[00:03:22] Preston Pysh: So. And I don’t like to start off shows where I’m talking so much. This is an interview with you, but this is something that I’ve, I’ve really wanted to do because I know I’m talking about micro strategy a lot online, and I don’t want people to have this impression that they should go out and buy it right now because I’m not saying to buy it or not buy it.

[00:03:38] Preston Pysh: I’m just trying to cover it. And obviously because I have a position, I’m very interested in it. So all of that aside, I’m going to go really fast and then I want to throw it over to you because I want to hear kind of your point of view, but real fast for the audience, my basis for my very first buy in MicroStrategy, and this was a one time buy that I did.

[00:03:57] Preston Pysh: This was in an IRA account for both of these positions that I’m talking about. This was in the 21st of November, 2022. I paid 159 and 63 cents for my basis on the first buy. The second buy was more recently in January, the 22nd of January of 2024. When the price of MicroStrategy dropped below what the treasury value, the Bitcoin treasury value was, there was this really short moment.

[00:04:22] Preston Pysh: It got down to like 460, 450, somewhere in that range, and I was valuing the treasury over, it was over 500 at the time when I, when I bought a leap, a long call option, I just bought it at the strike of 470, the price at the moment was at 470, I didn’t do it out of the money, and it matures, I did, since it’s a leap, it’s long dated, it’s a 19 December 2025 call, so there’s over 600 days that remain on this.

[00:04:50] Preston Pysh: And again, it’s in an IRA account, so I don’t have the tax ramifications. So those are my two positions. I have not added to those positions. I don’t think that I will add to those positions. I think I’m just going to continue to squat on those. There’s like really would appear to be really well timed positions.

[00:05:08] Preston Pysh: And so, as I continue to talk about it in probably a year from now, I’m going to probably still be sitting on these positions and I’m not going to be selling them and I’m not going to be adding to them and I think that that’s really, really important context for people. All right. Sorry to talk so much.

[00:05:21] Preston Pysh: I want you to go and kind of talk through the same kind of setup so people can kind of understand where you’re coming from with it.

[00:05:27] Jeff Walton: Yeah, absolutely. I think that’s a fabulous context. I was I had a similar situation where I purchased MicroStrategy for the first time in 2021, except I was at the very peak.

[00:05:39] Jeff Walton: I bought it at the very peak. So I kind of rode the GameStop wave. I made a crazy investment decision where I liquidated my entire portfolio. I bought GameStop shares. I rode that wave to the top, exited when sentiment broke. And ended up having to figure out where to put that money over the next couple of weeks after that.

[00:05:57] Jeff Walton: So part of it was in Bitcoin. I didn’t, I was, I was still in that period where I was trading Bitcoin and I didn’t really understand what it was. And you know, there was a lot of volatility. I didn’t really know what was going on, but I was also fascinated by the fact that there was a company that moved 100 percent of their cash assets over to Bitcoin.

[00:06:13] Jeff Walton: I was like, wow, this is incredible. What’s going on? I’ve never seen anybody do this before. This is just so strange.

[00:06:19] Preston Pysh: So Jeff, Give folks a real fast just a background on what it is that you do and what your background is.

[00:06:26] Jeff Walton: I am a reinsurance broker. So I sell insurance to insurance companies.

[00:06:31] Jeff Walton: And so what that effectively does is it diversifies weather risk and insurance risk across the globe. So we take tranches of weather risk from, you know, large insurance companies and, and diversify those. So we’ll have anywhere from 10 to 50 re insurers on any one individual risk tranche, and we’re out selling those to individual re insurers across the globe.

[00:06:52] Jeff Walton: I’ve got a unique perspective on how big money kind of moves, really, because it’s insurance for insurance companies. And the re insurance market is highly dependent on current rate environment. opportunity cost of capital. There’s different types of insurance and reinsurance to allocate to different locations, different regions.

[00:07:12] Jeff Walton: And so that understanding of the insurance market and the reinsurance market and how insurance and reinsurance market cycles work has given me a unique perspective on how the stock market works and how all of the capital world kind of fits together. I think that’s the, Why I might have a different perspective or a unique perspective compared to other people, because I’m seeing the big money moves from the top down and looking at it almost like a chess board as opposed to being from the bottom up looking at trying to understand what’s going on.

[00:07:41] Preston Pysh: Let me ask you this, because I think this is important context too, it seems like that you’re a little bit more of a trader or that like you would be looking at this position if it blew out to like some of these crazy numbers that we’re going to get into that you’re saying that you think it could go to, you would potentially exit that position, whereas I am a very long term holder, like from my point of view, if I could own MicroStrategy and never sell it in my entire life, I would probably do that.

[00:08:08] Preston Pysh: If I think that the fundamentals will still remain there and that they deploy their treasury and like this whole other stuff that we’re going to get into, I really just never want to realize. And I, again, it’s in an IRA account, so I don’t really have this problem, but I just have this inherent bias that I buy things very, very long and I try to never get rid of them.

[00:08:25] Preston Pysh: And if the volatility blows out like crazy, and we can talk about what the ramifications of that might be for microstrategy. I’m more looking at it from the lens of Michael’s going to do what Michael does, and he’s going to do it really well, better than I could do it. And I’m just going to let him do his thing because he’s a pro, right?

[00:08:42] Preston Pysh: So I’m curious, is that correct? Is that correct framing?

[00:08:44] Jeff Walton: No, definitely not. I’m certainly not a trader. I was a trader for the GameStop play because that was a dynamic that I was seeing in the market that it felt like wasn’t going to break. And I felt like I was at the front end of it. And I went through that whole process and I had to think through the game theory associated with the GameStop trade.

[00:09:03] Jeff Walton: And the game theory associated with that was that there were more players in the game than just retail. Retail was not moving the trade. Retail compressed the trade, but there were also large hedge funds in the trade that were burying Citadel and Melvin Capital. And knowing that there were other players in the game influenced how I made decisions.

[00:09:25] Preston Pysh: Talk us through this. Talk us through the GameStop, like, if you can. Give everybody an overview of how it blew out, like, what was causing it, who some of the major players were, if you do know.

[00:09:35] Jeff Walton: The GameStop trade was, it was incredibly interesting. So I was following it go from, you know, 20 to 30 to 40 to 70 in a week, purchased put options on a Friday.

