Transcript: Nik Bhatia on How Credit Creation, Not Rotation, Funds Bitcoin

Marty Bent [0:07] You've had a dynamic where money's become freer than free.

Nik Bhatia [0:09] I mean, talk about a Fed just gone nuts, all, all the central banks going nuts. So it's all acting like safe haven.

Marty Bent [0:17] I believe that in a world where central bankers are tripping over themselves to devalue their currency, Bitcoin wins. In the world of fiat currencies, Bitcoin is the victor.

Nik Bhatia [0:28] I mean, that's part of the bull case for Bitcoin.

Marty Bent [0:31] If you're not paying attention, you probably should be. Thank you for taking some time during the holiday season to do this. I texted you last week after watching an incredible YouTube video that you put out, and you were gracious enough to join me on Festivus to have a discussion about it.

Nik Bhatia [0:53] Anything for a friend, Marty. Great to see you, man.

Marty Bent [0:57] Great to see you too. And also, congrats on the new book launch, The Bitcoin Age, number 1 on Amazon and Money and— what is it? Money and Economics? Money, Markets, and Economics?

Nik Bhatia [1:09] Yes, thank you, Marty. It's called Bitcoin Age. It will be out in February 2025, although I'll put an asterisk on there because on January 20th or 21st, we might be getting some material news regarding Bitcoin. And so I am keeping that asterisk there in case I have to write a few extra pages, which I, to be honest, I am planning to do so. So we'll see.

Marty Bent [1:35] So you're bullish on the Strategic Bitcoin Reserve?

Nik Bhatia [1:38] I am. My position on it has evolved a little bit, but I am. And I would say now that it is my base case. I'm over 50% mentally. on that one. So we'll see.

Marty Bent [1:53] Maybe let's start there. I mean, the video that I watched, reached out about, has to do with MicroStrategy, their utilization of the convertible debt market, and how the repo market is affecting inflows into Bitcoin. But before we get to that, How profound would a strategic Bitcoin reserve by the US government be in your mind?

Nik Bhatia [2:23] It would be very profound. It would be probably the largest news event in Bitcoin's history from the government perspective. Obviously, we have other events in Bitcoin's history that probably matter more for the growth of the network, but thinking about long-term adoption, and the hesitancy of so many people around the world, both in the United States and outside, to say, I'm not going to buy Bitcoin, I'm not going to use it, because I think one day the US government will ban it, make it illegal. The biggest misunderstanding, I believe, in the outside world is that Bitcoin challenges the dollar to the point where it threatens to kill it. But That is not a full picture. If the US dollar and the United States want to survive very long-term, it's beneficial for the US to be involved in Bitcoin. Not necessarily buy it, but not to make it illegal. To be a leader, to be the home of— as it already is— the home of the first publicly traded company to enter the NASDAQ 100. Obviously, these are American companies, but Coinbase being launched on the New York Stock Exchange, the ETFs, Fidelity and BlackRock, these are both American companies. The US is already the home for Bitcoin in theory. So this just takes it to the next level, and it permanently eliminates this idea that the US government is coming for Bitcoin. Which I think is a fallacy. I believe that's a fallacy for a long time.

Marty Bent [4:11] Yeah, it's been really encouraging to see how the incoming Trump administration, just Trump generally, has been posturing around this. Like you said, it's our market to lose at this point. The individuals in the United States hold the most Bitcoin. The companies that have been started here are arguably the most successful in the world. And I think it's pretty massive too. And whether or not they decide to go out and execute on the plan that Cynthia Lummis has put in place, for example, I think that would be interesting. I think there's ways in which the US government would have to be strategic about acquiring a strategic reserve. They decide to go out in the market and actually acquire Bitcoin. with a stated goal of reaching a certain target, whether that's a million Bitcoin or something else. But I just think, having worked in the industry the last 4 years with the Biden administration, I think the proverbial weight that's going to be lifted off the shoulders of everybody working on Bitcoin is going to be so immense that—

Nik Bhatia [5:23] And it already has been. It already has been. You feel that there's an energy in the industry. But I want to express my low IQ take on why I believe the SBR is going to happen. This is not a thorough analysis, this particular take that I have, which is that—

Marty Bent [5:45] Right.

Nik Bhatia [5:46] Trump is a maverick. Let's just say that as a mild word. We know The guy is very unique. Okay. One of the things that he does is he says wild shit all the time. Okay. Another thing that he does, because we have 4 years of his presidency, is he actually goes out and does a lot of the things that he says he's going to do. So he campaigned on a strategic Bitcoin— well, he campaigned on a pro-Bitcoin administration.

Marty Bent [6:20] Right.

Nik Bhatia [6:21] He came to Nashville and he spoke. Then, as he was reaching the point of being elected, he credited some of the Bitcoin people with giving him a boost.

