Markets with Madison | Michael Saylor: Why MicroStrategy’s Bitcoin funding is NOT a glitch

Link to the video: https://youtu.be/eThjo9wYoF0

Madison Reidy: Michael Saylor, thank you so much for having us in your incredible apartment. It’s so good to be here.

Michael Saylor: Yeah, thanks for coming.

Madison Reidy: You are most welcome. I heard in another interview that you did that you resented people who worked from home, so I felt like we had to come and fly all this way to do this one in person. Now you were just telling me before but I’d love my audience to hear this: You spent some time in New Zealand growing up. Tell me about that.

Michael Saylor: I did. My father was in the United States Air Force and there was a station down on the south island in Blenheim, and so when I was a child — I was around age three, and I stayed there till age six. I remember walking to school through a wheat field and every day at school the highlight of the day was when they delivered our lunch. It was either fish and chips wrapped in a newspaper or it was a meat pie and you could alternate between one or the other.

Madison Reidy: Sounds about right.

Michael Saylor: It was the culinary highlight of my childhood. When I came back to the US the food went downhill from there.

Madison Reidy: That’s amazing. So you actually started school in New Zealand so I’m going to claim you as a Kiwi for the rest of this conversation if you’re all right with that?

Michael Saylor: Okay!

Madison Reidy: Now look I want to get the figures right: MicroStrategy’s Bitcoin holdings is 252,220 is the number of Bitcoin you hold — is that still correct?

Michael Saylor: That’s correct.

Madison Reidy: And if we put that at the current price around $66,000 US dollars, that is the total value of about $16 billion dollars.

Michael Saylor: Maybe closer to $17 billion right now. $16.5-$17 billion.

Madison Reidy: Now do you mind if I personally ask how many Bitcoin you hold personally, and its total value?

Michael Saylor: I have more than 17,732 — that was the amount I announced about four years ago. I haven’t sold any.

Madison Reidy: Wow, that’s amazing. Okay we’re going to come back to that and talk more about the Bitcoin revolution in the later stage of this interview, but first I want to talk about MicroStrategy, the company that you yourself started decades ago now. How should investors think about the underlying software company, because you still operate it right? You often talk about MicroStrategy as a Bitcoin development company, but I can imagine the actual software company is quite critical, because its success provides the means to accumulate more Bitcoin.

Michael Saylor: Well the way to think about MicroStrategy is three components: (1) We’ve got a balance sheet which is the Bitcoin balance sheet, (2) we’ve got a software business — a technology business — and that was the springboard for us to get into Bitcoin, (3) and now we’ve got an emerging Bitcoin securitization business where we’re a Bitcoin development company and we leverage our Bitcoin balance sheet to issue securities to the public market that no one else could so easily create as us. So if we look at the software business, well that’s a $500 million dollar a year revenue business and it generates consistent cash flows. And that got us to 2020 and that’s still a very healthy business. It’s a multinational and we do business with thousands of companies all around the world including customers in Australia and New Zealand and Korea and Japan, you name it. But the best way to think about MicroStrategy if you’re an investor is: We’re the largest operating company that holds Bitcoin. So if you have $17 billion dollars of capital — of Bitcoin — that’s permanent, so there’s no redemption rights to that. There’s ETFs like Blackrock or Fidelity that are comparable to us in size, but those are overnight deposits. So if you said, Hey I’ve got $17 billion in deposits, people can take the money out of the bank tomorrow. Well they just basically are a trustee holding the money, and they return it when they’re asked to return it — you can’t leverage it and you can’t build businesses on top of it. MicroStrategy has permanent Capital. So for example we can issue convertible bonds on top of that capital. We have $16-$17 billion in Bitcoin exposure, we have $4.2 billion in convertible bonds. The bonds we can issue fairly cheaply because we have a stock. The stock reflects the permanent capital of the Bitcoin, but that’s not redeemable either. That means that it can generate a premium to the Bitcoin. So as people trade the stock and they trade the options on the stock, the stock trades at a premium to the asset value, and when the stock trades at a premium to the asset value the company issues either equity or convertible bonds at a premium to the underlying assets. When we do that, we don’t just put the money in the bank or in T-bills — we actually invest the money in Bitcoin. So you could imagine: If we were to sell a billion dollars of equity in the market and it’s backed by $500 million of Bitcoin at 100% premium, then we buy the Bitcoin and three days later we’ve generated a $500 million gain for our shareholders — in Bitcoin. So that’s very interesting. That generates what we call a BTC yield. Now if we do the same thing with a billion dollar convertible Bond, we don’t do it at 100% premium — it might be a 200% premium because the bond comes at a premium to the stock. So when you go up 40% over a stock which is 100%, now you’re looking at something that looks more like 180%. So now a billion dollar bond sold into the markets backed by $350 million dollars of Bitcoin: We buy back the billion of Bitcoin, we capture the $650 million gain — another BTC yield. So the real operating business of the company isn’t the software business anymore. I mean that’s still there — it generates $75 million in cash flow, but one of those bonds would generate ten years worth of earnings in five days. And so, really, MicroStrategy is pioneering a new market: We’re issuing securities backed by digital capital — backed by Bitcoin — and then we’re buying the Bitcoin back. So what that means is I could issue the bond in one week, buy the Bitcoin, capture the $300-$400-$500 million gain, announce it to the market, the stock would trade up. I could do another bond the next week. So instead of a traditional model where I raise a billion dollars, I go find real estate in Auckland, I invest in the real estate, I leverage it up and in five years you determine whether I was smart or stupid.