[00:09:46] Jeff Walton: I realized that I was screwed over the weekend. I sold the put options for a profit on Monday morning and liquidated my entire portfolio. And I bought spot GameStop shares on Monday morning. And then kind of rode that way from 70 bucks all the way up to 300 or whatever that happened on a Wednesday or Thursday.

[00:10:06] Jeff Walton: Robinhood turned the buy button off on Thursday, and that was, I will never forget this. That was I still had free capital. I think I just got my bonus or something, and I wanted to double down. I was like, I’m buying today. I’m buying more. This phenomenon still exists. Then I realized I couldn’t buy anymore.

[00:10:23] Jeff Walton: And I could only sell. And at that point, sentiment had kind of, in my mind had kind of been broken, right? Like it made people think, what is this company actually worth? And you start to zoom out, right? And you’re looking at a market cap of, I don’t know what it was at, but like 30 billion or something like that.

[00:10:39] Jeff Walton: And you, you start to look at over the weekend, I was totally ruined a vacation with my wife, which is still over one for that. But over the weekend, I was looking at what their assets were. I was trying to value the company, almost doing the opposite of what I’ve done in this MicroStrategy trade. And you know, starting to realize that there were other players in the game, like these large, large hedge funds.

[00:10:59] Jeff Walton: I don’t know who they were, but I did, I was watching the the order book and the blocks of trades that were occurring in the order book over time were 20, 000 shares, 50, 000 shares, and that’s not retail. Retail moves 2, shares here and there, not 50, 000 shares.

[00:11:20] Preston Pysh: One of the things that I think is really important with what you’re talking about with GME, when you’re looking at it from a market cap size, like it was a pea, it’s really small relative to the size of MicroStrategy and some of these other SME companies.

[00:11:32] Preston Pysh: And so when you had so much short selling taking place for major players, they’re looking at this and they’re saying, all right, well, if I can apply this much capital to these short traders, they’re going to become forced buyers. I’m going to blow this thing out and I can just liquidate rug pool, get out and, and walk away.

[00:11:48] Preston Pysh: But I think a really, really important consideration in that particular trade was the size of the market cap of GME in the face of how many people were talking about it. And that, that made it a very unique scenario. And then you had the whole Wall Street bets and like the social media aspect combined on top of that of something with such a small market cap.

[00:12:11] Jeff Walton: Yeah, it was a, it was a small market cap. And I think more importantly, it was a small float. I think there were 72 million shares that were tradable at the very beginning when I looked into this and I realized I looked there were like 60 million shares short and that is just pretty simple math like, okay, if there’s, you know, if there are more people buying this than there are shares available, then the shorts have to close this position.

[00:12:33] Jeff Walton: And it seems like a no brainer. It’s like, yeah, I’m going to take a position because I know other smart people see what I see and that was the that was my that was my ultimate strategy the hardest part was figuring out to exit and because you know, there’s this diamond I know I’m probably going to get a crap for this But there’s this diamond diamond hands, you know aping in and holding but I had to figure out what smart money was doing and smart money And thinking about this, right?

[00:12:58] Jeff Walton: If they, if they got in at 70 and they wrote it to 300, if you’ve got a billion, you know, a 500 million position on this, and you just turn 300 percent return, you just made your entire company’s returns for five years in a single trade. And whereas retail is holding out for 10, 000 percent returns, because that’s going to change their life.

[00:13:20] Jeff Walton: And knowing that the smart money is happy with two or 300 percent returns, and they’re likely going to exit, I had to follow what smart money was doing.

[00:13:29] Preston Pysh: All right, well, let’s, let’s dig into Microsoft. No, no, no, this is good. So let’s dig into MicroStrategy. So when you’re looking at it, walk us through how you think about it from a valuation standpoint.

[00:13:40] Jeff Walton: How I think about MicroStrategy. Actually, I kind of want to, I kind of want to get back to this trader. Yeah, let’s do that. The trading position. So, I think the, in the last four years, I’ve, I’ve, I’ve been fully orange pilled, right? Like I’m, I’m full Bitcoin, full steam ahead. I’ve got Bitcoin on cold storage.

[00:13:57] Jeff Walton: I think holding it on cold storage and making an on chain transaction is a phenomenally worthwhile exercise. It’s once you do it on on chain transaction, you see the math, you see how everything works. And then understanding that there’s a company that holds drastically more Bitcoin than anybody else, and likely there’s no other company that’s going to catch them.

[00:14:19] Jeff Walton: I wanted to be on that side of the trade. Thinking about Horizon. If you take the same perspective with Bitcoin as you do with MicroStrategy, I agree with you a hundred percent. This is a, this is a buy and hold forever. And if you, if you start to see what Michael Saylor is doing and how he’s managing capital.

[00:14:40] Jeff Walton: You can do the same conceptual thing with your MicroStrategy holdings. You can use your MicroStrategy holdings in an investment account as collateral to take out a loan to do with it what you will, like, go buy a house or do whatever you need to do. Alternatively, there are other ways to harvest a yield off of long term holdings with covered calls or covered put options.

[00:15:03] Jeff Walton: And there are strategies where you never have to hold or you never have to sell your micro strategy holdings in perpetuity. And I think having that thorough and fundamental understanding and thinking a little bit differently helps provide perspective on the micro strategy trade. I think. The really interesting part to me is that Bitcoin effectively undermines the entire perspective of the microstrategy trade.

[00:15:29] Jeff Walton: You can’t un Bitcoin a Bitcoiner. I’ve never seen it happen. I’ve never seen somebody that’s super pro Bitcoin and ends up switching gears and ends up not being a Bitcoiner. And those are the people that are holding MicroStrategy. I think the other thing that I did want to talk about is that I’ve seen a lot of these like cold storage maxis where they’re, you know, you should only buy Bitcoin in cold storage or you should only buy Bitcoin ETF, not the, not MicroStrategy.

[00:15:56] Jeff Walton: There’s, you know, risks associated with it. I definitely understand and agree that there are risks associated with different forms of purchasing Bitcoin correlated assets, and I think they both have a position in somebody’s portfolio. I think that MicroStrategy is effectively creating a proof of concept of how somebody that holds Bitcoin in cold storage could potentially earn a yield on it.

[00:16:16] Jeff Walton: And we kind of get into that, but yeah.

