to talk to someone who truly understands this industry." Jeff, you're here now. You are the Chief Risk Officer. In my previous video, I mentioned that your approach is quite crazy: using an 11.5% preferred stock to support a 13% preferred stock, the math just doesn't add up, right?
Jeff Walton: Let's go through it step by step. First, let me briefly introduce myself to provide some context. I am Jeff Walton, the Chief Risk Officer at Strive. Before joining Strive, I was in the reinsurance industry. What is reinsurance? Simply put, it's "insurance that insurance companies buy." Insurance companies are also afraid of being burned by a wildfire or a hurricane, and reinsurance is a tool to help them mitigate this kind of volatility.
Insurance companies are essentially a capital machine, managing capital on one side and the corresponding future claim obligations on the other, earning returns by taking on risks. A few years ago, I left reinsurance and joined a Bitcoin company because, in my view, Bitcoin is a digital form of capital, more flexible and transparent than traditional forms of capital in the market.
The SATA you mentioned in your video is a perpetual preferred stock with a 13% annualized floating rate. It is supported by several sources of capital to meet its monthly dividend obligations. One crucial data point: as of today, we have $1.2 billion in Bitcoin on our balance sheet, with only $10 million in debt. This means our leverage is only 0.83%, which can be essentially ignored.
Coffeezilla: Hold on, you didn't include the preferred stock in that leverage calculation, did you? Equity is not debt.
Jeff Walton: Right, I didn't include it.
Coffeezilla: But you call it "digital credit," which is quite misleading in itself.
This is actually one of my grievances with you—not personally against you, but the way you and Michael Saylor both do this. You use a very "debt-like" language to describe something that is not actually debt. That's part of why I make videos—objectively speaking, as long as the risk disclosure is in place, you can sell however you want; but using vague language in the marketing process, ordinary customers have no idea what they are buying, and many people end up getting burned that way.
You call it "digital credit," and the average person immediately thinks it's debt. But as you just said yourself, preferred stock is not debt. You have no obligation to repay the $100 principal that the customer invested.
Jeff Walton: Let's look at it from a different perspective. When you buy this thing, what risk are you actually underwriting? I have 0.83% debt on my balance sheet, less than 1%, the rest is all equity, $1.2 billion in Bitcoin, plus $12 million in cash. On the question of "Can I afford to pay 13% annually," what risk are you taking on?
Coffeezilla: You are taking on the risk of Bitcoin dropping, the risk of you being hacked, the risk of you issuing higher priority debt in the future than this preferred stock, a bunch of risks, all listed in your SEC filings.
Jeff Walton: Yes, so the risk you are taking on is credit risk, whether we can perpetually pay this interest, and the credit risk of the reserve assets on our balance sheet itself. That's why we call it 'digital credit,' because what you are buying is inherently credit risk. It's not debt, there is no principal to repay.
Coffeezilla: But people on the market don't understand it that way. I've listened to a lot of your and Michael Saylor's podcasts, and you often compare this product to bonds, talking about "the current yield on bonds." But bonds are completely different. You hold them to maturity, the principal is returned to you; of course, it depends on the specific type, but if you buy U.S. Treasury bonds, the principal will be returned. Your product doesn't have that. Saylor even compares it to a bank account. It's not a bank account at all. Your own disclosure documents clearly state: "This is not a bank account, nor a money market fund." So why do you still try to associate it with bonds and money markets externally?
Jeff Walton: I think it's fair to compare it to other credit instruments in the market. If you look at perpetual preferred stock issued by banks, that's a real apples-to-apples comparison. But I admit there aren't many external comparisons seen. The credit risk of any instrument, when you break it down, is essentially math. How do you calculate the credit risk of a Boeing bond? Look at the balance sheet, look at cash flow, make an estimate of the company's future performance, that's all there is to it.
Coffeezilla: But each tool has different risk types and protection mechanisms. You can't just brush it off with "it's all math."
Jeff Walton: I am talking about math. The risk comparison of institutional underwriters is about credit risk. What is the probability that I will receive this money in the future? Any credit tool has to solve this problem. One is "Can I get my principal back?", which is the logic of traditional bonds. Preferred stock is another logic: how long do I have to hold it to earn back the invested principal through dividends? This is the tool's "duration."
When you buy JP Morgan's 5% perpetual preferred stock, it will take you 20 years to break even through dividends. This is the credit risk you are taking. You don't have to worry too much about liquidity because it is perpetual. The focus is on how long it takes to earn back the money. The perpetual tool does not repay the principal, which is completely different from traditional bonds, but it's all math.
