How to Value Bitcoin Treasury Companies w/ Pierre Rochard

Bitcoin Finance and Treasury Management

Introduction to the Discussion

• The host welcomes participants, acknowledging technical issues on the platform and expressing gratitude for their attendance.

• The session focuses on Bitcoin treasuries, featuring Pierre Rashard, a notable figure in the Bitcoin community known for his clear insights.

Insights from Pierre Rashard

• Pierre is introduced as a founder of the Bitcoin Bond Company and host of various podcasts, including "Bitcoin for Corporations" and "Reorg."

• The discussion highlights how perspectives on Bitcoin finance have evolved over time, particularly regarding its potential as an investment strategy.

Personal Finance Perspectives

• A common dilemma discussed is whether individuals should pay off debts (like mortgages) or invest in Bitcoin.

• Mainstream financial advice often suggests paying off debt first; however, Pierre argues that investing in Bitcoin may yield higher returns than the cost of debt.

Risks Associated with Debt and Investment

• The conversation shifts to credit card debt, emphasizing its high-interest rates (around 20%) which complicate financial decisions.

• Individuals have historically leveraged personal finances to invest in Bitcoin; however, this can lead to risky situations if not managed properly.

Corporate vs. Personal Financing Strategies

• The discussion transitions to corporate strategies for leveraging Bitcoin investments, citing Michael Saylor's approach with MicroStrategy as a case study.

• Key advantages of corporate financing include limited liability protection and better access to favorable loan terms compared to individual investors.

Financial Engineering Without Liquidation Risk

• Corporations can borrow against their Bitcoin holdings more effectively than individuals due to negotiated terms that prevent liquidation during market downturns.

• This strategic advantage allows companies like MicroStrategy to navigate volatility without risking their assets while attracting imitators looking to capitalize on similar opportunities.

Understanding MNAV and Bitcoin Companies

Overview of Current Market Trends

• The discussion begins with a recap of market dynamics: fiat currencies are declining while Bitcoin is rising, highlighting differing risk profiles among companies and their access to capital.

• Shareholder attraction to Bitcoin investments is noted, emphasizing the creation of shareholder value amidst these trends.

Introduction to New Financial Metrics

• A wave of new financial metrics for evaluating Bitcoin companies is introduced, including terms like adjusted Bitcoin yields and Bitcoin per share.

• The focus shifts specifically to MNAV (Market Cap to Net Asset Value), which has become a central metric in assessing company valuations.

Understanding MNAV

• MNAV stands for multiple to net asset value; it involves calculating a company's total assets minus liabilities to determine its net asset value.

• For Bitcoin treasury companies, the calculation includes the current dollar value of owned Bitcoin minus any debt, providing insight into true asset worth.

Historical Context and Valuation Insights

• Historically, MicroStrategy's (MSTR) MNAV fluctuated significantly; it was around 8x when first introduced but dropped below 1x during bear markets in 2022.

• Currently, MSTR's MNAV sits at approximately 1.9x, raising questions about how equity can be valued higher than the underlying assets.

Skepticism and Future Expectations

• Critics argue that if an investor buys $2 worth of equity for only $1 in Bitcoin claims, this valuation seems illogical without future growth expectations.

• Proponents counter that increasing Bitcoin per share could justify higher valuations as companies grow their holdings over time.

BTC Yield and Investment Dynamics

• Companies may issue shares at a premium when their MNAV is high (e.g., 2x), using proceeds to buy more Bitcoin—this raises concerns about sustainability resembling Ponzi schemes.

• However, low leverage among these companies suggests potential for future borrowing against assets could enhance shareholder returns if managed wisely.

Practical Examples and Comparisons

• The conversation touches on practical examples comparing different companies' MNAV values; Tesla's is noted at 764 while Rumble's is at 119.

• These figures indicate that despite high market caps relative to their Bitcoin holdings, these firms possess intrinsic value beyond just being classified as treasury companies.

MNAV as a Metric for Company Valuation

Understanding MNAV in Different Contexts

• The speaker discusses the utility of MNAV (Market Net Asset Value) as a metric, suggesting it is only relevant for companies primarily focused on asset valuation rather than operational earnings.

• In the case of Tesla, the valuation is driven by car sales and future innovations like driverless cars, making their Bitcoin holdings less significant to their overall value.

