[00:02:07] James Check: Yeah, it’s funny that you label as contrarian. ’cause generally speaking of just writing about what I think is happening in like the real world, I think what’s probably more interesting is how quickly and consistently the narrative on Twitter diverges to the most bullish possible scenario or the most bearish possible scenario.

[00:02:22] Yeah. And as always, reality is dead through the center. I’m like, guys, I can see reality. It’s like right in the middle. Yeah. But this is a very interesting topic and it actually comes back to a degree of PTSD for myself as an analyst. So something that I’m very, very aware of is that in the 2020 and 21 cycle, and I can say this with great confidence, there’s not a single analyst in the world who knew anything about how to use on chain data.

[00:02:45] Yes, we knew what they were. We kind of like, we understood what the metrics stood for, but actually using them in a live fire exercise, nobody had the experience. It was just too early. Yeah, most of these tools were already being invented in 2019 at best. So that’s kind of the background. Now, I made two major mistakes in the 2021 cycle.

[00:03:03] I think I joined Glass, started February 21, so about three months away from that first major sell off. And in that first sell off, I was bullish as everybody was. And the thing that I primarily missed is the GBTC ARB and also the amount of leverage that had built up. 

[00:03:18] Mm. 

[00:03:18] James Check: So the first lesson I wanna take away from that cycle.

[00:03:21] Do not miss. When you move from a spot driven to a leverage driven market, mm, which is natural in all markets, you get to the euphoric peak and everyone goes levered long because the market’s bulletproof, it can’t go down. That’s exactly the time when it’s gonna get down. Mm. I’ve been in a very big way.

[00:03:37] So that’s the first lesson. Now the second one is after we sold off, we had about a 50% sell off. Went from 60 K all the way down to 29. We spent about two months chopping around there in June, July, and then we finally ral back to a new all time high. And that second all time high, all the way up. The one thing that I was looking at is going, guys, there’s no activity.

[00:03:56] The men pool is empty. Mm. Blocks are not full. We’ve got very few transactions. Volume is kind of in a strange, like it was picking up, but it wasn’t really a very organic pattern. And anyway, we got to 69,000. And me being the young naive analyst that I was, I said, okay, I guess my data is wrong. And I flipped from being guys, I’m a very cautious analyst at this point.

[00:04:18] And I flipped saying, look, the market’s proving me wrong. We’re going up. And of course, I flipped bullish at the exact peak. 

[00:04:23] Mm. 

[00:04:23] James Check: So that was the second lesson learned from the 2021 cycle amongst many others. But they’re the two big standouts. So now when I look at our current market, if we wind back to November, December, the blockchain was packed, right?

[00:04:34] People are transacting. There’s volume flowing through. Nothing to be bearish about whatsoever. Since April, we have more or less seen that second dyna, both of those two dynamics in our current market structure. And that is that leverage is exploding through the roof. We’re seeing futures open, interest options, open interest, even lending markets are really starting to speed up, which makes sense.

[00:04:56] People are starting to feel like this market is more bulletproof at this point. We’re seeing a lot more speculation, a lot more of those funds. But also the network itself is very, very quiet. But we have a very interesting dynamic. So as I mentioned, blocks are almost empty. Transaction volumes are still quite high.

[00:05:14] And I was doing a breakdown study of this yesterday. Most of the transactions we’re seeing now are very large, so there’s not many of them. Mm-hmm. But the the mean is moving around like several hundred thousand dollars. And if you think about how means and me and mediums work, if your mean is starting to creep up, ’cause you’ve always gonna have a preto distribution of lots of small transactions and a handful of big ones.

[00:05:34] What we’re basically seeing is those handful of big ones are carrying most of the volume. So on chain volume is actually very high, still, relatively speaking, it’s off the peak, but uh, spot volume is declining, has been since November. ETF, trade volume declining since November. Futures volume all time high.

[00:05:51] So we have watched this pivot from a spot dominated market, even as close as April. All the way into a futures and leverage dominated cycle. So important just for people to recognize that we have truly phase shifted over the last three months. 

[00:06:05] Preston Pysh: That is really fascinating, and I love the call out from the previous cycle of like what your major learning point was.

[00:06:13] How much of the, you know, if we’re looking at the ME pool and we’re seeing how little transactions are happening there, relatively speaking to other periods in time, how much of it do you think has just been moved over to the ETFs? Because so many people own Bitcoin this way, and if Coinbase is moving the net on a one day every day, if they close, they only really need one large transaction to settle whatever the differences are.

[00:06:39] Does that kind of maybe throw a wrench into some of the way that you’re looking at it or comparing it to a previous cycle? 

[00:06:45] James Check: Yeah, so this is a very good question. One I get all the time, this dynamic of do the ETFs break some of the on chain data and on chain metrics? And the answer is absolutely not. And the reason is because we have two different buckets of on chain metrics.

[00:06:56] There’s various ways we can slice and dice it, but there’s metrics that describe coins that are moving and metrics that describe coins that are not moving. So if we’re looking for a sentiment profile of what’s going on in the market, we only look at coins that are moving, that’s gonna be your net flows, that’s gonna be your exchange, inflows and outflows.

[00:07:13] And here’s another important stat. On any particular day, even today with the ETFs, somewhere between 60 and sometimes 80% of all on chain activity is coins going in or out of exchanges, deposits and withdrawals. So basically what we’re doing is we are looking at that 60 to 80% of all transactions and saying, is there a signal in what people are, are they taking profit?

[00:07:33] Are they locking in losses? What’s their overall, how old are the coins? So we’re getting a profile of that and saying, okay, do we think that’s a representative sample of everything else that’s going on? And generally speaking, if you’ve got fear in the market, you’ll see it in an on chain data, you’ll see it in future data, you’ll see it in et TF data.

[00:07:49] Now, there’s no question, right as lightning’s gonna take some retail transactions when we’re in Seoul, we had a dinner and there’s probably, I don’t know, 20 people, two dinners and everyone paid with lightning. So yes, there’s probably 30, 40 transactions that didn’t happen on chain that said half of us had to do an on chain transaction to get into lightning in the first place.

[00:08:06] So yes and no. The ETFs really, it’s no different to the the spot exchanges. People would deposit their coins to Binance or debit and they’d do their trading. So all of these things are telling you the same story. But we’ve gotta remember that there’s still a whole stack of people out there holding individual coins.

[00:08:23] And the higher that the price goes, the more they go, you know what, I’m actually gonna start locking in some profit. And what we saw over the last three months, this rally in particular, it’s actually the first time we’ve seen it this cycle. Coins age three to five years. And if you just think about where three to five years is, this is 20, 22 bottom buyers, right?

[00:08:39] People from literally from the previous cycle who bought low and are starting to distribute this rally is where we saw the first wave of them selling. It was nothing close. We saw in November and December, that was like 86 billion a month. I think we got up to about 30 or 40 billion a month, 35. So we’re at decent levels.

[00:08:55] But no, generally speaking, this looks like a very, very quiet market. And it seems like a lot of the speculation activity has shifted. There is definitely more derivatives, but I think these treasury companies are also just where all the punters are going. 

[00:09:07] Preston Pysh: So this is the question I have is long-term, do you see this to be something that’s just a unique situation right now where we don’t have much action in the men pool because there’s this whole host of people out there that say long-term we need transactions to be picking up in order to substantiate the fees and everything that miners are gonna continue to work towards.

[00:09:27] Like the all of that piece of it. Do you see this as like a real issue long term, or do you think it’s just kind of where we’re at right now in the cycle and with more time, you’re gonna have a lot more transactions that pick up, call it five, 10 years from now. 

[00:09:41] James Check: Yeah, it’s a little bit of both, and I think there is, there’s definitely a valid case to say that like for me right now, I’ll do a handful of transactions a month finding my, you know, regular DCA, but generally speaking, most people are hobbling and I think that’s in this monetization period, it does make sense that more people are going to hoddle.

[00:09:56] Now, I am surprised when I log in or I look at PLE space, I see 115 waiting transactions. I like, you’re telling me there’s 115 people in the whole world who wanna transact in the next 10 minutes? Remarkably quiet. So I don’t really have a good read on why it’s suddenly gone, this quiet. It’s definitely like if I call back to my 2021 analyst self, it’s generally a sign.

[00:10:17] It’s like, well, if people aren’t really using Bitcoin, probably not the best sign. It would naturally be far more bullish if loads and loads of transactions are waiting semi mind. So I think that’s probably the first dynamic to take away. In terms of the long-term arc of miners, I actually wrote a piece of some time back called Securing the Bag, and what I was trying to capture is my like long-term thoughts on the mining picture and probably the key insights that I pulled from that.

[00:10:40] The first one is that we have to separate miners and mining. I. One is an individual company or an entity, and frankly, they are expected to go bankrupt all the time. This is part of the natural cycle of Bitcoin. They’re fighting the most ruthlessly capitalist, I don’t even know what you call it, right? The difficulty adjustment wants to send you broke, and it’s a really, really cutthroat industry.

[00:11:00] You don’t control your energy prices. You don’t control your output prices. The difficulty, adjustment’s, always making it harder, and people keep coming on trying to fight for that block reward. It’s just an impossible industry to win in. So miners are expected to go bankrupt all the time, but they’re also forced to innovate.

[00:11:16] They have to find the cheapest energy. They’ve gotta come up with the most creative and ingenious solutions, long-term power contracts, flaring methane, landfills, whatever it is that they can do to stay alive. So the second insight that I took away from it is that the one dimensional argument of look subsidy going down mean Bitcoin debt is a very, very surface.

