The Bitcoin Treasury Playbook With Tyler Evans & Josh Solesbury

Do you see these popping up in every single country or nation or geography where there's no Bitcoin ETF?

I do. I mean, 6 months ago I would have said, yeah, well, we'll see a handful of them start now at the, at the rate they're coming. I think we're speedrunning this playbook. I think we're going to have one in, in every single capital market in the next 12 months.

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All right, everyone, welcome back to Empire. Very interesting episode coming up. I think we have received more questions about this topic than any other topic right now. There's all of these, let's call it, MicroStrategy lookalikes happening. And we saw this with Bitcoin-related companies. Now we're seeing it with Solana-related companies, companies like Sol Strategies. Now we're about to see with the long tail of assets. So brought on the two smartest people I think in this space, which are Tyler Evans, um, CIO of UTXO, one of the co-founders of BTC Inc., uh, board member of Metaplanet, uh, co-founder of Nakamoto, a whole bunch of other things. And then, uh, Josh Salisbury, who is an investor at Parify. So Tyler, Josh, welcome to the show, guys.

Thank you. Awesome, awesome to be here. A lot of fun stuff for us to talk about today. Yeah, yeah.

Pumped on this. Quick housekeeping.

We are now less than one month out from Permissionless, June 24th through 26th.

Get your ticket. Empire10 is the code. All right. So first, I think we can't talk about this topic without starting with MicroStrategy, right? The 800-pound gorilla in the space. So maybe I would love to just start high level on this topic. I don't know if this is a question for Tyler or for Josh, either you guys can take this, but why is this working and what did Michael Saylor do here with MicroStrategy that was so innovative and how did he kickstart this and figure out this capital markets play here?

Yeah, to zoom out with Saylor specifically, obviously wrote the playbook here, the champion, the 800-pound gorilla. I think what he did was really innovative in a couple things. First, he was very early to take this leap when it was not a consensus trade like it started to be today, when it was much more risky, when he was really the first public mover from the US markets and was willing to take the leap, bought into Bitcoin intellectually, had some great folks around him educating him about Bitcoin.

And saw the potential of Bitcoin as an asset class, but really as a transformative tool for MicroStrategy. And there's a whole history to unpack there.

But with MicroStrategy kind of being like a baby of the dot-com bubble, like riding the early internet days to a massive valuation, what made Saylor worth billions on paper in the dot-com crash. And really how he tried to reinvent that company over the years. And I think what really got the flywheel started for MicroStrategy was, or Strategy Today, his courage to be the first mover. But really he identified the need in the US market in this era prior to the Bitcoin ETFs when there was no real way for institutional allocators to express Bitcoin view, Bitcoin exposure in terms of any sort of regulated exchange-traded product. I mean, you had GBTC live at the time and you had some of the European ETPs, but where he was able to accumulate enough Bitcoin on the balance sheet of strategy that it effectively served as a Bitcoin proxy, a Bitcoin ETF in those early days to kind of get the flywheel started for him. And I think as he's grown the model, as he's evolved the model, as he talks about it today, really the beauty of the model that he has discovered and capitalized effectively on is how to take Bitcoin as the commodity instrument on the balance sheet, but not just be selling one-to-one Bitcoin exposure to the street.

Instead, to be able to effectively securitize that Bitcoin into different financial products, financial wrappers that appeal to different institutional allocator pools, whether that's the fixed income market, the convertible bond market, pensions, insurance funds, folks that even with the spot Bitcoin, even with it being easy to buy direct Bitcoin exposure, have no mandate or no ability to access this asset class as the best performing asset of the last decade, but who want some exposure to this trend.

And so with strategy, he's able to package it up and kind of securitize it in all those different risk-reward tranches for institutional capital pools.

MicroStrategy aside, actually, like why is this even an interesting topic? I mean, you guys at ParaFi, one of the best investors in the space, you could be investing in a myriad— tokens, early stage, late stage, all these other kind of things. Why are you guys so excited about this kind of treasury strategies play, and why should Empire listeners care about this?

No, it's a great question. I think there's two answers to that. The first is we see strategy and all these other vehicles as part of Cambrian explosion in the public markets where it's what we call reverse tokenization at Parafi. So it's tokens coming into the public capital markets in all sorts of instruments. And it's pretty like insane if you think about it because MicroStrategy has been around for a while, but it's really in the last 9 months where you've now seen all sorts of instruments from like the pref market to the convertible note market to equity to PIPEs. Have crypto exposure. And so I'll give you some stats on the magnitude. You've had from this January to May, roughly 40 companies raised capital to have some type of crypto asset on their treasury, in their treasury, on their balance sheet. And that was roughly $17 billion in capital. So, you know, pretty big size. MicroStrategy alone has issued like $6 billion in converts and and then like another 18 or so. Yeah, I think even more in equity since the 2121 plan was announced. So really big numbers is kind of the first thing. And then you have these like sleepy markets, quote unquote, kind of being disrupted by Bitcoin, right? You have the pref market, which used to have a vol of like, I don't know, 5 or something, and now he's trying to deliver an 8% for them. You have the converts. I think MicroStrategy might be the largest single convert issuer of all time, which is crazy. So basically to sum up that first point, it's the magnitude of disruption of the capital markets is very interesting to us at Firefly, where, you know, you can find fascinating opportunities and you can scale them as well. Public markets are more liquid. And then the second is, you know, what's really interesting to us personally, and it's actually how I met Tyler and David a while back with the GBTC. Trade is we believe that you can construct a Bitcoin plus return profile with these instruments where I can engineer Bitcoin performance on the downside and superior performance to Bitcoin on the upside through the right structure and then kind of entry point from an NAV standpoint. And that's super attractive because if you think about it, Bitcoin is like the best performing asset basically every year for the last 10 years. There's like one or two that was an exception. So the ability to engineer that quote-unquote Bitcoin+ performance is very interesting.