Coffeezilla: Our disagreement lies here. Calling it "digital credit" I think is misleading, let's set that aside for now. Let's talk about the actual credit risk of these things.
Let me make it clear: I don't think you or MicroStrategy will collapse tomorrow. My view is that this is a snowball that will gradually grow. The more debt accumulates, the more it will slowly erode you and MicroStrategy, trapping a bunch of people inside. Because the more successful this product is, the heavier the looming debt becomes.
Jeff Walton: Then let's talk math. This is fundamentally a math problem.
Coffeezilla: But it becomes especially difficult to talk about it up to this point. Because Michael Saylor will come out and say, "As long as Bitcoin rises 2.5% annually, we can perpetually pay all dividends." He often says this. But this is based on the current STRC issuance. The more STRC is issued, the more Bitcoin needs to rise needs to be recalculated. This number is dynamic, do you agree?
Jeff Walton: Not necessarily. If Bitcoin rises on its own, the balance sheet will also grow, and relatively the debt ratio will be diluted. They hold 818,000 Bitcoins. When Bitcoin's price rises, the balance sheet also increases, and the leverage ratio decreases.
Coffeezilla: Yes, the leverage ratio will decrease. But it will also decrease when the price drops. That's what I'm trying to say.
Furthermore, I believe there is a flywheel effect at play here. On one hand, you are creating yield products to raise funds, and on the other hand, you are using these funds to buy the nominal support assets of this product. The act of buying itself drives up the price of this asset, making it seem more stable.
However, this flywheel effect works in the opposite direction as well. When you need to sell assets to pay dividends, it creates selling pressure on that asset. That's why when Michael Saylor mentioned "we might have to sell Bitcoin to pay dividends," the market reacted so strongly.
I know you all hate the term "Ponzi-like." But a core feature of a Ponzi scheme is actually quite simple: using new money to pay returns to existing investors. Let me give an example: If MicroStrategy used funds from the issuance of STRC to pay a dividend in STRC, would you consider this a Ponzi-like scheme?
Jeff Walton: Cash is fungible, and the source of incoming cash can be structured in various ways. The fundamental difference between a Ponzi scheme and our type of asset management vehicle is this: Ponzi schemes don't have reserves, but we do.
Coffeezilla: But ultimately, isn't your reserve also made up of continuously incoming investor funds? As new money comes in, you put it into the reserve to pay future dividends.
Jeff Walton: Well, Ponzi schemes also have reserves, right?
Coffeezilla: No, Ponzi schemes don't have reserves. The investors' money doesn't go into any "reserve account"; it goes directly to pay existing investors.
Jeff Walton: But initially, they must have some, right?
Coffeezilla: Let me give you an example. Suppose I take $100 from you, promising to give you a 10% return forever, but I do nothing with the money, just leave it there. Now I have $100 in my account as a "reserve," and I use this $100 to pay you interest. Sooner or later, when the reserve runs out, I will have to bring in new funds. The problem with a Ponzi scheme is this, it becomes a debt snowball.
I acknowledge that you have a fundamental difference from a Ponzi scheme: Ponzi schemes typically involve an element of deceit. If your risk disclosure is adequate and clients are willing to take the risk, that's the clients' prerogative. But what I'm trying to say is that this structure shares a similarity in vulnerability with a Ponzi scheme: it is unsustainable in the long term unless Bitcoin keeps rising forever. However, I believe betting on "Bitcoin rising forever" is a very risky proposition.
Jeff Walton: Is that insurance company a Ponzi scheme?
Coffeezilla: No, it's not.
Jeff Walton: Why not?
Coffeezilla: Because it has a real business that generates real cash flow. It sells risk.
Jeff Walton: Believe it or not, almost 100% of the payouts by insurance companies come from the premiums they collect. By your definition, isn't an insurance company also a Ponzi scheme?
Coffeezilla: It's different. An insurance company has real profits, real cash flow coming from the assets it underwrites. A similar comparison would be this: Imagine an insurance company not selling insurance but issuing an "income product based on something." You ask, based on what? The answer, "Based on our balance sheet." Where does the balance sheet come from? "By selling this income product." That's more like you. A real insurance company sells a clear product; I insure my car, I pay a premium.