[00:11:37] You know, there’s really no depth to it. It takes away the idea that miners have to innovate and look, if a miner goes bankrupt, they will have to fire sale all of their rigs. And this is the other key insight. The rigs have a cost basis. So yes, it may not be profitable for somebody who just bought a new fleet of the latest genesis, but if they have to fire sale them at 10%, it’s gonna be profitable for that dude anywhere in the world.

[00:12:00] Yeah. So if you sell those rigs at the right price. They will always be profitable to mine somewhere in the world at some point in time. So it’s really this transition of rigs between balance sheets and all of this insight came down from a very, very simple observation. Hash rate is always at all time high at and after a halving, which makes no sense.

[00:12:19] If we’ve just had a cutdown of issuance, why is the hash rate ripping to the upside? And there’s only two ways this can happen. New rigs coming online of the old generation, which is CapEx, or new rigs of a new model coming online that they’re more efficient, which required R and d and CapEx. If an industry, the mining industry, not miners, if the mining industry was stressed, they wouldn’t be investing more money in r and d in CapEx.

[00:12:42] They wouldn’t have the cream on top of their revenue to do this. They would purely be just running the OPEX as long as they could. So the fact that we see hash rate climbing means that there’s enough cream on top of the industry to continue to invest CapEx. So they’re actually in a, continue to be in a very, very healthy spot.

[00:12:58] So far. There’s no evidence that declining subsidy is bearish. For the mining industry, certainly bearish for minor. Yeah. 

[00:13:06] Preston Pysh: Yeah. I think long term, I think the concern that I have with this particular topic is people just want to get into the code and start making updates and changes because they’re looking at how little action is currently happening this month in the memo, and they’re saying, we need to do something long term.

[00:13:23] This is gonna be bad. And it’s like, no. Free and open market, you really need to take your hands off of it. And I love your point about if you die because you didn’t have cheap enough energy, or you just really were bad at operations or whatever the case might be, those rigs are gonna be resold at some type of discount to somebody that is doing that better.

[00:13:44] Or eventually they’ll flow into the hands of somebody that’s doing it better. And I think that’s so important for the space to understand is really you gotta take your hands off this thing and not mess with, what’s the word I’m looking? It’s like physics, right? Like you don’t want to go in there and start adjusting the dolls of gravity or these key inputs to that everybody has to build foundations on top of.

[00:14:06] James Check: And the other thing that Eric Skoll Hass done a very good job of explaining in his book, crypto Economics, which is a dense read, but very, very good, is he basically describes that fees are the only thing that protects Bitcoin from censorship. Because if you’re an attacking miner and you’re doing some kind of 51% attack, let’s just say you’re mining empty blocks, you are getting the block subsidy too.

[00:14:23] So putting a tail emission on actually just gives your attacker the exact same reward as your honest miners. The only thing that stops that attack if somebody is mining empty blocks is that all the transactions that want to get mined start banking up and they have to start out bidding themselves and putting my higher fee pressure.

[00:14:39] And eventually that fee pressure gets big enough that all those dusty s nines and all those other miners that are in people’s cupboards, people will pull ’em out, plug ’em in, because they want to collect those rewards. So mm-hmm There becomes an incentive to get back above that 51% and kick that mine off.

[00:14:54] Right. And start earning their rewards instead. So the blocked subsidy doesn’t actually secure Bitcoin. It’s the fees that secure Bitcoin from censorship resistance. 

[00:15:02] Preston Pysh: This is a topic that the casual listener, somebody who’s interested in Bitcoin, they might not understand the deeper, not mentioned topic that you’re addressing here, which is filtering and spam on the blockchain.

[00:15:17] So tell people what, because I think this is a really nuanced like insider, like if you’re really close in following Bitcoin a lot, you understand what we’re getting at. But for the casual listener, help them understand what the deeper context is to what you’re saying there. 

[00:15:32] James Check: Yeah. So at the end of the day, what do miners do?

[00:15:34] They’re responsible for building the blockchain. So taking all the transactions that are out there in the men pool, putting ’em into a block, and that selection of what goes into that block is a debate that we are currently having of what miners put into that block. But effectively, the way the Bitcoin protocol was designed is miners can choose from whatever is weighing to be confirmed, and generally speaking, they’ll choose the ones that pay them the most, right?

[00:15:56] The ones that are paying the highest fee. So within that context, if you have a miner come on or a mining pool, and at the moment that’s really one of the biggest risks is the centralization we have in mining pools. Really, you could say that the Bitcoin mining pool network, probably about three or four mining pools all you know, some of them are even the same entity.

[00:16:13] So that’s definitely a risk factor. But they’re designing what goes into that block. Now, imagine that, let’s just say for example, if you’ve got four entities that control the pools, and let’s just say for argument’s sake, the Chinese and the American government decide to lean on both of those pools, you might have 80% of the network Now that’s getting leaned on.

[00:16:30] Say, okay, you have to mine empty blocks. You are not allowed to put transactions in. You now have a situation where all of those mining pools will be mining empty blocks and all the transactions are effectively being sent. Now, if let’s just say there’s 10% of the hash rate that chooses to mine everything as per the standard rules, and they don’t care, they’re not being leaned on by any government, that means that one in every 10 blocks on average, will actually mine your transactions.

[00:16:55] So this idea of censorship, it’s a spectrum. It’s never gonna be, if you’ve got 51% of the miners, they’re not gonna include anything. There’s still 10% that will. The risk is that those, that 80 90%, they could say we’re actually not gonna build on top of any of the blocks that the 10% mine. So the 10% mine block a hundred thousand.

[00:17:15] And they say, no, we’re actually gonna remin a hundred thousand and there’s a one in or a nine in 10 chance that we’re gonna do that. And we are basically gonna censor your entire chain that you are building. So that’s another risk that comes into this whole dynamic, and it’s why pool centralization is a major risk.

[00:17:29] But at the same time as those fees build up, right, it would be tremendously disruptive for the Bitcoin network. But this is the most important thing. It’s not fatal. There is a recovery process here where essentially the fees continue to build up. The miners who are recognizing that this is probably destructive to their pool, to the hardware and the bitcoin network, by and large individual miners can then say, oh, you know what?

[00:17:52] I’m gonna switch my hash rates somewhere else. This is obviously tricky when it comes to, you know, if there are governments leaning on pools, because if you’re a regulated US minor and you’re in the US and the US is saying you have to mine through this pool, suddenly it gets very tricky. But there is the option for miners to point their hash rates somewhere else.

[00:18:10] That’s why a lot of this stuff going into legislation, particularly in places like the US is quite important. Just giving that right to mind and all these dynamics. So there is definitely a risk over the long term of this pool centralization, but effectively they can say, look, we’re not gonna include these transactions, but that fee pressure will build and that’s this natural incentive for mines sake, but I want to collect those fees.

[00:18:31] And the bigger they get, the juicier, the reward becomes, and actually this is even more so when the subsidy is lower, imagine the subsidy is 5, 6, 7, 10 halvings away, and we’re well below one Bitcoin per block. Suddenly you’ve got 20 Bitcoin worth of fees. This is a gold mine. They’re gonna turn around and say, oh, you know what?

[00:18:49] I have to point somewhere else and collect these fees. So there is a natural incentive to recover from this. 

[00:18:53] Preston Pysh: Yeah, I think when you just kind of look at the game theory that plays out in some of those scenarios that you’re saying you do see, now you have pool operators or individuals that are gonna go out there and try to start a new pool that isn’t gonna be censored by the government as well.

[00:19:08] And I think that there’s just a lot of. When you think of the second and third order effects of governments trying to do something like that, the robustness of all of these incentives really start to shine and really start to come out and express themselves. You have your newsletter, which is amazing, and one of the things that you recently talked about was this is a quote unquote weird cycle.

[00:19:30] So what do you mean by that? We had a little bit of the discussion at the start of the show, but help us understand this framing of it being a weird cycle. 

[00:19:38] James Check: It is a weird cycle and I wrote another piece yesterday called Same, same but Different. I’ve been exploring this idea of how the cycle is different, how it is the same, and it is a bit of a strange cycle and it’s thrown a lot of people for a bit of a loop.

[00:19:50] I think the first one that has definitely confused people, and this is one of my base cases for this cycle, is it’s just gonna confuse people. They’re gonna lose track of where we are, where the floor was, where the ceiling was, did we top, did we bottom? I just think there’s a lot of dynamics that’s gonna break people’s existing mental bottles.

[00:20:06] Strangely enough, we are still following the quote unquote four year cycle if you measure cycle bottom or the cycle low, but we’ve gotta remember that we’re a hundred times bigger than we were in 20 16, 17, and you get a lot of the behaviors. If we look at people’s unrealized profit or loss, the way that that’s trading, the way people are accumulating at their cost basis and selling it slightly above it, all these dynamics look very similar to 20 16, 17, but we’re a hundred times bigger in the, the piece I did yesterday.

[00:20:33] If we look at the ETFs, they’ve got $132 billion in a UM. If we combine that with some of the biggest treasury companies with like 220 billion, the Bitcoin market cap peaked at 260 billion in 2017. 

[00:20:45] Mm. Yeah, so just 

[00:20:46] James Check: the capital that’s in the ETFs and strategy in a couple of other of these companies. Is the entire 2017 market cap.