Can we go deeper on that actually? Because so, you know, I'll pull up this chart. This is just MicroStrategy and Bitcoin, and you can see that MicroStrategy has outperformed Bitcoin. So Josh, tell me more about this asymmetric Bitcoin exposure, both from the angle of how this happens, but also why this happens. And maybe the folks who haven't gone too deep on MicroStrategy are asking one simple question, which is, why can't I just buy— why are people buying MicroStrategy? Why don't they just buy the Bitcoin ETF from BlackRock? Or why don't they just buy Bitcoin in a Coinbase account or something like that? So walk me through this chart.

There's a couple of factors at play, but at a very high level, to what Tyler said, it's Saylor's ability to kind of captivate the capital markets to kind of slice and dice, you know, Bitcoin exposure in different ways and basically through capital structure arbitrage create a juiced up return on Bitcoin is why you see this. It's so in finance you have this term, I think Jeff Park spoken about it too, who's a great thought leader in this. You have, it's called torque and basically like through capital structure engineering, Michael Saylor has applied torque to Bitcoin performance whereby he can get it to outperform when things are going up because to kind of what Tyler said is you're taking on these other forms of financing, but what you're doing at the bottom is you're increasing the amount of kind of Bitcoin, the amount of Bitcoin value per share. And as long as your premium is kind of staying at a certain range, you're effectively able to create value through that. And so when you take a step back, Why are people buying these instruments? Like, why can Saylor do that? Or, you know, other companies, why are they doing that? The reason is, and I believe is, these instruments are very volatile and it's this underlying volatility of Bitcoin that kind of perpetuates upwards. And if you can package that volatility in an appealing way, you know, kind of debt investor wants it in some way, a prep investor wants it in another way, An equity investor wants a lot of it in, in, in a different way. But if you can package that and effectively monetize it, which is what you kind of hear when people talk about MicroStrategy, you're able to kind of bring in that capital at a premium to the NAV and therefore you're kind of able to grow this Bitcoin stack in a less diluted way. And effectively, if that's the engineering that you're seeing where now that I have more Bitcoin per share, when Bitcoin goes up, and my premium over it is high as well, I'm essentially outperforming Bitcoin. So if he didn't have any of these capital market instruments, it would be very hard to generate this outperformance. I don't know if you'd add anything to that, Tyler.

I think that's pretty spot on.

And the phenomenon here that Saylor's able to achieve because of this premium is like that that positive growth in Bitcoin per share, or colloquially called BTC yield, in the strategy and investor circles. And so if you look at buying a Bitcoin ETF, if you buy today, you have 1 Bitcoin exposure, you actually have like 0.99 Bitcoin exposure the next year because you've got fees, custody, your Bitcoin balance per share of that is actually decreasing over time. Whereas strategy, They're able to capture this arbitrage, issue convertible bonds, add leverage in intelligent ways, and where Saylor has a track record of making the Bitcoin per share go up over time rather than down. And so public market investors apply a multiple to that growth profile of how quickly he's growing the Bitcoin on a fully diluted basis. And because it's growing, they are valuing it at more than 1 Bitcoin today.

I was going to add like a really simplistic example, which I think, you know, helps— I found helps folks kind of see this— is you take a plain vanilla convertible note that's, uh, has a strike that's at a premium to the stock. So zero interest, like no bells and whistles. And, you know, people have been buying these 0% interest convertible notes, which is crazy as well if you think about it. But let's first start with why does that amplify that, you know, the Bitcoin, uh, yield is because you're effectively selling equity at a higher valuation because it's eventually going to come and convert ideally. And so you're taking that money and you're buying Bitcoin today and you're exchanging it for less dilution because it's not at today's share price, but it's at future of higher share price. And so right there, you're taking money in, you're buying Bitcoin, but your share count is decreasing at a kind of lower dollar impact rate. And that's exactly like what that torque and that Bitcoin yield growth is. But the flip side is why, why am I buying this as a convert investor? Well, because the volatility is so high, the kind of right tail of the stock's distribution is wider. And so when you value convertible bonds, like a very simple way is you take like the bond component and then like the call option, then that call option becomes a lot more valuable because of the volatility. And so then you're kind of, you know, you're willing to pay a premium for that instrument.

This episode is brought to you by zkSync. In 2024, zkSync took a step toward a multi-chain future by transforming from a single L2 into an ever-expanding network of zkChains, the Elastic Network. To onboard the whole world into crypto, many specialized chains must be able to coexist, work together, and share liquidity. Institutions and global financial leaders creators choose zkSync for unmatched security, scalable infrastructure, better onboarding, gasless transactions, and privacy-first design. Join over 20 chains including Abstract, Sophon, and Cronos in the Elastic Network today. Behind zkSync is the zkStack. It is a one-stop platform for building private blockchains on Ethereum. The stack solves all the typical privacy, regulatory, user experience and deployment concerns of blockchain without compromising performance or security. Join the Elastic Network today at zkSync.io/empire. Thanks to zkSync for making today's episode possible. I wanted to take a moment to tell you about Marinade, the platform connecting Solana holders with the best staking rates on Solana. Marinade unlocks a high-performance staking delegation platform that brings billions in liquidity and security to the Solana market with solutions for both individual traders and global institutions from both DeFi and traditional finance. Use Marinade to earn rewards on your Solana treasuries and holdings. Optimize your Solana staking with Marinade's best-in-market features, including user downside protection through protected staking rewards and optimized delegation via Marinade's automated auction marketplace. To learn more about Marinade, visit marinade.finance or click the link in the show notes. As always, investments in blockchain technology involve risk. Terms and conditions apply.

