Is More Bitcoin Per Share "True" Yield?

Hello, everybody, and good afternoon. It is day three in Vegas, so props to everybody for being here and grinding through. I appreciate the support. My name is Matt. I am managing director and head of trading at BitGo, one of the world's largest digital asset infrastructure providers. I am here with Richard Byworth of BYZ Partners and Alexander Blume from Two Prime.

​

The panel today is called Is More Bitcoin Per Share True Yield? What we are going to try to do is unpack how this mechanism is working today. You are going to hear a lot from these two guys, but we are going to talk about the emergence of different digital asset, and specifically Bitcoin, treasury companies that are unlocking value for shareholders in novel ways.

​

They are doing it through the financialization of their balance sheets, issuing securities in different forms, whether equity, debt, or preferreds, and ultimately buying more Bitcoin so that the value per share continues to rise for investors. Obviously, there is an argument about whether that is true yield, packaged leverage, or something else altogether.

​

Those are the topics we will dive into, while also weighing what that yield looks like from a risk-return perspective relative to true yield on spot Bitcoin, either by lending that Bitcoin for a fixed interest rate or selling call options on BTC to generate yield, and how those mechanisms differ. Before we jump in, Richard and Alexander, do you want to introduce yourselves, talk about your background, what your companies focus on, and your journey in the space?

​

Sure. I am Rich, managing partner at BYZ Partners. We are an alternative asset management firm. Our key product, which we built at our previous firm and are launching at the end of this year, is a Bitcoin-denominated fund of crypto hedge funds designed to make 3% to 8% a year in Bitcoin terms. My background is traditional finance. I was a convertible bond trader originally, then moved into distribution of derivatives across equity derivatives, futures and options, convertible bonds, and that whole piece.

​

Then I ran a crypto company as CEO for a while, which was a little bit difficult and a challenge as a Bitcoin maxi running a crypto company. That was one of my first value misalignment problems.

​

I am Alex Blume, founder and CEO of Two Prime. First, I am grateful to be here, and thanks for listening. Two Prime is a Bitcoin financial services business. We focus on generating Bitcoin-denominated returns primarily through derivatives trading. We are also one of the largest Bitcoin-backed dollar lenders in the world. I think we have originated about $3.5 billion of Bitcoin-backed loans over the last 24 months or so, with no bankruptcies.

​

Beyond that, we offer separately managed accounts. We work with institutional clients, including a number of public companies, and try to solve unique problems for each one. It varies from group to group.

​

Awesome. To get into the meat of it, I have been in this space since 2017. I came from a big macro hedge fund, Bridgewater Associates, took the leap of faith, and joined a very nascent market structure in crypto. I have really seen from the center of the ecosystem how yield on Bitcoin has evolved over time, what yield really is, and how it is expressed in the space.

​

It started with lenders just lending out their Bitcoin unsecured all the way through 2022. Those lenders would earn somewhere between 3% and 6% annualized on their Bitcoin, which seemed like a great deal at the time, until major credit events happened and caused massive contagion with the likes of Three Arrows, Alameda, and FTX. What looked like a great return at the time happened to be picking up pennies in front of a steamroller.

​

Yield has matured a lot since then. It has come a long way in the last four years. There is now yield through selling options on spot Bitcoin. There is still oversecured lending in the space. There is arbitrage between spot and futures markets to capture yield. More recently, there is this concept of yield through BTC accumulation, almost in the form of digital credit. That has obviously been popularized by Strategy, but now there are many other funds and firms seeing the benefit of it.

​

The first question I have, Richard, is how would you frame what this yield is mechanically? How does it work? How is the value being created? Operationally, from a balance sheet perspective, what is going on behind the scenes to create that yield for investors?

​

Essentially, what Strategy and many of these other companies are doing is arbitrage in the capital structure at different times to add more Bitcoin per share for common shareholders. There are three main products being used.

