Comfy Sunday Spaces v27 - Jane 15B loss, STRC, CFTC, BTC VOL

What does it mean to separate sailor and the AI slop and the branding and the distribution channels they use from the financial instrument? Yeah, so actually it's funny because Kyle and I were very divided on S-TRC. We've both been pretty bullish on it. It was close to double digit percentage of our portfolio at some points. We continue to average down. By no means was this a super comfy position for us. So what does S-TRC? So effectively S-TRC is a perpetual offering where you are paid in kind. So your entry price is essentially rebased. So you are paid around 1% yield a month for holding the instrument. So if you invest a million dollars, you're going to get around 12% yield. So you would make 120,000. This can be cash if you want, but the most people for tax efficiency will take it as a lowering of the basis. Meaning if you invest at a hundred dollars, which is the power amount when a bond is trading at power, it trades at the issue price. And if you receive a dividend, then your entry price will be rebased down to 99. Right? And so this instrument was a way for Sailor to take dollars from people in almost a limited size. They issued over 10 billion dollars in this paper. I think it was what? 13 at the top or something like that? Yes, about 13. Yeah, maybe 12.8. They took those dollars and immediately yeeted them into Bitcoin with like zero hesitation. Anytime this piece of paper, these bonds traded above a hundred, they would sell them and then they would also take those dollars generated. And buy Bitcoin with that. And so this was a way for Sailor to go and this was explicitly laid out in his guidelines for him to go 1.2x-lovered long, which many of you here are perpetrators. You might hear 1.2x-loverage and say, oh, well, that's really not that risky. That would take a substantial drawdown to actually be liquidated. And you'd be correct. Sailor has about 50, 60, some odd billion dollars of Bitcoin, probably 54 billion that around these prices. And he went out and bought another 13 billion on leverage, which sounds like a lot. And a lot of people were very up in arms saying that this was going to be a disaster and this was going to blow up. This was Terro Luna 2.0. But the reality is that it's not really like Terro Luna. And it's very different from something like a T-bill. But this instrument is a way for you to supply leverage to Michael Sailor. And your bet, sort of the game theory around fixed income, is that Sailor can stop paying the debt theoretically. Now, this would be a DEF CON scenario. This would be something where the people that bought these bonds, which are not small fries like us, they are large institutional trading firms like Fortress and PIMCO and some of these other large potentially insurance companies. These are the people buying billions of dollars worth of this paper. They would be very rightly so pissed off. And they would not trust any other further moves or debt offerings or even equity offerings that Michael Sailor did because he would be deemed an untrustworthy counter party because he promised to pay you this money and he doesn't. And so what happened? So what happened was STRC in Interactive Brokers, which is the platform that we trade on or most of our equity trading, that in hyperliquid. STRC was experiencing a bit of volatility. It traded from 98 down to 93. And then from there, all of the lenders, so all of these brokers, excuse me, not lenders, but all of these brokers essentially changed the margin requirement on STRC. And so before you would get a bow, I think it was as high as $0.60 on the dollar or $0.50 on the dollar for STRC, meaning you could sort of loop. A lot of people are familiar with DeFi, leverage blending and looping and stuff for maybe Ethereum staking yield. There were quite a few people who were doing STRC looping because you can borrow from Interactive Brokers at risk-free rate plus 1%, which is 4.5%. And then you could go and buy this instrument, which is paying you 12% tax-free. Right? And so you have this interest that you can net out and take his capital cost. And then you get this nice 12% juicy yield for supplying Sailor with leverage. This was sort of forcibly unwound. And STRC ended up trading down to 70 cents or 73 cents. And so obviously people were already uncomfortable and very worried about this asset in the first place. So this also led to some panic selling and quite a few people being very upset. There were quite a few posts saying this was going to be the end of Bitcoin and Michael Sailor was going to get liquidated and sort of all of this hysteria. Now we were in this position and we averaged down in the high 80s. And we felt low 80s, yeah. Maybe until 80s. We were selling a lot at like 82. Yes, correct. And we felt very smart. And then it went to 70 and we felt very uncomfortable. But this ended up being a great trade because fundamentally what this is is you are just effectively supplying Sailor with leverage. And again, the dynamics of the paper and the event of a liquidation are very complicated. I don't think we necessarily want to get into that. But what effectively this instrument is a lot simpler than people make it out to be while there is some risk embedded in it, you are pretty duly compensated for this. And you sit almost at the top of the capital stack. So it's very important for people to understand about fixed income is that all of these different bonds that someone would do, someone like Google, for example, they have all of these tranches of debt that were issued over the last few years. They're constantly recapitalized and bought and sold. Sometimes Google will pay their bond back because it was at a higher interest rate and they can refinance later. All of these bonds trade at different preferences, meaning in the event that Google went bankrupt, which is highly unlikely, which is why Google's debt is so safe. In the event of a bankruptcy, the most senior bonds, the bonds at the highest preference, would have their first dibs claim on the assets. And then as soon as they are made whole, then it goes to the next tranche and the next tranche and the next tranche. There is one small offering above STRC that has a little bit more seniority. That's a very weird, sort of unloved, unwanted stepchild instrument that Sailor has. But Sailor has really focused all of his attention on STRC. And there's actually some rumors from fixed income investors that a lot of lenders to Sailor, people who are buyers of these bonds, are actually looking to recapitalize things and sort of organize everything, all of the debt that they've issued over the past three, four years, into one singular offering which is STRC and really simplified things. It would be good for Sailor. It would also be good for the lenders because they can buy some of his other