[00:16:18] Preston Pysh: Well, so this is where, so when I put on the position back in the day, or you could just say back in 2022, or even here in January, when I was looking at the price and I’m saying, okay, the price is trading below just the treasury value alone. This doesn’t make any sense.

[00:16:35] Preston Pysh: I think that there should be at least a slight premium on top of it, just being very conservative in my valuation process and I’m looking at the underlying Bitcoin and I’m saying, I think that in this coming cycle, I think it’s totally in the realm of possible to go between 300, on the price of Bitcoin within by the call date of December of 2025.

[00:16:57] Preston Pysh: So when I’m looking at that and I was looking at the value of the treasury, you know, the treasury at the time, let’s just ballpark it and say it was worth 500 a share. The Bitcoin in each share was worth about 500. And so I’m saying, okay, so let’s just say a 10 X’s from here would be a reasonable estimate.

[00:17:14] Preston Pysh: So the, the treasury values 5, 000 and I think that the shares should be. In this cycle, I’m, I’m just kind of valuating in a very short term kind of way. I’m looking at that and I was like, I can do these calls at 470, a strike at 470 and I think they’re worth in excess of 5, 000 a share within 18 months.

[00:17:32] Preston Pysh: So it was just kind of a no brainer for me. And the valuation for me was just really simple. Because I was completely discounting and not even trying to value the longer tail to all of this, which we can kind of talk about next, but just, I guess as a Buffett investor and kind of looking at it as like, okay, this is just, this is just obvious.

[00:17:52] Preston Pysh: Like this one’s not even hard. The value, the values there, like I’d be crazy to not like lock this in right now. I’m curious is, was for you, was it a very similar process or were you looking at this very differently?

[00:18:04] Jeff Walton: It was a pretty similar process. I mean, I really started with the Bitcoin holdings and where I thought Bitcoin could go as a, as a, as a baseline.

[00:18:12] Jeff Walton: And I was thinking, you know, okay, maybe it goes to 200, 000. What is their treasury of Bitcoin holdings at 200, 000? What is it at 500, 000? What is it at a million? And looking at those impacts of to their corporate treasury over time at these different Bitcoin prices. And then I tried to zoom out and look at the market as a whole.

[00:18:31] Jeff Walton: What is a stock? You know, what, what is the stock market? What drives value in the stock market? And this is where I really started to apply the game theory associated with the stock market. The stock market is not a casino. A lot of people think it’s a casino, but really it’s a playing field. It’s a dynamic playing field and everybody’s playing the game and everybody’s got a different strategy.

[00:18:53] Jeff Walton: And if you understand the strategy of the different players in the game, and some of the strategies are very basic. and very static. If you understand those strategies and you understand the dynamics of the playing board, you can develop a strong strategy to understand where capital is going to move.

[00:19:09] Jeff Walton: There’s more players to the game than just retail, just the people that are on Twitter. In fact, just, just retail probably makes up maybe 5%, maybe 5 percent of the stock market. That’s probably way too much. Actually, maybe it’s 2%. Really, I tried to zoom out and think about the structural design of the stock market and how other stocks are evaluated right. I started, I looked at. How is Apple evaluated? And, and what I, what I did is I created this top 20 U S equity comparison. So I looked at the top 20 equities in the U S stock market. And I looked at different metrics that people use to value these companies, right? I looked at PE ratios. I looked at liabilities to asset ratios.

[00:19:51] Jeff Walton: I looked at multiples on that asset value. I looked at earnings per share. And what I found was there was no one single homogenous way to compare any asset in the top 20 assets. I think I’ve heard you talk about PE ratios, like average PE ratios. There’s average PE ratios, but the PE ratios deviate drastically, right?

[00:20:10] Jeff Walton: Like I think Eli Lilly’s PE ratio is 123 and they’re the eighth largest U. S. equity. And so when you start to think about this sort of like, okay, there’s no homogenous way to compare any of these statistics. What is the true real indicator of what a company is worth? And how far into the future do investors look at these investments?

[00:20:36] Jeff Walton: And thinking about, again, like zooming out even further, right? Looking at Microsoft, Apple, some of the, some of the really top ones. I’ve really kind of boiled it down to this looking at net asset value and kind of comparing some net asset values. Because the top companies, in my opinion, the top companies in the stock market, they’re valued purely based on sentiment and future financial strength.

[00:20:59] Jeff Walton: And future financial strength, Is a function of profits and revenues in the future or the strength of their assets and how productive their assets can be.

[00:21:10] Preston Pysh: And how long they can remain competitive.

[00:21:13] Jeff Walton: And how long they can remain competitive. Absolutely. Absolutely. That was the perspective I took and I was trying to think about, it occurred to me that every single one of these companies all had different types of assets, right?

[00:21:26] Jeff Walton: They all had fundamental different business models and ways of generating revenue and different, you know, ways of, of utilizing the financial markets. Right. They all have different shares outstanding. Some are issuing shares. Some are doing share buybacks. Some are issuing debt and there there’s an enormously creative and large world of capital markets that can be utilized.

[00:21:49] Jeff Walton: And all these companies are doing those types of things and doing them a little bit differently, but where those large companies really get value is from the passive component of the market, the passive index fund component of the market. So the S&P 500, QQQ, Total Stock Market Index, all of those index funds, I went and I did some math on this, there’s like, I think Apple’s, of Apple’s holdings.

[00:22:13] Jeff Walton: I think about 12 percent of Apple’s holdings are actually, I think 6 percent of Apple’s holdings are S&P 500 ETFs. I think it makes up, I think it makes up like 360 billion, right? And that’s a whale. That is an absolute whale and they’re not going anywhere. Any future dollars that are going to S&P 500 ETF, they have a market cap weighted allocation that’s going to Apple.

[00:22:37] Jeff Walton: And so this, this kind of gets into the fundamental design, like, of the stock market. I mean, who’s investing in these passive ETFs and it’s pension funds, it’s insurance companies, it’s endowments, it’s everybody with a 401k and they don’t want to, they don’t know what to do with it, so they’re just putting it in index funds, and I think there’s a large, a very, very, very, very large pool of capital in the stock market that is just a passive zombie and not really doing anything.

[00:23:04] Jeff Walton: If you know that there’s this large chunk of capital that’s a passive zombie in the market that’s not doing anything, the value of a stock is actually everything else that’s trading on the margin. It’s actually a very small number of shares that people are trading that are determining the value of the stock.