​

The first is sales of common equity at a premium to NAV. If your stock is trading at, say, a two times premium to NAV, and you have $200 million of Bitcoin and a $400 million market cap, then you do another $200 million capital raise. You double your Bitcoin base. You were trading at two times mNAV, and you have turned your company from a $400 million company into a $600 million company. If mNAV or pricing stays constant, you have doubled the amount of Bitcoin, and the premium is cheaper because you are now at only 1.5 times.

​

We have seen that. Obviously, now we are in a bit of a bear market for these companies, so it is difficult for them to raise money in a meaningful way when Strategy is trading around 1.05 to 1.2. I am from Europe, as you may be able to tell from my accent, and many of these companies are trading at a discount to NAV. They cannot use that mechanism right now.

​

The other mechanism is convertible bonds. Convertible bonds essentially have a strike price that is higher, so you can ratchet that synthetic mNAV higher by leveraging the volatility that Bitcoin gives you as a company into a higher strike in the stock. The problem is that if the stock does not go up, you end up with a debt burden in three or five years, based on either the put or the maturity of that product.

​

You can get some very interesting coupons on this debt because the volatility is so high, and hedge fund managers will pay you for that volatility and happily almost do zero-coupon bonds. But it comes with a debt burden.

​

That is where we get into the third tranche of these products, which Saylor again led through preferred equity. Preferred equity is very compelling for this type of strategy because there is no obligation to pay back the notional amount. You just have an obligation to pay the dividend on a biweekly, monthly, quarterly, or annual basis. That can be quite meaningful.

​

But if you are of the opinion, which I think most investors in these companies are, that Bitcoin is a long-term sustainable play to the upside, then this is a way for you personally to do a carry trade: to essentially borrow money for the very long term and take the upside of Bitcoin. You are sacrificing 10% to 15%, depending on the product, but you are getting the CAGR of Bitcoin. Historically, we have looked at 50%; even if you are conservative looking forward and say 25% to 30%, that still gives you a very nice bit of upside over the longer term.

​

Those are the three key products being used today by these companies. All those different functions increase the amount of Bitcoin per share that the common shareholder has. Part of this panel is to try and define what we should be calling that. My view is that the closest word is BTC yield. I think it is an accurate description, and that is where the discussion starts.

​

It is a valid argument, because it is almost philosophical in a sense. Is it true yield, as Richard says, or is it dressed as yield, but actually something else? Alex, I know you are more of the skeptic when it comes to this topic. In your perspective, is what Richard is describing yield for investors, or how do you think about the risk-return of this trade generally?

​

No.

​

When I think of the word yield in finance, I think of being compensated for the time value of money, for putting something into a Treasury, the most safe, predictable, highest-credit-rating kind of thing you could participate in. All of these things we are describing, unsecured lending, covered call selling, and capital markets operations through digital asset treasuries, have so many layers of risk in them that they almost could not be farther away from a risk-free return.

​

You have the risk of an active management company. You have the key man risk of Michael Saylor. You have regulatory risk. You have all sorts of different capital markets risks. Even how Strategy is accumulating Bitcoin over time has shifted. Their policy around how they create value has shifted.

​

I think it is a totally valid way to try to make money or make more money than just holding Bitcoin alone. I just think that by calling it yield, especially for a retail product that people are buying with maybe not so much financial experience, it deeply misrepresents what is going on. I do not think people understand what they are getting. They just think, it is Bitcoin plus something else good. It is really basically an actively managed hedge fund.

​

If I could add something to what Alex said, I completely see your angle. I find it a little weird that we are sitting at a Bitcoin conference talking about the risk-free rate being U.S. dollar Treasuries. With U.S. Treasuries, of course, they can print money to pay the coupon forever. But what you are missing is the risk of the denominator. It is hidden in the denominator. That is the debasement of money as a result of the printing of this oversized debt burden.