Jeff Walton: Isn't preferred stock a product? It's a stock, it's perpetual preferred stock, that's a product. Customers hold it for a reason.
Coffeezilla: Customers hold it because they think they will receive dividends, that's not a product. Is Nvidia's stock a product?
Jeff Walton: Of course.
Coffeezilla: No, Nvidia's GPU is the product.
Jeff Walton: Stock is a product. Customers use it for storing value. Our perpetual preferred stock is a product.
Coffeezilla: No, it's not. Is your insurance policy a product?
Jeff Walton: An insurance policy is a financial contract, a financial product, aimed at compensating you when you suffer a loss. Our tool is also a financial product. In simple terms, it's a structured finance firm, not that complex.
Coffeezilla: The issue is that its sales pitch is too simple, but the underlying risks are quite complex.
Jeff Walton: Let's talk about the Bitcoin market. One of your underlying assumptions is that Strategy is the only major player in the Bitcoin market, which is fundamentally incorrect. Over the past 11 days, Strategy has not bought a single Bitcoin, yet during these 11 days, the Bitcoin market traded $350 billion, equivalent to 4.4 million Bitcoins. Strategy was not involved at all. This is a globally liquid market.
So, what is the scale of Strategy selling Bitcoin to cover monthly dividends? With the current Bitcoin price at $80,000, they would need to sell 1530 Bitcoins a month to cover the dividends. In 11 days, the market traded 4.4 million Bitcoins. Selling 1530 Bitcoins poses no pressure on the market.
The underlying liquidity of Bitcoin has always been there. They can sell Bitcoin anytime to pay dividends. However, in practice, the cost of issuing equity is lower. They can issue common stock, issue perpetual preferred stock to pay dividends, and they also have operational cash flow.
Coffeezilla: What everyone finds suspicious is this process: you sell STRC to buy Bitcoin, then sell Bitcoin again to pay STRC interest. I don't want to use that "P" word again, but this strategy looks like taking a non-interest-bearing reserve asset, packaging it, and selling it as an interest-bearing product.
Jeff Walton: Yes, we are converting it. We use the capital structure to slice the same asset into two products. Bitcoin goes on our balance sheet, and then we use the capital structure to create risk layers. The senior layer in the capital structure is low-risk, while the junior equity layer is high-risk. This is Capital Structure ABC, not complicated.
We issue a 13% senior perpetual preferred stock, which is like selling off a portion of the risk and returns bundled together, leaving all the remaining risk and returns on the common equity layer. So, our common stock is more volatile than Bitcoin itself. We call this "amplified Bitcoin." On one side, we have digital credit, and on the other side, we have amplified Bitcoin.
Coffeezilla: I think your common stock will be permanently flattened because it's at the bottom of the capital structure.
Jeff Walton: Our common stock has a beta of 1.6 to Bitcoin. The Beta of Strategy's common stock to Bitcoin is 1.5. There is demand in the market for "leveraged Bitcoin," just look at the volume. MSTR's daily trading volume is higher than IBIT, with an average daily trading volume of around $20 to $25 billion.
Coffeezilla: That's because the market is now mainly driven by algorithms, algorithms are hedging. You can hedge the underlying Bitcoin position with leverage tools because the options market is deep enough, and the spot market is also deep enough.
Jeff Walton: Most retail investors are not hedging, they just truly believe in this thing, believe in the story Michael Saylor is telling.
Coffeezilla: Do you really think that $20 billion in daily trading volume is all retail investors?
Jeff Walton: I didn't say it's all retail. There are plenty of institutions running algorithms, like Jane Street, Citadel, Clear Street, all are market makers. What I mean is that common stock is the purest expression of "leveraged Bitcoin."
Coffeezilla: No. It also has people with higher priority above it, you have creditors above you, preferred stockholders. That's not called pure.
Jeff Walton: The market disagrees with you.
Coffeezilla: In the long term, this will be very difficult for those who believe in "pure leverage."
However, this does not affect the core issue: for this to work, it must be sustainable in the long term. I have said it repeatedly, I'm not worried about you collapsing tomorrow. I'm worried about those retail investors who see this as a "leveraged bond" or a "leveraged savings account," they are not aware of tail risks. And honestly, I don't think you yourselves are truly aware of it.
Jeff Walton: I have run 10,000 Monte Carlo simulations, with all four probability models tested, and conducted historical scenario backtesting of the balance sheet.
Coffeezilla: Alright, so after running through all scenarios, what is the scenario where people lose everything?
