I mean, it had to happen.
If we can't get more inception-like overlaps or M&A activity, we can get uuuh, double trouble?!
Background:
Bitcoin treasury companies work on trading against overvalued air... with their shares trading at above the value of the bitcoin they hold, a simple trade emerges: print shares, buy bitcoin, profit. (The cool dudes call it "accretive")
Well, the party ended and all of them (minus Strategy) trade at below 1 mNAV, so no more dice. (Hence NAKA debacle and silence across the bitcoin treasury board. I'm as shocked as you are.)
Also, we've been here before:
Borrowing money at 11.5% to buy Bitcoin is a good trade as long as Bitcoin goes up by more than 11.5% a year, which, you know... But even when it is a good trade, it doesn’t carry: You need money to pay that 11.5% coupon, and Bitcoin doesn’t have any cash flow. If you sell billions of dollars of high-coupon preferred to buy Bitcoin, you will need hundreds of millions of dollars of cash every quarter to pay the coupons.
WHAT TO DO?!
WELL, some people in this space gotta keep things interesting so,
if you run a DAT and are paying like 12% on your preferred stock, and I run a DAT and am paying like 12% on my preferred stock, you could raise some money to buy some of my preferred stock? Which would pay you a 12% yield? And give you some cash flow? Obviously my preferred stock is not Bitcoin — if Bitcoin goes up a lot, my preferred stock probably won’t — but it’s Bitcoin-esque. Bitcoin-flavored. Maybe it will make your shareholders happy?
ICYMI (#1452317), Strive -- another treasury monstrosity -- put one third of its cash balance (which is there to signal to investors that they have the cash to pay preferreds!) into Strategy's preferred... because 11.5% is better than UST yields, I guess?
OK, fine, mental accounting is a thing and there is some opportunity cost logic:
It's not _quite_ "I scratch your back" or cross-ownership or Ponziate my returns put into your instruments/your return into mine -- but _kind of_.
It's a weird time we live inIt's a weird time we live in
Here's Levine's commentary on STRC:
it has the offsetting disadvantage that you have to pay a very high coupon. Strategy, for instance, has a weird floating-rate preferred stock called Stretch, which currently pays an 11.5% coupon. Last week it sold about $1.2 billion of Stretch to buy more Bitcoin.
"weird floating-rate preferred"... I mean, it's not that weird and it's high on purpose to attract schmucks, so I dunno.
archive. https://archive.md/bCh0X
I've also been expecting this to go the M&A route. It doesn't make much sense to me for the market to carry a bunch of BTC's.
I was thinking recently that IF some large nation-state ever wanted to acquire a very large amount of bitcoin for reserve purposes, then acquiring a "BTC" would be most sensible way to do it. The mechanics of that would really work would be interesting though....
People have definitely mentioned that for the US via Strategy. Are you thinking about a scenario where Strategy takes their stash to another large state?
Either another US or another country.
Basically it becomes more like a one-time very large OTC buy - now obviously shareholders would demand a premium over spot, so the question is does the premium shareholders demand work out to be less than what gov would pay in slippage trying to buy very large amounts on 'market' (OTC or not)
That assumes it's done in an above board way. There's also the possibility of some sort of seizure on some flimsy pretense.
True true. More than likely carrot and stick.....investigate them via SEC simultaneously while negotiating a "settlement".
Very plausible.
I'm also thinking about how, if the seizure were ruled illegal after years in court, the damages would be based on the dollar value at the time of seizure. They wouldn't have to transfer the bitcoin back.
But there are 5,000 banks, Undisc! Dont you get it, its like credit but diiiigital
I imagine there will be many financial services companies on a bitcoin standard as well
The twitter-sphere was shilling STRC hard last week. Felt like everybody was yodelling about how much corn strategy was hoovering up. I had to reread tgd bitmex article on it to remind myself of the play. Sadly, none of Mr Saylor's products have yet enticed me.
Are we going to hold a celebration or a funeral when he gets to 1 million coins? Maybe an Irish wake? You know the ones with lots of drunken brawling?
I'm game
https://twiiit.com/joakimbook/status/2032108421915287636
There is a very particular kind of financial engineering that only really makes sense once you accept two premises
One that Bitcoin is not just an asset but a sort of secular religion for capital and
Two that yield is now a cosplay activity rather than a boring actuarial exercise
Once you accept those two points everything you describe becomes less insane and more inevitable
If you step back this whole DAT and Bitcoin treasury ecosystem has basically run through three phases
First phase
You can issue equity at a premium to the value of your Bitcoin stash
If the market is willing to pay 1.2 times or 1.3 times your Bitcoin per share value then your business model is as sophisticated as
Print stock
Buy Bitcoin
Call it accretive
In other words you are not a company you are a levered closed end fund with marketing
But as you note that arb closed
Most of these now trade below one times their modified NAV
Once you trade at a discount you no longer get paid to lever up you get punished for it
Second phase
Fine
If the equity game is over we go to preferreds and debt
You sell 11.5 or 12 percent paper to buy more Bitcoin
The story is simple
If Bitcoin goes up 50 percent per year then 12 percent is a rounding error
If Bitcoin does not go up fast enough or actually goes down you have sold a very loud promise into a very quiet cash flow
This is where the problem gets physical
You must generate hard dollars every quarter to pay that coupon
Bitcoin does not know you exist and does not remit dividends when your interest charges are due
So you are in a timing lottery every three months
Either you
Sell some Bitcoin and slowly destroy the premise
Or raise more capital and hope the music keeps playing
Or invent fee income and ancillary business lines large enough to plug the coupon hole
Third phase
Now we arrive at the reflexive yield loop you are pointing at
You have a DAT paying 12 percent on preferreds
I have a DAT paying 12 percent on preferreds
Neither of us has real operating income because our actual product is exposure to Bitcoin with a Greek chorus of buzzwords
So one of us says
What if my cash pile which is supposed to reassure preferred holders that coupons are safe
Instead goes and buys your 11.5 percent preferred
Then magically I have yield to point at
Look
We have cash flow
We hold this security that throws off a double digit coupon
This supports our ability to pay our own preferred
Please ignore that the source of that yield is another entity that is doing structurally the same thing as we are
It is not a cross ownership Ponzi in the formal legal sense
But it rhymes very loudly with circularity
deleted by author