​

I would say that actually the risk-free rate is where the problem is. If you are talking about language and you are upset with BTC yield, where you are seeing an amplification of the amount of Bitcoin that a company owns, with Bitcoin per share growth being referred to as BTC yield, I have a way bigger problem with the risk-free rate. That is misleading people. That is fiat-designed language to make you believe in government debt so they can keep refinancing the Ponzi. If we are going to get focused on language here, let us talk about the fact that the risk-free rate is not, by any definition, a risk-free rate.

​

There is risk inherent in any yield-bearing asset. You are getting compensated a return by holding the asset because you are choosing to incur some sort of risk. Those risks can be inherent in different asset types in different ways. For Bitcoin, I am not going to say whether it should be called yield or not. You are earning a yield in some way, shape, or form. But to Alex's point, of course you are taking risk on the asset and on the counterparty. You are also doing that when you are lending out your Bitcoin, selling calls, or trading basis. There is always some inherent risk.

​

My next question is about this specific BTC accumulation. Obviously, we saw it work really well in a bull market. We have seen how it is managed more defensively in a bear market. It reminds me very much of a reflexive product, where the more people buy, the higher the price goes; the more securities are issued, the more BTC is bought, and the higher the price goes. Is there a danger to the reflexivity on the way down? Is this a house of cards situation? If it is not, how is it not? What is the risk mitigation if Bitcoin trades down to $25,000 or $30,000? How do these companies keep shareholders from getting stuck holding the bag?

​

If we see it trade down to $25,000 or $30,000, then the value of the Bitcoin is cut in half. Saylor at this point is about 4.2 times overcollateralized for the product. This is another reason a lot of people do not understand why he is running the ATM and the MSTR common. He is trying to keep that buffer on the baseline of the collateral to keep it sustainable.

​

What he is doing with these preferreds is creating a forward carry trade. This is the trade that all of us, as long-term believers in Bitcoin, want to be doing. Saylor is enabling us to do that by issuing these products. We cannot issue infinite product. We are not connected to the fiat Ponzi, where fixed income managers need to allocate based on various interest rates or equity portfolio managers need to allocate despite the Mag Seven looking completely mispriced in terms of risk. That is the real fiat Ponzi being unwound into Bitcoin by Saylor.

​

When you look at all of this and ask whether Bitcoin can be successful, if you do not think Bitcoin is going to be successful, you should not be invested in these companies. That is really the end of the conversation. If it drops to $20,000 or $25,000, Strategy is still absolutely fine with the collateral rate. Does that present different risks for lower-collateralized companies trying to do this? Yes, that is a different conversation. But I would definitely say that the way Saylor is running this, he is not taking a huge amount of risk if you believe in the long-term viability of Bitcoin.

​

How about the new product, STRC? This is preferred equity that pays roughly 11.5% annualized to holders of the asset. I think it is now being paid twice a month, denominated in dollars. If you are a general equity holder of MicroStrategy and there is continued issuance of stock around the cap table, how should you think about that as a common equity holder?

​

I do not think you should feel good. My concern is that even if Bitcoin does well, these stocks can do poorly. If you buy into something at a three times mNAV and Bitcoin goes up but your multiple contracts to two, you have fewer Bitcoin in dollar terms of the share price.

​

With the STRC product, how was it funded? It was funded through the sale of the equity. If you are holding the main equity because you think that is going to go forever, then funding the debt payments to STRC is against your interest. If you think Bitcoin is going up 30% or 50% a year, why would I trade it for an 11% upside? If it is so risk-free and so great, why does it have to pay 11.5% to get people to use it?

​

There is a lot there, and the whole thing is a brand new mechanism, with a track record of I think eight or nine months. There are a lot of unknowns, and I think the MSTR value and the STRC value are fundamentally at odds with each other.

​

Just to clarify a couple of things, MSTR does not finance the sales of STRK.

​

STRK does. They sold MSTR to get dollars instead of buying Bitcoin with the sale of MSTR, and that debt service is the STRK.

​

You are talking about the U.S. dollar reserve that he created.