Marty Bent [6:34] Let's—

Nik Bhatia [6:34] we don't have to say we gave him the biggest boost or the smallest boost. Give me one second. My amazing wife is bringing me coffee. Thank you, baby. And then he campaigned on the fact that he is going to put in a strategic Bitcoin reserve toward the end. Then he got elected with winning the popular vote and winning 7 out of 7 swing states. Then he says, I'm going to do— I'm going to do something very good for the Bitcoin people. After he got elected. So my low take is that he got elected on a Bitcoin agenda, and then once he got elected, he said he was going to do it. So I believe he is going to do it. That's the whole take. He has shown that— we had Steve Myron on. He just got announced as the head of Trump's Council of Economic Advisers. And we asked him, what is Trump going to be doing on Bitcoin? And he said, it's part of his recipe for the success of the country. He has determined, or his people, his sons, his advisors have determined that Bitcoin is a part of making America great again. He's decided it. His whole team agrees with him. So they are going to do something. for Bitcoin. Now, do I think they should, or do I think they will purchase a million extra Bitcoin? I don't know. And I don't have the strongest take on that, that they should be buying. But should they be strategically embracing Bitcoin, keeping it in the treasury, and having pro-Bitcoin policies? Undisputedly, yes. And they will make executive action, I believe, in the first few days to progress toward that. I don't know if they're going to buy Bitcoin. And I just think it's too early to say.

Marty Bent [8:41] Well, over the weekend, there was— Nic Carter put out a piece explaining why he doesn't think the Strategic Bitcoin Reserve is advantageous for the United States, particularly if it wants to maintain dollar dominance in the US. Curious if you read that, your thoughts on that, and whether or not Bitcoin could actually help the Treasury in this debt situation that we've—

Nik Bhatia [9:12] Yeah, that's a good question. No, I didn't read Nick's piece. Um, and here's, here's what I'll say. Bitcoin, from the United States perspective, does not threaten the dollar today. I just, I don't see— I see Bitcoin today advancing the dollar. So I'm a price guy, as you know. I'm watching the charts since Trump has been elected. The dollar has gone straight up. Bitcoin has gone straight up. That's all the information I need, Marty. Like, I don't try to overcomplicate game theory 10 years into the future. I'll let other people do that. I'm looking at the United States putting in policies going forward over the next few years that bring capital to the United States of America, hence the dollar going up. The euro is crumbling. The Canadian dollar is crumbling. The Aussie dollar is crumbling. The Chinese yuan is pushing up against, and by up I mean dollar strength. Chinese yuan pair is pushing up against its all-time highs, meaning the all-time weakest level of the Chinese yuan. So if you look at other currencies, they are performing very poorly versus the dollar in the MAGA era, which were only 6 weeks into now. So I see the dollar continuing to attract capital from other places around the world. That strengthens, that strengthens the dollar. Then I see Americans purchasing Bitcoin, starting Bitcoin companies, and that will attract what? More capital to the United States and strengthen the dollar. So in the short to medium term, I see the dollar and Bitcoin performing very well together. Very well. Now, if the US wants to prevent Bitcoin adoption to protect the US dollar reserve currency over the long term, I just, I think that's shortsighted because somebody else is going to win. And if someone else is going to win the capital flight and attract Bitcoin to their country, the US dollar will fall because of capital flight. Prices are all about flow. That is the only thing that drives price. Flow can be described as liquidity. It can be described as credit creation. All these things that we're going to talk about today, flow is the only thing that matters. So if you put good policies in the United States, money will flow here. And one of those good policies can be pro-Bitcoin policy in which money still flows here. You want to talk about 10, 20 years down the line when Bitcoin starts to replace fiat, which it probably does the further we get into the future. You know, somebody else is going to give you that better answer. Like, let me give you my 20-year vision, and I'm going to do some of it in my book. But what I'm not going to do is speculate about the entire death of fiat. We'll sprinkle it in there because in 100 years, in a completely digital society, I don't see government currencies having a place. But that might be beyond my ability to project.

Marty Bent [12:48] Yeah, I completely agree. I think Bitstein put it perfectly, I think 7 years ago now at this point. Bitcoin is a game and the only winning move is to play. And to think that the US government should sit on the sidelines because of some perceived fear that an endorsement of Bitcoin, an allocation to Bitcoin within the Treasury would significantly hinder the dollar's dominance is just shortsighted. I think you got to—

