Founder of business intel firm shares 'pretty indestructible' biz model

Key Concepts

• Bitcoin Drawdowns: Significant price declines in Bitcoin's history.
• Emergent Transformational Asset Class: A new type of asset that is fundamentally changing existing markets.
• Volatility: The degree of variation of a trading price series over time, measured by the standard deviation of logarithmic returns.
• Sound Money: A currency that is not subject to arbitrary inflation or devaluation.
• Counterparty Risk: The risk that the other party in a transaction will not fulfill their contractual obligations.
• Digital Credit/Equity: Financial instruments used by companies to raise capital.
• Return on Capital Dividend: A dividend paid out from a company's profits, often tax-deferred.
• Leverage: The use of borrowed capital to increase the potential return of an investment.

Bitcoin's Performance and Market Position

Charles opens by highlighting Bitcoin's recent negative performance for the year, noting it's the first time since 2023. This is concerning for newer holders unfamiliar with Bitcoin's historical boom-and-bust cycles. He mentions the "meme writers" are active, taking shots at "crypto bros," with Michael Saylor posting a simple "Believe."

Michael Saylor counters that "Believe" is not a strategy, but emphasizes that Bitcoin has a proven track record. He states that Bitcoin has experienced 15 major drawdowns over its 15-year history, yet has always recovered to new all-time highs. Saylor characterizes these drawdowns as "par for the course" in the lifecycle of an "emergent transformational asset class." He argues these downturns are healthy as they "clear out the tourists, the leverage and the weak holders" and "set the basis for the next rally upward."

Regarding the impact of Wall Street's involvement, Charles suggests that increased institutional participation might lead to less volatility. Saylor agrees, noting that Bitcoin's volatility has decreased over time. He provides figures: in 2020, Bitcoin was an "80 asset" (implying 80% volatility) growing at 80% annually. This has since reduced to a "70 asset" and then a "60 asset," and is now a "50 asset" growing at 50% annually. He projects that volatility will continue to decrease by "another five points" each year as Bitcoin matures, aiming to become "about 1.5 times as vol a still as the S&P index and 1.5 times better performing."

Charles questions if Bitcoin is a "victim of its own success," with other cryptocurrencies and assets like gold drawing attention. Saylor acknowledges the excitement around AI, digital assets, and digital currency but reiterates Bitcoin's unique position as the "ultimate digital opportunity for sound money enthusiasts." He asserts that for those seeking to "save your money forever and avoid counterparty risk," Bitcoin is "stronger than ever." He suggests leaving the "shiny things" and opportunities in other areas to "tech investors that are experts in those areas."

Strategy's Business Model and Financial Robustness

Charles then shifts the focus to Michael Saylor's company, Strategy, whose shares have been "hammered pretty good." He asks Saylor to explain their approach to raising money to buy Bitcoin and address criticisms that this model might collapse.

Saylor defends Strategy's performance, stating the company is "up about 70% a year for the past five years," while Bitcoin is up "about 50% a year for the past five years." He claims Strategy is "one of the top performing companies maybe it plus NVIDIA in the entire S&P index." He also highlights Strategy as the "best capitalized company in the crypto economy," with "more than $50 billion of equity" and "billions of dollars of liquidity in the equity everyday." Their credit instruments are described as "100 times more liquid than the average preferred equity."

Saylor explains their capital-raising strategy: "to raise capital by selling digital credit, or by selling equity to invest in Bitcoin which is digital capital." He reiterates Bitcoin's appreciation rate of "about 50% a year for the past five years" and projects "about 30% a year for the next 20 years." Strategy offers credit instruments that pay "about 10% dividend yield in the form of a return on capital dividend," which is "tax deferred."

He outlines the strength of this business model: "as long as Bitcoin goes up 1.25% a year, the company can pay the dividend forever and create more shareholder value." He adds a crucial point: "If Bitcoin stops going up, 0% forever, we've got about 80 years to figure out what we do about that."

Charles probes further, asking about the impact of Bitcoin going down more significantly and if there's a "domino effect" trigger. Saylor confidently states that "The company is engineered to take an 80-90% drawdown and keep on ticking," calling them "pretty indestructible." He quantifies their leverage as being at "the level of 10-15% going towards 0 right now," which he considers "extremely robust."

Conclusion

Charles concludes by commending Michael Saylor for his resilience and steadfastness, especially "when the pressure is on." He notes that those who have followed Saylor "through thick and thin are so much wealthier for it."