​

They sold MSTR and kept it in billions of dollars instead of buying Bitcoin, like they were doing before, in order to service the debt on STRK. So you did not buy Bitcoin; you bought dollars instead.

​

What you need to understand is that if you are looking at STRK as a pure credit investor, you need to assess whether you can get your money back. That is literally how fixed income people look at the world. If I can get my money back, I am fine. So Saylor says, okay, I will raise $2.5 billion and pay my coupons for the next two years. I can definitely do that. He did that in one week with common ATM.

​

A lot of people are failing to understand that the mechanism he has built is extremely powerful and able to do this. Yes, he put $2.5 billion aside at a $65 billion or $70 billion market cap. It is not the end of the world that he is sitting on a portion of cash to make sure he has those coupons, so that these people feel comfortable that he can pay the STRK coupon or dividend for the next two years.

​

I think it is misleading to say that because he is sitting on cash, that is a problem and you are wasting the dilution effect on the MSTR common holders. The MSTR common holders want to be in this carry trade that they cannot engineer themselves personally: long-term borrowing of fiat, which is going to keep depreciating, while being exposed to Bitcoin without ever having to pay back that debt. No individual is able to do that. Saylor is able to do that on your behalf through the common equity. Today you are buying at about 1.05 or 1.1 times mNAV. If there is ever a time to be looking at MicroStrategy stock, it is probably now.

​

To me, the disconnect is that just because a company owns a bunch of Bitcoin and I own shares of that company, I cannot redeem my shares for Bitcoin. I cannot trade the STRC for Bitcoin. It is all tied to supply and demand for STRC or MicroStrategy. Whether or not Bitcoin goes up 10x, if people do not like the stock, the stock will go down, and I cannot force them to give me Bitcoin back.

​

We saw this before Grayscale converted to an ETF. The idea was that it was risk-free: you buy the shares and could sell them at a premium in six months. But people lost faith in the product, people had less demand for Bitcoin during a bear market, and it traded at a discount to NAV of 30% or 40%.

​

Strategy has more mechanisms to try to stay away from that outcome, but at the end of the day, these products are based on supply and demand for the stock. There could be money to service the debt, but if I have no faith in the management company, or other aspects, or people just get scared and there is a run on the bank, the product can go below par.

​

There is a way for Strategy to keep it from going above par, because they keep selling more of it. They do not have a clear mechanism to bring it back up other than ratcheting up this interest rate higher and higher, which they have already done, I think, seven times.

​

The danger of that too is that we have seen it play out in massive bear cycles and markets over the last ten years. The market can always go lower than you think. Psychology matters a lot, especially in some of these locked assets where there is no redemption mechanism. We saw it with GBTC, we have seen it with the ether trade, and we have seen it with other instruments where when folks want liquidity and there is no redemption mechanism, the price can really dislocate and trade much lower. I do think that is inherent risk. But to Richard's point, the number of ways and avenues to utilize the balance sheet to risk-mitigate that is really important.

​

MSTR has traded at a discount before. Part of that was because he had straight debt with Silvergate that people were concerned about. His liquidation level was about $3,000. When we hit $14,000 or $15,000 post-FTX, that is what we call squeaky bum time. You start to feel the risk and think, okay, I am getting a little bit close to this situation and I am not very happy about it.

​

Saylor was probably looking at that and saying, I am never living through that again. That is what has happened. He restructured that debt, and this is why he is not doing converts anymore. He does not want to ever have that situation where he has any level of debt obligation, which is why the preferreds are a completely different game changer in this situation.

​

He might eventually have to pay 15% in a bear market. But at the end of the day, if he is well collateralized in the Bitcoin and you believe in Bitcoin as an investor, you should feel a level of comfort with this product.

​

In the last five minutes, let us shift gears and look ahead. We have dissected what the value creation is today, what mechanism is functioning, and the risks and returns associated with it. How do you see this phenomenon playing out over the next two to three years? Are we going to see other incumbents start to take market share away from Strategy? How does the world look from a digital asset treasury perspective over the next two to three years? I do not want to go further than that because we all know how crypto works. You can only look so far.