Josh, there are two words that you said that I want to dig into. One was arbitrage and one was captivate. How much of this is driven by financial engineering and what you just explained and the arbitrage, right? The financial side of this. How much of this is driven by the captivate word, which I largely bucket as Michael Saylor is probably the best marketer for Bitcoin in the history of Bitcoin. So how do you think about that? And Tyler, maybe same question to you. I'm curious how you guys think about that.

I'm willing to say that I think a large part of it is captivating, candidly. I think having that ability to storytell something, you know, critical. We look for it when we're assessing other opportunities. And the reason why is in like a steady state, you're effectively convincing folks to kind of buy Bitcoin at a premium, right? Everything else aside, like pure steady state, even more financing. And I think the ability to convey what I just said in a much more effective manner and to tell a story and to say, look, this is why you should pay me a premium today because of the yield that's generating in the future. Is a big part. I think putting my venture hat on, storytelling's always a big part. And I think for this especially, Saylor's communication skills and his ability to explain things, like his recent quarterly earnings deck has so many fascinating slides, really well done. To me, that's a big part of it. Tyler, curious what you'd say.

Yeah, I mean, I agree on the marketing side. In terms of arbitrage, there is an arbitrage component, but rather than pure financial engineering, how I would really I characterize it is that Saylor's identified a true supply-demand imbalance in the market where there's demand for fixed income investors who want Bitcoin exposure, and there's no supply of products that can service that demand before Strategy started issuing those instruments. And so, he's identified these arbitrage or supply-demand imbalances where the market's looking for a product like this, he's in a unique position with a massive Bitcoin balance sheet to be able to create a financial product that services that demand. And because there's a supply-demand mismatch, he gets preferential pricing on that, which he converts into more equity, more Bitcoin for the common stockholders.

And Tyler, you're referring in that sense, not to MicroStrategy, the stock, but STRK and things like that.

I mean, I am referring in some categories even to the common stock where there's index funds, sovereign wealth funds, other buckets of capital that want Bitcoin exposure that by mandate can't buy an ETF. So he services that need, but he was very forward-looking to identify the ConvertArt folks, the fixed income investors where they had different needs, and he was able to craft a product to fit that market.

One really small thing. If you look at his most recent deck towards the end where he talks about Bitcoin credit risk and and trying to explain that, you know, with the right engineering, you can engineer an investment-grade debt instrument. I think you kind of can see where he's trying to go next. Personal speculation. If we can bring a Bitcoin-related product to the, you know, large institutional-grade debt market, I mean, that would be an accomplishment for the industry and very fascinating for those guys who can kind of get this volatility package in a way that they can digest it.

Yeah. Can we talk about the similarities and the differences to Grayscale? And specifically what I'm referring to is the, obviously the Grayscale NAV premium discount in '21 and '22 and '23. And then obviously, uh, you know, it kind of compressed to zero with the, with the ETF. But how do you guys think about that comparison?

There is the comparison there.

Uh, Josh and I both worked deeply on that trade, um, for, for the course of years.

So, um, can you say more about what it, what it means to have worked deeply on that trade? Like, you were just doing that trade in size, or what does, what does that actually mean?

We were doing this trade in size on, on both ends of it. Um, you know, I think it's public now, we, we led a little bit of an activist campaign around forcing the conversion to an ETF. I remember David's tweet. Um, we, we, uh, collaborate with a number of numerous funds who saw the same opportunity we did that eventually, you know, it would convert to an ETF and go to zero. So the product we knew pretty well at the time. You know, I think the strategy stock taps into a similar supply-demand imbalance in the market, which is why GBTC traded at that massive premium for so many years. The key difference here is that instead of, you know, that, you know, it being a trust product where only outside investors can create shares and capture that arbitrage, which funds like ours were doing. Instead, now with the corporate issuer model, the company is the one who can issue new securities, who can capture that arbitrage and turn it into shareholder value.

And so the mechanics of it are very different, but it's created because of a similar demand for institutional-grade Bitcoin exposure.

That both of those products were able to service.

Yeah, I guess the one thing I would add is my theoretical assumption, and there's been active Twitter discussion between, I think it was actually David and Jeff Park about this. My assumption would be on the discount case, you shouldn't be able to sell Bitcoin and buy shares back. So there's like a better mechanism of coming to NAV. Now whether, you know, CEO—

Josh, you're saying if the premium dropped, just make sure, uh, because if the premium drops below NAV, you're saying should— this is about the conversation around should companies sell BTC or Sol Strategies sell SOL and repurchase shares in that scenario?

I think that would close the NAV, and that makes sense. You know, Grayscale couldn't do any of that type of activity, uh, um, right? The question is, will a CEO want to do that, right? There's some people on the ideological side that maybe you know, really our position around kind of stacking Bitcoin. But I think there's an interesting argument to say that from a Bitcoin yield standpoint, what Tyler said, it actually would be accretive in that case to sell a bit of Bitcoin and buy shares back. Uh, so you are delivering Bitcoin yield even though you're reducing your Bitcoin stack. But, you know, some folks maybe don't, don't want to be selling any Bitcoin at all, which would create a fascinating, uh, opportunity set for folks like Tyler and myself to then you know, try and get into those names and see if you can kind of drive it back to, to a premium or to NAV. And then the other thing is maybe in the future you actually see acquisitions between treasury companies, right? It's like if there's a stranded treasury company trading at a 0.6 NAV, instead of me raising money to buy Bitcoin, why don't I do like stock for stock merger and just suck in all that Bitcoin into my balance sheet? So maybe that's the future. I don't know, but it'd be very interesting.

Yeah.

What kind of assets are good for this? So obviously Bitcoin, Bitcoin is good for this, um, for this type of structure. What else is good for this?