• The speaker emphasizes that Tesla's high MNAV does not reflect its performance or strategy regarding Bitcoin accumulation; they have not aggressively invested in Bitcoin.

• Companies like Tesla and Nvidia show higher returns on invested capital from operations compared to Bitcoin, indicating rational investment choices away from cryptocurrency.

• A broader market perspective suggests that if other companies had similar returns on invested capital (around 12%), they should have preferred investing in Bitcoin over traditional goods and services.

Coinbase's Approach to MNAV

• The discussion shifts to Coinbase, which has limited Bitcoin holdings (about 10,000 BTC), with an MNAV of approximately 86 times its Bitcoin value.

• The speaker expresses skepticism about the usefulness of Coinbase's MNAV unless the company actively monetizes it by selling shares to acquire more Bitcoin.

• Coinbase’s cautious approach resembles dollar-cost averaging through trading fees rather than aggressive investment in Bitcoin assets.

• Stock buybacks by Coinbase are viewed negatively as they contradict strategies aimed at increasing Bitcoin holdings.

Evaluating Marathon Holdings' MNAV

• Marathon Holdings presents an interesting case with an MAV close to one, indicating equal market cap and Bitcoin holdings; this could be seen as a positive sign.

• However, potential liabilities such as legal issues related to data center noise must be considered when evaluating their true financial health beyond just MNAV metrics.

• The speaker highlights that operational factors like lawsuits can impact perceived value and should be factored into any assessment of a company's worth based on MNAV alone.

Limitations of Using MNAV Alone

• There are concerns about overstating asset values if depreciation of mining rigs isn't accounted for; thus, relying solely on MNAV may misrepresent a company's financial standing.

• For MNAV to be truly useful, a company would need at least 95% of its balance sheet comprised of BTC assets alongside significant cash flows tied directly to its Bitcoin strategy.

• If operating cash flow dominates without strong ties to BTC investments, traditional business metrics will overshadow any insights gained from analyzing MNAV.

This structured summary captures key discussions around the relevance and limitations of using Market Net Asset Value (MNAV), particularly concerning companies involved in cryptocurrency versus those focused on traditional business models.

MNAV Analysis of Bitcoin Treasury Companies

Overview of MNAV Discussions

• The discussion begins with an analysis of various companies' Market Net Asset Values (MNAV), including Tesla and Coinbase, highlighting the low MNAV of 21, ranked 137th by MNAV at 0.063.

• A low MNAV suggests that a company may hold more Bitcoin than its market valuation indicates, raising questions about the implications of such a low figure.

Evaluating Low MNAV

• The speaker emphasizes the importance of understanding a company's operational status when assessing its low MNAV, suggesting that credible backers like Tether and Soft Bank could influence future outcomes positively.

• It is noted that while there are indications that companies like 21 have substantial Bitcoin holdings, clarity on their financial processes is needed before making definitive assessments.

Future Projections for 21

• The speaker predicts that a clearer picture of 21's MNAV will emerge in approximately 18 months after the completion of their financing process and access to equity monetization options.

• There is a call for balance between evaluating a company's operational health and its Bitcoin holdings when interpreting MNAV as a metric.

Contextualizing MNAV

• The speaker advises against viewing MNAV in isolation; it should be contextualized within the broader framework of each company's operations and financial strategies.

• Operating cash flows should primarily serve to cover debt obligations related to Bitcoin purchases rather than being expected to grow rapidly, which complicates the utility of MNAV as an indicator.

Financial Modeling Considerations

• A thorough financial modeling approach is necessary for analyzing Bitcoin treasury companies due to complexities involving risks, returns, disclosures, and potential dilution from various financial maneuvers.

• Understanding these nuances allows investors to form educated opinions on whether specific Bitcoin treasury companies are undervalued or overvalued compared to direct Bitcoin investments.

Engagement with Audience

Opening Up Discussion

• The hosts invite audience participation by encouraging listeners to request speaking opportunities during the session focused on Bitcoin treasury discussions.

Frequency and Content of Sessions

• They announce plans for daily sessions around significant equity announcements or earnings calls, indicating ongoing engagement with current events in the cryptocurrency space.

Insights on Earnings Metrics

• An audience member comments on how many Bitcoin treasury companies lack traditional earnings metrics due to their business models focusing heavily on asset value rather than income generation.