Nik Bhatia [13:22] I want to tell people that in my book, Bitcoin Age, I have a fantastic story of how the United States government helped found the internet. We got to TCP/IP, which is a protocol that everybody can use, and that led to the open internet. But TCP/IP was 5 years after the first universities had started to connect via the ARPANET, which was a Defense Department project. They brought in people from the RAND Corporation, from MIT, from Lincoln Labs. Lincoln Labs was the think tank arm of MIT. They brought in people from SRI, which was the Stanford Research Lab. And it was the Defense Department, a few top universities, basically Stanford, UCLA, USC, Berkeley, MIT, and, and UC Santa Barbara. And they linked them all. And it was a government, not mandated, but a government-directed project that we need to find a way to communicate. And guess what? They were still 100% reliant on AT&T, who had a monopoly on long-distance phone telephone communication. So the internet today being this big open internet that we think, it didn't start as an open internet. Bitcoin is a very unique project that it actually started open. Then after 15 years, the US government realizes Oh, this is actually an open project that is very similar to the one we started in the '60s that was closed but ended up being open. And by the way, one of the most important parts of that story is that a few years after TCP/IP launched and started to be used by the universities and these research students, guess who said we are going to transfer our entire network onto TCP/IP? ARPA. So the Defense Department actually adopted the open standard after creating the prototype closed standard several years before. So the United States being not only pro-internet, but actually founded the internet, is the legacy that we should be using for context for Bitcoin adoption. And I'm not talking about the US going out and buying a million Bitcoin. That's the next level. It's something that we'll see next year. We'll see if that's something that they're going to do, and we can talk about that then. But the pro-Bitcoin policy Taking some of those seized coins and putting them in the Treasury's custody. These are very important things that have a tremendous historical context.

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Nik Bhatia [19:56] And there's no doubt in my mind that Donald Trump understands this and his advisors understand this. It is a part of their plan. We had Trump's new chief economic advisor on The Bitcoin Layer a couple weeks ago, and he said, I believe they're going to do this because it's part of that growth plan. We have to figure out a way to revive the economy in the United States that has been globalized. I mean, that's what the whole politics is about today, is that you, you outsource the manufacturing, you destroy your industrial base. And in that way, the global economy might be better off for it, but the domestic economy and the people themselves are not necessarily better off for it. And the politics then goes toward nationalist politics. And that's what the people have voted for this time. And in that vote, they hope for domestic forward policies. And this is one of them. The reason it's one of them, it's not random. He campaigned on it. He went to Nashville. Barron is— Barron is like, Dad, you, you got to do this. And you know what Donald Trump said to Barron? Okay, son. I will do it. And he's credited Barron with the Rogan thing. And later on, we will understand more and more that he's going to credit Barron with the Bitcoin thing. He's got youth in his ear. This is a good thing because the country needs— they need a plan for the future. They need a plan for young people.

Marty Bent [21:57] Yeah, that has been, I think, comparing this campaign with the 2015 campaign and the 2016 to 2020 administration. It seems like he's learned a lot of lessons having been around the block once, and this time around really leaned into his family, his young sons, to help advise him instead of getting co-opted by by the blob, if you will. So I'm incredibly optimistic. And the crazy thing about it is this is just one bullish factor in the Bitcoin backdrop right now. I mean, I've reached out to you because it seems like your base case for Bitcoin's potential meteoric rise has changed as you came to understand the MicroStrategy utilization of the convertible. debt market better and better, and particularly how repo markets play into that and credit creation. The creation of new dollars to buy Bitcoin has added a whole new variable to the flows that can come into Bitcoin. And I think it would be really interesting if we just dove into this. You did a 45-minute video on The Bitcoin Layer that we'll link to in the show notes that everybody should go read. But I think for— excuse me, go watch. But for anybody who hasn't watched that, what was the unlock for you and what are the dynamics at play here in terms of how MicroStrategy has sort of tapped into this market and is— I don't want to say weaponize it, but utilizing it to— produce an incredible amount of flow into the Bitcoin network.

Nik Bhatia [23:44] That's the keyword, is flow. So let's go back 6, 7, 8 years to my original Bitcoin thesis about why me and my family and friends should be long this asset for the long term. The thesis was that Bitcoin is, you know, at the time, let's just call it $100 billion market cap. So, you know, 10 or 20x ago, right? So about a $5,000 Bitcoin price. And I'm looking at this $100 billion number, and I'm looking at another number, and that number is about $500 trillion. And the $500 trillion comes from, let's just say, 100 stocks, 100 bonds, and 300 in property. So that's a very crude initial assessment of this one pile of wealth, $500 trillion, existing wealth, by the way, existing assets. Not all of it monetized because the $300 trillion in property, a lot of that has never changed hands in theory, stayed within families for centuries. So, we got about $500 trillion in assets and we got this $100 billion digital gold asset. And gold at the time was about $10 trillion. It's closer to $20 trillion now. inflation. And so I'm thinking about 100 billion Bitcoin and 10 trillion gold, and I'm thinking Bitcoin can easily get to $500,000 per Bitcoin and 10 trillion market cap because it's better than gold. We know this. I mean, it's not a new theory thesis. Bitcoin is much better than gold from a global reserve asset perspective.

Marty Bent [25:51] It's digital.