unloved, sort of weirder experimentation debt, get a nice payoff function, and then this would sort of get rolled up into STRC. And we sort of see this as a buying opportunity in that sense, where the converts and the delta between where the unloved debt is being bought out and what the strike price of STRC, that these other investors and the other debt are going to be given, may cause STRC to trade a bit lower as people are closing their arb, they said, oh, I got a nice 10% gain on the stat. I'm going to now sell my STRC position. And this may be something where you could see STRC trading into the 90s, or we never want to give explicit price targets. But again, any discount that STRC is trading to par also makes the yield increase, because the assumption is that this bond will eventually be return to par. Now, there's no, so yeah, there's no forcing function that would make this return to par other than market forces, but this is essentially the theory when you're thinking about fixing commitments. Sorry for the long-winded explanation, but that's everything. It's important to know. It's all very important to know the mechanics of this. And I think if you're in the audience right now, you might be asking yourself, like, so what? I don't want to buy this. I don't care about this. It's this sidecar that maybe people pontificate about, but who really cares? And the answer is knowing what's been going on with STRC has probably had the most alpha on the price of Bitcoin out of any individual signal in the past six months. Right. What happened is the market dumped really hard. And Q1 of this year, STRC started to like really bid the market. And the Iran War broke out. And although equities sold off, Bitcoin held 65 because Sailor was buying like 7,000, 10,000 Bitcoin a week. And he basically just floored it. And STRC took us straight up to like 82,000, 83,000. And then as soon as the STRC market deteriorated, that is the appetite for STRC flipped in a discount to a par started to open up. Bitcoin basically went from 82 to 58 in like a straight line. I mean, it didn't, it didn't sort of like mean-rovert at all. And as Bitcoin went down, the discount on STRC widened and then it crescendoed. And now you're kind of seeing STRC heal. And so I look at this and I ask, is this a leading indicator like Sailor and Micro Strategy and I think a lot of their financial experimentation has been a bit of an overhang because if you're going to be a buyer of Bitcoin, you want to be comfortable if there's no, you know, Boogieman left to get liquidated. There's no guy who's going to come in and, you know, ruin your day by having to unwind tens of billions of dollars into a market that's like front running their telegraph cells. And so you look at STRC at 80 cents and you say, wow, that's not something that I really want to be dealing with as a Bitcoin buyer or Bitcoin holder even. But things are are healing, right? We kind of were, I think some of the first commentators on STRC, flood of myself, to put out the thesis that Sailor should just sell his Bitcoin and buy back STRC with it. You know, he sold a piece of paper for $100 and the bearer of that piece of paper is more than willing to return it to him for like 80, right? That's, that's like a pretty cool trade, right? If, but if I lend you money, if I lend you 100 bucks and then I only ask for 80 back, that's like a great deal for you. And it's a great deal for Sailor and he's actually doing it, right? It took about a month and a half for two months for us to be vindicated on that prediction, but he's doing it. You're seeing him go out and sell probably not nearly aggressively enough, but, you know, a few thousand Bitcoin a week and he's bidding STRC and it's not even taking that much buying, I think, just the signal that he's willing to do it is enough to calm the market. So definitely something to pay attention to, even if you're not actively trading STRC here, have any interest in it at all, because it's been very predictive of Bitcoin in the past couple of months. Correct. This has been probably the single greatest source of alpha on Bitcoin price, which is the understanding that he has all options on the table. And it's very likely when Bitcoin has gone down, but STRC has actually gone down more than the Bitcoin, that it's sort of efficient for him to sell some Bitcoin and rebuy STRC to repegate. And he's effectively stopping out of his Bitcoin wall. You can think about this in very simple terms as, hey, you know, I bought this Bitcoin on leverage and now I sort of have the stop loss where he's sort of mechanically able to sell Bitcoin to rebuys debt. So STRC is a very interesting instrument. I would implore everybody to who trades short-term midterm Bitcoin for someone who has, you know, a 10 year fee at the basement view on Bitcoin. I don't think it's that important to learn about STRC. You can probably mostly ignore it, but for someone who is short-term trading, especially medium-term timeframe, you know, really going for swing positions and really thinking about rebalancing their portfolio with some consistency, you absolutely need to understand STRC. It is probably one of the largest net flows both selling and buying due to the dynamic of the debt of Bitcoin today. So yeah, we traded it. We didn't do as well as we would have liked, but it was a fairly profitable trade full disclosure. We have unwound our position for now, but that doesn't mean that if we deem that it becomes cheap again, we won't take a second look. Right now, it's actually trading quite close to par and it's outperformed Bitcoin over the past few weeks. Even without the yield itself, just STRC has sort of been drifting back to par ever since that flush. Okay, got. Let's talk about BitcoinVal and some of the levels and actually some of the pricing we saw on some options that we took a look at. So where is Bitcoin volatility right now? And why do you think volatility is so low? Yeah, so Bitcoin volatility right now, like 30-day BitcoinVal has been trading under 40 for, I believe, at least a week now. Yeah, actually, like a couple of weeks, it's been sort of trading under 40. This tends to be like the absolute rock bottom historical low. And in fact, if you look at the realized volatility, because that's for implied volatility, the realized volatility has actually been trading much lower than that. So despite the fact that BitcoinVal has traded low in an option since, it's actually still been profitable to be short volatility because the realized has been even worse. I don't know. I mean, I think this just reflects sort of a lot of interest for people to take risks. We've kind of seen a period where there isn't a lot of need to sell, right? We saw a lot of very motivated sellers in the way down. This was capital rotating out to other things. These are mining companies that needed capital.