Madison Reidy: The history of our property market — you’d be pretty smart.

Michael Saylor: It’s a 5-year investment cycle. And if I was smart, after 5 years I come back to the capital market and I say I’d like to raise another billion. Now I have to find another set of real estate in Auckland or Blenheim or Sydney or Melbourne, and it takes another 5 years to figure out whether it worked. So what you have there is heterogeneous credit, and you have a slow investment cycle. MicroStrategy has homogeneous credit: We’re going to raise a billion, buy Bitcoin, show you that we bought Bitcoin that accreted Bitcoin per share, the investors look at it — it’s an immediate gain. We just lived through 5 years in 5 days. And then once we’ve done that fast, rapid investment cycle, what’s your next idea? I’m going to do the same thing again. I’m going to buy another billion of Bitcoin. And so if you look at that against the backdrop of this year: In the first quarter we did an $800 million convertible bond, we bought Bitcoin, the market liked it. The very next week we went back to the market, did a $600 million convertible bond, bought more Bitcoin, it was accretive, the market liked it. So what did we do? We went back the next quarter, we did another $800 million bond, we bought Bitcoin, the market liked it. In the middle we sold hundreds of millions of dollars of equity. And the next quarter we sold more equity — we sold $1.3 billion of equity in Q3. We basically did that at a massive premium, so we captured a large BTC yield. We announced that, the market liked it, and then the very next week we did a convertible bond, and that became a billion dollar convertible bond. And so what you see is we’re running a very rapid investment cycle. We’re developing a city in cyberspace — we call that city Bitcoin. It’s like if we were the first public company to show up in Manhattan and we started selling debt or public equity instruments in order to raise money to develop Manhattan, and everybody else was using cash — or going at a slow rate. We found that the two innovations are (1) we issue public securities to develop Manhattan, and (2) we can build a building in 5 days. You can’t do that in real space — it takes 5 years to build a building, and you can’t hit the public markets for capital. But in cyberspace I can raise the capital every month, I can build a building in 5 days. Our investors are Bitcoiners. So if you’re a Bitcoiner what do you think? You think Bitcoin’s going to go up forever with some volatility. So what do you want? You want more Bitcoin per share. So how do you know whether the company is succeeding, that’s giving you Bitcoin per share? Well we do the deal, we announce BTC yield — this is how your Bitcoin per share accreted. How long does it take it? It takes a few days. So the real MicroStrategy business is to be the leading public issuer of securities in order to acquire Bitcoin. And as we acquire the Bitcoin, we’re driving up the scarcity of the Bitcoin. We’ve now bought more than 1% of the Bitcoin. Now there’s only 450 Bitcoin available for sale every day by natural sellers — the miners. So 450 times $67,000 a Bitcoin — it works out to $20 million and change. So you can see what happens is: If we’re raising capital via tapping into the public equity markets and the public fixed income markets and we’re bringing that capital back and we’re structuring our balance sheet and we’re buying the Bitcoin, then that’s good for Bitcoin. And of course, that leverage that we get via issuing the debt? That’s $4.2 billion of debt at 80 basis points. So we pay less than 1% interest for the $4.2 billion, which creates the leverage on the equity. And because there’s leverage on the equity, that creates more performance. It also creates more volatility. Now who wants volatility? The option traders want volatility. So in the options market we’ve gone from a $3 million open interest in MicroStrategy options to some days $40 billion. So the options traders are trading high volatility — you could think of them as: The options traders want 10x leverage on Bitcoin. 10x-20x leverage. And maybe they want it long — they want calls — or maybe they want to short it 10x. The haters want to short it, the lovers want to long it. But then MicroStrategy is like 1.5x Bitcoin. And then if you build a derivative on MicroStrategy like MSTU or MSTX, they’re like 2x MicroStrategy — so that’s like 3x Bitcoin. How well have they done? They raised $700 million in two weeks, no marketing. So on top of this stack, if you’re looking at spot Bitcoin — you either buy Bitcoin or you buy IBIT or FBTC — they’re offering you standard Bitcoin returns: 50% ARR with 50 vol. 50 volatility and 50% ARR and 100% upside 100% downside — that is the digital commodity. MicroStrategy, the stock, is 1.5x. And the way we get to 1.5x is we issue these bonds which give you half the upside of Bitcoin, little downside. What if I want half the upside, 5% of the downside? Well you buy a convertible bond senior in the capital structure of a company that’s 4x over-collateralized. So people that are risk-adverse, they can actually buy the bond and get half the benefit. People that are Bitcoin maximalists can buy the equity and get 1.5x benefit. The degenerates, the traders, they can get 3x-10x, and then the haters can short the common stock or short with puts, and we have sometimes $15-$20 billion dollars of open put interest. When I was a younger man, when we first came public — I was in my early 30’s — and if people shorted my stock I would be like, Errgh, they’re shorting my stock! I don’t like them!