Nik Bhatia [25:52] instantly verifiable. So $500,000 is a lock, basically. I told my friends and family, I wrote it in Layered Money. There's actually a sentence toward the end that says, and we should expect that Bitcoin one day will cross gold in total market value. So, you know, 2021, I published that Bitcoin would be going to $500K and beyond. So getting to $100K shouldn't be that dramatic or surprising, and it wasn't, right? I mean, if we're expecting these higher prices, $1 million, $2 million, even $500,000, getting to $100,000 isn't a big deal. But when we got to $100,000 and we got to $2 trillion, I'm thinking about, okay, what is next for Bitcoin? It got to $2 trillion, quite easily from $100 billion, and it's probably going to $10 trillion now quite easily. It's going to $1 million quite easily, which would be about $20 trillion or $21 trillion, because that's only 10x away, 5 to 10x away. Bitcoin does 5 to 10x every few years anyway. So we're already there. We're bumping up against $1 million at $100K. But the thought exercise came in that, okay, how do we get there now? How do we get to a million? What's going to drive it? Is it the $500 trillion rotation where people sell stocks and they sell bonds and they sell their apartment buildings and then they buy Bitcoin? Or is something else happening? And I realized that something else was happening, that Michael Saylor is not selling assets to buy Bitcoin. Not only is he not selling assets to buy Bitcoin, his investors that are buying his convertible bonds are not necessarily selling other assets to buy those bonds.

Marty Bent [28:01] How?

Nik Bhatia [28:03] Because if you're a bond investor, and I worked at 2 bond shops, one of them had about $4 billion under management, the other had over $100 billion under management. At the $100 billion firm, I personally was responsible for the execution trading of about $20 billion of those securities. So we had a lot of treasuries, and those were all in my book. I didn't make all the decisions. I made some of them, but I was in charge of trading. So I had to know everything about the market. As I was trading these bonds, some of my treasuries that were on my book, the credit guys would say, hey, sell 5-year treasuries. I need to buy this 5-year Apple bond, and I need cash. So I said, okay. So I sell my treasuries, he buys the Apple bond, And in a couple of days, the money comes in from my sale and it goes out to Apple, basically. And Apple gets the money. And where did it come from? It came from an existing pile of money that in which I own US Treasuries. But what if I shouted back to Rob, hey, Rob, I don't have any fives. You're just going to have to buy it I'll sell Treasury futures on the other side so you don't take on double duration, because each bond has duration risk. So I'll sell Treasury futures, you buy the Apple bond, you don't have risk. But then Rob says, well, how am I going to finance it? Where's the money? And I tell Rob, call Morgan Stanley and ask them to finance your bond. So he calls Morgan Stanley and Morgan Stanley says, we'll lend you 80% of the money. or 70% of the money at SOFR plus 50 basis points. And Rob looks at the screen and he says, okay, done. So now Morgan Stanley has just created 70% of the new purchase from thin air. Now, where does Morgan Stanley get the money? Well, Morgan Stanley repo desk underwrites that collateralized loan because they've taken the MicroStrategy bond as collateral. They've issued money. Where do they get the money? It's basically the daisy chain of banking liabilities from their parent bank. And their parent bank doesn't necessarily have to mark that extension of the balance sheet until month end, but their desks are managing how much liability expansion is happening. And then at the end of the month, they try to true it up to make sure that it looks good for the books, the window dressing that we hear about. And at the end of the month, they have expanded their balance sheet by X amount. And some of that X, a proportion of it, is due to an expansion of repo financing. Therefore, my entire point about this next wave of Bitcoin price increase is that it is due not 100% to a rotation. This was the big word that we would all use for years, that the bond market is $100 trillion, guys. Some of that money is going to get into Bitcoin, but you're assuming that they're going to sell the bonds. But that's not how these bond managers do things. Yes, they sell some bonds to buy new bonds, but bond funds finance positions with repo. They borrow money to buy new bonds, and that's how they leverage. So they're over 100% in their AUM in securities holdings. And if you have 150% long bonds, that means you have a negative 50% Role. It's a financing role. It's a borrow. The 50% over 100 comes from the borrow, and that borrow doesn't come from somebody else's borrow. It comes from credit extension. Go back to your basics on how a bank extends a loan. Balance Sheet A is 100 assets and 100 liabilities, and Balance Sheet B— next month or next day is 200 and 200, because there's a new 100 loan and new 100 deposits. That is an expansion of the monetary system, the financial system. And my whole thesis here is that Bitcoin getting to $20 trillion is not going to happen because there's several trillion of bonds being sold And then buying Bitcoin, or bonds being sold and giving it to Sailor so that he can buy Bitcoin. It's going to be people basically just call it a new company, a new company with a lot of cash flow, so a lot of creditworthiness. Let's just say Nvidia. Nvidia goes to their let's just say they go to the capital market and say we want. Bitcoin as a strategic reserve now. We want it as a corporate balance sheet item. And Nvidia says, by the way, Marty, do you know how much cash Nvidia has on their balance sheet? I have no idea. By the way, this $20 billion that we have in cash on our balance sheet, just making up the number, we're not going to use any of that. We don't want to use our cash. And so the market says, well, how about you issue a bond? And Nvidia says, great idea, because the carry, meaning the interest expense, will be 5%, and our expected Bitcoin return will be 30% per annum. And so that is a return on investment, invested capital that we embrace. So let's make that decision. It goes to the market, it issues bonds, the market buys the bonds, finances them through additional repo financing. If you don't want to think about repo, just think of it as credit. It's just a credit line. So investors say, hey, can I have a credit line? They go to Citi and they say, hey, Nvidia just issued some new bonds. I want to buy them. Will you lend me money? And Citi says, okay, here's a new loan for $100 million. The bond fund takes the $100 million and buys Nvidia bonds. There's no repo there, just another random bank that lent you money. Now you have a loan to Citi. You have to pay interest expense on that. You have a long asset Bitcoin, and the long asset Bitcoin is 100% leveraged because you borrowed the money from Citi. And is Citi's balance sheet larger today than it was yesterday? Yes. So where did the money come from for new Bitcoin demand? It came from thin air. It came from nowhere. And that's credit. That's balance sheet expansion. And that is what I believe drives Bitcoin going forward, not some grand rotation. That's an obsolete narrative. It doesn't mean that you and I aren't taking some earnings that some company you know, paid us and taking that money and buying Bitcoin. That's existing money. That will continue to happen for sure. But you have this entirely new segment of demand that is credit expansion to buy Bitcoin. And that's what takes Bitcoin to $1 million and beyond, and quite easily, because everybody who has Bitcoin that will sell it, I believe, then the money that comes to buy will be new money from the financial system.