[00:20:53] Yeah. So you kind of look at that and go, really, it’s amazing that it’s behaving the same way, but really it shouldn’t be because it’s so much bigger that it doesn’t really make sense. It’s quite remarkable. It’s a bit of anomaly that we’re following in such a similar pattern. Now, there’s another thing that’s really thrown people, and that is no question.

[00:21:09] That is Bitcoin dominance, which has been a 3.6 year unrelenting, unstoppable uptrend. And I think there’s just a lot of crypto investors who have just been left at the altar holding bags of stuff that nobody actually wants. And look, even amongst the Bitcoin crowd, there’s gonna be a lot of Bitcoiners out there who also want to speculate placing Fiat games.

[00:21:28] And they’re even, they’re being re reminded, Hey, remember when you were Bitcoin only? This is why, and people are now starting to shift back again to this been like, if you go back to 20 18, 19 20. The Bitcoin dominance started to peak in like June, 2019. It was about a one and a half year period of oil claims getting crushed, and then they started to slowly recover.

[00:21:48] Mm-hmm. It has been nonstop, just perpetual bleeding for 3.6 years, which is more than double what we saw in the past. So it’s really just thrown a lot of people for a loop. Why do you, and we’re now seeing a lot more. 

[00:22:00] Preston Pysh: Yep. Why? Why do you think that is? Why did the altcoins ’cause I mean, the last cycle, it was crazy.

[00:22:06] I remember just like, how are people this, everything level, this mental to be, and it was just all speculation. Like people knew they were buying something that was a scam, but they didn’t care because everything was just bidding. So they just jumped in. But you haven’t seen a trace of this on this cycle.

[00:22:22] Yes. It’s almost like it just died on the vine. I think so many people, maybe it’s ’cause they all got wrecked so bad in the last cycle. Yes. Yeah, 

[00:22:29] James Check: no, there’s a lot of elements here. And I think the first thing to understand is that, and I’ve been an astute observer of the crypto ecosystem for a long time, but the first and foremost reason that we got to watch all the reason we got to watch Wall Street get built bug for bug error, for error.

[00:22:44] And we got to see why the world has regulations. Because if you just give, if you allow people to speculate on whatever they want, they’re gonna create Fugazi tokens and just take people’s money. So we got to actually speed run and see how the financial world got set up. So to me, as a, as an engineer, I’m like, wow, I get to speed run and watch how the financial system came to be.

[00:23:02] So every cycle has been defined by a new distribution mechanism. In the 20 16 17, it was ICOs. People could launch their own tokens on Ethereum. That’s like crowdfund. They then moved towards this VC funded, right? Because suddenly they realized, oh, we probably shouldn’t fleece retail like this. So then VCs go, don’t worry, we’ll invest and get it up to a $6 billion round, and then we’ll issue it to the public.

[00:23:24] And then they would just down every coin, the list on Binance was just down only. So retail go, okay, we’re getting scammed again. So then they invented yield farming, and this is another key element. If you go back to the 2017 cycle, you had to buy Ethereum to trade on these ICOs. So that’s where the demand from E came from, and I think the Ethereums got a lot of things wrong this cycle.

[00:23:43] They believed that people actually wanted the E, they forgot that they actually had to buy the E as the casino chip in 2017. In 2020 and 21, you had to buy T to plug it into these yield farms and get 16 quadrillion thousand percent AP wise. But again, it was the casino chip. And same for NFTs. You had to buy T to trade NFTs if you then go across to this cycle.

[00:24:06] Solanas being the darling for all the crypto investors. But they also didn’t recognize you had to buy sold to speculate on meme coins. And the meme coin phenomena also tended out to be a huge grift. We saw what happened with the Libra token. If anyone’s seen that interview with coffee zilla with his name, Hayden Davis or whatever, it was a real like eyeopening.

[00:24:24] I mean, no, no surprises, but grift upon grift upon grift. So I think that a lot of crypto investors have just. Finally worked out first thing retail got destroyed in FTX, absolutely destroyed. I don’t think a lot of people really understand. Probably the per now I’m of the view. I knew it would be long lasting, but I now think it’s permanent.

[00:24:42] I think the reputation of crypto got so unbelievably destroyed when FTX blew up. There’s a lot of retail who would just never come back. Isn’t it fascinating 

[00:24:50] Preston Pysh: that Solana is effectively FTX coin? Yes. Right. Isn’t 

[00:24:55] James Check: that 

[00:24:55] Preston Pysh: crazy? 

[00:24:56] James Check: That’s, and and the other thing that’s, I ran a study a little while back where I pulled four different metrics and I was trying to just like, how do you plot the strength or the breadth is probably the better term.

[00:25:07] The breadth of alt season because I was trying to understand like how these cycles have changed over time. So I did four different metrics. Are we seeing capital inflows over the last 30 days? Yes or no? 50% of the coins in profit or loss based on their on chain level. Uh, 50% of investors in profit or loss.

[00:25:23] So remember this is 50%. This is not like ripping to the upside. This is just not bearish. And then is the price trading above? Its 200 day and I ran this study for the top thousand, top thousand non Bitcoin, non-ST coin tokens. And what you can see in 2021, and from 2019, it’s slowly building. All four of these traces are building up into that final crescendo in 2021.

[00:25:44] This cycle, we saw a very, very brief blip where we only just got above 50% of all coins being not bearish. And even then it was only the 200 day, and then it died off about two weeks later. We haven’t seen this like sustained altcoin bull run. We saw flash in the pan and it’s all over. So I just really believe that the world has clicked and gone.

[00:26:05] You know what? There’s just no there, there. And you’ve shown me now for a decade. There’s no there there. And I think Alex Thorn from Galaxy had a really good line. He goes, crypto’s been like the dog barking at the postman, and he’s finally caught the postman and he doesn’t know what to do with it because he actually didn’t build a product.

[00:26:21] There’s no thing there. Yeah. Yeah. So now that you’ve caught the bike. All right. You’ve made a lot of noise, buddy. What are you gonna show me? And there’s just, there’s very little to show. Yeah. Aside from stable coins, there’s just not much there. 

[00:26:33] Preston Pysh: Yeah. That seems like that’s the real innovation with all of it, which is you’ve been able to tokenize sovereign debt and saleable all around the world in a way that for a lot of this, it’s like, especially Tether.

[00:26:46] This is like non KYC. If you want to be able to buy something in dollars, you don’t have to buy some ETF that isn’t saleable that you can spend as a token. That seems to be the real innovation that’s yet to be seen. Whether that turns into tokenized equity, which then can be used in a very similar way as the stable coins for real businesses and not some clown coin.

[00:27:10] James Check: And then even, so what’s the value in that system? The value is the equity. Yeah. The platform that you’re tokenizing stuff on. No, there’s no reason for that to attract any value. So really what we’re actually finding is that yesterday you’ve got this base layer infrastructure. I do believe that at some point there’s going to be equities and tokenized stuff moving around.

[00:27:28] I, there’s no question that Wall Street’s gonna go down this path. That doesn’t mean there’s gonna be any value accrual for the L one token that it sits on. Same way that protocols on the internet don’t, uh, cure any value. 

[00:27:37] Preston Pysh: I think this point is a massive, massive foot sto for anybody on Wall Street or that that’s playing in this space.

[00:27:44] That point is so important because look at the Taproot asset protocol. That is just one example where you can do all of this stuff on top of Bitcoin and you don’t need some native token like Ethereum or Tron or Solana to be able to do it. And this is the part that I think is really important and that’s missed on non-engineers.

[00:28:07] When you look at how that’s built, you get faster transactions. You’re gonna have lower fees, right? The incentives that are built on top of the Lightning Network by issuing tokens. On top of that, you’re just getting better performance and you have better infrastructure and better software engineering underneath of it.

[00:28:27] And so long term, I just dunno how those networks are gonna be able to continue to compete against something that has lower fees, faster transaction settlement, and it has a more robust network of nodes that are all running the software. Like, I don’t know, I just. I don’t see many people talking about that, and I see it as being something that is super obvious and super important for where are we in five years?

[00:28:53] Where are we in 10 years with respect to tokenizing more stable coins and tokenizing actual real companies equity and making it saleable. 

[00:29:03] James Check: When I peel back the onion, and I’ve looked at the whole scaling concept from several angles, but the thing I’ve always found very interesting is we’ve more or less accepted, the blockchains don’t scale.

[00:29:10] They’re a very inefficient database. Now, if we look at it, and this is my contrarian take about Ethereum, a lot of people will say that it’s not decentralized, it’s controlled by a small cohort. And you know, parts of that may be true, but the reality is I actually think it’s too decentralized. They have over-designed the system that it’s trying to support.

[00:29:28] When if tether and circle turned off all their stable coins, the whole defi system collapses. So at the end of the day, your real weakest link is tether and circle. So this is where you then look at something like Solana, where they’ve tried to speed everything up and basically have very, very high compute nodes and all this kind of thing.

[00:29:45] And they’ve sacrificed the illusion of decentralization. But in many ways, that’s actually more in line with the level of centralization of your weakest link, which is your stable coins. Without your stable coins, your whole system collapses. But the other thing is that with Ethereum, they’ve tried to scale a blockchain with more blockchain.

[00:29:59] We know the blockchains don’t scale, whereas lightning and it very much remains to be seen whether we’re going roo assets is very early, and whether we do actually get some kind of adoption, the user experience challenges and. Liquidity and all. That’s a real challenge, but lightning is infinitely scalable because it is strictly not a blockchain, and this is why it’s quite interesting, just as an observer, we’re still many years away from some kind of serious scale there.