I think there's a limit. This is my personal opinion. I, I, you need an asset that has, uh, size underlying-wise to be able to accumulate. Um, it needs to have recognition and, and quote unquote, you know, trust of some sort, because I find it hard to engineer or to convince folks to kind of, you know, bring money in and like the convert market or ref market if it's like some random long-tail asset that no one knows and it's like moving all around the place. So I think there's a natural limit to this. I do see an exploratory opportunity to do this with a couple other assets because they have the vol profile that's actually higher than Bitcoin and they have, you know, an underlying market cap that can digest kind of large purchases. But I think candidly, it's a bit of a sign of froth in the market, perhaps when you have all sorts of long-tail assets trying to kind of come to market and engineer their own MicroStrategy. Because I just, I struggle to see the sufficient kind of demand in the capital markets for, you know, the 58th random token MicroStrategy.

But there's a bunch of these, right? So Tether, SoftBank, and Jack Mallers launched 21. Um, they're now the— I just saw this article, um, right before this, which is their 21 is now the— in third place, quote unquote, among, you know, corporate Bitcoin holders, uh, behind Strategy and Mara. Um, obviously your co-founder, uh, David Bailey— I'm, I'm guessing you're, you're working on this, you're working on this one too, which is Nakamoto. Um, I think you helped start this one too. So you guys raised a $510 million pipe. I know this is like a live deal, so I don't know how much you can actually talk about this one, Tyler, but maybe Tyler, if you could just walk me through how you think about these. To me, they're like, it's MicroStrategy or it's Strategy copycats, but I don't know if these are all, and which is fine. Like there's room for more than one, obviously in the world, but I don't know how, like, what's the strategy behind this?

I do think there's room for more than one. We're already seeing that a little bit with Strategy in terms of kind of how they've tapped out the convertible bond market where a a lot of convert buyers, you know, the institutional funds who are the end buyers of these products have risk limits where they can only have so much percentage exposure to one company or be so much of a, on the cap table as a shareholder. And so we already see strategies starting to hit some of those limits.

I know there's one big institutional fund that owns 10% of Strategy, and every time, you know, Saylor issues more equity, they buy up to that.

They want as much as they can buy, but they're capped out at 10%. So now they've got some more vehicles to offer that same viewpoint on Bitcoin through. I think we're starting to see a lot of differentiation with the market. And Saylor's done a masterful job. There's a lot of levers, nuance in terms of how you can approach this market, like with what 21 is doing, obviously with what we're doing with Nakamoto, which is a whole spectrum of things. Piece of that is on the operating business strategy, have the software business. 21 is a pure play. Nakamoto is exploring some operating opportunities.

And then in terms of the leverage, the types of bond or convert or pref instruments, how much leverage and how you apply that on the balance sheet, there's a whole variety of approaches there.

And then there's also the question of what do you do with the balance sheet? And Saylor, to his credit, has a very firm conviction about never sell your Bitcoin and keep it in cold storage, max transparency, which the market has loved. But now, there's a whole variety of things you can do with Bitcoin. They all come with different risk-return profiles. There's ways to generate in-kind native yield on Bitcoin through, let's say, on-chain activities or lending or working with that asset on your balance sheet within the market. And I think you're going to see some differentiation in terms of approaches there, how active folks are with the balance sheet, what types of leverage or debt instruments they issue, and then what's the core business, or do you have one at all? Doesn't matter.

This episode is brought to you by zkSync. In 2024, zkSync took a step toward a multi-chain future by transforming from a single L2 into an ever-expanding network of zkChains, the Elastic Network. To onboard the whole world into crypto, many specialized chains must be able to coexist, work together, and share liquidity. Institutions and global financial leaders choose zkSync for unmatched security, scalable infrastructure, better onboarding, gasless transactions, and privacy-first design. Join over 20 chains, including Abstract, Sophon, and Cronos in the Elastic Network today. Behind zkSync is the zkStack. It is a one-stop platform for building private blockchains on Ethereum. The stack solves all the typical privacy, regulatory, user experience, and deployment concerns of blockchain without compromising performance or security. Join the Elastic Network today at zkSync.io/empire. Thanks to zkSync for making today's episode possible. I wanted to take a moment to tell you about Marinade, the platform connecting Solana holders with the best staking rates on Solana. Marinade unlocks a high-performance staking delegation platform that brings billions in liquidity and security security to the Solana market with solutions for both individual traders and global institutions from both DeFi and traditional finance. Use Marinade to earn rewards on your Solana treasuries and holdings. Optimize your Solana staking with Marinade's best-in-market features, including user downside protection through protected staking rewards and optimized delegation via Marinade's automated auction marketplace. To learn more about Marinade, visit marinade.finance or click the link in the show notes. As always, investments in blockchain technology involve risk. Terms and conditions apply.

I want to nerd out for a second. How do you actually start one of these? Like, how are they structured and how do you— like, I saw this. So again, Tyler, I don't know how much you can say, but like, my understanding is you start a you start a holding company essentially, and you probably seed it with like, I don't know, $5 or $10 or $20 million. Then you go raise a couple hundred million and maybe some of that is equity and maybe some is debt, something like that. And then you got to find a public shell company and then you do some sort of PIPE reverse merger type of finagling and get the, get the public shell company. And then, and then now your holding company is public. So now you trade publicly and then you just start using all that capital that you raised to buy a bunch of Bitcoin. How did I do there?

I think you're ready to start one.

You got it.

I'm done.

Blockworks.

That is one route with Nakamoto. We charted a path that's very similar to that one. We're actually seeing a ton of diversity here too, though, in terms of approaches. You've got folks who've gone the SPAC route, like 21 merging with Canor Equity Partners. Got folks like Metaplanet who was an existing listed operating business. They were a hotel company where they already had a balance sheet, owned some hotels, but needed a new lease on life. And so they just raised an equity round into the existing listed company to kind of kickstart their Bitcoin journey. We're seeing reverse mergers. We're seeing some folks go the IPO route. We're investors, and I'm on the board of the Sparta Web Company out of the UK, which IPO'd 2 weeks ago, 3 weeks ago on a stock exchange there, who's able to do a direct listing or an IPO into essentially a holding company just for the Bitcoin treasury strategy.