[00:23:20] Jeff Walton: And if the sentiment of those small, of that small tranche of people that are trading the equity changes or shifts, That’s how you would see any, any change in like these large or any equity, really. It’s, it’s, it’s what’s trading at the margin, not everything else. Very, very long winded way of thinking about the market.

[00:23:41] Jeff Walton: That’s how I, that’s how I think about the market. I take this like very, very high level view. So then, then I look at MicroStrategy, right? And they’ve got, at the time, when I was doing this, they had like 127, 000 Bitcoin, and it was more than 10x the next closest company with Bitcoin. And I was trying to think my way through, like, okay, who can catch them if this is truly the new financial ecosystem, the rails of the new financial ecosystem?

[00:24:07] Jeff Walton: Who could possibly catch them? I think I heard Saylor say, you know, if it’s good for a million, it’s good for ten million. If it’s good for ten million, it’s good for a hundred million. And if you take that concept and you start, you know, applying 10 million per Bitcoin times 100, you know, what, 205, 000 now, you start looking at those numbers, they’re staggering.

[00:24:27] Jeff Walton: And that is financial strength, because they have the ability to use those assets as collateral to generate a yield. And I think that’s something that most of the market misses is that Bitcoin is eventually going to be used as collateral. It’s already being teased out right now, right? You start to see these loans where you could start to use your collateral, your Bitcoin collateral to get a loan to go buy a house.

[00:24:52] Jeff Walton: MicroStrategy is effectively going to be the bank in the future offering liquidity for Bitcoin the financial system in the, at some point in the future. They don’t need to do it now. Way too volatile to do it now, but as the number of coins mined, as we get to, you know, 2034, where 99 percent of the coins have been mined.

[00:25:13] Jeff Walton: The volatility is likely going to have reduced decently.

[00:25:18] Preston Pysh: From that point of view, if I’m Michael and I’m looking at like what risk premium I would need to lend them out, like you would, you would literally laugh in my face if I said the number, because I’m looking at the return that I’m going to get just naturally through the appreciation because of how early we are in the timeline.

[00:25:34] Preston Pysh: And I’m saying you’d have to pay me like, you know, well over 50 percent annualized for me to assume that risk that you’re going to actually pay them back to me. And so anybody who’s not valuing them at some crazy level like that, or I guess it’s not crazy, it’s very rational why you would want that type of return to lend them out.

[00:25:54] Preston Pysh: You realize why he’s not doing these fancy things with it. And there’s no reason to do anything fancy things with it. And we’re probably 10 years out or whatever, until there’s going to come a time where you can start to do this in a way that, you know, maybe it gets down to 20%, 30 percent to start lending these things out in the early days of, of it kind of starting to make sense.

[00:26:17] Preston Pysh: And again, we’re probably talking 10 years from now before we get to that point. I love your point about, you know, he’s going to effectively become a bank with, with this treasury, and he’s also going to be looking at the economic calculation of all the other equities that, that exist, and them now being re denominated and recapped in Bitcoin terms, and I think we’re going to see PEs down to 5 or whatever, they’re definitely not going to be 35, that’s for dang sure.

[00:26:43] Preston Pysh: And so your point that you bring up about can anybody catch up without there being massive amounts of slippage, because the amount that Michael would have to be paid to sell the company outright or to, to collect his treasury, I don’t think that there could be a number for him.

[00:27:00] Jeff Walton: Yeah, I agree with that. I don’t think there’s a number.

[00:27:03] Jeff Walton: I also agree with your, your loan terms, right? I don’t think this is a short term perspective. However, it’s, it’s naive to not consider it 10, 20 years from now, the price of Bitcoin is going to be far less volatile because there, because there’s going to be much more. It’s just the, the, the way that the S curve and the adoption curve works.

[00:27:23] Jeff Walton: Bitcoin is going to be far less volatile on a relative numbers scale and basis and it all comes down to like actuarial science. If you’re able to throw a volatility charge on what Bitcoin price is moving and how, where you’re generating your yield from that it will all be able to be calculated at some point in the future.

[00:27:43] Jeff Walton: And I think if you think about the current global economy and how things are produced and how the world kind of works. I tend to boil it down to there are two major components economically that allow the world to function and it’s lending and insurance. And because if you’re, if you’re, if you have a business idea and you want to go start a business because you think you can go make disproportionate amount of money, you need to go get a loan from somebody to run with this idea.

[00:28:16] Jeff Walton: So that’s what, that’s one component. And then you’ve got the insurance component without insurance, life would be too risky to do anything. Without insurance and without reinsurance, life would be too risky to do anything and having both of those components are necessary for kind of a functioning economy.

[00:28:32] Jeff Walton: And if we’re going to think about a Bitcoin denominated world, you need to have lending and you need to have insurance. And if you’re looking at a company with more than 10x the amount of Bitcoin of anybody else, I think they’re going to have the opportunity to get into these ventures with lending and potentially insurance and generating a yield off of those functional business structures.

[00:28:58] Preston Pysh: Jeff, let’s, let’s get into the thing that I think you and I had a little bit of back and forth on that. Maybe we see this a little bit differently with respect to capturing the spread. I am I love, I love this.

[00:29:10] Preston Pysh: I’m kind of beating the drum and, and to be quite honest with you, just kind of having fun and like tagging, tagging Michael and I know he can’t respond and I don’t want him to respond.

[00:29:20] Preston Pysh: But when I’m looking at like right now today, and it’s so funny, cause literally back in January, February, the price of micro strategy was at parity or even above the treasury value today, I would say that the treasury values around like. The Bitcoin on, on his treasury is worth about 800 a share and the post market close today, it’s sitting at 1, 784 per share.

[00:29:43] Preston Pysh: So you have basically a thousand dollar premium above the, the treasury just since January, February. And that is massive. That is huge. And so I’m looking at this and, and he’s obviously been announcing all these convertible debt deals. Recently, he did an 800 million convertible debt deal. Then just a couple of days ago, he announced another one.

[00:30:07] Preston Pysh: I think it’s 525 million that can be converted into common stock. And I think it’s at like 85 bps. It’s like a pittance. the interest rate on what he’s getting here because, and this is what’s so crazy for fixed income. This is probably one of the best fixed income instruments on the planet right now to buy.