Madison Reidy: But you still call them degenerates today, though!

Michael Saylor: No, that’s a term I would reserve for people that are trading with so much leverage they might get wiped out on the weekend, but they do it for the thrills in lieu of going to Vegas. When I was a younger man, I would have been concerned about people shorting my stock, but now I’m not because MicroStrategy is really just providing a set of institutional instruments that institutional investors can use to tailor a portfolio that’s long-short hedged — they can sell the volatility, they can arbitrage the volatility, they can arbitrage any instrument against any other instrument, they can generate yield, they can buy insurance. Some of those people that are short, they’ll short a billion dollars of MicroStrategy and they’ll buy a billion dollars of Bitcoin. And so if we didn’t exist, then billions and billions of dollars of capital from the traditional finance markets wouldn’t be invested in Bitcoin because they can’t buy or hold the underlying crypto-asset — they can only buy securities or bonds or options or other instruments. So we’ve become an institutional gateway for Crypto exposure by all types of investors. And my real aspiration now is: If you really hate Bitcoin, I want you to love us. We’re the perfect instrument to short, because I promise you I won’t sell it. We’re going to be levered long Bitcoin, and if you don’t like it or if you just want to hedge it, you get to sell our stock or buy puts. The worst thing I could do is to take your side of the trade or to interfere with what you’re doing. So I think part of MicroStrategy’s rise to prominence in the space is: We have been laser-focused, we’re very consistent, we’re very transparent. We’re going to buy Bitcoin, never sell Bitcoin, we’re going to borrow money intelligently. If you like Manhattan and if a company said, I’m going to borrow $5 billion at 1% interest and I’m going to develop real estate in Manhattan, you might think that that’s the kind of company you would like to invest in. But if you hate Manhattan and we’re 150% exposed in Manhattan — you’ve got this investment thesis like, That’s the company I want to short! And the most important point in the marketplace is you just have to be very pure, true to your focus, have integrity and consistency and transparency, because it’s not my job to trade, hedge, arbitrage, or construct that portfolio — there are guys with hundreds of millions or billions of dollars in a Bloomberg, and that’s what they do every day. So my contract with them is: We’re going to do what you can’t do. We’re going to buy Bitcoin, hold Bitcoin, and we’re going to issue equity and we’re going to issue debt instruments, and you can’t do that. We’re a public company on the NASDAQ Stock Exchange in America with a nearly 30-year track record, and we have $16 billion of permanent capital — that’s Bitcoin — so I can create an equity with 80–90 vol, I can have permanent capital. We can stand massive swings because of our capital structure — that’s what we can do. What you can do is decide if you want to buy it, sell it, hedge it, or short it.