​

I think there is a broad range of digital asset treasuries. I have no direct relationship with them, and they are not a client of ours currently, but STR describes itself as the Berkshire Hathaway of Bitcoin. They are going to try to take Bitcoin and trade it, maybe acquire companies, create insurance products, and turn this Bitcoin into a productive asset.

​

I would not go to Berkshire Hathaway for my yield on my dollars, and I would not go to STR for yield on my Bitcoin. But I would hire an actively managed company to do interesting things and have access to institutional products that most people probably cannot access by themselves.

​

I think you will see increasing competition to create interesting structured products, build operating businesses inside companies, manage Bitcoin like a pension fund would, and manage Bitcoin with a multi-manager diversified portfolio. There will be a few large winners and a lot of big losers.

​

Even if you did all that stuff right, I do not know Berkshire Hathaway's multiple, but there should be a multiple on repeatable income from creating a real business extrinsic of just being your own stock. I think that is the only sustainable path for a few of these companies. They are effectively publicly traded, actively managed hedge funds, and that is fine. I just would not call it yield. I would call it a publicly traded, actively managed hedge fund.

​

I think you are absolutely right. We are going to see treasuries being put to work. One reason we have the fund that we built at BYZ Partners, and at our previous firm that we are now moving over there, is because we see this need. Everyone who is a Bitcoin investor wants more Bitcoin, whether you are a Bitcoin treasury company, an individual, or even a sovereign. Once you understand what this asset is, you want more Bitcoin.

​

Putting Bitcoin to work and trying to create some level of yield around it in the lowest-risk possible way, giving it to professional managers to allocate and eke out these types of returns, is what we are trying to do. We are targeting a 3% to 8% return in Bitcoin depending on the vibrancy of the year, basis expansion, and these types of things.

​

One thing we have not talked about is a tool that is underutilized for Bitcoin treasury companies. If you have an active ATM, you are selling stock into the market constantly, and at the end of any week you are buying Bitcoin with the proceeds of those stock sales. One thing you can do, which we have sort of seen Metaplanet do a little bit, is pair the ATM with a put underwriting strategy.

​

At the beginning of the week, you sell one-week puts at the money and say, I am happy to buy Bitcoin at that level. You have a good estimate based on previous weeks and volumes of how much Bitcoin you are going to be able to buy at current prices. You sell that amount of puts, and you have cash coming in. As long as you are trading at about one times NAV, this is accretive.

​

I think this is a tool that has not been properly utilized by the market. As I said, Metaplanet does it to some degree with a very small portion of its stack.

​

Let us circle back to the subject of this discussion. I think the team at STR is absolutely doing the right thing by looking at different ways to leverage their Bitcoin, do different things, and create more value for investors. But the key point is that Bitcoin per share growth is growth. We will all agree that it grows the amount of Bitcoin you have as a shareholder.

​

When I first bought MicroStrategy, it was 2020. I had been in a Bitcoin ETF in my pension, paying a negative yield through a 2.5% annual fee. It was the only Bitcoin ETF I could get in my pension in the UK. Saylor came along in 2020 and bought Bitcoin on the balance sheet, and I switched out. If I had stayed in that ETF product, over the last six years I would have paid 15% in fees. Instead, Saylor's performance has outperformed Bitcoin by 100%.

​

So I call that yield. It is certainly not risk-free, but neither are U.S. Treasuries, by the way. What do we want to call this? Is it BTC carry? Is it BTC accretion? Frankly, I think the best way to describe it is BTC yield.

​

I think the one thing we have realized is that there are clear differences and different ways of viewing the same thing. It is all around how you think about that philosophically, practically, or based on your own mental model. Unfortunately, we are out of time. I appreciate you gentlemen getting up here. Thanks, everybody, for listening, and great job.