Distribution Insights on MNAV

• Questions arise regarding whether the distribution of MNAV across different companies will become uniform over time or if certain firms will maintain competitive advantages based on their ability to acquire Bitcoin effectively.

Clarifying Earnings Terminology

• The discussion highlights misconceptions about earnings among these companies; they do generate earnings under new accounting standards due to unrealized gains from their Bitcoin holdings.

Understanding Earnings and Financial Terminology

The Nature of Earnings

• Discussion on the quality of earnings, emphasizing that unrealized gains may not be counted in adjusted earnings.

• Operating cash flows and free cash flow from operations are deemed immaterial compared to the balance sheet.

Bitcoin Treasury Companies

• Speculation on equilibrium market net asset values (mnavs), suggesting they could range between 1x and 2x for ideal Bitcoin treasury companies.

• Early-stage Bitcoin treasury companies might exceed 2x mnav due to rapid growth in Bitcoin per share.

Market Dynamics and Price Influence

• Explanation of how mnav compresses naturally as companies realize yield on their premium without negative implications.

• Analysis of why MSTR recovered from below 1x, attributing recovery to an increase in Bitcoin's price over time.

New Metrics in Financial Analysis

Forward MNAV Concept

• Introduction of forward mnav as a new metric added to the glossary, indicating months needed to cover MNAV.

• If the market assigns a greater than 1x mnav, it signals management teams to sell stock and buy more Bitcoin.

Shareholder Perspectives

• Acknowledgment of differing shareholder expectations regarding leverage; retail investors desire more leverage while institutional shareholders advocate for caution.

Future Possibilities for Bitcoin Ownership

Debt-Free Ownership Scenarios

• Inquiry about whether a strategy could own all Bitcoin without liabilities attached; potential exists but comes with trade-offs regarding credit access.

Leverage Considerations

• Retail investor disappointment noted regarding MSTR's lack of leverage; pressure exists for increased leverage despite risks associated with overextension.

Understanding Leverage in Stock Valuation

The Role of Leverage in Equity Valuation

• Discussion on how leverage impacts the value creation for common stock, particularly in relation to Bitcoin performance.

• Challenges arise when pricing stocks based on perceived future leverage; investors must discern if current prices reflect true value or are inflated due to anticipated gains.

• New buyers face uncertainty regarding whether they are purchasing undervalued or overvalued stocks, as existing leverage may already be factored into current trading multiples.

Metrics and Transparency in Valuation

• Introduction of longtail metrics to assess leverage, noting that traditional metrics like MNAV do not account for it.

• Emphasis on the importance of understanding a company's cost of capital, specifically looking at preferred shares and their market performance as indicators of debt costs.

• Example provided with MicroStrategy's perpetual preferred shares trading above par, indicating effective debt management and lower borrowing costs.

Investor Considerations and Market Dynamics

• Highlighting the need for potential shareholders to seek transparency in treasury companies' financial instruments before investing.

• Discussion about opportunity costs associated with investing in equities versus Bitcoin returns; investors should consider where their capital is allocated.

Questions from Investors

• A participant from Sweden raises questions about timing for buying company stocks based on technical analysis (TA).

• Inquiry about SPAC investments and whether their MNAV is reflected in stock prices prior to going public.

Market Efficiency vs. Information Asymmetry

• Explanation of the efficient markets hypothesis suggesting that all available information should lead to fair pricing of stocks.

• Counterargument presented regarding retail investors lacking full information, leading to misvaluation during speculative phases before companies finalize their structures.

• Legal constraints faced by companies limit their ability to disclose comprehensive information, creating uncertainty among shareholders which can affect stock valuations.

Market Volatility and Investment Strategies

Understanding Market Dynamics

• The market has shown volatility, with significant price fluctuations as retail investors process information. This challenges the efficient markets theory due to potential asymmetries in how information is digested.

Investment Considerations

• If there are uncertainties regarding the proper calculation of MNAV (Market Net Asset Value), it may be prudent to refrain from investing and instead hold Bitcoin until clarity emerges.

Due Diligence in Management Assessment

• Evaluating a company's leadership is crucial; understanding the CEO's history and commitment to the crypto space can provide insights into future performance.

• A management team that consistently pursues a Bitcoin accumulation strategy, like Sailor's approach over five years, indicates reliability compared to newer players who may lack focus.