[00:30:25] Preston Pysh: If you have a mandate to own fixed income, people are looking at it and saying, there’s no yield. Like who, what idiot is buying this? And I’m looking at it and saying, no, you don’t understand. This is literally the best fixed income thing that you can possibly buy. If you have a mandate for it. And just as one other point to this, people are completely missing how important and how valuable this is for Michael’s other strategy, which is to convert the common stock spread into more Bitcoin onto his balance sheet when it’s trading at a premium to his treasury.

[00:30:56] Preston Pysh: And the reason why is because all of these convertible fixed income instruments are able to provide deep liquidity into the common stock. Okay. That’s what’s lost. Cause you have all this wall street fast money that you kind of addressed earlier in the show that’s coming in and they’re hedging both sides of this.

[00:31:15] Preston Pysh: They’re trying to capture the spread. They are not long term holders. They’re in and out. They’re taking a short position and they’re just trying to get a risk free return. But what that does is it adds absurd, absurd amounts of volume. to the common stock because of these convertible debt instruments that he keeps issuing.

[00:31:31] Preston Pysh: So it’s almost like this scenario where he is able to capture this common stock spread to the treasury by because he has such deep liquidity. I literally saw today. He had the same volume of trade as Amazon today, which for people that aren’t like following along is totally nuts. Nuts for the market cap size of his company to have this.

[00:31:58] Preston Pysh: So if I’m trying to put on that trade where I’m trying to issue all this common stock, transmute it into Bitcoin, and I have deep liquidity in the common stock, like, I can do that all day long because there’s so much liquidity. I think Wall Street is totally asleep at the wheel, and now to the point where you and I were kind of going back and forth, you were suggesting, hold off because the spread’s going to blow out more.

[00:32:21] Preston Pysh: And I’m just saying, I don’t want to get greedy. Like be this little piggy thinking that I can perfectly time that. And I’m just saying, just capture the, just capture the spread. It’s 1, 000 right now. Just capture the spread. So let me hear your point of view on, on, and I think some of this goes to your GameStop experience.

[00:32:38] Preston Pysh: Why do you think it’s going even more absurd than 1, 000 per share on the spread?

[00:32:44] Jeff Walton: I think it’s going more absurd. You know, I’ve tried to think through this volume conundrum a little bit on the MicroStrategy daily volume. And I think it’s a total misnomer. of the actual shares trading at the margin, because I think there’s a bunch of HFT, high frequency trading algos that are trying to capture a risk free premium based on some underlying fundamental algorithm pegged to Bitcoin.

[00:33:08] Jeff Walton: And I think that is a, it’s not real volume.

[00:33:12] Preston Pysh: Oh, really? Okay, so you don’t, you think that even though the numbers are there, that, that it could disappear pretty quickly?

[00:33:19] Jeff Walton: I think the actual number of shares trading at the margin is far smaller than what the volume indicates. And I think that’s why we’re seeing the premium grow at such a rapid pace.

[00:33:30] Jeff Walton: Why is that? Why are you saying that? I’m saying that because the float is so incredibly, like the shares outstanding is so incredibly small. You’ve got, you’ve got 17 million, whatever, people are going to argue about that, 17 million shares outstanding per se. Saylor’s got 15 percent of them. You’ve got ETFs that have another, I don’t know, 30%.

[00:33:51] Jeff Walton: Institutional investors have 60%. Institutional investors. Are not selling this, and you’ve got retail that’s bullying their head in in here. And so now like when you start to do some just really rough math of the 17 million shares outstanding, you probably have like, I don’t know, 13 or 14 million that aren’t moving.

[00:34:09] Jeff Walton: At all. And it might be more than that. I would argue that it probably is more than that. And so really, you may see these massive volume figures, but I think those volume figures are a total misnomer because what’s actually trading at the margin of the people that are actually buying and people are actually selling is much, much, much, much smaller.

[00:34:26] Preston Pysh: So Jeff, but doesn’t that go to my point of saying, capture the spread now while you can get it? Because if you sit around and wait. You’re going to be too illiquid and you’re going to get, you’re playing a fool’s errand of trying to time something like that when you should just capture the spread.

[00:34:41] Jeff Walton: Yeah, but come back to that, is that more passive money is coming and people are holding, right?

[00:34:48] Preston Pysh: You’re saying the S&P 500 entrance?

[00:34:49] Jeff Walton: No, no, no, not the S&P 500, right? There are, MicroStrategy is already included in a handful of market cap weighted indexes. Index funds, one being the Vanguard total stock market index fund. You’ve got all of the Russell index funds. They’re in the Russell 2000. You’ve got many index funds that they’re already included in.

[00:35:08] Jeff Walton: So passive money comes into this trade monthly, probably daily. You know, there’s no great way to see like when it exactly comes in, but passive money is going to come in. And as the market cap rises, And those funds rebalance and reallocate the weight distributions of their total funds. The relative proportion of new dollars coming in is going to be a larger proportion of the fund.

[00:35:33] Jeff Walton: Forget the S&P 500. It’s a great story. And if it happens, it’s even, it’s jet fuel to this thing. But you already have passive money that’s coming into the transaction. What do we know about Bitcoin? There’s some pretty big events that are on the horizon in the next month and a half. And we’ve got the halving.

[00:35:51] Jeff Walton: And, you know, there’s, there’s a lot of, you know, bold scenarios going on here. You’ve got quantitative easing, interest rates. Everything is going on. And my argument was just be, I think you can be strategic and I’m sure they’re, they’re calculating some like accelerate relative accelerations in the price of Bitcoin relative to the price of microstrategy in terms of rate of return.

[00:36:16] Jeff Walton: And there’s a, you could take the derivative of that curve. And once that rate, the relative rate of change between Bitcoin and microstrategy changes, that’s the time to issue new shares. to maximize the, the relative premium.

[00:36:31] Preston Pysh: Do you ever see, that one of these, and this is going to sound like I’m going off topic, but like, I like to use nature or physics to try to help me think through problems like the one that you’re, that you’re talking about.

[00:36:42] Preston Pysh: There’s this visual of this ball that like drops down and it has volatility versus one that you start and it just like is at a 45 degree angle and goes down. And what you often see in that clip is how the one that has more volatility is actually moving faster than the one that’s just going straight at a 45.