[00:30:23] However, it is infinitely scalable. Yeah, it’s not constrained by all these blockchain dynamics and like in many ways they’re over designing the system for what it’s actually trying to do. 

[00:30:32] Preston Pysh: And everything that’s being issued on top of these quote unquote blockchains are, they’ve got an issuer anyway, which is centralized, call it tether or circle or whatever.

[00:30:43] It doesn’t matter who you are, if you’re issuing something on top of it, you’re a centralized entity anyway. So I just think so much of this is missed, especially from the technical standpoint as to where the incentives are gonna drive this in the future. But 

[00:30:58] James Check: there’s the assumption that the blockchain is a piece of technology that’s useful.

[00:31:01] But the reality is the concept of a blockchain has been around long before Bitcoin. There’s a reason why nobody was building on this stuff for many years because they’re basically looked and going, there’s not really an edge here. It’s a database. And really the main benefit from any of this blockchain technology, having any kind of decentralization, is really some form of arbitrage.

[00:31:21] Mm-hmm. So for Tether, for example, there’s a jurisdictional arbitrage, and it’s actually in the US’ interest that people can access dollars. So for example, tether is heavily adopted in the emerging markets. And for whatever reason, tether has, it’s not circle, it’s not USDC, it is Tether. Mm-hmm. And maybe that’s because they have the allure of being somewhat KYC free, despite the fact they actually freeze.

[00:31:43] Far more funds than Circle have to date. So they actually are more prolific with their censorship than USDC is. But the emerging markets have selected it nonetheless. So there is that kind of, maybe it is KYC free and the US where benefits from it being a bit KYC free. I struggle to see tokenized equity in Apple stock.

[00:32:02] I struggle to see the brokers allowing that to be KYC free. So suddenly you’re like, okay, you’re probably still gonna have a walled garden here for this stuff to work. So how about do we really need a blockchain? How 

[00:32:12] Preston Pysh: about 20 years from now? Because I, I agree with your point, but on the timeline, if we really go far out, I think there’s gonna be a huge push for KYC to be lifted and it for it not to be used.

[00:32:25] James Check: I mean, I certainly hope so. 

[00:32:26] Preston Pysh: Yeah, I think that’s where it’s all going. But timeline wise, I think it might be out there a lot further than many of us would like for it to go. But I think that the natural incentives and the competition from a global perspective is gonna naturally take it there. Would you agree with that?

[00:32:41] James Check: I would certainly hope so, because the challenge with KYC is, first of all, it’s obviously there’s just a privacy element, but these things become honeypots and how many times do you see people losing, or companies, or even government agencies losing big honeypots worth of people’s data that you really shouldn’t have to collect these things.

[00:32:56] And a part of freedom is that you don’t have to KYC for everything that you do. So I would certainly hope so consider me a little bit more skeptical on government’s willingness to let go of that kind of secure surveillance state. But, uh, we’ll see. I certainly hope it happens. 

[00:33:09] Preston Pysh: Yeah, I think it will happen.

[00:33:10] I just think it’s way out there. I think they’re gonna, I think that’s probably right. Very hard to keep it in place. Okay. So you described all these rug pool things that happened through the previous cycles. You have a lot of rumblings online saying that the Bitcoin treasury companies are the next wave of this.

[00:33:31] Well, I don’t want to give you my opinion. I’ll tell you my opinion after you kind of respond to that. 

[00:33:35] James Check: Yeah, so I think I put a tweet out the other day, their coins, call them what they are. That’s basically what I think treasury companies are. Okay. Now, by the way, that’s okay because every single, remember how did every single cycle in the old coin space happen?

[00:33:47] It was a new distribution mechanism, so it used to be ICOs and it became yield farming. Then it became meme coins. There’s always a new way. It is funny that this cycle, Bitcoins are equities who are now buying Bitcoin, and the idea is if you give that company money, they will buy more Bitcoin than you otherwise would be able to, and their stock price will go through the roof, which will allow you to buy more Bitcoin.

[00:34:08] It is literally the same mechanics for a Bitcoin who’s looking to build more Bitcoin in a very fast and, you know, high adrenaline environment. It’s coin trade. It’s exactly the same thing. Now, that doesn’t necessarily mean that the companies are going to be coins per se, but in a just a very rudimentary framework.

[00:34:27] They are. And when I look at across all these different treasury companies. It quickly becomes apparent that most of them, like any company or any business, there’s gonna be a Pareto distribution. There’s gonna be some that are gonna really kick ass and stand out. And I wrote a piece the other day just about analyzing treasury companies and looking at various metrics, MN days to cover a Met Metric that I kind of iterated on called Days to Replace.

[00:34:48] Kind of like stock to flow, but for treasury companies. How long’s it taken to double their overall stack? Price performance? A whole bunch of different things. I didn’t look at all treasury companies ’cause they’re popping up like mushrooms at the moment. But the ones that I did look at it very quickly, if you run through these different filters, basically strategy and Meta Planet with the only ones that really stood the test, there’s gonna be a bunch of other ones that are popping up here and there, but they’re the two that stood out.

[00:35:12] The other ones like Semi has been really underperforming and all the miners have been very much underperforming. And some of my key insights here was go hard or go home. This is just very, very clear. If a company is not going all in on this treasury strategy, the market’s just simply not rewarding them with a serious premium.

[00:35:29] So they have to be, and you can see it, right? Meta Planet hit gets to 10,000. Bitcoin sailor buys 10,000 Bitcoin the next day. So this is like go hard or go home mentality. Over the long arc of time, MN has been compressing towards one. I’ve had this long-term thesis at the Gravity, not the result. The gravity is towards one.

[00:35:47] And what that means is that, and I run this by going to the extremes. If a company stops doing all treasury operations tomorrow and said, we’ve got enough, we’re happy, we’re good. That company would trade towards its Bitcoin treasury value, plus whatever premium their operating business is worth. That’s really what I would expect to happen.

[00:36:04] If the stock goes too high and the premium explodes out the roof, then the company has a massive incentive to sell stock and buy Bitcoin, which is going to increase your denominator and reduced your stock price. So they also have an incentive to push it back towards one. So there’s always this gravity that wants to pull it towards one, and the companies that are gonna be the most successful are the ones that continue to generate, whether it’s excess volatility or some kind of premium.

[00:36:30] How do you keep the premium going? If we take the other extreme where, let’s imagine Bitcoin on the balance sheet is normal, every company does it. It’s just part of day to day you’re a value investor. How would you value a company swap fee at or the US dollar for Bitcoin? How do you value a company book value plus whatever their growth potential is?

[00:36:47] Yeah, the exact same story. So M nav, the gravity is towards one. That doesn’t mean it has to be one. There’s jurisdictional things like meta planete where I think it’s like a 50 or 45% tax to hold spot Bitcoin, but it’s much cheaper to hold the equity. So there’s a A two X premium that kind of makes sense baked into it.

[00:37:04] But again, it all depends when people buy the stock. If you are buying early in their growth curve and at a premium, that’s not too excessive, if it goes. If the stock goes higher and they buy Bitcoin and the premium stays at a higher level, then you win. If you buy like strategy, a lot of people bought when the premium was at three x, we saw about $42 billion of trading on the top.

[00:37:25] The premium has compressed like 1.4, 1.5. That means you got crushed and there’s a lot of people who didn’t quite understand these dynamics and they bought when the premium was very high. The actual Bitcoin balance could be the same. It could be higher premiums. Compression. That’s what squeeze people. 

[00:37:40] Preston Pysh: I think that last point, as a value investor and somebody who loves those principles.

[00:37:45] I mean, this was Ben Graham’s big thing was like, Hey, if you’re gonna pay, and he would always talk about growth stocks versus value stocks. And it’s like you’re paying 50 times earnings. You better be prepared for it to go to 20 times earnings and get absolutely annihilated. And it’s a very similar concept.

[00:38:03] We’re talking about balance sheet growth with Bitcoin versus, you know, what Ben Graham was talking about was basically the income statement and the company’s ability to grow its earnings and the multiple that’s paid over that. For people that aren’t familiar with any of these ideas, which I would argue is probably most people, they just kind of, they might hear a podcast, they might hear Michael go and talk or whoever, and they’re like, wow, they sound really smart.

[00:38:28] I’m gonna buy that stock. And that’s the end of their analysis. They don’t understand any of these financial terms or even the difference between an income statement and a balance sheet for a lot of them. And I’m not trying to say it and frame it that way as if everybody’s dumb. People are just busy with what they do for a living, their livelihood, and they’re trying to preserve what they’ve made and not lose it.

[00:38:51] And they listen to a little bit and they just go and make a decision on that ’cause they don’t have the time to know all this other stuff. So I think your point is really, really important for people that are buying these things in lieu of just buying Bitcoin. You better know what you’re doing. You’re gonna get destroyed if you don’t know what you’re doing because of the M Ns three, Michael or whoever who’s ever running one of these companies, they’re highly incentivized to capture that premium over the MA by selling more stock and trying to transmute it into more Bitcoin.

[00:39:24] And if you’re, you don’t understand that and you’re not buying, if you dunno 

[00:39:27] James Check: where the yield is coming from, it’s probably ’cause you are the yield, you’re the yield. 

[00:39:31] Preston Pysh: But that’s talking more about the amateur investor that’s trying to buy this and trying to really kind of wrap their head around it. But where I would push back a little bit is in the framing that they’re all a coin company.