Analyzing MNAV for Investment Timing

• Buying opportunities might arise when MNAV is low, but it's essential to understand why it’s low—whether due to negative sentiment or management confidence issues.

• A low MNAV could signal market distrust in management's ability to increase Bitcoin per share, which serves as a red flag for potential investors.

Divergence Between Company Valuation and Bitcoin Price

• MicroStrategy (MSTR)'s valuation reflects both Bitcoin's price and its implied volatility. If Bitcoin rises slowly while implied volatility decreases, MSTR’s stock may stagnate despite rising Bitcoin prices.

Implications of Market Movements on MSTR Valuation

• For MSTR to thrive, explosive movements in Bitcoin prices are beneficial. Historical spikes post-Trump election illustrate how rapid increases can drive demand for MSTR shares through options trading.

Distinguishing Between Saving and Investing

• Holding Bitcoin is akin to saving—storing value securely—while investing involves greater risks by allocating funds to others for profit generation. This necessitates thorough qualitative and quantitative research on potential investments.

Discussion on Bitcoin and Investment Strategies

Introduction to the Conversation

• The speaker expresses enthusiasm for future discussions, indicating a positive engagement with the audience.

• A participant named Britney thanks the host for providing valuable information and poses a question about savings versus investing in Bitcoin.

Concerns vs. Opportunities in Bitcoin

• Britney asks if "Paper Bitcoin Summer" is a concern or an opportunity for long-term holders.

• The speaker views it as an opportunity, highlighting risks associated with leverage taken by treasury companies that could lead to panic selling during price drops.

Historical Context of Leverage and Liquidation

• Reference is made to March 12, 2020, when leveraged trading led to a flash crash in Bitcoin prices due to panic selling.

• The speaker notes that treasury companies operate under governance frameworks that limit irresponsible leverage-taking compared to individual traders.

Implications of Company Financial Health on Bitcoin Holders

• If treasury companies face financial difficulties, they may sell shares rather than their Bitcoin holdings, which would primarily affect shareholders rather than BTC holders.

• In cases of bankruptcy (Chapter 11), existing equity holders may be wiped out while debt holders become equity holders without necessarily liquidating all Bitcoin assets.

Positioning in Current Market Conditions

• The speaker suggests that treasury companies are becoming protective cushions for BTC rather than causing market liquidations.

• Britney follows up asking how best to position oneself in this moment; the speaker emphasizes starting with buying and storing Bitcoin securely.

Investment Strategies Moving Forward

• For those already holding Bitcoin, the speaker recommends conservative investments focusing on established entities like MicroStrategy (MSTR).

• Education is emphasized as crucial; understanding financial fundamentals and analyzing company reports (10Ks) is necessary before making investment decisions.

Open Discussion and Further Questions

• Another participant raises concerns about broader issues within the cryptocurrency space beyond just specific companies or figures like Michael Saylor.

Bitcoin's Impact on the Market

The Unique Space of Bitcoin

• Bitcoin has created a unique space in the market that cannot be manipulated; it must be embraced as a significant innovation.

• The introduction of Central Bank Digital Currencies (CBDCs) is still not widely understood, indicating a gap in public knowledge about new financial technologies.

Value Proposition and Comparisons

• Comparing fiat currencies to Bitcoin is deemed inappropriate; each serves different purposes and should not be directly compared.

• There is a perception that the common person lacks opportunities in this financial journey, leading to losses rather than gains.

Security and Exploration

• Security remains an under-discussed aspect of cryptocurrency; more focus should be placed on how individuals can explore and gain from these technologies.

Utility of Bitcoin

• A fundamental question arises regarding what individuals intend to do with Bitcoin or altcoins, emphasizing the need for clarity on their value propositions.

• The utility of money, including Bitcoin, lies primarily in its ability to facilitate transactions and savings.

Narrative Wars in Cryptocurrency

• The ongoing debate between viewing Bitcoin as a payment method versus digital gold reflects deeper narrative conflicts within the crypto community.

• Progress can be made simultaneously in both payments adoption through Lightning Network and broader financial system integration.

Adoption Through Traditional Finance

• Exposure to Bitcoin via traditional finance channels like index funds represents a victory for cypherpunks by broadening access without direct engagement with cryptocurrency.

Shifts in Crypto Narratives

• There is an observed shift within the crypto community towards adopting traditional financial narratives while maintaining core principles.

