Why MicroStrategy Could OUTPERFORM Bitcoin w/ Cern Basher

Added: 2026-05-24

[00:00:02]Hello everyone. And now we have another important episode with the great CERN Basher, one of the best specialists I ever met on Micro Strategy, the crazy treasury company that is disrupting the world and really dividing the shareholders and investors of the world into one side thinking this is the biggest Ponzi scheme ever and the other side saying this is the biggest genius in financial engineering that we have seen in a long time. that creates a totally new paradigm and we had a great conversation CERN and I last year that got a lot of interest was a lot of fun and we will recap some of the things I would have happened and that now actually happened and also discuss AI and how it relates to Bitcoin and have some specific micro strategy questions.

[00:00:52]So welcome CERN.

[00:00:53]>> Hi Joe, good to be back. Yeah this is a great topic.

[00:00:55]>> So that topic is not covered enough and you're one of the best experts in the world. I will say on that topic I haven't seen much other two smart takes on that other than yours. So and of course Michael but here here's an insider advantage.

[00:01:11]>> It's it's interesting. There is there is now a a strategy. It's now called strategy. There's a strategy community and it's not unlike Tesla. There's people with different backgrounds that are that are contributing to it. But as you can imagine it's much smaller than the Tesla community because the Tesla community is also blessed with people that love the product the cars. In the strategies case, you don't have that.

[00:01:31]It's just people looking at it from financial >> product the preferred. We love Bitcoin.

[00:01:36]We love the blockchains.

[00:01:37]>> So maybe to get it started, can you give us just a very quick overview for those who are new to the topic? Not into Bitcoin. I hope everyone knows what that is, but into micro strategy. What's the core idea here of a treasury company of the first treasury company? Why not Bitcoin? Why not just buy Bitcoin? What is micro strategy and why might it be as attractive or more attractive than Bitcoin?

[00:02:01]>> Yeah. So, let's take Bitcoin out of the equation. Let's say that you thought the best asset in the world was gold and you wanted to acquire as much gold as possible. How could you do it? Well, you can do what Strategy did initially was they sold stock in their company to buy gold, Bitcoin. They also raised debt to buy more. And now they've come up with the latest and greatest financial innovation and that's these preferred stocks that now uh one of them in particular is going to pay a dividend every two weeks. And by the way, one of their competitors has now come out with a similar strategy but paying daily dividends. This has really gotten out of hand in terms of how where this is going. But but why not get paid daily?

[00:02:39]Why not, you know, why wait two weeks?

[00:02:44]So anyway, they've been on the forefront of this innovation and creating these these income securities and one of them in particular is paying 11 12%. And a lot of people look at that and say, how is that sustainable? How can you pay 11 12% on these income securities if Bitcoin or gold only goes up something less? This is this is a house of cards waiting to fall. Well, what they're missing is that they've got five times as much collateral as they've issued in preferred. So, while the preferred is they're paying 11 and a half, they only need about 2.4% growth in their Bitcoin holdings for this to be completely sustainable. Then you get to the next point where they say, "Okay, what's happening here?" Well, what's happening is they're selling the preferred stock.

[00:03:27]They're paying dividends with money that they get from selling the preferred stock. And people were like, "This is a Ponzi scheme. This is the definition of a Ponzi scheme." Well, it's also the definition of how an insurance company operates. Insurance companies sell pre sell premiums on their policies. Think about an auto insurance company. And they are paying off claims with some of that money that they take in. And if they get any money left over, then they get to invest it. This is exactly what Strategy is doing. They get to invest that extra money into Bitcoin. Now, as it stands right now, the amount of premiums, amount of sales that they're getting on an average month is much higher than the amount of dividends they're paying out. So, it's not as though they they have to sell all this money and they're immediately paying out all in dividends. No, they're actually putting quite a bit back into into holding Bitcoin. So, what's different about this is it's a balance sheet company. It doesn't need revenue than earnings to meet these payments. And what's nice about it is it's introduces a whole different set of risks and therefore diversification into a portfolio. And as an income investor, it's very appealing because now you've got something that I think is very secure and structurally sound that is paying you a very attractive yield that you can't get anywhere else or without taking crazy amounts of risks. Perhaps the yield on these things is much higher than what you see on any CD, any money market fund, any bond, any junk bond.