Madison Reidy: So let’s talk about MicroStrategy’s rise, then. In the past few days it hit $43 billion dollars — a 52-week high. All of those functions that you spoken about are the reasons why you think that your stock can currently command a premium to its net asset value/ $43 billion at its high versus that $16 billion in its net asset value, being the Bitcoin holdings. Give me the rationale — beyond what you’ve mentioned about those functions — that you think it may be able to continue to expand, to perhaps $1 trillion US dollars.

Michael Saylor: To put it simply: We’re the only company that can issue Bitcoin-backed bonds. Anybody can buy Bitcoin and have all the downside and all the upside and all the volatility, but what if I want half the upside but no downside? If you look at the fixed income market, look at the corporate debt market, look at the preferred stock market, look at the convertible bond market — people in the convertible bond market, they have to buy a convertible bond. I can sell a billion dollars of bonds in one day to people that have to buy the bond. They can’t buy Bitcoin. They can’t buy the equity. So who in the market is the leading issuer of convertible bonds? Well, we are — MicroStrategy — we’ve issued like $5 billion dollars worth of convertible bonds, and so we’ve got that credibility. And what’s going to back the bonds? Bitcoin. Well what if I had $50 billion of cash in treasuries and I wanted to issue Bitcoin bonds? It wouldn’t work. Why? Because the volatility of a T-bill is 5. The volatility of Bitcoin is 50. The volatility of MicroStrategy equity is 80. If you want to buy a convertible bond, you want to buy a bond from an issuer that has volatility more than 45. You want high volatility. You want high liquidity. And of course you also would like the Bitcoin upside. If Bitcoin doubles, the convertible bond will will provide you a Bitcoin return, but only if it’s sold to you by a company that’s all Bitcoin. So MicroStrategy is this Bitcoin securities company. And if I want high vol, high performance Bitcoin equity, well you have to have a company that’s 150% Bitcoin. If you want high volatility, high performing Bitcoin converts, you need a company that’s backed by Bitcoin. If you want to buy a bond that pays 100–200 basis points more than conventional things, you need a company that can sell you that bond that has a way to generate [returns] better than that. So there’s an entire swap market out there where a lot of people would love to get paid 7% interest — fixed income retirees. People literally have hundred billion dollar funds and they have to buy bonds that generate fixed income. That’s the name of the fund: Fixed income. They can’t buy Bitcoin. They can’t buy the equity. They might not even buy the convertible bond. So MicroStrategy can generate that bond. And of course, Bitcoin’s been going up 50% a year. So we have crude capital, digital capital, on one side — this is 50% with massive volatility. There’s a lot of people that would love 10% fixed income with 10 volatility. So how do you turn high voltage capital into low voltage fixed income? You need a transformer. What’s the perfect transformer? A company with $10-$20-$30 billion dollars of Bitcoin, and then I sell a billion dollar bond here [one location] that gives you this percentage and this low volatility, and I invest the money into this [another location] which is high performance, high volatility. And so what MicroStrategy does is: We’re scraping or stepping down the volatility, and we’re stepping down the performance. Now you would think: Why would you want 10% instead of 50%? Why would you want that? Well MicroStrategy’s gotten 50% every year for the past 4 years, but we took 50 vol. The world’s full of people that would rather have 5% and 5 vol, or 10% and 10 vol, or 15% and 15 vol. So in essence, MicroStrategy’s opportunity is to be that leading public company in securitizing this asset class, and then providing the derivatives — fixed income, high yield, convertible, high performance equity — and you can’t really do that if you don’t have a public company with permanent capital. You can’t do it with an SEC 40, an ETF, or a trust, see? They’ve got overnight deposits — they can’t generate 5 years duration leverage on some kind of preferred or bond-like instrument. The last metaphor I give you is: Standard Oil created the oil business. So I give you a petrochemical refinery, and think about what goes in one side: It’s crude oil. What comes out the other side? (1) Gasoline. Why do you put gasoline in the car? Because that’s the only thing that works. (2) Kerosene. What do you put that in? Jets. That’s jet fuel. (3) Propylene. All of those petrochemical products come out this side. The refinery does a lot of work — and in comes crude oil. So think of MicroStrategy as: We take in crude capital. There’s no doubt it’s the best performing asset in 15 years. Theoretically, the best form of capital is digital capital, it’s just scary to a lot of people — it’s too volatile, it’s too difficult to manage, so they want someone that can domesticate it, step it down, package it in safe components, and then connect it into the fixed income market, the high yield market, the convert market, and the public equity market. So MicroStrategy, we just inadvertently backed into that. Because to do what we did, you have to start with a very small company — a billion dollar company — and then we become a $40 billion company, and now we’re 150% Bitcoin. So if you take another billion dollar company and do what we’re doing, you can’t catch us, because at this point we can grow $5-$10 billion dollars a year in capital, or faster. You can’t catch us if you start with the same thing. But if you take a big company like Google or Meta or Microsoft or Apple and they took $50 billion and they bought $50 billion of Bitcoin, well that would be good for Bitcoin and that would be good for their shareholders and if Apple did it a lot they might add a trillion dollars to their market cap. But it would be a trillion on top of $3 trillion. So at the end of the day, Apple would be an enterprise [that’s] 25% Bitcoin, 75% Apple. MicroStrategy is an enterprise [that’s] 150% Bitcoin. So how do you create a company which is 150% Bitcoin that can sell billions of dollars of fixed income instruments, or billions of equity into the market with a permanent capital base that’s going to oscillate [or] vibrate with the frequency of Bitcoin? I’d love to say we had the idea 4 years ago and that’s what we’re trying to do — no, we just kind of stumbled on to just a really great business.