So folks are getting creative with it. It's called the Smarter Web Company, SWC.

Is it this? Yep. And this was a web design agency. It says yes. Okay.

Web design agency turned, turned Bitcoin treasury company.

Okay. So, okay. Tell me more about this. So you find a web design agency and I'm guessing they're not doing too well, like MetaPlanet, maybe not doing too well as a business. And they're like, all right, we either shut it down or we pivot and become a Bitcoin company. Like, were the SmarterWeb company— are the SmarterWeb company founders involved? Are they done? You buy the company, were they Bitcoiners? Maybe tell me a little more about this.

Yeah.

And in terms of the backstory there with SmarterWeb, I got to know the CEO, Andrew, probably about a year ago. We started talking about the opportunity for a MicroStrategy in the UK market where he's based. His background is in the TradFi world there with one of the large online brokerages, and he was a strategy investor, big Bitcoin investor, knew the playbook. So he wanted to start a pure play Bitcoin company for the UK market and basically go the IPO route in the UK. And as he navigated that listing process, some of the regulatory components, it became clear that it was going to be easier to IPO the company if it had an operating business outside of just a balance sheet. And so he ended up folding in the web development company that he'd run for the last 10 or 15 years as a part of that transaction to get it public. But the focus and the vision was always around how do we build a Bitcoin treasury in the UK and this listing path, the web development company were just a route to accomplish that end.

Yeah. Do you see these popping up in every single country or nation or geography where there's no Bitcoin ETF?

I do. I mean, 6 months ago I would've said, yeah, we'll see a handful of them start now at the rate they're coming. I think we're speedrunning this playbook. I think we're going to have one in every single capital market in the next 12 months. So Yeah.

So I was after— so we had DAS in March and I had a dinner one of the nights and I sat next to Saylor and he's like, there will be a MicroStrategy in every country in the world in 12 months. And I was like, 12 months? I was like, that's ridiculous. And, uh, I mean, the rate is happening, it's going pretty—

you might be right about that, per usual.

So, um, Josh, how do you think about structuring these deals?

No, it's a great question. I mean, you know, there's different entry points, right? So we started the episode with strategy where it's already a public company size. These are very kind of elaborate processes of building an instrument that you want to raise a billion plus from. So I think that's a separate bucket where, you know, Tyler and I have kind of rolled up our sleeves and have worked together things in the past and, you know, definitely kudos to Tyler and David on doing this, you know, with Metaplan and several others, is, you know, smaller opportunities where they're still private or they're just public. And here you have, I think, a lot more room to be creative. And, you know, our objective as an investment firm is to provide the best risk-adjusted return for our LPs. And so what we'll do is we can look at, you know, the different instruments that we can arrange to essentially build that Bitcoin Plus return profile. And so what generally is at disposal for folks at Color and I is you can come in with a straight equity investment, you come in with a convert, you can add warrants, you can put a put option on that convert. So I can essentially fund the convert into like bankruptcy remote SPV and hey, if things go really bad, I can redeem my Bitcoin and get it back, which, you know, that's true Bitcoin performance downside. Or you can maybe do something on the equity side, but you say, look, if we work together, if you have someone like Tyler adding value on your board, probably get some warrant kickers where if this thing gets to a certain level, we get more equity at kind of a fixed price. And what you're effectively doing there is you're finding ways to kind of reduce that downside, increase that upside, and build that asymmetry. Like, I think that's That's the ideal mindset to kind of go into these. Now, you have to be careful because there's a lot of moving pieces. Like sometimes when we're looking at these before they're public, you probably want to consider like, okay, like what if they can't go public? Or like, what if macro just completely changes? So there's probably another put option in there. Hey, if the company can't go public, we get Bitcoin on the downside, for example. So we're actively trying to think through these, trying to work with these founders on these. And then also just, you know, what really helps is when you have a founder sitting across from you that has some capital markets experience, it's much smoother because you can like think about, okay, not only how are we structuring this round, but how should we think of future capital issuance? How do we want to make like a standardized kind of path to going public? Because you don't want to do something very wonky at the first round and then no one else wants to kind of, you know, either take it public or come in after. And so I think that's when, you know, having folks like us or Tyler kind of being able to just sit with you and like explain how we've seen these in like 15 other markets should hopefully be of assistance to these founders.

Um, probably a dumb question, but you, you're, you're seeding it and then you're getting warrants or you're essentially getting this nice call option on the company. But if they're not able, feels like there's two bad things that could happen. Either they can't list, in which case I'm assuming you just build in these like provisions where you get to reclaim, you get to reclaim the assets that you put in, um, whether that's in Bitcoin or in just US dollars, or they trade and for some reason they trade below NAV or some, something like that. They actually can list, but then something bad happens. And then I'm assuming you build in, yeah, some sort of, again, clawback or put up puts or whatever it is. Um, if it feels like a good deal as an investor, or what am I missing there?

Our objective is to try to get the best, uh, risk-adjusted return possible. And so, you know, I want to get as close to a, uh, heads we win, tails we break even scenario, uh, again in Bitcoin-denominated terms, right? So there are— most of the capital in the world is dollar-denominated. So for Tyler and I, it's a little bit easier to wrap our heads around for other folks, and I've seen this in rounds, they're like, oh, I can't put money in this because what if Bitcoin price goes down? And it's like, we're afforded the ability to not have to think.

So they're still thinking in US dollar terms, I see.

Correct.

Right. That's your—

that's almost your edge, is that you think in your Bitcoin-denominated.