[00:04:45]For the most part, people have put a lot of money into private credit investments. They've locked up their money for for who knows how long. Even those yields aren't as high as as this.

[00:04:53]So, this is becoming a bit of a black hole now in the in the in the credit market and starting to suck in more and more capital. And every month that this goes on, uh, Strategy has been able to raise more and more money. Just this week, they made their sixth largest Bitcoin purchase they've ever made from selling STRC, 1.95 billion. It's it's pretty pretty amazing. I'm sorry, it's closer. It's actually 2.1 billion.

[00:05:18]Sorry. this was their eighth time that they've invested more than $2 billion in a single week into Bitcoin.

[00:05:23]>> I mean, fundamentally, the whole thesis of micro strategy and all the preferred is kind of simple. It's the assumption we raise money not through that a little bit through that. We can discuss this in a second because I think some of that comes to next year. Some of the convers we raise money to buy Bitcoin and we pay everyone for it for giving us that money and our big bet is in the end Bitcoin appreciates more than what we pay long term. That's not true. They have a problem at some point.

[00:05:55]>> And you can do that with any asset by the way. You could do it with real estate. You could do it with gold. You could do it with stocks in theory.

[00:06:01]Although there's rules in the US stock market that kind of preclude this, but not offshore. You could go to the Cayman Islands and put the structure in place and do this basically with any asset you wanted to.

[00:06:10]>> Yeah. Well, the thing is by the way talking about that also our conversation last year was a little bit an inspiration but also my own research in micro strategy. That's the base of the pioneer bonds. We I launched this and in Luxmo we now securitizing that and the it's the mechanism is not as directly linked like well with micro strategy is also not directly linked. It's not that there is like a contractual obligation to buy Bitcoin. I think they just issued a preferred.

[00:06:37]>> Mhm.

[00:06:37]>> So it's in a way it's very similar that our thesis with the Pioneer Bonds was is similar to Bitcoin but I think even better. We are basing betting on the age of AGI. We are betting on the best AGI stocks from Nvidia to Tesla to Micro Strategy. funny enough that if you create a bucket of those and trade them a little bit that the returns you're generating will be enormous, right? If you do it right, like enormous in the sense of way above treasuries, like >> um and the problem is and that's similar to it's it's in a way it's very similar to the preferred only that our we don't pay interest. We aim at a certain return that we don't guarantee, right? Which is much higher 30%. Um, so we don't guarantee that you take the risk, but the design of the entire pioneer reserve is can we convert these very high returns and smoothing them out over time. So maybe Tesla makes 100% one year and then negative 20 the next year.

[00:07:31]Maybe you don't want that. Maybe you just want 30% every year.

[00:07:35]>> And whatever the percentage crash is, it's very similar to Michael Sailor, right? He says I pay you 11%. Because my personal bet is Bitcoin will appreciate 30%. because that's what it did and will continue doing and then I just get very rich because I pay you 11 and make 30 you know times whatever 100 million pretty good but I make what my service as Micro Strategy or Michael Sailor to you is I pay you less than I make but I'm taking the risk I'm converting this whole volatility situation into stable yield for you and I think that is exactly what a lot of beginners don't understand about investing think that risk is as important as return. Right?

[00:08:20]If you instead of making people a lot of money just take out the risk, they want it even more than return. I rather most people prefer 11% stable than 40% and then -10 and then 30 that drives them nuts.

[00:08:36]>> And this and this is also what is true when you look at pension plans, annuities where you receive a promise to pay. Again, there's nothing about a pension plan that is absolutely guaranteed. If pension plan fails, your pension can go away. Now, maybe the government steps in and continues to make some payments, but it might be a lower level. So, all these pension plans that are out there that are underfunded are have risks even though people see their monthly income. They all depend on having enough collateral, enough securities to support those payments.

[00:09:05]That's also the case with annuities, right? the insurance company takes in capital, invests the money. If they can do a good job at that, then the annuity can continue. And this is effectively what strategy is doing, but with Bitcoin instead of traditional investments like stocks, bonds, and real estate.

[00:09:20]>> Yeah. And it's it's interesting. Uh I don't want to make turn this into a matrix podcast, but it's people are caught in matrix and they believe there are risky things in life and there are safe things in life.