• Discussions around digital asset treasuries indicate attempts at co-opting established financial strategies within the crypto sector.

The Evolution of Bitcoin Treasuries and Market Dynamics

Critique of Crypto Influencers and Market Trends

• Over the past five years, crypto influencers on X have criticized Michael Saylor for accumulating Bitcoin on a traditional finance (TradFi) balance sheet, despite recent evidence suggesting market product fit.

• The emergence of imitators, such as Joe Lubin from ConsenSys sponsoring an Ethereum treasury company, indicates a growing trend towards digital asset treasuries (DATs), which are essentially altcoin treasury companies adopting Saylor's strategies.

Shift from Tokenization to Securitization

• There has been a significant shift in perspective; securitizing assets is now viewed as more valuable than tokenizing them. This contrasts with the previous belief that tokenizing securities would integrate traditional finance into the crypto world.

• The failure of tokenization efforts over the last decade highlights that while many resources were invested in creating token platforms, they did not yield substantial results compared to securitizing tokens.

Understanding Market Capitalization and Adoption

• The size of global securities markets far exceeds that of crypto markets, making it logical to approach adoption by aligning with existing financial structures rather than attempting to pull them into the crypto space.

• While some TradFi players have entered the crypto realm, their experiences often revealed limited value, leading to minimal momentum in this direction.

Value Unlocking through Securitization

• Securitizing Bitcoin has unlocked significant value for two market segments: those seeking higher volatility and risk versus those preferring stability and lower risk through lending against tokens.

• Interest in securities markets is rising not only for Bitcoin treasury companies but also for digital asset treasuries due to these contrasting risk profiles.

Concerns about Digital Asset Treasuries

• Critics argue that many digital asset treasuries may simply be offloading tokens from foundations into public retail markets without genuine scarcity or long-term viability.

• A lack of scarcity among crypto tokens can lead to pressure on those controlling these assets to issue more tokens, potentially diluting value for existing holders.

Bearish Outlook on Digital Asset Treasuries

• The speaker expresses skepticism regarding digital asset treasuries' sustainability due to their opportunistic nature and potential short-lived gains driven by market manipulation.

Risk Profiles in Bitcoin Treasury Companies

Variability in Risk Based on Share Structure

• Different types of shares issued by Bitcoin treasury companies can result in varying risk profiles; for instance, MicroStrategy's history shows how common stock issuance differs from preferred stock or convertible debt offerings.

Importance of Evaluating Securities Offerings

• It’s crucial to assess all securities offerings carefully alongside their pricing structure to understand inherent risks associated with each type.

Understanding Security Valuation Risks

The Importance of Valuation in Security Investment

• The primary risk in investing is purchasing an overvalued security, which can lead to significant losses despite low inherent risks.

• This principle applies universally, affecting both retail and institutional investors who must consider valuation alongside risk assessment.

Company Perspective on Securities

• The risk associated with issuing preferred versus common stock depends heavily on the pricing of those securities.

• Selling preferred shares at a high implied yield (e.g., 20%) is riskier for the company than selling them at a lower yield (e.g., 5%).

Dividend Obligations and Their Implications

• Companies like Stride can suspend dividend payments, reducing their own financial obligations but increasing buyer risk.

• Each preferred stock has unique terms; understanding these details is crucial as they dictate potential risks for investors.

Market Dynamics and Risk Assessment

• In bearish markets, obligations to pay dividends could lead to dilution of common stock, creating additional downside risks for shareholders.

• Conversely, companies that are under-leveraged may miss out on gains during bullish markets if they optimize solely for downside protection.

Navigating Complex Risk Landscapes

• Investors must evaluate the nuanced nature of risks—balancing potential underperformance against liquidation threats in varying market conditions.

Engagement and Future Discussions

Community Interaction and Upcoming Events

• Participants were encouraged to engage further with community members like Master Hodler and Larry Frink during the discussion.

Promoting Educational Resources

• Listeners were directed to subscribe to the "Bitcoin for Corporations" YouTube channel for more insights into Bitcoin investment strategies.

Upcoming Features and Tools

• Announcements included new features on bitcoin treasuries.net aimed at enhancing user experience with analytics tools.

Event Participation Opportunities

• Information was shared about upcoming events related to Bitcoin Treasury's New York City unconference, encouraging attendance and participation.