Yeah. Where this is coming, like, the pool of capitalists is coming from internally at our firm is, is our Bitcoin pool. And so it's, you know, how can I get a Bitcoin-plus return on that pool? And I have seen friction with other investors who come in from a dollar standpoint because sometimes they can't hedge the Bitcoin side or they're just very worried. And so they could lose in that scenario. And I think you kind of alluded to one of the other risks is once this is public, it can be volatile. Maybe they couldn't quite engineer a sizable volume or float that you might be actually very illiquid and your ability to get out might be harder. We try to make very sure that we can de-risk these scenarios and work with founders to kind of make the process smooth. And I think we can get as close to that heads we win, tails we break even. And the founder does as well. We're generally kind of first money in or sometimes right after Tyler. And we're coming in at the ground level with these founders. So we're all aligned on creating a a successful outcome and one that can essentially provide institutions and retail that market with Bitcoin exposure in a better format than they can currently get right now, where it could be restricted, it could be disadvantageous from a tax standpoint. So ideally bringing Bitcoin exposure to some of these foreign markets is kind of a nice objective to have.

I'm going to pull up this tweet. So this is Dan— what is Dan's name? McCardell, I think. He's one of the co-founders of Messari, OG Bitcoiner. And, uh, so there's this news as we're recording this. Basel Medical Group, BMGL, announces plans to acquire a billion in Bitcoin. And Dan goes, uh, look, this corporate treasury stuff is annoying and it's probably going to end badly at some point. I wish it would stop. Let this tweet serve to disprove all the statements we'll get from journalists to the effect of, quote, Bitcoiners all praised the corporate treasury strategy and now it blew up on them. Haha. Um, what would you, Tyler, what would you say to Dan? And really I'm asking a question about kind of the risk of this whole strategy.

Yeah, I think Josh put it very well in terms of how we try to structure these to avoid as many of the risks. I think from my perspective, the main risk here that's going to come is really with the use of leverage or converts by these companies. Strategy can issue them at very favorable terms, but where you've got companies, as we've got more on the playing field trying to speedrun this playbook, that take on excessive leverage.

And we saw this with the public Bitcoin miners in the last cycle to the exact same disastrous, in some cases, effect, but take on financing on predatory terms, take on too much leverage, actually encumber their Bitcoin, which strategy doesn't do. They have the luxury of issuing just straight common corporate obligations where Saylor has every option in terms of issuing more equity, refinancing the debt, servicing it from the cash flows of his software business to pay down that liability. But where companies actually will encumber their Bitcoin or put it as collateral, there's a lot of ways that you can add risk that will probably end badly in the cycle for those that get out over their skis.

But I push back on Dan a little bit in terms of this being good for Bitcoin. This is like a vehicle that's really served to onboard billions of dollars from TradFi institutions into Bitcoin. That's made Bitcoin accessible in their portfolios. That's made them ask the question, get their investment committee to learn about whether they should have a position on Bitcoin. And where, like we mentioned, Saylor is one of the best spokespeople and marketers for Bitcoin. So I think it's a net positive for the space. I think people are going to have to take on more and more risk as they try to catch him. And that's where I would buyer beware.

Yeah, I think that last sentence is spot on, which to me it feels like what's going to happen is there's going to be a lot of really legitimate things that happen here and that come very legitimate players who come into the market like Jack Mallers' thing or Nakamoto or MetaPlanet or the London one that you're doing. I'm blanking on the name right now. So there's going to be all these legitimate players, but the more players who come in, the more risk you have to take on. It's like, it's like when we had, you know, one lender in the industry in 2020 and then 2019, 2020, and then you get, you got BlockFi and then you got Nexo and then you got Celsius and then you got Genesis and then they're all trying to compete with each other. So they start offering better rates and they push the terms out further, and then they start trading their own book, and then, and then it blows up. And so it feels like what will happen is you've got these pretty legitimate players now, but you know, when the 65th Bitcoin treasury company comes into the market, I actually think there's an idea today that a lot of the companies run hot. Um, they're actually pretty low leverage from what I understand, but eventually, as the 6th, the 65th company will run hot and will take on too much leverage. Anything else that you guys think is misunderstood about this strategy?

Well, I think for us, the biggest thing is just to understand what you're buying from a Bitcoin perspective too. What we call the MNAB multiple, what the market cap of the company is divided by their Bitcoin stash in dollar or euro terms.

That is kind of like the key valuation metric that investors like me and Josh are very sensitive to. But those, so we're very sensitive to that on the private side as we're structuring these deals on the public market side, especially on things that are newer, lower liquidity, higher volatility. So we've seen some of these companies trade at a 10 to 20x valuation of their Bitcoin stack. And so if you're out shopping these on Robinhood, like, you should understand that metric, know how much Bitcoin is behind the company, you know, how much you're paying for $1 of Bitcoin on the balance sheet. And if you're paying $10 or $20, uh, maybe that's not a good deal.

If you're paying $2 or $3 and they're growing it 100% a year, maybe it's a fantastic deal.

Josh, anything?

I would add this, you know, there's— there, I think there's a bifurcation over time of sound operators who have a very— as something we look for, like a really deep understanding of capital markets, who understand right now it's a great time to raise, but like they're being very thoughtful about how they do it. And then those that kind of chase, they see it in the narrative. And I think execution will just become very difficult because, you know, there's small things, you know, as a smaller operator, you probably don't realize, but You know, MicroStrategy can issue STRK because in the worst case, they have such a robust ATM program and such great volume that they can issue shares, bring capital in, finance the prep dividend. But if I'm like a small operator and I'm just looking at the deck and thinking, I can do this, you're going to run into some serious problems because there's an advantage to, you know, some of these more shrewd operators, some of these bigger companies. Where their access to capital markets and their quote unquote like moat allows them to get financing from many different areas. And if you kind of start to behave like them, but you don't have that access to financing, it could be a perilous result. So definitely want to underscore like the thoughtfulness on capital market side as something really important to look for when you're assessing folks that are trying to build strategy out.

Yeah.