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Nik Bhatia [39:31] And let me tell you how it works. We're looking at— now I'm back on the desk and my portfolio manager says, hey, can you run a report and tell me run a holdings report and give me our allocations across the account. And I'll give the allocations. I'll be like, we got 25% in treasuries, 50% credit, and 25% in structured. And the portfolio manager says, hey, 25% in treasuries is too high. That means we're not taking enough credit risk. You need to rotate some of that. You need to get it down to 20%. Okay? So that means I have to sell 5% of my treasuries and buy some credit with it. Well, then I go to the 50% credit allocation. And then my credit portfolio manager says, hey, can you give me a sector breakdown? And I said, you're 5% energy, 10% transportation, blah, blah, blah. And they said, hey, there's not enough technology exposure in there. So what can you do about that? And I call my credit desk and the credit guys say, there's not a lot of Apple bonds in the 10-year part of the curve that's available. So then you'll say, well, let me call them. And I'm giving you an example of Apple just because it's a recognizable company. But this is actually what happens with medium-sized companies like MicroStrategy. So let's pick a smaller company actually. Um, so let's go with, um, let's go with a smaller company that is— or let's go with Broadcom. Broadcom is a company that just crossed $1 trillion in market cap. So it's an enormous company. Broadcom is a chip manufacturer. Broadcom is a big tapper of the debt market. They come and they borrow these huge amounts of money from the debt market. So if I'm lacking technology exposure and we look at the line items and I'm lacking some Broadcom tickers in my portfolio, my credit guy will actually call Barclays, who he knows runs the deals for Broadcom, And he'll say, hey, Barclays, get Broadcom to do an issuance and make sure that they issue a 5-year, a 7-year, and a 10-year, because we want all 3 of those tenors because we need credit spread duration across the portfolio. We have too much concentrated in 5. We need a little bit 5, 7, and 10. So my credit guy calls Barclays. Barclays calls the CFO of Broadcom, and says, the market is ready. Well, actually, Barclays starts calling. They call PIMCO. They call WAMCO. They say, hey, if we brought $15 billion in Broadcom bonds, would you be a buyer? Would you be a buyer of 5s? Would you be a buyer of 7s, 10s, 20s, 30s? Would you buy 40s? They're thinking about a 40-year. PIMCO says, wave it in. We'll buy a 40. We'll buy every tenor. So Barclays calls Broadcom back and says, hey, the market is ready. We think you could come with $10 billion. You could probably hit them with $15 billion. But as long as you do it in every tenor that they want, and we'll help you structure the deal. A few days later, Broadcom comes, they issue $15 billion of bonds. Every bond manager gets called from Barclays. They put in their orders. They put in $25 billion of orders. Everybody only gets half the bonds they wanted. Broadcom is licking their chops because in 3 months or 6 months, they can do it all again. What I'm telling you is confirming what you're saying. MicroStrategy bonds have an attractive risk profile. The bond managers are looking at the returns of their competitors that bought the early ones, and they're saying, we need to chase that. Call our dealer, tell them to call MicroStrategy and tell them to issue. We'll take down 100% of the deal. Well, the dealer says, that's not going to be healthy for the bond issue. So we're actually going to call a lot of your competitors and see if they want in too. And they call everybody. Everyone says yes. They pencil in their orders. And it's called a soft order. You And so the dealer knows exactly how much demand is going to come. So they're not surprised when they bring the bond and the bond gets the orders because why? They've already taken the orders. And so the bond managers driving the bus here and saying, we want those returns, is not something I saw coming. I didn't see that coming. And it doesn't mean that I— it actually means that I wasn't bullish enough on Bitcoin. And that's what I had been struggling with over the last few years. I mean, sorry, few weeks, because I have always been very bullish on Bitcoin. But to realize that I wasn't because I actually missed a fundamental that has to do with my industry in the bond market, it's been a trip. It's been something that I've embraced. And I just want to be honest and transparent with people that, hey, when I told you that Bitcoin was likely to go to $500,000 in my book in 2021, that was, that was not bullish enough, that I could have said more. But at the time, that's what I said. So we'll say more in the next book.