[00:39:44] This is a super complex, totally financial thing that’s playing out right now globally. And what I want to say about this is what I think is happening is you’re having somebody perform a service if they’re doing it at a premium of, this is hard. This is hard to explain. Let me explain it like this.

[00:40:05] MicroStrategy, and I’m gonna use them as the example because I think they’re the ones that are doing this. They’re the benchmark. They’re doing this responsibly. And people might hear me say that and roll their eyes and say, what do you mean? They’re doing it responsibly? They’re doing it in billions per week.

[00:40:18] But listen to what I’ve gotta say. They’re providing us. I fully 

[00:40:20] James Check: agree, by the way. Yeah. That, that, this is my conclusion as well. That strategy. Is they Correct Benchmark? Yes. I guess which everything else should be compared. 

[00:40:26] Preston Pysh: Yeah. And I think to the point you made about Meta Planet, I think they’re doing it somewhat responsibly, but they’re in a unique position because of the setup that they have from a legal regulatory standpoint where it’s so hard for people in that country to buy Bitcoin.

[00:40:41] And they’ve got this really unique setup where they can do it responsibly because of this gift that they kind of have by being in Japan. But let me just frame this from Michael’s perspective. He is providing a service and he’s being paid handsomely for this service that he’s providing. And what the service is, he is securitizing fixed income and he’s doing this through convertible debt issuance, and he is doing it through preferred stock issuance.

[00:41:07] Okay, so what in the world does that mean? Okay, if you go today and you wanna buy fixed income, because let’s just say you’re in your sixties or your seventies and you just want some income on all the money you’ve made for your life. Let’s say you saved $2 million and you wanna live off that $2 million and you need some type of fixed income percentage off of that $2 million, and let’s just say the number is 5%, which would give you a hundred thousand dollars a year if you can lock in 5% somewhere.

[00:41:39] That’s in fixed rate terms. There’s always risk associated with putting your money in some type of fixed income instrument. That might be, if it’s in a sovereign, it’s the, whether the government’s gonna out the base, that percentage of 5%. You know, if the government, the base is the money by 7%, well, you just lost 2% of your buying power by not keeping up with the basement.

[00:41:59] If you’re a corporate, if you’re buying corporate debt, the risk is in not only just the inflation rate of the currency, it’s also whether the company can actually pay you back if they would go bankrupt. And if you’re a preferred shareholder, it’s even more a risk than that because they might pay out all the, let’s say they go bankrupt, they’re gonna pay out the fixed income bond holders first, and then they’re gonna pay out the preferred, and then they’re gonna pay out to the common.

[00:42:24] So the risk is there when you’re talking about corporates. So what is Michael doing as a service? When I say he’s securitizing fixed income, what he’s doing is mind blowing. Because if you look at traditional fixed income, they’re going out and they’re issuing this debt. They’re taking all this money that they raised by issuing the fixed income or the preferred stock.

[00:42:46] They’re taking that money that they made in the hope that they can make it all back and then pay that investor the dividend coupon or the dividend or the coupon back to the investor. They either have to take it, they have to build some infrastructure, they have to make a product or service, and then they have to earn it back into the future, and it’s all based on their ability to collect future cash flows.

[00:43:09] That’s the risk to these investors today and for decades, what Michael’s doing okay, which is drastically different. He already has the money. He doesn’t have to go out there and earn it over the next five or 10 years or perpetuity if it’s preferred in hopes that he can give you that dividend or in hopes that he can give you the coupon.

[00:43:29] He already has it. In fact, he’s got like five x what it is. And so what’s so different is when we look at MicroStrategy as an example, if you add up the coupons that he’s gotta pay out and all of the dividends that he’s gotta pay out for everything that he’s issued to date, guess what that number is?

[00:43:48] It’s way low. It’s about 2%, right? 

[00:43:50] James Check: I think I did these calculations. I looked at it, I’m like, it raised like $3 billion a month from memory is what I last looked at. So if he’s raising 3 billion, I forget what the number of the coupons is, but, and this is before the latest Stride issuance. Yeah. It was like, uh, 1.6 or 1.8% of his raise is being paid out.

[00:44:08] Yeah. But it is a drag. And actually I’m curious about this. The more that he issues these preferreds. Because an insight that you had and sold, which I hadn’t actually clicked to, is that he set them at 8% and 10%. Yeah. As a reflection of the monetary debasement to make it absolutely attractive over the long term.

[00:44:23] So I never quite clicked to that, but I always looked at and go, it’s quite high because he was doing converts at zero basically, where he is got like an effective coupon of whoa, you know, 0.5%. 

[00:44:33] Preston Pysh: I framed it as well. He just looked at the M two debate, global M two or US M two, and like he’s just like, well, I’ll just pay that.

[00:44:41] But I think if you talk to Michael, and I haven’t, obviously, I think that he would probably frame it more of, well, if you go into the preferred market today, it’s paying six or 7% and I want mine to be the most desirable so I can afford to pay more because I’m fully backed with this $60 billion treasury of Bitcoin.

[00:45:02] But the point that I really want to hit home to people is if you look at the coupons that he has to pay, and you look at the dividends that he’s gotta pay, it’s around like a hundred to 120 million annualized. Okay? That’s not including the face value of the debt that he has to pay back. I’m gonna put that aside, but if you just look at it from an interest expense, and I know dividends aren’t interest expense, but let’s just kind of treat them like interest expense.

[00:45:28] If you look at these numbers, $120 million to Michael, who’s sitting on a 60 billion in treasury is a pittance. It’s an absolute pittance if we’re just gonna round the numbers and say they’re a hundred million. This is literally 600 times he has in the treasury of what he’s gotta pay out. And the dividend in the coupon.

[00:45:52] And here’s the other point that I think is really crazy for people to kind of wrap their head around. He can print more stock certificates and raise more cash to pay this stuff back if he really wants to. And I think that that’s lost on these people saying he’s, oh, MicroStrategy is gonna have a margin call.

[00:46:12] Like that is the most brain dead thing. And we did hear that on the stage itself. That is the most brain dead thing I’ve ever heard in my entire life. It’s somebody who just literally hasn’t done the math or even understands the math like at all. So when I say he’s securitizing debt, what he’s doing is he’s literally, he doesn’t have to go out and earn the cash flows in the future.

[00:46:34] He’s already got ’em. They’re sitting in the bank vault 600 times over what he’s paying out an interest expense on an annualized basis. And this is, there’s nothing on Wall Street even close to this. And when you look at the fact that he’s paying more, at least in the preferred market, he’s paying 200 basis points higher on these coupons in the preferred market than anything else that’s out there with literally a hundred times less risk.

[00:47:02] Like Bitcoin could go down 50% tomorrow and like he’s got it for years in decades, he’s got it for decades to make these payments. What’s so interesting is he’s securitizing fixed income and he’s already got all the money in the vault to back it all up. And that’s the thing that’s blowing people’s minds.

[00:47:21] And here’s the recursive loop that everybody’s missing and why this is so different than clown coins that were issued in 2017. Okay. He is securitizing this debt. They’re going out and buying it. It’s putting more Bitcoin on his balance sheet, which then makes the common stock run. Okay. And what’s he doing when the common stock runs?

[00:47:41] He’s issuing more common stock so he can get more cash and buy more Bitcoin, which allows him to securitize more debt for fixed income. Or preferred issuance. So there’s this recursion. So somebody might look at this and be like, Preston, come on. This sounds like a Ponzi scheme, right? But what I would push back is, what you’re missing is that under the Petrodollar system for four decades, you had central banks that literally just continued to pump and pump and pump printing into the fixed income market.

[00:48:12] They did this for 40 years, right? And if you don’t think that bubble is unraveling in some capacity or some way, you are outta your mind and you don’t understand it. And so for people that are looking at MicroStrategy or any of these treasury companies, Bitcoin, treasury companies that are number one profitable with a real operational business at the helm, and then securitizing fixed income, whether that’s through preferred or convertible debt.

[00:48:40] In a responsible way that’s actually back, they actually got the Bitcoin in the vault many times over what they’re issuing. I just don’t think that you, as the person who’s skeptical or maybe calling this a scam, actually understands what’s unraveling with a 40 year bubble and fixed income’s a 40 year bubble.

[00:48:59] I’m sorry. It’s, it is. But I also wanna preface something that you said, James, that I think is really important. There’s gonna be a lot of fakers out there that try to Oh yeah. Do this. That literally have nothing. Like they don’t have a company, they just, they’re going out there and they’re trying to securitize and they’re trying to get this thing rolling.

[00:49:16] And I think that to do this, you really do need to have a company. It needs to be profitable at a minimum. ’cause if you’re not, you’re gonna definitely have to sell Bitcoin. But yeah, those are some of my thoughts and I think there’s a lot of jargon in there and people will hear the jargon and they immediately say, this person’s a snake oil salesman and they are a scammer.

[00:49:38] ’cause they don’t understand like some of the terminology and they don’t understand the 40 year fixed income bubble that’s bursting and they don’t understand. Like there’s a lot going on here to kind of wrap your head around. But those are some of my thoughts. 

[00:49:51] James Check: Well, I agree with all of it and it is a fascinating trend that we’re early in.

[00:49:54] I agree that calling out like a strategy a Anaplan, I’m sure there’s others, but they’re the ones that so far from my initial gut checks. Have basically shown up and go, they are doing it as I think responsibly is a fair way to describe it. I would, and there’s two questions I wanna ask you. Actually. The first one is this idea of them selling the Bitcoin.