And I don't want to dance on any graves, but we've already seen one company that's run this pretty disastrously in the US capital markets where they were selling ATM shares in the market below a 1 asset value, like at a discount where they took on a lot of leverage and encumbered their Bitcoin. And that's been in a death spiral. So that is something that could happen here. I don't want to celebrate anyone's demise, but yeah, just those are the risks that come with this strategy.

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Let's pivot from Bitcoin. And this is, I think, where you guys— I think you guys have agreed this whole episode. Maybe you guys start to diverge here because I— Tyler, I get the sense hardcore Bitcoiner, probably very focused on the Bitcoin strategy. Josh, I'm not saying you're pro doing this with the long tail of tokens, but maybe you guys are a little more comfortable doing it with non-Bitcoin assets. How does this work, Josh, with non-Bitcoin assets? Like someone like Sol Strategies is the— or we don't have to talk about Sol Strategies specifically, but non-Bitcoin assets, is it the exact same playbook? Is anything different?

There's a lot of similarities. Again, we apply the same rigorous framework, right? It's like, what is the structure? How are we investing in this? What is their plan from a capital formation standpoint? How high quality are the operators? A lot of those similarities prevail. I think the biggest difference that you'll hear about, there's probably two. One is public markets access to these other tokens might not be there at all. Like there is no SOL ETF, so maybe that's an argument for, hey, there could be retail interest in this. The other one is the yield from a POS asset is interesting because effectively you kind of can have more accretion because you're, you're not only stacking, but you're getting more assets because you're stacking and it kind of compounds a bit. I think there are folks on the institutional side that are interested in that. And you can maybe create some type of instrument where that's used to pay the dividend or the interest versus having to sell your assets in a negative scenario. But look, I think it really is like a similar story It's a different story, like Tyler's earlier point, where there might be some funds out there that like Solana or Ethereum and they say, okay, I've got my Bitcoin set of treasury plays. Let me add one of these because it's maybe higher vol and a little bit higher up on the risk curve, or the piece of paper that they gave me has this interest component from the POS staking. And so they may go in and want that exposure. So I think there's a lot of similarities, but those would be the couple of the differences that come to mind is public markets access to these tokens and the nature of staking and those cash flows and how they may affect the profile of instruments you can issue.

I've talked to a lot of like L1 and L2 founders recently who are like, oh, I need a, I need a public entity to go start buying my tokens, basically.

And they're doing it.

And there's basically like services now. There are bankers and advisors who are putting together these deals. It feels like, you know, the new market maker deal. It's like, yeah, I've got a shell company, I've got the shell company to sell you. I'll put it together, I'll take 2% and I'll go help you raise the capital. And, you know, yeah, boom, we'll get this public, public entity live where we're buying your tokens. You know, you insert, insert L1 ecosystem. What do you think about that strategy?

Someone's always trying to sell you something to make money, to make fees on their side. So I think you have to be really careful of expectations versus reality. I fundamentally believe that the best thing, best ROI on their time is probably building like a really good L1 or technology or an ecosystem. But why I say that is, you might get out now when there's some kind of seed in the capital markets. But if this thing turns, it becomes more fundamentals-based and is really looking at, you know, how much capital is there, how much demand is there, what are the types of instruments being created, what does the options market look like, how can I hedge this? I think all these other tokens start to become extremely unappealing because you can't go and do that. And so the access to pools of capital could dry up really fast. And that's kind of the risk you're undertaking, I think. So the appetite in the markets for these assets, I think, is for these long-tail assets is extremely temporal if it's there, is my personal take. And while you might get out the door, if markets kind of become, they change in a couple of quarters and you can't raise any more financing, then you're kind of just stuck. and you spent all this time kind of doing that versus something else that had a better ROI for, for your L2 or L1. So yeah, my personal feedback is that I think the demand for these isn't actually there, and especially in the long term, and you have to be extremely thoughtful about, you know, what you want to do with this vehicle because there isn't just infinite demand to like issue ATMs and converts, uh, It is finite and taking its toll. I think there was like, by the way, $25 billion in ATM, like shelf findings of like stock that didn't come into the market in the last couple of months. So there's a lot of money coming on with these and at some point it gets a little exhausted for that long term.

I think it really comes down to that institutional bit where I like to say like 2024 was the first year of the institutionalization of Bitcoin. So Bitcoin's been around a decade plus. Last year is the year it really started hitting the institutional scene. But to run this at scale and long term and sustainably, you're ultimately servicing an institutional buyer, institutional bid. And where that clearly exists for Bitcoin today, if that exists for the next asset or the long tail assets, much more dubious and probably It's too early for that stuff today. And so if there's no institutional bid and there's no, you know, convert fixed income, there's not these massive capital pools that sailors figure out how to attack who ultimately want access to your product, then you're just dumping on retail through the public markets in a highly scrutinized, regulated, surveilled way. Could go poorly.

Let's say someone did this. It feels like the most important piece is finding the Michael Saylor. This is the thing that people don't understand is that you can't just run the playbook without a good operator and CEO running it. It's like, oh, I'll just get a shell company to start buying my tokens. Like, boom, voilà, token number go up. But yeah, you kind of need this like amazing— someone who's brilliant on the financial side and brilliant as a marketer, which is an incredibly tough person to hire.

Yeah, we call that the director of Bitcoin strategy role, and every one of these companies needs a good one. So for For MetaPlanet, that was Dylan LeClair from our team. We put him in place there. He's done a phenomenal job, but kind of being like the evangelist to the Bitcoin community on the podcast, telling the story of what you're doing. And if you just have the financial engineering but not the community, not the excitement, not the narrative, not the market presence, doesn't translate into the flows you need to get an ATM program or something rolling. So that's a very critical piece of it. Not just buying the Bitcoin, point, but making sure the world knows you're committed to it long term.