Marty Bent [45:25] Hard to believe that you weren't bullish enough considering how bullish you have been. since 2021, or probably earlier. But back on this, I don't want to call it a hack, but this opportunity that bond investors are taking advantage of via MicroStrategy, using Nvidia as an example earlier, how sustainable do you think a strategy like this is moving forward? Is it specific to MicroStrategy? Will anybody have similar success? Are there different ways in which this will manifest across different companies and different sectors, different market caps? I guess the simple question is, how long can this strategy run? And is it as long as Bitcoin adoption continues to increase and maintain the pace that it has for the first 16 years? Is this a strategy that is very sustainable moving forward?

Nik Bhatia [46:26] Well, I don't know. What I still believe is that Bitcoin is probably headed for another overdone price move and then correction. So that's still my base case, is that we're still going to cycle up and cycle down. And so perhaps as we get into the other side of the cycle, call it 2026, or I don't know. But then you might see a change in the way that they're issued, because flow is what matters, right? And so if interest rates get hiked or there's some liquidity contraction and the first few bonds stop getting issued, then prices go down, then the flow is out, then actually people are selling the bonds And you can't fight flow. So that's the way I'm thinking about it, is that flow will continue until something makes the flow stop, and then the price goes down, and then the flow reverses. So I think something like that will probably happen again, and it'll be interesting to see how the corporate Bitcoin bond market operates in a bear market. Saylor was buying during the bear market, but he was issuing equity to do it, right? I mean, mostly he was issuing notes as well, but the energy and the phone calls from the bond managers to the dealers probably wasn't there. So we'll have to see. I do think that this speculative attack type of issuance and purchase is going to be replicated in the sovereign market. So we might see countries in the Middle East, Eastern Europe, Asia, Latin America issue sovereign bonds in part to build a strategic Bitcoin reserve. And that is something that the Trump move will The Trump strategic Bitcoin reserve is going to trigger more strategic Bitcoin reserves. And I believe that those countries that are going to be triggered into doing this are going to say, hey, let's just tap the bond market. And nothing gets repoed more easily than a sovereign bond. Even EM bonds, they get repoed. The haircuts are expensive, the rates are expensive, but the borrow is provided because those Eurodollar banks love— I mean, so EM bonds, emerging market sovereign bonds are for the most part issued in the Eurodollar market. It's the Eurobond market. It is a London issue. So when I would buy bonds, when I buy treasuries from Citi or from Merrill, and I get delivery of my bonds, my bonds come from the DTC account of Merrill's New York desk. And I know that because I do all the— I mean, seeing the settlements, you know what DTC account it's coming from, and you send the ticket to your ops guys. You know everything, where the money's going. When you participate in an SSA deal, which stands for Supras, Sovereigns, and Agencies, this is like when World Bank issues bonds under the IBRD ticker, or when the European Investment Bank, EIB, issues bonds, or AFDB, African Development Bank. Or what about the country of Indonesia? What about Saudi? Where do they issue their bonds? Out of the London desk. So when I have to send funds and get bonds, I have to actually check that my wire is going to London and my bonds are coming from London. So the, the point here is that when The EM desks, so let's say the Goldman desk in London, when they run a bond deal and they call everyone and say, hey, are you going to participate in this Indonesian sovereign bond? What does the manager say? Yes, but you have to finance me the position or else I'm not going to do it. I don't have the cash, but I'll take it. if you do good financing. And what does that mean? Repo. So, the repo market is central to domestic bond issuance, international bond issuance, and specifically London Eurodollar Eurobond issuance. And that repo financing is done in the Eurodollar market, so we can't even measure it. And that, by the way, is why LIBOR used to exist, is because they would need to have a rate to center their balance sheet around in the international market. So that's why they use LIBOR, L in LIBOR for London. It's a London rate. Now they use SOFR worldwide because the financial system discovered that Anyway, we don't have to get into the death of LIBOR today. But to answer your question, sovereign debt issuance for strategic Bitcoin reserve purchases financed by the London Eurodollar repo market is something that I did not see coming. And I couldn't have seen it coming where the politics was 12 months ago. in the United States. But we had the shift. I guess the shift was always there, Marty. I mean, if we think about the conversations that you and I have had over the last 4 years, we've visited in Texas together. The understanding that the politics is shifting towards where it did in November, we understood that. But to still say that this is my base case, that Trump gets elected, puts in a strategic reserve, and then, you know, random sovereigns are issuing bonds to stockpile their own Bitcoin, all getting financed in the repo market. I just didn't see it coming. There's no shame in admitting that this type of action, which could take Bitcoin to several million dollars, was not in my wheelhouse a year ago. It just wasn't.