Madison Reidy [27:55]: I do want to get to Apple and how you perhaps plan to convince companies like that to follow your Bitcoin adoption strategy playbook. But this whole conversion, financial engineering-type strategy is often referred to online as the “infinite money glitch.” But I wonder if it is infinite or not? And if it’s not, do you perhaps see it running into more of a supply issue first, or a demand issue first? Demand being, perhaps, there might not be potential buyers of all of those other options like bonds. Or supply, that if you create too many shares and can make too many conversions from your stock, that existing investors will be diluted too much that they run into a cap with that. Or can this just keep going forever, Michael?

Michael Saylor: See, the misnomer there is it’s not a money glitch — it is a digital transformation of the capital markets. When you have a system that moves from a higher energy state — a more disordered state — to a lower energy state, lots of energy gets given off. Think of steam becoming water. Is it a money glitch? It’s just steam becoming water, and it condenses. What happens when water becomes ice? It’s not a heat glitch. And what happens when you add heat? The ice becomes water, the water becomes steam. So if you look at the capital markets, you’ve got $800-$900 trillion dollars of wealth in the capital market and you’ve got people invested in all of these heterogeneous assets. Why did 98% of the companies in the S&P not perform? How come 1% of all the returns come from 7 companies? If you study the convertible bond market, someone issues a convertible bond, it takes them 5 years for the investors to figure out whether it worked. And then when they come up with a new convertible bond, it’s a different credit proposition. It’s very inefficient. If you think about preferred stocks? Very inefficient. Junk bonds? Very inefficient. Private credit? Very inefficient. Fixed income? People get very low yields. I’m getting this [low] yield and I’m taking all this credit risk and counterparty risk. So of the $900 trillion in capital in the global capital markets, half of it is just long-term capital — store of value. That is pure capital: People with money just want to keep their money. Rich just want to stay rich. I give you an organization, a billion dollars in the endowment — you just want to not lose the billion dollars. So that $450 trillion is invested in buildings that are rusting. It’s invested in cars. It’s invested in fleets. It’s invested in things that suffer from 20th century risk factors: Credit default, war, tariff, tornado. You had a good business at Kodak and your family had all their money in Kodak — and then what happened? Or you own Xerox — and what happened? Then you own the best business in Ukraine — and then there’s a war. I could give you 10,000 examples of risk factors that destroy wealth. So you’ve got that $450 trillion on one side, and then you’ve got $1 trillion digital capital [i.e. Bitcoin]. It’s like, Well I had a building, I get rid of all the things that make the building a problem and I make it an invisible, immortal, indestructible, teleportable digital building — that’s what Bitcoin is. So this “thing” that people think of as a glitch? It’s not that — it’s energy flowing from a steam state, from highly disordered, inefficient bouncing into each other, into a more ordered state. You’re in Africa, I give you a billion dollars, I say, Go invest in any real estate in Africa in anything you want — any country — hold it for 30 years. There’s not a single thing that you would want to invest in. And I say, Well, would you rather own a billion dollars of real estate in Africa or a billion dollars of real estate in New York City? Well you can see you’d rather swap the New York City risk for the Nigerian risk. And then I say, Well would you rather own a billion dollars of real estate in New York City or a billion dollars in cyber Manhattan [i.e. Bitcoin]? There’s no mayor in cyber Manhattan, there’s no property tax in cyber Manhattan, there’s no storms, there’s no weather in cyber Manhattan — everybody lives forever in cyber Manhattan. You can teleport cyber Manhattan 60 times a second. You can program it as an AI. So it’s not a glitch — it’s simply capital flowing from a disordered economy. In Argentina and Nigeria they have hyperinflation. If I happen to be there and I’m selling pesos and buying dollars — the peso used to be one peso to the dollar and today it’s like 1,400 or 1,200 pesos to the dollar. Was that a glitch? That’s basically the free market — capital flows to where it’s treated the best, and so if I have capital in Argentina, I would put it in the US. And if I have capital in the dollar — let’s take the dollar: 100 years ago in Miami Beach, an acre of land on the waterfront cost $10,000. Today? $10 million. The dollar lost 99.9% of its value against real estate waterfront property in Florida. Is that a glitch? And the peso lost 99.9% of