Yeah. Putting my venture investor hat on, I agree. Storytelling is critical. It's critical to convincing folks, not just on the capital side, but on the hiring side, on the regulatory side, on the partnership side. And we see that as well in these public companies too. Whereby just being able to effectively communicate what you're doing, how you're doing it, transparency is all beneficial. And I think, you know, my personal— you kind of see this like phantom premium exist with some other founders of public companies like, you know, Elon Musk or Jensen Yanowitz at NVIDIA, where the way they interact publicly with folks, I think does like in a way that relate to the— I'm not going to say that the share price performance, but there's some type of relationship where I think they can garner a premium because they're really effective storytellers and communicators. And, you know, people do also invest in people besides the product. So I think there is that element there.

Maybe we can zoom back out of like the structure of these things and all that. And I actually just want to hear like the grand vision for all of this. Like questions that have come into my head are like Bitcoin, like just Bitcoin corporate treasury strategies, like will all— like, I think right now the people doing this end up being— you got these kind of like shell companies, they're public, they didn't really make it. But like, what's Apple going to do with their Bitcoin strategy? What's Amazon going to do with their Bitcoin strategy, if anything? So maybe let's go zoom way back out, go big picture. Tyler, I think I'd throw it to you first. Like, what's your grand vision for all—

how all this comes together?

Capital markets, public markets, and Bitcoin. Yeah, on a long time horizon.

Well, I think the answer is hyper-Bitcoinization.

It's about Bitcoin becoming the reserve asset. And I may sound like the crazy token Bitcoiner in the room, but you've seen other companies kind of tiptoe into the waters here with Tesla putting Bitcoin on their balance sheet, Block holding some number of companies who are treating this. They're not running the same playbook as Saylor. They're not trying to be a Bitcoin strategy company. It's purely a responsible treasury management strategy where just like BlackRock is recommending a 2% Bitcoin allocation in their model portfolios, they're choosing to put some percentage of their cash balance into Bitcoin, particularly these large corporates that have no productive way to spend the capital that are just starting new share buyback programs or dividending out of shares. It means they don't have any useful way to deploy that capital. So the best thing they're doing today is just returning it back to shareholders.

So Bitcoin as a monetary asset can be an answer to that. And I think once we— now we've got Coinbase in the S&P 500, we've got Strategy in the QQQ looking ahead to S&P inclusion for it too. Now, because of those companies, Bitcoin exposure is a piece of every index, every mutual fund, every retirement fund in America is backdoored their way into Bitcoin a little bit. And if it's your job as a money manager to match that index or outperform that index, now the benchmark that you're competing against or the peer set that you're competing against has some Bitcoin exposure. And if you need to catch up to them, your investment committee has to be asking themselves the exact same thing. So I think we'll see a proliferation of this. By my count, we've got more than 80 publicly listed companies worldwide that have Bitcoin on the balance sheet in some form or fashion. I expect that'll double or triple in the next 12 months here. And then you'll have a few like the strategies and Nakamoto of the world that are really all in and trying to build the biggest Bitcoin war chest where Bitcoin is the business rather than it being a diversifying component of Apple or Tesla's business.

Reverse tokenization, it means a lot to us at ParaFi. It's actually a term at Bencoin. You know, from the start of ParaFi till now, we've not at all ever seen the level of activity at the intersection of public markets and crypto assets that we're seeing today. And so there's treasury plays, there's, you know, IPOs and SPACs, there's companies buying assets. There's ETFs. And this is just one, it's something that as an industry we should really celebrate because I think it means that we've hit a certain milestone where institutions are now engaging with these assets. It's becoming more normal, becoming more legal to do so. And that's great for the adoption of our industry. But two, it really is just bringing, you know, pools of capital that were never there as a marginal buyer into the fold. And into interacting with digital assets. And so for us as a firm, that means we have, you know, several more investable opportunities, different instruments. Public markets tend to be deeper, so we can engage in size. But as an industry, what makes me happy is it means that the quantity of people interacting with us in some way is now like shot up exponentially, whether that be, you know, someone's retirement account, an index money manager or public company officer. And I think it just brings a lot of legitimacy and will unlock doors for us on the technology side as well. Because if people become accustomed to Bitcoin and there's Bitcoin going through the pipes, well, why can't stablecoins go through the pipes as well? Why can't we do more payments in stablecoins? Why can't we make it legal to effectively engage with these assets in terms of our bank plumbing? So I think there's a lot of offshoots that we are not even considering that come from public companies interacting more with our space through these assets.

Yeah, nice. Tyler, is there anything that you, um, outside of Bitcoin, is there anything in the rest of the crypto land that gets you excited?

You know, at, at UTXO Bitcoin BTC Inc., we're all focused on, on the Bitcoin ecosystem. You know, I, I take a pretty wide view. I'm angel investor, LP, and in funds that are specialists and other pieces of it within the Bitcoin ecosystem. We're still very excited about kind of the Bitcoin L2s programmability, DeFi ecosystem being built on Bitcoin. We've got a venture portfolio that includes a lot of the leading projects kind of building in that space. And we see a huge opportunity with, again, these treasury corporations being like stage 1 to Trojan horse tradfi flows into Bitcoin, where now once they come to Bitcoin, they learn about it a little bit. There's a whole new financial, the next-gen financial ecosystem that we've been talking about that can be built on top of it as a collateral asset. And just trying to settle the shares we've invested in some company in Japan compared to settling the payment for that in Bitcoin is such a night and day difference. Reinforces the case for Bitcoin every single time. So I'm hoping people can fall further and further down that rabbit hole as a result of this.

Yeah, 100%. Tyler, appreciate you. Josh, appreciate you. Enjoyed this conversation immensely, and I think it's a very interesting topic that is— I feel like we are like inning 2 of this, and it's about to heat up very quickly. So thanks for providing the knowledge.

Thank you.

Thanks, enjoyed it, fellas.