Marty Bent [53:25] And in terms of sovereigns issuing debt to buy Bitcoin, I mean, I think that was— that's core to many people's cases that would put forth that acquiring a strategic reserve would set off some chaos in Treasury markets, because you're almost explicitly saying, I want to hold this asset in Bitcoin as a reserve asset over these government bonds, over these treasuries, would incite a collapse in confidence in treasury government bond markets overall. And so when it comes to issuing bonds to acquire Bitcoin, this has been floated around by Luke Gromen, Preston Pysh, and others over the last 6 months since the fervor around Trump's campaign began to pick up and people became more confident that he would likely win the presidency again. Do you think with these bond issuances to acquire Bitcoin, there needs to be a component of the bond that actually has Bitcoin in it as well? So you raise cash for a 10-year, 30-year bond, you take 10% of it, hold it in Bitcoin within the bond structure, and then share with the Bitcoin appreciation. that bond eventually comes to term. Something like that necessary or completely unnecessary?

Nik Bhatia [54:53] So I think that Saylor is doing that. He's trying to get that emotion with his convertibles, give the people the upside, right? Because it's in the name, you get to convert. So then you get to participate from the common side. And that's my understanding. of his converts and the upside that he's giving his investors, because he is focusing on the common shareholder. And he said that in the last few weeks, he's kind of hammered the table there that we're focusing on the shareholder. So I'm not— so it, it would be— I think it would be a good thing for a sovereign to issue that type of debt structure. I think it would attract I think it would attract capital. I think it would work, but I don't think they need to at the beginning. I honestly think they could say in the prospectus, we plan to take 10% of these proceeds and put it in a strategic Bitcoin reserve. And that would be enough to get the demand, because embedded in that sentence is the understanding that if the bond is heading for default, the strategic Bitcoin reserve can be liquidated in order to satisfy the debt holders. That's potentially embedded in that type of language. So from a bond desk's perspective, unique structures that don't fit in with the typical operational cash flow of a semiannual coupon-paying bond, it's not fun for a bond manager to get involved in that type of thing. They literally have to reinvent some of their operations to make sure that they can even account for their performance. Because if you have 10% upside on a bond, or you have 10% of the Bitcoin, your holdings— let's try this again. Let's say you own a bond and 10% of that bond has a variable price due to a Bitcoin component, your entire risk system isn't set up to model that security. It's set up to model duration, convexity, coupon, and yield, and spread, like the basic bond thing. So my initial reaction would be, I don't think bond funds are going to want a totally unique structure right off the bat. But do I think it's a bad idea? No, I think it's a good idea. It might happen in the future, but I don't think unique structures are essential to get this Bitcoin sovereign market going. We'll have to wait and see the first country to try it out. But I anticipate more just they'll have some language in the prospectus that said some of these funds are going to go to Bitcoin purchases that we plan to hold for the long term strategically, something like that.

Marty Bent [58:02] Fascinating. That's— I think I'm trying to tame my bullishness here because when the critics, whether it's of MicroStrategy or the US government positioning that they are going to go out and acquire Strategic Bitcoin Reserve lambast the strategies, they're almost looking myopically at— I mean, we're seeing it obviously with Jason Calacanis and others on FinTwit who are saying that MicroStrategy is completely levered, they're going to blow up. And it's obvious to me that they don't understand what's happening with the converts specifically. I think they're all neglecting to acknowledge the fact that a lot of the debt that's been acquired by MicroStrategy has already converted to equity. And if Bitcoin goes up and MicroStrategy's share price goes up, the debt that they still hold will likely convert to equity as well, sort of delevering them in the process of their stock price going up. And they're all looking at it myopically, like, oh, MicroStrategy can't do this forever. They can't push the price of Bitcoin up. And then similarly with sovereign nations, the United States, if government does this, they're looking at it singularly, not factoring in all the other demand sources for Bitcoin, which are individual businesses. We're beginning to see Bitcoin veer its way into private credit markets with commercial real estate being underwritten and dually collateralizing commercial real estate debt with the properties and Bitcoin. And that's one thing I think a lot of people are missing when they're critiquing these individual strategies is that they're looking at them myopically and completely neglecting all the other demand forces that are drawing flows towards Bitcoin. And I think that is a grave mistake for many because at this point in Bitcoin's life cycle, 16 years in, it is a brand name. I think unless you're living under a rock, it is hard to admit that Bitcoin is most likely not going to die. It's been up and down so many times and it simply hasn't died. It's only gone up and to the right over time. And that is one thing as we head into 2025 that I really want to articulate to people out there who are critiquing these individual strategies and looking at them in an isolated fashion is the demand drivers toward Bitcoin are so multifaceted at this point in Bitcoin's life that if anyone were to slow down, whether it's MicroStrategy convertible notes or governments acquiring Bitcoin, there's still a number of other demand factors that cannot be ignored. And it is just insane to watch it all play out in real time right now.