[00:36:58] Preston Pysh: But what you fail to see is if you run that clip long enough and you keep watching it, the one that’s at a 45 actually catches up to the one with all the volatility and variance, and then goes faster than it. So when I’m looking at what’s playing out here, I see this being a very similar dynamic as that scenario where if Michael is stepping in and capturing the spread and he’s doing it, especially at a price where like when I’m looking at this next cycle, and let’s say I was bearish.

[00:37:29] Preston Pysh: And I think we’re going to go through another. And if I thought we were going through another cycle, which I think is a huge, if let’s say it goes to 400 or 500, where’s it coming back down to? And I would say a hundred thousand, 90, 000 would be the low it call it. What would it be two years from now or two and a half, three years from now we would be seeing a low and maybe that it’s 90, 000.

[00:37:50] Preston Pysh: And if that’s true, any buys that are the transmutation of common stock to Bitcoin would be bad buys or dilutive to the shareholders. If he was doing that, if he could lock in, you know, if he was, let’s just say he was selling shares and collecting cash and then dropped it all in at, at 900 or a hundred thousand on the the next low, that’s how he would ensure that he’s not dilutive.

[00:38:17] Preston Pysh: With all of that said, I’m looking at the current price, and the current Bitcoin price is at 68, 700 right now, and I’m saying you got about another 30, 000 in Bitcoin, where it’s a very, very high probability trade to capture the spread, because if you go through another cycle, it could be dilutive. So like, to your point, you’re saying, let that spread blow out because I’m with you, it might just blow out to like epic proportions, right?

[00:38:44] Preston Pysh: Like, that’s really kind of your point. You’re saying, let that blow out, then let’s capture it. Maybe the price of bitcoins, and I don’t want to take words out of your mouth, but maybe the price of bitcoin when you get to that peak blowout. And what I’m saying is, you’re transmuting it at a basis. That is higher than where the next low could go and which could result in you actually being somewhat dilutive to the shareholders in that scenario, but I don’t know.

[00:39:11] Preston Pysh: I think this is one of those scenarios where, where all the years that I’ve participated in markets. I usually get burnt the most when I try to get too cute with things and I try to be like, Oh, I’m not trying to be mean. When you said it’s calculus, like I can’t even tell you the red flag that like went up in my head.

[00:39:29] Preston Pysh: It was like, that’s a bad idea because-

[00:39:32] Jeff Walton: It’s because you’re saying it’s calculus.

[00:39:33] Preston Pysh: It’s a bad idea.

[00:39:34] Jeff Walton: It’s too complicated. It’s too complicated. Yeah. It’s too complicated. Yeah. I definitely understand. And I think one of the points I was getting at is like the velocity at that time was rapidly changing.

[00:39:46] Jeff Walton: And if everybody, if you think about again, this is game theory, right? Just taking a step out, look at all the players in the game. If everybody that’s actually truly holding Bitcoin is also holding MicroStrategy and the whole ethos of their entire trade. Is there going to hold Bitcoin forever? And they’re going to hold micro strategy forever.

[00:40:02] Jeff Walton: I like this.

[00:40:02] Preston Pysh: If you, if you know that they’re not moving, we call them psychopaths. Let’s, let’s call it what it is.

[00:40:09] Jeff Walton: They’re psychopaths. I’m one of them, right? You know, it’s not moving. Like. I am not selling MicroStrategy 1 forever, but why would I sell now when I know the bull market is on the horizon? And so if you know what everybody, well, you’ve got institutions, they’re not moving.

[00:40:25] Jeff Walton: You’ve got other smart, like, traders that know what’s going on. They’re not moving. Everybody knows what’s on the horizon. And then you have zombie money coming in the door to try to capture all of the remaining tiny liquid float, that spread is going to widen, and the velocity, the, the acceleration, we, we, we’ve seen it.

[00:40:43] Jeff Walton: I mean, we’ve seen it in the last two weeks. Yeah.

[00:40:46] Preston Pysh: And I’m, I’m literally looking at the spread blowing out and you’re exactly right. It’s accelerative. The spread that’s blowing out is accelerative. And I guess when I’m looking at the fact that they had so much volume today, and I know, and I like your argument that maybe it’s not actually all there and it might be a little bit of smoke and mirrors, but I’m also looking at Michael and I’m just like, dude, can you just like issue another, like 25 percent of all your shares outstanding and just like capture this spread and transmute it into Bitcoin and like, And then the price is really going to rip because he’s going to have so much more Bitcoin at such a great basis as we’re getting ready to go into an environment where I think we’re going to see just absurd moves here in the coming year.

[00:41:25] Jeff Walton: Yeah, I think that makes sense. The when I was comparing what you can do, right? Like you can, you can issue shares or you can issue debt. When I looked at the company’s balance sheet relative to the assets that they hold, it’s like raising flags, go issue more debt. And that’s what they did there.

[00:41:41] Jeff Walton: They went and did this kind of convertible debt bond, which I thought was a, that’s a brilliant, that’s a brilliant trade.

[00:41:48] Preston Pysh: Not to mention it helps in his taxes. Like it reduces his tax burden. The, the interest rate’s a total pittance. And the enhanced volume in the common stock is I think the really like crazy qualitative kicker that people aren’t thinking about.

[00:42:04] Jeff Walton: Yeah, I think the one interesting question I, I’ve been talking about this on Twitter a little bit is I would love to be in the room sitting across the table at those meetings. Can you imagine what those meetings with the executive committee at micro strategies like that when they’re trying to go get 600 million of capital and who are those people, right?

[00:42:24] Jeff Walton: Are they actual funds or are they maybe sidecars of large corporations that won’t, they know that they won’t be able to get a Bitcoin purchase past their board. So maybe they go buy convertible debt somewhere else. aka MicroStrategy. So, I would really love to know who’s on the other side of those transactions and it’s super opaque.

[00:42:45] Preston Pysh: I think the fact that you’re seeing it being over subscribed tells you everything you need to know. Like, we don’t need to know who it is. It’s just the fact that it’s over subscribed tells you there’s a massive appetite for it. Like, when you look at who the biggest shareholders are from an institutional standpoint, it’s like really smirk worthy.

[00:43:02] Preston Pysh: Vanguard and others that, like, it’s just hilarious. And let me ask you this. I’m of the firm opinion that we’re watching something that is somewhat unimaginable and that is going to absolutely go down in the history books is probably one of the most obscene, I don’t even like to call it a trade, but transitions of a company that is going to be a global dominant player 10 years from now, Mike, everybody’s going to know what micro strategy is as if it was like Apple stock or whatever.