Jeff Walton: The scenario of a business model collapse is: Bitcoin plunges 80% to 90%, then stays at a low for ten years without any upward movement or recovery. This scenario is indeed devastating to the business model, but the probability of it occurring is extremely low. We underwrite based on the long-term trajectory of Bitcoin, a $1.6 trillion asset that banks are adopting. BlackRock's Bitcoin ETF is the fastest ETF to reach a hundred billion in size in history and is BlackRock's top revenue-generating product. Morgan Stanley and Charles Schwab are also on board. We underwrite based on Bitcoin as a productive monetary asset and its long-term trajectory as digital capital.
Coffeezilla: Let me tell you where I feel the most awkward. You underwrite the risk of something and then hedge it with the very thing itself. Generally, risk hedging should be done with unrelated assets.
But that's another topic. I want to talk about what I see as the tail risks of products like this: first, Bitcoin trades sideways; second, Bitcoin crashes and cannot recover; third, you get hacked; fourth, you mismanage; fifth, you issue debt with higher priority than existing preferred shares, screwing over the current shareholders—
Jeff Walton: Senior debt—
Coffeezilla: Let me finish. These are all real risks. They are also listed in your SEC disclosures, so you can't deny them.
There is also a risk that you will keep issuing new preferred shares. Not debt, but preferential equity obligations. With each new issue, the annual increase in Bitcoin required to sustain dividends is pushed higher. Bitcoin will not always trend upward; there’s no reason to believe it will.
As your balance sheet becomes more stretched (not necessarily leading to bankruptcy, but the burden is increasing), the market will demand a higher price for these preferred shares. Either you raise rates (increasing the cost of capital) or the stock price falls (existing holders take a hit). If they received 13% for two years, but the preferred stock price drops to $78, their actual return is wiped out.
In just five months, you have already increased from 10% to 13%—
Jeff Walton: We were at 12% during our IPO and now we are at 13%.
Coffeezilla: Alright, from 12 to 13. I might have confused it with STRC, which went from 9 to 11.5. Regardless, both of you were able to increase, but any rise in the cost of capital is not good for long-term sustainability. This is basic logic, the cheaper the capital, the better. Your current 13% is already very expensive capital.
Jeff Walton: Compared to other things, yes. If it's traditional balance sheet, traditional cash flow, and also facing AI threats, then 13% is indeed a very high cost of capital.
Coffeezilla: Alright. I've gone over all the tail risks with you, where do you think I've misunderstood?
Jeff Walton: I think we have a discrepancy in the probability ranking of these risks and their relative position to other risks in the market. The whole world is probabilistic; even driving out has a probability of accidents, so all probabilities need to be ordered to form a mathematical distribution.
I'd like to respond to a few points you raised. If the price of our senior perpetual preferred stock drops, we can buy it back, directly eliminating this liability from the balance sheet.
Coffeezilla: Are you saying, like a stock buyback, repurchase your own preferred stock?
Jeff Walton: Yes, Strategy can do it too. If their tool drops, they can buy it back on the open market.
Coffeezilla: But there is a big problem with this thinking; this kind of thing always happens when you are in your most financially stressed period. By definition, if the trading price of your preferred stock falls, it's because your balance sheet is under pressure. That's exactly when you shouldn't use cash for buybacks.
Jeff Walton: This is just one tool in the toolbox. We are managing this thing in an institutional way, just like an insurance company manages its balance sheet. We have a clear future liability picture (which is your mentioned 13% cost of capital), just like an insurance company faces future claims such as "slip and fall" or dog bites. We have a duration liability, so we need to match the capital structure with the duration liability.
We have 12 months of cash on hand, 6 months of STABLE coin liquidity, backed by 18 to 20 years of Bitcoin liquidity support. We are operating with this capital vehicle as a liability management vehicle, except we only have one type of asset, using the balance sheet to absorb its volatility.
Coffeezilla: Right. But if this asset doesn't appreciate at the speed you need—
Jeff Walton: Then we are taking on risk on the balance sheet, not the preferred equity holders.
Coffeezilla: No, they are also taking on risk.
Jeff Walton: They are taking on the risk of "whether we can deliver the return."
Coffeezilla: Well, that's just two sides of the same coin. You are taking on volatility risk, and they are also taking on the same volatility risk in a different form.
Jeff Walton: They are taking on 13% to bear the black swan tail risk you are desperately trying to render.