[00:09:34]>> Are safe, pensions are safe and Tesla is risky. And what they don't understand is there has never been a government that has not defaulted and except the United States because they're still around. But every other government and they will default too at some point.

[00:09:49]>> Mhm.

[00:09:50]>> This all can go away because there is no such thing as safety. There's only engineering. That's the only thing that exists risk engineering.

[00:09:58]>> And it's just the amount of engineering being done that creates the illusion of safety. And when the most illusional delusional safety thing blows up, that's where you have the biggest experience of unsafety, right? When your pension and your treasuries go to zero, then you feel really bad, much worse than if your Tesla stuff go to zero because what ends? So yeah, I just want everyone to understand this is all engineered. There is no such thing. Everything is taking risks, creating products around it and try to buffer risk and getting paid for buffering that risk. Doesn't matter if you're the government or an insurance company or Tesla. Even Tesla takes out a lot of risk. You don't you don't have risks of Model Y sales going down because you of the stock. It's all being translated into stocks. So very interesting. So I want people to just get a little more comfortable with this engineering thing. It's not that might sailor invented and he's the bad guy by tricking us. It's like the entire world runs on that principle. Exactly.

[00:10:59]Frederies, are you kidding? Like are you kidding me? Do you know what these people do every every day? So it's not that they are not engineering financial products.

[00:11:07]>> Well, any any bank's financial engineering, a money market fund is financial engineering. Any structured product, any structured note, annuity, it's all engineered to deliver a certain return stream and certain risk profile.

[00:11:19]This is nothing different. It just so happens to be done with Bitcoin, which many believe is the most pristine asset on the planet, and that's debatable, but that's fine. But Bitcoin in this case, the way it's structured currently, only has to go up 2.4% a year for this to be sustainable forever at current dividend rates. In the case of STRC at 11 12%.

[00:11:39]So, it's something worth understanding.

[00:11:41]It's something that people shouldn't just dismiss because on the surface, it seems crazy. If you dig under the layers a little bit, you'll soon see that it's in my opinion a very interesting investment and a nice addition to kind of the toolkit of investment options, particularly for people that are looking to earn income from their assets. Even if you're a Tesla investor, let's consider this for a second. You're not looking for income. You've got your Tesla stock. You're happy. Okay? And let's say it's in a brokerage account.

[00:12:06]Tesla stock sitting there and you want it to go up. Awesome. What you can do is if you have access to margin and if your margin rate is low enough, let's say you got a margin rate of 5 a.5%. You could borrow a little bit on margin and you could buy FTRC and earn a spread of about 6%.

[00:12:22]Why not, right? You're not putting your Tesla shares at risk because if depending on how much you do, if you took it up to the max, then if Tesla goes down, you might get a margin call.

[00:12:32]Now, in that case, you just sell some STRC, not your Tesla stock. and CC is is stabilized the actual price of the >> Yeah. So that's one issue. When you and I talked about this back in the summer, it was a new security. There was a lot more volatility. And what they've done now is a couple of things. One is that they have created a cash reserve. So not just the billions that they have in Bitcoin, but they've got 2.25 billion now in cash that's there to pay dividends for I think this works out to the for the last for the next 16 months there would be enough cash to pay dividends. Okay. Now, initially the reserve was higher in terms of the number of months, but because they've issued more STRC, the number of months has come down. At some point, I think we may see them replenish that cash reserve to a higher number. So, we get back up maybe to 18 months at some point. So, they have cash to cover the next 15 16 months. And if they need to, they could sell Bitcoin. So, that's that's not not really an issue. And of course, they have access to raising more capital all the time. And so, just last week again, they raised about $2 billion worth. And by the way, what happens is when STRC trades above 100 a share, it could be strategy that's selling you those shares. And last week, 57% of all the transactions above 100 were strategy selling shares to people, raising more capital. And that percentage has kind of been going up over time. What's to keep the stock from going down? Well, that's the attractive dividend. That's the 11 12%. If the stock goes down too much, then it'll it'll yield 12%. And if it goes down further, it would yield 12 1/2 and 13 and so on. And so that's the economic incentive to keep the stock trading at around par. If it goes above, the company sells more, keeps the price down. If it goes too low, then that yield becomes higher and it attracts more investors. If it's goes, you know, below 100 and trades at 99 and doesn't recover to 100, then what strategy would do is raise the dividend rate to keep making it more and more attractive. And this is what happened since you and I talked. This came out at 9% yield and they raised it all the way up to 11 12.