[00:50:11] So basically the idea is that strategy’s already got the treasury. 

[00:50:15] Yeah. 

[00:50:15] James Check: But in order to service those preferred and. Granted, there’s a, there’s a phase shift that has to happen wherein, let’s call the growth phase. Mm-hmm. They’re in the accumulation stage. Mm-hmm. For sailor to sell a single satoshi from that treasury, I think would just break everybody’s competence in the whole model.

[00:50:31] Mm-hmm. So I actually don’t think he can do that. So what he is really doing is buying the next hundred years. Worth of dividend payments. Something you said in eo, which I thought was, it’s so obvious if it is accretive, when your stock has a premium to your nav, it is accretive to sell stock by Bitcoin.

[00:50:45] Preston Pysh: 100%. 

[00:50:46] James Check: Flip that around. M Nav goes below one. Yeah, which I believe that we will have a down period in Bitcoin. It’s going to happen. So if you’ve been convinced by any influencers that we’re never gonna have a bear market again, I would unfollow because it’s going to happen. Because it always happens. When we have a bear market.

[00:51:01] Many of these companies will see their Mav go below one. And in that world it is actually a creative for them to sell Bitcoin and buy the stock. Yes, the inverse. Now, I don’t believe that Sailor and Strategy are going to do that because that is more or less why I think they’ve launched Strike Strife and now Stride.

[00:51:18] Stride has preferred that he doesn’t have to pay the dividend and it’s gonna trade more like a junk bond within my base case. So I’ve kinda got two prongs to this question. The first one is when the M Nav goes below one for some of these companies. How do you think strategy and these, let’s call ’em the responsible bucket.

[00:51:34] How do you think they handle that situation versus some of the smaller ones? And I think there will be just the same way. That minus have always been procyclical. They buy too many machines, they huddle too many coins. They go through the bull market peak and then they, you could all out at the bottom of the day.

[00:51:50] Mm-hmm. Many of these treasury companies, the smaller ones, the ones that don’t have the grit, the shareholder like, ’cause their CEOs have to act in the best interest of the shareholders, not in terms of Bitcoin. And if that requires selling Bitcoin to protect their share price and they don’t have any other avenues.

[00:52:04] They will do that strategies of a scale where they have tools to do this. So two questions. What happens in the MN below one scenario and the second one, maybe this is just a different topic. The strike strife stride. He’s setting up a yield curve. Yeah. You can actually see what a fixed income does, what he’s tokenized.

[00:52:20] Bonds, fixed income with strife, convertible debt with strike and stride as a junk bond. My, I’ve got all three tickers on my trading view now because when they start to trade above or below a hundred dollars, that’s gonna tell me, does the market think he’s gonna be able to raise dividends? Mm-hmm.

[00:52:36] Because if they think he’s gonna be able to pay it without selling his Bitcoin, they’re gonna trade at a premium to their face value. Yeah, right. He’s selling a hundred dollars for $103. 

[00:52:44] Preston Pysh: Especially with it being 200 bips over, you know, even more risk riskier things. Correct. Yeah. 

[00:52:48] James Check: Correct. And then when they start to trade back towards or below a hundred dollars, that’s signaling the market’s going, Ooh, I think we might be getting along in the tooth on this treasury company trend.

[00:52:57] And I’m very confident that in this early phase. There is only so much demand and money that’s willing to pile into these treasury companies. Serious pension funds and institutional capital are not buying the 52nd treasury company. Right? They might buy the first one. Mm-hmm. Maybe the second one. There’s only speculative retail money that’s gonna jump into these smaller companies.

[00:53:19] So I think there’s an exhaustion point there too, but some ideas there to bounce around. Yeah. So help me out, Mav below one. Let’s go there. Yeah. 

[00:53:26] Preston Pysh: Mav below one. Alright, so the math is very simple. If the company’s M Nav is below one and they’re optimizing for Bitcoin per share, they sell the Bitcoin, they buy the stock back, and that’s how they’re gonna acquire more Bitcoin per share.

[00:53:41] It might sound antithetical to somebody to hear that, but I would challenge that person. Go get an Excel spreadsheet. Go work the math and what you’re gonna. Is that what we’re saying is a truth? Will he do that? Or Let’s talk about Michael specifically. I agree with you. I don’t think he’s gonna do it even though it’s actually, ’cause that’s 

[00:53:59] James Check: the reputation that’s actually more valuable to him.

[00:54:01] I think so. For his shareholders, 

[00:54:03] Preston Pysh: yes. I think that even though that is a truth that we just said, that he will have more Bitcoin per share for anybody that’s a shareholder, if he would do that under that scenario, I still don’t think that he’s gonna do it because what is his product? His product that he has been, you know, people will say it’s a data analytics company and it is, they have that product line.

[00:54:26] It only makes a hundred million a year. His real product is a service, and that service is the securitized fixed income. And so what I think he does is he potentially spooks that market of anybody that’s in fixed income that’s buying these issuance. He spooks them when he’s selling the treasury of Bitcoin that’s backing all of this securitization of the fixed income.

[00:54:47] So for that reason, I think that that’s why he won’t do it is because he knows his real product or his real service is the securitization of fixed income. 

[00:54:56] James Check: I’m sorry, just to jump in here. Yeah. There’s one thing that, I think it was his interview with Alex Thorne and this, he had this one line that just sat with me and I’ve been thinking about it ever since.

[00:55:04] He goes, someone asked like, if your debt is trading at a low level right distress level, are you gonna go out there and buy it back? And Michael just goes, no, Mr. Bond investor, that is your opportunity to go out there and buy my distressed debt at a cheap price because a face value is a hundred dollars and you can pick it up to 50 cents.

[00:55:21] Yeah. And I think that’s a good example of him saying like, no, the market can go and pick this up because the opportunity is there and I’m gonna follow through. So I think that’s something that sat with me ever since you said it. 

[00:55:29] Preston Pysh: Yeah. Yeah. I think he’s very consistent in his messaging. He’s very consistent that he is going to be the major player in the United States for securitizing any type of fixed income.

[00:55:40] Mm-hmm. That’s what he is messaging to the market. And so far, what a. I mean, the amount of Bitcoin that he has been able to put on the balance sheet by doing this is mind-numbing. And just because you don’t a month? Yeah. And just because you don’t understand it or you think that all we’re doing is just spewing a bunch of financial jargon, I would highly encourage you to dig way deeper.

[00:56:03] The other thing that I would say is the second part of your question. 

[00:56:07] James Check: So the second part is, as we go down this, so m nav below one, I agree that Sailor probably met planet, I’d say that M N’s compressed in a bear market. But my base case is that we’re gonna just like miners and I think miners, which are also now treasury companies, they’ll do the same thing.

[00:56:21] They will all puke out their coins at a low price, whether to protect their share price or whether just because they don’t have the CEO ownership that sailor does. Right. The, the buying. Yeah. So a lot of these companies who don’t or aren’t all in, they’re kind of half in. And I actually, strangely enough, and from my studies, I would put miners in the same bucket as being half in because your operating business is incinerating capital miner’s job is to burn money and dig in a hole in the ground.

[00:56:47] So as a result, that business will take over in the bad times. That’s going to be your primary Yeah. Uh, thing that you have to look after and your treasury is secondary to making sure that those miners keep spinning. 

[00:56:59] Preston Pysh: So when we’re thinking about this idea of securitizing fixed income, what it comes down to is having a pristine balance sheet that isn’t imposing more risk and not making the issuance riskier.

[00:57:12] I. And so when we think about a business that, let’s just take a minor, for example. Let’s say that half of the revenue that’s coming in is a lot of risk and they’re not like MicroStrategy is a perfect example. If you’ve got $60 billion worth of Bitcoin on the balance sheet, the operational business is a pittance of that.

[00:57:32] It’s almost unnoticeable because it’s so small in comparison, if you’re buying the fixed income instruments that he’s issuing through convertibles and preferreds. You’re not worried about the impairment of the operational business really messing up the value of that because he can pay it for literally decades beyond what’s been issued.

[00:57:52] And so you could make the argument that the smaller that the operational business is, as long as it’s still kind of profitable relative to the size of the Bitcoin, makes him a better service provider of these fixed income instruments. Whereas a minor convolutes that risk through all of their operations and their sheer size and their CapEx and all these other things that they’ve gotta potentially service and potentially impair the fixed income issuance.

[00:58:19] So I 

[00:58:20] James Check: agree. I think at the end of the day what we are looking at is that sailors, that the Bitcoin Treasury Company, I think this is what my biggest insight from this whole study, the idea of a Bitcoin treasury company is not to just accumulate Bitcoin, it’s actually to accumulate Bitcoin and develop some kind of a system like what Sailor is doing, which is a.

[00:58:38] His, it’s a flywheel. His business line. 

[00:58:40] Preston Pysh: Yeah. 

[00:58:40] James Check: His bus, exactly. His business line is actually the issuance of the debt. Yeah. That is actually, that is what he sells as a product. 100%. There is, there is a huge market for volatility, common equity. There is a huge market for fixed income. Literally fixed income and fixed income, which is paying substantially more than everything else.

[00:58:58] Yeah. That is the product line. The treasury is the result and the means to the end. There’s gonna be a lot of companies out there that are like, oh, I’m gonna buy Bitcoin because buying Bitcoin is what we do to get our stock price up. Those companies are not going to be in the same bucket. Mm-hmm. As let’s call the responsible how we wanna frame it.