its value against the dollar in 20 years. Is that a glitch? That’s really just capital flowing from a weak asset to a middling asset to a stronger asset. Bitcoin’s advance is capital flowing from 20th century analog assets — financial and physical assets — to the 21st century digital economy. It’s going to go fast: Early on, it went really fast the first decade. It’s been going 50% a year ARR for the past 4 years. The $1 trillion equalizes with the $450 trillion — probably this $450 trillion will become $700 trillion, but this $1 trillion [of Bitcoin] will become $100 trillion. As this becomes a fraction of the 20th century economy, the difference [equalizes] between the cost of capital in the Bitcoin universe which is 50% right now, and the cost of capital in the dollar universe which is about 12–14% — basically that’s the return of the S&P — so the S&P sets the cost of capital for traditional, conventional assets and Bitcoin is the opposite. Bitcoin is like 3.5x the S&P and it’s also 3.5x the volatility. Look at Bitcoin volatility 55 versus the VIX. If you look at the two, it’s not a complicated thing — it’s a thermodynamic idea that any physicist will tell you: This is a hot fluid, this is a cold fluid, I pull up the gate and I mix the fluids, and how hot is the bathtub? It’s somewhere in between. It’s going to be in between scalding hot and freezing cold, and in the middle — if there were some ice cubes in this one and I released scalding hot water here — some of the ice cubes are going to melt, but you’re going to end up with a warm bath. With the exception that if you look out 10 years, instead of 50 vol versus 15 vol, maybe it’ll be 45 to 40 to 38 to 36 to 32 to 28 — this volatility is coming in, this ARR is coming in, now this comes up. Because what happens when Apple and Google and Microsoft and Facebook or whatever when they buy Bitcoin? Take the bottom 98% of the S&P 500 — if they bought Bitcoin, their performance would start to approach the big tech, and so the performance of the S&P index will move toward Bitcoin as they put Bitcoin on the balance sheet. Bitcoin performance will move toward the S&P as we move from a 100:1 ratio to a 10:1 ratio to a 5:1 ratio, and these things equalize. But if you understand it as thermodynamics and collapsing into a more efficient energy state — how is it not more efficient to be able to teleport a building 60 times a second between New York and London? That’s efficient vs. Your family made an investment in London 30–40 years ago and they changed the law last month and now you’re going to lose all your wealth. That’s inefficient. So Bitcoin is the digital transformation of capital. MicroStrategy is just a business taking advantage of the digital transformation. But if I was talking to Apple I would say, Don’t buy back a $100 billion of your stock — buy $100 billion of Bitcoin. It will go to $500 billion, you’ll have a $500 billion business growing 20% a year, you’ll make $100 billion in investment gains a year, your investors will look at it and they’ll add a trillion or $2 trillion dollars to your market cap and now the company will be valued 60% based upon the operating business, 40% based on the balance sheet. And the risk will shift, because the risk in a conventional company is: The balance sheet’s worthless and the company’s valued based upon the P&L. And so if you make a billion dollars a quarter, I basically value it at 20 P/E, so I take the quarterly result, I multiply by 80, and I say, Oh you’re worth $80 billion dollars because I took one billion and multiplied by 80, and the balance sheet’s worthless. But the next quarter I say, Well my billion went to zero. That’s 80 times a billion dollars and change — you’ve got a massive whipsaw. That’s why these companies’ stocks crash. If the company had $40 billion of tangible assets on the balance sheet, that puts a floor on the equity. And really what you want is a well balanced company — it’s like Harvard University or Yale: They’re not valued based upon the earnings of this semester of freshmen entering Harvard. They’re valued because they have $18 billion in the endowment, and if they close the university it’s still rich — they have $18 billion in the endowment. So MicroStrategy is just pioneering — it’s kind of common sense. Your family wouldn’t give away all your money and just say we’re going to work harder. And a university wouldn’t give away all its money and say we’re going to raise tuition, cram the classes, cut the teacher’s salary, and work harder. But conventional wisdom in finance is: Your company ought to dividend out its capital, it ought to buy back its stock, it shouldn’t actually hold any capital on the balance sheet, and it should just raise its prices and tell its employees to work harder and cut its cost. And that in a nutshell is why 99% of the companies in the world underperformed the Magnificent 7, and why they all could benefit by just adopting Bitcoin as their treasury reserve standard.