[00:43:33] Jeff Walton: I absolutely 100 percent fundamentally agree with that statement. I think, I truly think that this is the biggest move, the biggest financial move in the history of finance and in the history of all of finance. I mean, this is, this is bigger than Rothschild’s figuring out how to front run in the 1600s and turning into a multi- generational wealth.

[00:43:53] Jeff Walton: Like this is fundamentally beyond comprehension bigger than anything that’s ever occurred before.

[00:44:00] Preston Pysh: Totally agree. You heard the Coinbase announcement that they’re going to drop a billion into the market. It was convertible debt, right?

[00:44:10] Jeff Walton: I think it was also convertible debt. Yeah. I, I looked at their balance sheet and I don’t know if they’re using that billion to refinance expiring debt.

[00:44:18] Jeff Walton: I haven’t really looked into that much. I would doubt they’re taking as big of a move financially as MicroStrategy and Michael are doing, but-

[00:44:25] Preston Pysh: If it runs as well as their exchange runs, it’s going to be, you know, a very poor use of funds.

[00:44:29] Jeff Walton: Absolutely. So should we should we get into some valuations and how, how it kind of Yeah, let’s ran, ran and looked at this a little bit.

[00:44:35] Jeff Walton: Yeah, go ahead. So this is the, this is what I used as my baseline. This is that table that I showed where I was looking at all of these homogenous risk characteristics or looking at P ratios, multiples, et cetera. And I was looking at what MicroStrategy was trading on it as its multiple somewhere around two and a half.

[00:44:51] Jeff Walton: And then you would see all of these other companies are trading in the range from anywhere from 1. 6 to 1430 or 60 even in terms of their multiples relative to their net assets, basically their assets minus the debt. And to me, that’s a representation of their financial strength. I looked at micro strategy and I, I took a, I wanted to do a dynamic price analysis, looking at different Bitcoin prices into the future and how that would potentially impact the market cap at these different Bitcoin prices at different multiples and looking at what they’re trading at today, they’re trading at a 2.68 multiple of their net assets. So they’re trading on a 30 billion market cap and then you fast forward and you look at a different. a couple of different Bitcoin prices. And so looking at a Bitcoin price of 125, 000, if you take the same multiple that they’re trading at today, 2.68, the price of MicroStrategy would be at a 61 billion market cap and a 3, 500 price for MicroStrategy.

[00:45:50] Jeff Walton: You go all the way to the furthest right on the graph. I’ve got 275, 000 Bitcoin price, which at a 2.68 multiple results in a 143 billion market cap and 8, 000 stock price. Now, thinking about where passive funds, how passive money flows into this, right? You’ve got the potential S& P 500, which is a boon.

[00:46:11] Jeff Walton: You’ve got potential QQQ, which both are a boon to the amount of capital that would flow into the trade. But regardless, you still have market cap weighted indexes that are going to passively be pushing money into the transaction. And if people truly take this strong Bitcoin holder mentality to MicroStrategy, The number of shares traded at the margin is going to become razor thin and price discovery to the upside will tear people’s faces off.

[00:46:36] Jeff Walton: Yeah. So I looked at multiple different trading multiples. So, Back in 2021, MicroStrategy hit a six times multiple like when it, when it really peaked at about like 1, 000 back in, in 2021, they were trading at six times multiple. So I took that same multiple and looked at different Bitcoin prices with that multiple at 125, 000 Bitcoin price and a six times multiple that results in 137 billion market cap and about an 8, 000 MicroStrategy price.

[00:47:08] Jeff Walton: Again, as you can start to see as you go further, if your price assumptions for Bitcoin go further out up to 275, 000 or I’ve obviously got many columns hidden here with a 275, 000 Bitcoin price and a six times multiple, you’re looking at 30, 321 billion market cap and 18, 000 share price. When GameStop had its short squeeze and there was a significant pressure on the remaining float and there was price discovery to the upside because the number of shares trading at the margin was so incredibly small, it was trading at a 49 times net asset value.

[00:47:46] Jeff Walton: Wow. In looking at what a 49 times net asset value looks like at 125, 000, at 125, 000 Bitcoin price, trading at a 49 times multiple, you’re looking at a one, a 1 trillion market cap.

[00:48:02] Preston Pysh: So I love, I love that you went here, but I would, I would push back to a point that I made earlier in the show, as far as market cap size.

[00:48:09] Preston Pysh: How much are you attributing, like, this multiple of 49, even being in the ballpark, just because of the sheer size of what MicroStrategy would be at that point? Say that one more time. Yeah, so, like, when we were dealing with GameStop, you’re dealing with this really tiny company and, you know, just doesn’t have the volume and, and is, you know, it’s a small market cap.

[00:48:31] Preston Pysh: When you’re looking at micro strategy and where this would be and call it a year and a half from now, you’re kind of dealing with two different monsters. Like the one is as a grownup and the other one’s kind of a little kid. So can we just kind of copy and paste and say, Hey, this multiple is possible, or is, is it kind of a function of like how small GameStop was?

[00:48:50] Jeff Walton: No, I absolutely think this is possible. The reason being when, again, game, I don’t like doing the direct comparison to GameStop, but it’s a good perspective on what like a short squeeze might look like where you’ve got very low liquidity, but GameStop, when that, when that trade. It kind of blew up. There were 70 million shares tradable with MicroStrategy.

[00:49:10] Jeff Walton: There’s 17 million shares tradable. So it’s much, much, much, much smaller. Yeah, right. The market cap is bigger, but what is market cap? What is market cap? Market cap is synthetic.

[00:49:21] Preston Pysh: You’re very, this is such a great point because you’re talking about the margins on the margins of what are being traded. That’s what’s driving the actual price.

[00:49:29] Jeff Walton: Right.

[00:49:30] Preston Pysh: Yeah, man, that’s a great point.

[00:49:32] Jeff Walton: So, so like market cap itself is synthetic. This is the same comparison of, of Samson Mao looking at a million dollar Bitcoin, right? If everybody, if everybody at the same time decides that they’re not going to sell their Bitcoin for a million dollars, and unless it’s a million dollars, And there’s no liquidity left.

[00:49:49] Jeff Walton: The price of Bitcoin goes to a million.