[00:59:13] That is where there’s a massive distinction. What is your product that you are serving? And Sailor has found a very interesting, very unique niche in this particular field. 

[00:59:22] Preston Pysh: Well, I think similar is probably a really good example of exactly what you’re saying. Where they went out and bought Bitcoin. How much do you know how much they bought and put on the 4,200 last I checked to thereabouts.

[00:59:33] Okay, so they got 4,200 Bitcoin. I looked up the financials. They made like 30, 40 million net income, I wanna say in the last year that they’ve, so they’re a profitable company. They can continue to sweep those cash flows into Bitcoin, which historically has a 40 to 50% annualized return profile. So when I’m looking at similar, and it’s trading below, it’s Bitcoin on the balance sheet, somebody would say, see, here’s an example of a company that this doesn’t work.

[01:00:04] Like what sailor’s doing doesn’t work here. I just think that the market’s looking at them, and first of all, with a base of shareholders, that’s way different than the shareholders that are holding MicroStrategy and buying all of the stuff that they’re issuing. And the common stock itself. You’re dealing with a medical company, right?

[01:00:21] And so you gotta swap out all of those investors for them to even think that they’re gonna try to do what Sailor’s doing. And I don’t even know that they’re gonna do what sailor’s doing by trying to securitize fixed income as a service in addition to. Their medical operational business. And so they’re kind of caught in this limbo of like, what are they?

[01:00:42] And the market’s confused and that confusion might continue to persist, you know? But if I’m the operator at similar, I’m just saying I don’t care what the market’s valuing me at, I’m gonna continue to do my operational business. I’m gonna continue to make money and I’m gonna continue to sweep this money into Bitcoin.

[01:01:01] And if the market just so happens to start valuing my business above the asset values of the Bitcoin on my balance sheet, maybe I’ll issue some more common stock. ’cause it’s really simple. If your company is trading at a M nav of 1.5, let’s say similar, gets to that at some point in the future. ’cause the market starts to value it differently.

[01:01:20] I mean, he’s buying the Bitcoin for. A huge discount by issuing more common stock and just sweeping it into Bitcoin. So he’s incentivized to do that and he will have, and I think this is important too, for anybody that’s doing this strategy of holding your treasury in Bitcoin, you have this option at your fingertips to exercise if the market ever puts you in that position, which is amazing.

[01:01:44] So it is different. I. In the future, you’re gonna have some, a couple major players in this space. You know what’s really interesting, James is 21. So 21 comes out. I had no idea for the most part, like what the operational business is. And going back to our original point of you probably need to have some type of operational business that makes money.

[01:02:09] I think that’s all true. I stand by that. But what I think is really interesting about 21 is how capitalized it was in Bitcoin terms so that I think they can run the exact same strategy that sailors gonna do, which is start issuing fixed income and securitizing fixed income that is backed by just a ton of Bitcoin.

[01:02:30] So like why did they seed it with so much Bitcoin? I think because they, yeah, that’s 

[01:02:34] James Check: a, you need the scale. You need the scale to get going. Right? Thats right. To differentiates. And one of my points in that, ’cause there’s a lot of people, and for my subscribers, I try to make sure that none of my subs feel like a deer in the headlights at any point.

[01:02:46] Right. Yeah. I don’t want everyone to be too surprised. And a lot of people that naturally, a lot of people are gonna feel FOMO as they see like meta planet ripping through the roof and this treasury company ripping through the roof. And I think it’s really important to recognize, like for 21, for example.

[01:02:59] Unless you were in the Telegram group where people were discussing that they’re gonna do a SPAC with cancer equity partners. Unless you were in that group, you’re never gonna catch that initial pump. And since then, right, they immediately shot to an M NAV of like five, four or five or something like that.

[01:03:14] But it’s still not, 

[01:03:14] Preston Pysh: it’s still not trading like in the public market. They haven’t 

[01:03:17] James Check: completed the SPAC yet. So there’s a risk factor in there as well. Yeah, so look, there’s a potential and a possibility that they go and try to compete with strategy. And again, competition is good in all facets of business.

[01:03:28] So that would be a good thing. And I think obviously they’ve got the scale, they’ve got the backing, they’ve got, you know, tethers got a huge amount of Bitcoin behind them, so there’s a whole lot of things that they could do there, but just don’t lump into these things because I know a lot of people have bought into the CEP not realizing that that SPAC represents like 2.7% of the eventual shareholder equity.

[01:03:47] Yeah, 

[01:03:48] James Check: so I initially did the calculation. I was like, Hey, look, their MAV is trading at like zero point. It was like, you know, 0.05. I’m like, Hey, it makes sense. But then I found out it was a 22.7% equity share and then you’ve gotta flip it over. You’re like, oh no, no, no, no. So five, they’re not trading at a, at an M nav of 0.2, they’re trading at MAV at five.

[01:04:03] So suddenly you realize that you’ve gotta be in the right room before these things move. Don’t go with feeling fomo. If you have missed the latest treasury company, they’re gonna come and go all the time. And that’s why I think spending more time studying on the, really the ones that have staying power, particularly when the bad times come, I think is gonna pay a lot more dividends.

[01:04:21] And as a value investor, it’s gonna be a way more, a beneficial process. 

[01:04:25] Preston Pysh: Two points on that that I think are really important for the listener. Number one is going back to what we said earlier in the show, which is as a retail investor or somebody who’s looking at all this and saying, oh my God, I feel like I’m missing out because these people are going on these shows and talking about these things and they’re really smart and I, it sounds like they’re really smart.

[01:04:45] Might be the other. The best way to describe it, and I need to own that, like if you’re buying it at an M Nava five and it’s just hitting the public markets, like what in the world do you think is gonna happen with that? It is gonna be the most volatile, violently traded thing on planet Earth as it tries to, what was 

[01:05:03] James Check: the Bitcoin 2013?

[01:05:06] Right. I mean, if you want a flavor of that, and a lot of people jump on the bandwagon, like, whoa, it’s, it’s volatile to the downside. I’m like, yeah, it’s gonna be volatile to the downside a lot. 

[01:05:14] Preston Pysh: Yeah. Well, and, and who knows, in the first days that it’s listed, you might see a rip to seven, a multiple of seven back down to two, then the four, and then the one and a half.

[01:05:25] And if you’re, you know, if you’re investing in this and you don’t have the stomach because you don’t even understand what I just said or what that even means you are going to be in for the pain train as to how these things are going to be received and hit into the public markets. Especially considering it’s something that we’ve never even seen before.

[01:05:45] Pit public markets. This idea of a company that’s securitizing fixed income with Bitcoin as it’s backing, like all this stuff is like never been done before. So that’s the first thing I really want to impress upon people that are listening to this is be careful out there if you don’t deeply understand this stuff.

[01:06:03] Buy and, and you like Bitcoin. Buy Bitcoin, right? 

[01:06:07] James Check: What? What? Just look at what the companies are doing. They’re selling the equity to buy the Bitcoin. They are telling you which part is the valuable bit. Just, there’s 

[01:06:14] Preston Pysh: nothing wrong with just stacking stats. So that would be the first point. The second point that I just want to kind of foot stomp is going back to like maybe you do have a competitor that’s a worthy competitor to MicroStrategy, simply because they have so much Bitcoin that they’re starting out with on the balance sheet.

[01:06:33] And it seems like they deeply understand like what his business really is, which is the securitization of fixed income. And they’re really trying to, to make a splash and go into competition with him. And what I think is an interesting talking, and I’m really curious to hear your thoughts on this. How does this evolve from a competition standpoint?

[01:06:52] Is there a market for three of these types of companies in the United States? Is there a market for 10 of these companies, or is there a market for one of these companies in the United States? Like how do you see the sizing? And I think internationally we’re gonna see a bunch that kind of crop up and kind of take different fixed income markets around the world.

[01:07:11] But in the United States, how do you see that competition playing out? Is there space for 21 to play against MicroStrategy? 

[01:07:19] James Check: Yes. No, I think it’s a very interesting question. The truth is, I don’t know, but what I do know is that there is not room for a thousand or 10,000. 

[01:07:26] Preston Pysh: Yeah, 

[01:07:26] yeah. 

[01:07:26] James Check: That’s one thing I do know.

[01:07:27] Yeah. And that’s why I think it was good that we actually touched on the, an experience of the last couple of cycles. Mm-hmm. Because we have already seen the lessons of how markets adapt. When you give them a certain set of stimulus in the ICO days, there was like a couple thousand coins and they all went up together.

[01:07:44] Mm-hmm. In the yield farming phase, it went through waves. There was like, you know, the L ones went, then this went, then that went, and then in this cycle there’re just, there’s millions of tokens being printed every single day and the cycle lasted in a blink of an eye. 

[01:07:57] Mm-hmm. 

[01:07:58] James Check: This is the same idea. If you oversaturate the market with too many of these things, everyone just goes, ah, I can’t, like how do I pick between these things?

[01:08:06] I’m just gonna buy an index. Right. I’m just gonna buy an index and not worry about it. Yeah. And then you get the balance waiting and you get the magnificent seven. That’s what passive ends up looking like, where it just continues to wait towards the biggest. So I also think potentially you’ve got like a Microsoft and an Apple type scenario where you’ve got this kind of duopoly on these two different entities.

[01:08:23] So I think there could definitely be room for two. Yeah. Competition is always good. You’re probably gonna have one that’s gonna be bigger than the other. I don’t think there’s room for a thousand, so it would probably somewhere in that gray zone. Far more towards the Reto distribution dynamic, as we’ve seen in the Bitcoin world, right?