Coffeezilla: The moment you mention "black swan," people think it's a once-in-a-century event. It's not. As long as Bitcoin doesn't outpace your cost of capital, you are losing money. That's the core issue.
Jeff Walton: Our balance sheet, like the Strategy, as long as Bitcoin rises by 2.3% every year, we can perpetually pay dividends. Our numbers are slightly higher, around 5.5%, because the preferred shares we issued have a higher proportion of held Bitcoin. Meanwhile, the U.S. money supply grows by 6.7% annually.
Coffeezilla: Let me simplify this. Your calculations are actually confusing because this number keeps changing with Bitcoin prices, SATA issuance, and STRC issuance. A cleaner algorithm is: the cost of capital you pay for Bitcoin is 13% annually.
Let's give a simple example: I lend you money, you buy Bitcoin with it, and you pay me 13% every year. If Bitcoin doesn't rise by 13%, you are at a loss; only if it exceeds 13%, you are in profit. It's as simple as that.
Jeff Walton: I agree on this. What we are underwriting is the future; this is a digital gold rush. We are underwriting Bitcoin to rise at a compound annual growth rate of 30% to 35% over the next 8 to 10 years.
Coffeezilla: Bitcoin will not rise at that pace. That's our biggest disagreement. Why do you think it can grow by 30% to 35% each year?
Jeff Walton: Because there has never been an asset with a fixed supply in the world. The underlying supply of Bitcoin is gradually approaching zero. Institutions are entering the market, ETFs are experiencing explosive growth, and credit products tailored to it are being issued, expanding rapidly. The entire credit market is $300 trillion. This is the largest potential market on earth.
Look at those junk bonds in the market—
Coffeezilla: Why are we comparing to bonds?
Jeff Walton: Ford issued a bond due in 2069 with a 6% annual interest rate. Do you think Ford will still be alive in 2069? Will the bondholders get their principal back?
As I mentioned earlier, one way of underwriting credit risk is to underwrite the probability of future cash flows. Now AI has suddenly emerged, threatening the cash flows of almost all companies. When you draw an umbrella over the probability of future cash flows, AI has blown this umbrella up. Some companies will perform well, while others will be wiped out completely. And these credit instruments are basically illiquid.
Let's not even get started on the private credit markets, completely opaque, and you have no idea what you are underwriting. They promise a 12% return, but the underlying company's financial support is purely speculative, with low financial reporting frequency.
On the other hand, underwriting a credit instrument where you can check the balance sheet online every 15 seconds, algorithms can calculate credit risk 24/7, transparency and liquidity are not even comparable. The overall market liquidity is increasing, not decreasing.
Coffeezilla: Are you trying to make me agree that "private credit doesn't work"? How did we even get to talking about private credit?
Jeff Walton: Because you asked me, "Why can Bitcoin maintain a 30% compound annual growth rate?" I maintain a 30% CAGR because the entire credit market is under pressure and will continue to be under pressure due to inflation, AI uncertainty, and cash flow issues.
Let me give you another perspective. Strategy received a B- credit rating from S&P, and I estimate that when you hear this, you will clap your hands and say, "Look at that, B-." But the key question is: How much credit did S&P give to the Bitcoin on Strategy's balance sheet?
Coffeezilla: Zero.
Jeff Walton: Yes, zero.
Coffeezilla: But what does this have to do with Bitcoin's 30% rise?
Jeff Walton: Because we can agree that the Bitcoin on the balance sheet should be valued at more than zero. Why did S&P give zero? Because of Basel III. Basel III is a post-financial crisis set of banking regulatory standards to prevent excessive bank leverage. Under the current rules, banks holding Bitcoin do not receive any capital credit, they cannot leverage Bitcoin, but instead raise the cost of capital. So banks have no incentive to hold Bitcoin. We believe this rule will change in the future.
Insurance companies are in the same situation. They cannot hold Bitcoin on the balance sheet and receive no capital credit.
Coffeezilla: Are you saying that if the rules change, institutions will adopt it?
Jeff Walton: Yes. And what we are doing now is precisely transforming this underlying capital asset into two different components. After covering this layer, insurance companies can hold this perpetual preferred stock and receive 45% capital credit. The demand will emerge.
The risk-return characteristics are different. You can totally think that our tool is very risky, no problem if you see it that way. But what you cannot ignore is that its risk-return characteristics are different from other assets.