Nik Bhatia [1:01:02] Yeah. And I'll give you one more bullish scenario in the bond market as well. But I can already tell, Marty, that if there's a hill that you're going to die on, it's going to be the, I only look at the 200-week moving average price of Bitcoin hill. Because when you think about up and to the right, people, they have a tough time understanding that with the observed volatility. They can't get past the swings. The scenario I wanted to walk you through is, let's say Saudi gets involved in a strategic Bitcoin reserve, and they come and we get a KSA bond that hits the market in the Eurodollar market. KSA being Kingdom of Saudi Arabia is the ticker that they issue under. So let's say we get a KSA bond and you get a big bond manager that comes in and buys the bond because they like the return profile. They don't borrow from the repo market to buy the bond. They just, let's say they sell treasuries and buy KSA. A couple weeks later, the bond is performing well. It's in the money. It's trading at a $102 price. The bond manager goes to their broker and they say, hey, we'd like to borrow some money against this KSA bond. Broker says, okay, we'll finance you 70%. So they wire, let's say you bought $100 million of bonds. Now you're a bond manager, you have $100 million of KSA bonds, and then you pledge them as collateral and you borrow $70 million. So now you have the economic ownership of $100 million bonds, and you have $70 million in cash. You also have an interest payment on the $70 million borrow, but you have $70 million cash. Now, let's say this fund, it's not a bond fund, it's like a multi-asset, it's like a macro fund. Let's say that macro fund says, hey, we actually now have a strategy of buying sovereign bonds and then using repo financing to buy Bitcoin to leverage our position. So now you are buying bonds that are explicitly meant to go purchase Bitcoin. So this KSA bond, they're going to take the proceeds and buy Bitcoin. Then the bond manager takes the bond, puts it on collateral, and the dealer, by the way, likes the bond because the bond is good collateral. First of all, it's a KSA bond. Second of all, it's got some Bitcoin behind it. Okay? So the dealer lends $70 million to the macro fund. The macro fund says, let's put that extra cash in Bitcoin and basically have a sovereign bond Bitcoin overlay strategy. It's so bullish, Marty. There's so much money that can just be created Now that Bitcoin is in the bond market, did I really expect my worlds would collide like this, where in 2024, I would be breaking down this Bitcoin sovereign bond overlay on Marty Bent? No, I didn't think that I would be.

Marty Bent [1:04:26] And do you think— we'll wrap it up with this because I've got to jump here. hop on a call, but I think just to end it up, do you think these bond investors see this as a way to catch up, outperform the benchmark? And obviously since COVID or a couple years after COVID, bond markets have been significantly hindered. The returns are not as great as they have been historically. Do you think they're viewing this as a way to close the gap in some of the shortfalls on returns?

Nik Bhatia [1:05:04] There's 2 parts to your question. I'll make it quick. Number one, the bond market in general is in trouble because we are in a more inflationary era. So the asset class itself is not the best asset class to own. With that being said, the bond managers themselves are focused on survival. They're just focused on beating the benchmark and not getting fired. Because if they get fired, their competitor takes the money, whether it's an equity manager or another bond manager. They're just trying to not get fired. So they're trying to make sure that their returns are good. That's it.

Marty Bent [1:05:37] It's pretty simple. And that's— it's funny because we've been talking about Bitcoin fix the money, fix the world. It can help recapitalize all these markets and create somewhat of a safe landing, a soft landing, bridge from this inherently fragile fiat debt system to a new era, which Bitcoin is a reserve asset. And as you said, you never thought your worlds would collide this way, but it seems like the market is naturally coming to this conclusion and leveraging Bitcoin to do this, whether they explicitly understand that they're helping themselves manufacture a soft landing or just taking advantage of a potential return profile that has been introduced because of Bitcoin and these debt markets that have emerged. It's just fascinating that it seems like it's happening in real time.

Nik Bhatia [1:06:35] Absolutely. It's going really quickly, and Bitcoin is a volatile asset class. So as we get more bullish and more bullish, Bitcoin is sure to make us look like idiots and have a big crash to get all the recent people that adopted shaken out forever and they get scared. So Bitcoin is one of those things where it's always trying to make a fool of us. So we have to do our best to stay humble and not try to make too many predictions. but it's hard to contain the bullishness for sure. Yeah.

Marty Bent [1:07:14] Well, I appreciate you doing this during a holiday week. And if you're listening to this, go preorder Bitcoin Age. You can find it on Amazon. We'll link to the book in the show notes. And I'm sure this is the first of many discussions we'll have around this topic because I think it's going to involve pretty quickly, and there'll be ways in which companies, sovereign nations, individuals even leverage some of these debt markets to acquire more Bitcoin that will materialize in the years to come. And so, Nik, really appreciate you doing this and can't wait to do it again.

Nik Bhatia [1:07:56] My pleasure, Marty. Appreciate you.

Marty Bent [1:07:58] All right. Peace and love, freaks.