[00:49:51] Preston Pysh: Well, and so anybody that’s looking at this and listening to what you’re saying, they’re looking at the price of the BTC and the highest price you have here is 275K. And you just said Samson miles million. Like what does that do to this? Like you don’t even, don’t even say the number because we’re getting into

[00:50:07] Jeff Walton: Crazy territory.

[00:50:09] Preston Pysh: Out of our minds. Like some of these numbers totally out of our minds. Yeah.

[00:50:14] Jeff Walton: So, but I, but I think the exercise is useful. I think, I think, I think the exercise is thinking about it as useful, right? Like I’m a, I’m a reinsurance broker. I think about tail events, like what is happening, like 0. 001 percent return period. I love that’s what I think.

[00:50:28] Jeff Walton: That’s what I think about. And you have to consider it, right? Like, if you’re holding an asset and you’re, and like you said, if you’re going to hold it forever, wouldn’t you want to think about what it might be worth? Oh my God. Right. Okay. Then you, then you zoom out, right? Let’s, let’s compare the market cap to any of these other companies.

[00:50:44] Jeff Walton: And you go back and you look at this multiple assessment and you actually realistically say, who can catch them? Who can catch MicroStrategy?

[00:50:51] Preston Pysh: I don’t know that anybody can at this point. Cause I think if they, if they try, they’re just going to blow out the price. I don’t think you’re going to get there.

[00:50:59] Jeff Walton: I think you nailed it.

[00:51:00] Jeff Walton: So Berkshire has enough capital. They’re probably never going to do it. Meta Zuckerberg has 61 percent voting rights. If you wanted to, he could.

[00:51:09] Preston Pysh: But to your point, like they have enough quote unquote capital, but what if they actually would attempt to go after it? The price is going to run so aggressively that they don’t have enough capital.

[00:51:22] Preston Pysh: Right. Like it appears like they do based off of like, if everything was stationary and not dynamically moving with the new participant that enters this, not to mention, we’re not even talking about the qualitative side of call it Apple or Berkshire, whoever is now implementing a similar strategy as Michael.

[00:51:40] Preston Pysh: Like, what you’re not accounting for is the third and fourth person that now has the incentive to also do it because now there’s not one person doing it, there’s multiple people doing it.

[00:51:52] Jeff Walton: This is, this is the, this is the biggest game theory situation I’ve ever come across. Yeah. I’m, I’m with you. I’m with you a hundred percent.

[00:51:59] Jeff Walton: It’s filled my brain for the last 24 months and full disclosure, I don’t think, I don’t think I explained it at the beginning. I made this strategy in February of 2023. And I have more than multiple handfuls of leaps on this. And I was developing this strategy over time, recognizing what was kind of on the horizon and where this could potentially go.

[00:52:21] Jeff Walton: So this is my strategy since early 2023 and it’s starting to play out and it’s pretty insane.

[00:52:29] Preston Pysh: I can only imagine. I can only imagine. So what are the walks with your wife like?

[00:52:37] Jeff Walton: I’m sure I would, I’m sure I would have a different perspective than she would.

[00:52:43] Preston Pysh: I got one other thing. Let’s get out of this because you told me that you were a punter and I quickly want to cover this because I find this type of stuff, I find elite athletes and people that are just able to perform at just pinnacle levels.

[00:52:58] Preston Pysh: You told me that the length of your longest kick, tell me this, this doesn’t even sound believable.

[00:53:04] Jeff Walton: Yeah. Yeah. So I I was a punter. I had a 75 yard punt. This was in, this was in college. We went three and 33 in college. So we went to the game in the gamer. No, no, no, no, no. So in, in my four years in college, we, we won three games and we lost 33 games.

[00:53:22] Jeff Walton: So we, we went defeated two years in a row. So I got a lot of work, you know, I was, I was on the field quite a bit. But yeah, I had a 75 yard punt. They called it, you know, the punt heard around the world. I posted it on Twitter a couple weeks ago. Yeah, it was out of the back of the end zone. I was like, my heels on the back of the end zone and flipped the field.

[00:53:42] Jeff Walton: I think we downed him on like the 10 or the 15.

[00:53:44] Preston Pysh: So, did you have a massive tailwind behind you? Like, give us the environmental setup. What’s going on?

[00:53:51] Jeff Walton: Yeah, the environment, it was it was warm. It was Southern California. It was on turf. I just absolutely blasted this pun. It definitely rolled, definitely rolled a little bit, but it went over the gut, went over the guy’s head and then just kept going.

[00:54:03] Jeff Walton: So I think it was probably from the line of scrimmage, it was probably 50 in the air, maybe 55 and then, and got a, got a material role. Yeah, that is awesome. It changed it. It changed the game. We won that game. That was my senior year. Wow. That was the one game we won my senior year and we turned the field and scored a touchdown right after that.

[00:54:23] Preston Pysh: Good for you, man. That’s awesome. All right. Hey we’re going to wrap things up. If people want to learn more about you, do you, tell us what, tell us what you got going on. Tell us where they can follow you.

[00:54:34] Jeff Walton: Yeah. So, we are, we are going to be available on all streaming services here shortly. Look up QuantBros.

[00:54:40] Jeff Walton: Me and my buddy Ryan are researching these types of trades and transactions, thinking about different perspectives on the market, using game theory, thinking high level, thinking really down in the nitty gritty and, you know, hoping to talk to interesting people that, that think differently and think about the markets.

[00:54:58] Preston Pysh: I love it. And I love the engagement that you guys were giving me on Twitter. It was really fun, the back and forth. And I, you know what? I really look forward to continuing to interact with you and seeing your success. And we’ll have links to all this in the show notes. So go check it out. Jeff, what a pleasure.

[00:55:16] Preston Pysh: Great analysis. That was really fun. Thanks for making time.

[00:55:19] Jeff Walton: Yeah, absolutely. Thanks for having me, Preston. Appreciate it.

[00:55:22] Preston Pysh: If you guys enjoyed this conversation, be sure to follow the show on whatever podcast application you use. Just search for, We Study Billionaires. The Bitcoin specific shows come out every Wednesday, and I’d love to have you as a regular listener. If you enjoyed the show or you learned something new or you found it valuable, if you can leave a review, we would really appreciate that. And it’s something that helps others find the interview in the search algorithm. So anything you can do to help out with a review, we would just greatly appreciate. And with that, thanks for listening and I’ll catch you again next week.

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