[01:08:38] Strategy really is the Bitcoin of treasury companies and every other business is trying to either find their unique niche or find where they sit in the broad spread of things. So that’s my general mental model. I also think that, going back to what we said at the start of this call, if we are in the euphoric phase of this bull where leverage is now everybody’s friend and people are starting to get very confident in the bulletproofness of the bull, and I still remain bullish as long as we’re above the short term cost base.

[01:09:05] So I remain a bull, but I’m also seeing a lot of science saying we’re later in this Bitcoin trend. For this particular cycle, assuming cycles aren’t gonna be, are gonna be the same and they may not, they could completely evolve. But one thing I know is definitely a characteristic of late stage bulls in every market, in every asset is leverage and speculation.

[01:09:23] And we are seeing a lot more leverage and speculation, but they’re the things to just pay attention to as these companies pop up. Do they have the grit and the tools toolbox? In downtrend, and the downtrend may only be down 50. Yeah, 50%, but it could take a year. It could take a year and a half. It could also be that there’s an endless amount of printing that’s about to come and go through the roof.

[01:09:45] All these things are possible. These companies need to be able to survive all these scenarios. I’m just curious because I know we haven’t touched on it. What are your thoughts on the strike strife stride? This I find such a fascinating idea. Yeah. As a civil engineer’s background, I’m learning about bonds.

[01:10:01] I understand how bonds work, but I actually chartered these things out and I showed the effective yield for the 8% to 10%, and then where each of those assets currently live. And it was the first time I’ve actually like done the work and visualized how yields trade, uh, how bonds and yield, uh, prices and yields change.

[01:10:18] I was like, ah, okay. That’s really interesting. How do you think strategy, ’cause they are in this more mature position, so even if 21 does get to their scales, strategy has a much bigger toolbox at this later stage of the bull market in determine how far it goes, that toolbox, how does he deal with strike strife?

[01:10:34] Stride. The first two obviously have to pay the dividend. Stride is interesting because he doesn’t have to pay the dividend. Yeah. So he is in a very interesting spot where if he wants to generate demand for it, he should probably pay the dividend. My assumption is he’ll pay the first dividend, but there will come a point in time where he’s gonna sell stride.

[01:10:52] Probably in the bear market it’s gonna trade most likely at distressed levels I would think. He’s really, really, what he’s trying to do is take pressure off the common 

[01:11:00] Preston Pysh: equity. He’s really incentivized to pay that thing relentlessly. The one that he doesn’t have to, he’s to pay it relentlessly, get the whole market in there, believing, oh, he will always pay this thing so that he has the option to not pay it.

[01:11:14] And he does that after it does a whole bunch of more shares issued under that vehicle. Right? So it’d almost be like poker where you never lie. Anytime you have to flip your cards over, you’re always telling the truth. And then at the very, you know, you’re late in the game is when you pull up the mass of bluff.

[01:11:33] And you’re paid handsomely for, you know, convincing everybody that you are always gonna tell the truth. That’s how I would, I know that sounds interesting. That sounds horrible to say. No, no, I 

[01:11:42] James Check: think that makes perfect sense. That was my like base case that he has to pay these things upfront. Yeah. To generate interest.

[01:11:47] Because if he just immediately stops paying him, it’s Yeah, it’s, yeah, it’s going down to 30 cents. 

[01:11:51] Preston Pysh: Yeah. Which then if he’s issuing more shares, he’s only getting 30 cents on the dollar and, but he has to pay or he doesn’t have to pay anything, but he can raise a whole lot more through that vehicle if he continues to convince the market that he’s always gonna pay the dividend.

[01:12:05] James Check: It’s also very interesting that he’s issued Strike, which was the convert, a tokenized convertible debt. Mm-hmm. Then he is done strife and he is got people used to this idea and then he is done Stride. It is very, very clever the way that he’s actually structured this whole thing out. The way I looked at it, ’cause my long running thesis for MSTR is, I was hard for me to see how it did well in the bear market.

[01:12:25] Mm-hmm. 

[01:12:25] James Check: There’s a lot of people at the moment who are saying it’s not doing well in the bull market either. But at the same time I was like in the bear, it’s going to be tough to raise capital. 

[01:12:32] Mm-hmm. 

[01:12:33] James Check: I can now see a bigger toolbox and I understand a lot more about how he’s going to navigate the bear.

[01:12:39] Then I take a look at all the other treasury companies. I’m like, you guys are so far behind. You’re not even close to the ability to withstand a drawdown. 

[01:12:47] Preston Pysh: He’s built a transmission. Right. At the end of the day, it’s like a bicycle that, you know, it’s a 21 speed bike, and if you’re going up a really steep hill, call it a deep bear market, there’s a lot of adversity in your environment that you’re dealing with.

[01:13:01] He has a lever to pull that puts him in a different gear to be able to handle that environmental setting. And by issuing all these different securities into these different pool, think of ’em as like different pools of capital. Mm-hmm. That you can issue the securities into. There are junk bond mandates that that’s what this fund does is buy junk bonds.

[01:13:21] And so he wants to suck on that soda straw of capital onto his balance sheet to transmute it in the Bitcoin. So he’s just going out to all these different buckets of capital that are there, and he’s creating a gear for each one of these things that then he can use for his environmental setting that he’s dealing with As that constantly is changing, that there’s one constant in the world, it’s that change, you better be ready for change, right?

[01:13:45] And so that’s what’s really unique about MicroStrategy is I think that they are geared for all sorts of environments. To try to continue to keep the M nav above one because if it doesn’t, then he’s got this really challenging situation that we talked about earlier in the show, 

[01:14:00] James Check: or he then says, that’s your uh, job Mr.

[01:14:02] Distressed equity investor. Yeah, this is where 

[01:14:04] Preston Pysh: you step in and that’s your opportunity. He’s on record saying that he’s just gonna sit there on his hands and wait for the environment to change. And what he’s got going for him is Bitcoin is just so volatile. It can change on a dime. And if the governments print a bunch of money and flood it into the system, bitcoin’s gonna rip.

[01:14:22] And then the common stock is going to get whipsawed with it. But I think the way he would think about it and then he’s back in the business, is securitizing fixed income. So 

[01:14:31] James Check: it’s funny, I wrote a piece some, in fact, very early when I started the newsletter about year and a half ago, and I called it the Flip flopping, documenting my journey.

[01:14:40] How I came to the conclusion being Bitcoin only. 

[01:14:42] Preston Pysh: Yeah. 

[01:14:43] James Check: Yeah. And I called the flip flopping because through that journey, many of us will have done this. I was like, wait, Ethereum is the best thing to sliced bread. I’m like, actually, you know what? I don’t think it’s gonna work. And then I would keep going back and forth and eventually the more that I studied it, the more I go, no, it is, it’s cooked.

[01:14:55] It’s not gonna make it. Yeah. For strategy. This is the only other time when I can like observe my own mental processing and I have flip flopped back and forth just the same way. Yeah. But instead of falling on the cyber, I’m like, nah, it’s cooked. I’m actually flying on the side being like, you know what?

[01:15:09] This is. Kind of brilliant and it’s fascinating. Yeah. It’s taught me so much about financial markets, so it’s the only other time I can in this space that I can remember doing so many back and forths, but just falling on the opposite side now in, in a positive camp. And they are, they’re just in a league of their own.

[01:15:24] It is a fascinating dynamic and I’ve learned a hell of a lot. 

[01:15:27] Preston Pysh: I haven’t sold my leaps. They’re, they come due in December, so we’ll see. I’m still holding on to them and I don’t know. I’m hopeful, but I think more interestingly is we are getting a masterclass in just financial engineering in macro. I mean, it is just beyond fascinating to study and to discuss from a financial media standpoint.

[01:15:53] ’cause it’s just endless the, you’re just seeing stuff that’s never been done before. Totally. I mean, it’s the, the one thing that 

[01:15:59] James Check: has struck me recently is Bitcoin. As simple as it is, the Orange Boomer coin just continues to invent new narratives to bring it back into the limelight. They just can’t keep it quiet.

[01:16:11] It’s amazing to watch and you compare that to the rest of this space and they don’t have any narrative. So it’s fascinating to watch that Bitcoin just reinvents itself. It just comes back from the dead time and time again. And here we are in 2025 and nothing has 

[01:16:25] Preston Pysh: changed. Yeah. Well, James, I appreciate it.

[01:16:28] I really enjoy these conversations. This is what we were talking about when we were in Seoul. Right now we’re just putting it on the airwaves. Thank you so much for coming on. Give people a handoff to your newsletter and anything else that you wanna highlight. 

[01:16:40] James Check: Thanks mate. Head over to check on chain.com.

[01:16:42] So our news, we do two a week written and video and a lot of people, a lot of our subscribers have said that it’s like having a second opinion because we all have our like Bitcoin instinct and a lot of people go, you know what, I just got to see the worked example. Like that’s why I felt that way. Okay, makes sense.

[01:16:56] So it helps people like really articulate their internal thoughts and feelings, just give them the data and the evidence and sometimes a brand new opinion on how these things shape out. But also check out our charting website. We’ve got all the charts are free, we’ve got stuff for strategy treasury companies, and pretty much any Bitcoin chart you could want.

[01:17:11] So I’ll head over there@checkonchannel.com. 

[01:17:13] Preston Pysh: Alright, thank you James. And we’ll have to do it again soon. 

[01:17:15] James Check: Good on you mate. Thanks a lot. 

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