I studied finance in college and worked in the capital markets for ten years. Modern Portfolio Theory by Markowitz, which won the Nobel Prize, is all about diversification—
Coffeezilla: How is this related to 30%?
Jeff Walton: The connection lies in the fact that these new tools have been created with different risk-return profiles and will be added to various investment portfolios. That's why Bitcoin can surge by 30%, because the demand will be staggering, and even banks will get involved.
Coffeezilla: But Bitcoin already has a market cap of $1.6 trillion. That's exactly why I don't believe it can achieve a 30% annual increase.
I view this kind of thing more from an adoption curve perspective. All products follow an S-curve, starting with early adopters, then moving into the mainstream, and finally the curve flattens out, not because the product is bad, but because it has matured.
Looking at Bitcoin now: strategic Bitcoin reserves, BlackRock holding Bitcoin, Michael Saylor personally holding around 4% of all Bitcoin, these major players, major events, most of what should have happened has happened.
Those willing to buy Bitcoin have pretty much entered the market, and eventually it will reach an equilibrium point. If you believe Bitcoin is an inflation hedge, then after it matures, it should rise along with the inflation rate. Not by 13%, not by 11.5%, definitely not by 30%.
Jeff Walton: But the money supply grows at a compounded annual rate of 6.7% each year. The U.S. debt-to-GDP ratio is currently at 120%, growing at a compounded rate of 3.5% each year. Isn't that greater than 13%? Why are you still holding onto dollars? Is there a risk to the dollar?
Coffeezilla: The dollar is the most liquid and widely accepted form of currency. If you talk about inflation risk, then certainly there is some, I do not deny that. If you're offering a product with a reasonable return, then that's great; but a number like 30% I think is insane, even 13% I find unrealistic.
What I am truly uncomfortable with is the positioning of this "Savings Account Plus."
Jeff Walton: This is preferred stock. Strategy has issued $100 billion in this form of "digital credit" over the past 9 months, and the momentum will continue to accelerate. The liquidity of these tools is a game-changer.
We are talking about a never-before-seen fixed supply asset, so it can be hard to grasp. But the math is actually quite simple. I think aiming to surpass gold is a reasonable target. Surpassing gold would mean Bitcoin reaching $1.5 million per coin, corresponding to a $35 trillion market cap. Bitcoin excels over gold in every dimension, being portable, transportable, transferable—
Coffeezilla: I don't want to get into a Bitcoin vs. gold debate with you.
Jeff Walton: I'm not talking about a 30% perpetual, I'm talking about a 30% CAGR over the next 8 to 10 years.
Coffeezilla: But your preferred shares are perpetual.
Jeff Walton: We can lower the interest rate. If demand surges in three years, or if the SOFR rate decreases, we can adjust the rate down, as permitted in the instrument's contract.
Coffeezilla: But if you lower it, the preferred share price will drop, and holders will lose out. That's a fact.
Jeff Walton: The price could certainly drop. But you need to consider what the risk profile of this instrument looks like compared to everything else in the market.
Coffeezilla: I'm not comparing you to the entire interest rate market. What I'm saying is: you are unilaterally lowering the interest rate; you are lowering it because you predict Bitcoin will grow slowly, completely unrelated to external interest rates. You are not pegged to the interest rate; you are pegged to how much Bitcoin appreciates because you are paying a capital cost.
Jeff Walton: We hedge against future liabilities, not directly against interest rates. Our current high capital cost is because these instruments are still new. In three years, with three years of payment history on these instruments, the situation will be different.
Coffeezilla: The "paying on time for three years" aspect proves nothing. Many companies that eventually collapsed paid on time for several years before collapsing.
Jeff Walton: Our balance sheet is strong and will continue to manage future liabilities.
Coffeezilla: Jeff, I agree on one thing: this product will go viral in terms of "how people perceive returns." This is exactly what I'm deeply concerned about. I believe the success of this product itself will be the source of its downfall. The larger the debt, the bigger the issue; the more it relies on how much Bitcoin goes up to meet its obligations. So, the biggest risk is actually being too successful.
Jeff Walton: The "downside risk of being too successful" is an interesting angle. But then again, when you buy home insurance, do you check the insurance company's financial strength and claims-paying ability?
Coffeezilla: Personally, I didn't check. My wife did.
Jeff Walton: You should. Look at the strength of the balance sheet; the question is: will they be able to pay you out in the future?