Madison Reidy [40:05]: That was an interesting point you made about analyzing and coming to the valuation in terms of analyzing the performance of a company. Investors historically, as you mentioned, just look at a price to earnings forward-looking ratio or look at the profit and loss. How should investors analyze MicroStrategy? Because — to give your metaphor — MicroStrategy is the tap to that capital flow. There’s nothing else like that. Are you a Bitcoin bank? Do we analyze you similar to a bank? I’ve seen a simplification perhaps is analyzing MicroStrategy like a REIT, like a real estate investment trust, but that feels too simple. I mean is there anything we can compare it to, Michael?

Michael Saylor: I think you’ve got to look at the balance sheet and say okay that’s one component — they’ve got this much Bitcoin. And then you’ve got to look at the P&L and say well how much investment income can they generate? So if the company gets to $50 billion dollar of Bitcoin and if Bitcoin goes up 20% a year, the company generates $10 billion a year of investment income, and that compounds 20% a year. So if you if I said to you, Hey here’s a big tech company that makes $10 billion a year and they’re growing that 20% a year, how would you value that?

Madison Reidy: I mean through the roof, right?

Michael Saylor: There you go. So it’s not very complicated. The thing that’s held people back is we’ve used indefinite intangible accounting for the last 4 years, and it’s not until 2025 that you actually start to do fair value accounting. And when you start to do fair value accounting you can actually see investment income and you can see the income potential. So it’s not complicated to figure out what the balance sheet is. Everybody knows — you know: 252,220 Bitcoin. The complicated thing is to grasp the idea of a company that issues securities backed by Bitcoin. The real franchise that MicroStrategy has is: We’re the leading issuer of Bitcoin-backed securities. So the question is: (1) How much capital can we raise? How much permanent capital do we have? And the second question is: (2) How much leverage will we use, and how intelligent will it be? And the third question is: (3) What’s your forecast for Bitcoin? So there’s three variables there. If we borrow $10 billion at 7% and we invest it in Bitcoin and Bitcoin returns 21%, then we scrape 14% arbitrage on $10 billion, we make $1.4 billion a year in the swap, we roll that into the business and then 10 years out you’ve got $50 billion in capital and you’re generating $10 billion a year of investment income just off of that one piece. But it all comes down to: What’s the nature of the capital, how much can we get and raise, and then how will we invest it, and [whether] we’ll be responsible. The haters think Bitcoin’s just going to go up 0% a year, so of course from their point of view the balance sheet’s going nowhere, and if Bitcoin goes 0% a year you can’t raise any capital. So if that’s your forecast, you’re not that interested. My view is Bitcoin is going to appreciate 29% a year ARR for the next 21 years.

Madison Reidy: Which takes us to what? What’s the dollar figure on that?

Michael Saylor: $13 million [per Bitcoin]. And what do you think my shareholders think? Well my shareholders are pretty bullish on Bitcoin. There’s no one buying MicroStrategy that hates Bitcoin.

Madison Reidy: No, they’re shorting it.

Michael Saylor: So at the end of the day the methodology would be: Figure out what’s your forecast for Bitcoin — by the way you can go to Google, type “Bitcoin 24” and you’ll find the Bitcoin 24 open-source model. It’s a 21-year model. You can download it, it’s a spreadsheet, you can put in your forecast for innovation rate, inflation rates, all the asset classes, monetization, demonetization, Bitcoin assumptions, you can put that all in and you can run your model and you can get your own answer. So do that and then you just got to consider how much capital do you think MicroStrategy will raise via securities offerings? And after you do that you decide are we responsible custodians? And then you create a 5 or 10-year model for our investment income and you figure out how much income can we generate and how fast can we grow? And of course all those things are very integrated. The more you know about the capital markets the more enthusiastic you get because we look and we say, The convertible markets are inefficient. The preferred stock market’s inefficient. The high yield market’s inefficient. The corporate debt market’s inefficient. The real estate market’s inefficient. So our view is: We want to be the Amazon of fixed income. We want to we want to build a better product, direct to a new distribution channel. I don’t blame people for not necessarily understanding that, because sometimes you have to see it. And in the absence of fair value accounting and the like, and 3-year forecasts — and those don’t exist — it’s a lot for people to grasp right now.