Coffeezilla: Agreed, that's the core issue. But you also need to see what the company's actual liabilities are. There's a line in your disclosure: "SATA is not collateralized by Strive's Bitcoin holdings." Since there's no collateral, why call it "Bitcoin-backed"?
Jeff Walton: I think the accurate term is "Bitcoin-driven." We have a Bitcoinized balance sheet.
Coffeezilla: But I recall you saying "Bitcoin-backed" before.
Jeff Walton: Bitcoin is on our balance sheet.
Coffeezilla: But there's no collateral, that's where my confusion lies. This goes back to the issue of that rhetoric. With no collateral, why call it "Bitcoin-backed"?
Jeff Walton: Because we have a Bitcoin balance sheet, it's not complicated.
Coffeezilla: Alright then, "Bitcoin-driven," "Bitcoin-backed," but not "Bitcoin-collateralized."
Jeff Walton: Strictly speaking, it cannot be called "Bitcoin-backed" because there is no collateral. It is "Bitcoin-driven." We have a Bitcoin-driven balance sheet.
My annoyance with this whole thing is that the concept of this capital vehicle is neither novel nor complex.
Coffeezilla: You said just five seconds ago, "This is brand new, nobody has ever seen this before."
Jeff Walton: The Bitcoin-driven perpetual preferred stock instrument is new, only nine months old. But perpetual preferred stock itself has been around for a long time.
Coffeezilla: But the way it's being marketed is new. "We're turning it into digital credit," "similar to a money market," this marketing rhetoric is new. My biggest dissatisfaction is with the marketing. If you had just said, "We have a perpetual preferred stock," we might not even be sitting here talking about it.
Jeff Walton: These products trade in a particularly interesting way, with stable prices and high liquidity. Compare it to JP Morgan's perpetual preferred stock. JP Morgan has $60 billion outstanding, with $2 million in daily trading volume. Strategy's perpetual preferred stock trades $250 million daily. You can't say this isn't interesting.
Coffeezilla: Because you offer 11.5%, and JP Morgan doesn't.
Jeff Walton: Why can $250 million trade within the narrow range of $99.95 to $99.97 when Strategy hasn't even issued new shares?
Coffeezilla: Because the algorithm anticipates the interest rate will keep the price suppressed, creating an arbitrage opportunity.
Jeff Walton: This is an unprecedented arbitrage surface. These instruments provide unique arbitrage opportunities for algorithmic trading because risk can be calculated in real-time 24/7. With other credit instruments, you have to wait for quarterly reports, and by the time you get the report, it's already a month outdated. This is one of the key innovations here: risk can be mathematically calculated 24/7, which other tools in the entire credit market cannot do.
Coffeezilla: I've heard you say "This is very interesting" many times. Yes, it is interesting. But is it a good investment? I don't think so. Personally, I believe it is much more dangerous than many people understand.
Jeff Walton: You should look at the math.
Coffeezilla: Alright, I'll show you the math. We disagree on the CAGR. I opened up a 13% compound interest calculator (from investor.gov). If Bitcoin grows by 13% per year (which is your cost of capital), in 50 years, one Bitcoin will be worth $36 million. I don't think one Bitcoin will be worth $36 million in 2076. I think that's insane, unrealistic.
Jeff Walton: You think one Bitcoin being worth $36 million in 2076 is unrealistic? I think it's absolutely realistic. The U.S. debt/GDP grows by 3.5% annually—
Coffeezilla: The U.S. debt growing by 3.5% annually, how does that make Bitcoin growing by 13% annually reasonable?
Jeff Walton: Because I believe the probability of fiat collapse is very high. Fiat currencies usually last around 200 years historically, and the one we are using now is 250.
Coffeezilla: So you don't think Bitcoin itself will collapse?
Jeff Walton: I believe the world will move towards an unmanipulatable global currency standard.
Coffeezilla: That's not what I'm asking. You said it's reasonable for one Bitcoin to be $36 million in 2076, which is 50 years from now. You issued "perpetual" preferred stock, and once it's issued, someone will hold onto it forever.
Jeff Walton: This is a floating-rate perpetual preferred stock that can have rate cuts in the future.
Coffeezilla: I've heard many people offering high-yield products say, "We can lower the interest rate in the future." But they can't do it because the investors won't allow it.
Alright, let's end the discussion here. We have many disagreements, but I hope everyone can learn something from this conversation, understand your perspective, and understand mine. Thank you for coming.
Jeff Walton: Thank you for your time and space.
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