Madison Reidy: Well you’ve even had to come up at MicroStrategy with your own measurement to measure the success of the strategy. You already mentioned it earlier on in this chat — the BTC yield. Currently year-to-date that’s around 12.2%, that yield. But over the next 3 years according to your most recent quarterly report, you’re targeting something between 4–8%, is that correct? So that then implies a diminishing in that yield. So once it decreases or compresses that yield, what happens then? Do you need to come up with another means to convert capital?

Michael Saylor: Well let’s just focus on BTC yield for a second. What is it? It’s the rate of increase in Bitcoin per share. So I think we’re getting close to almost an 18%, like 17% BTC yield for the year so far. That means that between January 1st and today you’ve gotten more than 17% more BTC per share. If I gave you a company and I said it’s got a dividend yield of 17% and I give you another company say it’s got a dividend yield of zero, you would value the second one based upon the underlying asset but you’re not going to get to any more. But the first one you would actually take the underlying asset and then you would take the yield and then the question is, How long will they generate that yield? And what’s the average yield over the lifetime of my holding period? In that case you could say if I expect 4–8% yield you could put a 10, 20, 30 P/E on that. It’s basically your earnings per share in a way, but we can’t really call it that because it’s a non-GAAP measure and it’s a Bitcoin per share-type measure that’s valuable to people that love Bitcoin. But when you think about it that way, the simple model there is: The company should have a premium equal to the multiple of the yield. If you think the multiple should be 20 and if you think the yield will be 8% then you could say the company should trade at 160% premium to the underlying asset. So the ability to generate that yield will justify that premium. It’s a simple model but it’s not the whole model. The real issue is: How are you generating the yield? And the way you’re generating the yield is through issuing securities to the public market. And (1) one way to do it is by issuing equity at a premium — that’s the most simple way imaginable. (2) Another way to do it is to issue convertible bonds at a premium to the equity, which may or may not be at a premium to the asset — that’s a slightly less simple but still kind of straightforward way to do it. (3) A third way to do it is I just issue a fixed income instrument that pays 7% and I buy Bitcoin with it that yields more than 7%.

Madison Reidy: Which is what you’re doing, right?

Michael Saylor: Well technically that’s not exactly what I’m doing right now. What we’re doing right now is we’ve issued equity at a premium, and we’ve issued convertible bonds at a premium. If the company in the future were to issue preferred stock that had a fixed thing, or issue bonds, corporate debt, or something that had a fixed coupon, then you would be swapping the fixed for the Bitcoin return. And of course in that case, look if your forecast for Bitcoin is to go up 7% a year and the company’s paying 7% for their capital, there’s no yield. If your forecast is to go up 21% a year and the company pays 7%, there’s a big yield. So if you use BTC yield then you just think about what’s the company going to do to get to it, and we’ve just got lots of different tools to get to it. And there’s a thousand things you could do. I’ll keep it for the sake of our interview to just those few because they’re simple to discuss. Our guidance, our target, is 4–8%. We’ve done more than double 8% this year.

Madison Reidy: So it feels pretty conservative then?

Michael Saylor: I think we try to be conservative in our guidance because we don’t want to disappoint our shareholders, but clearly we will pursue our objective as rapidly as we can, in a prudent fashion.

Madison Reidy: Should we talk about the Bitcoin revolution?

Michael Saylor: Yeah! Bitcoin revolution. It’s all Bitcoin.

Madison Reidy (preview): In part two of this interview with Michael Saylor he explains what could be Bitcoin’s next big moment.

Michael Saylor (preview): Banking is just the next logical step.

Madison Reidy (preview): And is that not exactly what Bitcoiners don’t want to happen?

Michael Saylor (preview): At the end of the day you have an OG crypto community that’s very hardcore about it, but if you look at where all the money is, 99.9% of the money is actually in the traditional economy. And in the war for the future of money, the war’s going to be won with money.