[00:14:21]And that seemed to be kind of the market clearing price where every month the stock trades at 100 more and more% of the time. The other thing that they've done is they've moved to and they're doing going through a shareholder vote right now for this is they're going to make the payments now twice a month starting in July.

[00:14:36]>> In theory you should get pretty good margin deals on that stock if it's so stable.

[00:14:41]>> They should. Now a lot of brokerage firms don't get understand it. They classify it as another risky equity. But over time, I think you'll see that the margin maintenance requirement on this will come way down and you should be able to leverage this to quite a large large extent.

[00:14:54]>> Is crazy when you think about >> it's like carry trade all over again.

[00:14:58]>> I mean, you only probably get 50% margin on that. Like if you have a million or 100,000, you can get another 50,000 or something.

[00:15:06]>> Yeah.

[00:15:06]>> So that is huge. If you get 11% plus 50% and it's getting very serious, you get 16% or something.

[00:15:12]>> Yeah. And and what's neat about this is a lot of Tesla shareholders who need income resort to selling covered calls.

[00:15:18]And that's a strategy that works for a lot of people, but a lot of people also get tripped up with it and they end up getting called away at certain times.

[00:15:25]Elon makes a billion dollar open market purchase one day and suddenly you're covered calls if you know you have a problem. This is a way of getting income from Tesla without subjecting your shares to that kind of risk. So it's very appealing for those for the >> Yeah. Also the covered course I'm not a big fan because there is no such thing as free money. I'm I'm a I'm a fan of naked put selling but that's risky but covered cost is kind of opportunity because why is equally risky and what are you going to do if this thing goes up 25% of a and you're sitting there and lost out on the entire thing and that will happen and then then you can say well and then it gets to market timing and then you're like have a problem then you're basically saying well I know where this goes up well then you don't need to sell covers you just buy calls then goods >> that's right >> so this is a tricky situation If you are in that cupboard call selling cab sure maybe over the last 5 years it was easy but if you would have done it the last 6 years you would be screwed so probably you're screwed now too if you keep doing so it's it's like you are basically assuming you can time the market or you can time Tesla and if you can't do that it's possible but then you don't need to sell cover cost and can do other things >> what's interesting here too Joe is that you know like an insurance company you can be a customer of his products like auto insurance and you could also be a customer of a stock because if you've got a great auto insurance company you may say well this is a great business I want to invest in this and so you've got the same kind of opportunity here with STRC you can be a customer of the income product and you can also own strategy stock and you can say look they are they only need a 2.4% increase in Bitcoin for this to be sustainable oh I think Bitcoin is going to average 20% a year for the next decade that looks like a pretty good trade-off for me it's only costing me 2.4 for to give these people their income and I get to keep the rest.

[00:17:15]And what's effectively happening is strategy is a way to if you're a Bitcoin fan increase your holdings of Bitcoin per share without putting more money in.

[00:17:24]So right now the company is on track. I think there I think Bitcoin per share this year is increased by 12.6%.

[00:17:31]as of their latest report, which was this morning. And if you just kind of extend that, extrapolate that out to the rest of the year, if they continue to raise capital at this pace, your Bitcoin per share would increase by 37% this year.

[00:17:43]>> Yeah. You're basically benefiting as my STR holder from the stretch holders.

[00:17:47]Like the stretch holders make the fixed income, but they don't get the real upside.

[00:17:52]>> Yeah.

[00:17:52]>> The common shares which I own, they're just a bet on Bitcoin combined with that business model.

[00:17:59]>> That's with the Bitcoin yield or whatever you call it.

[00:18:03]>> So yeah, it's an interesting >> the company has 64 billion or so in Bitcoin right now on their balance sheet and again every single month they're able to add to that by selling Stretch and other preferred. Last year their Bitcoin per share grew 29 22.9%.

[00:18:20]And this year it's on track for a higher growth than that. And so as a Bitcoin investor, that's kind of appealing because you get the benefit of more Bitcoin per share over time.

[00:18:29]>> We can look at the web page while we are talking. This is MSTR and here stretch.

[00:18:34]There we see all the cool metrics. 15 per share 19,000 turn of course very bad, but that's in line with Bitcoin. I don't know it's totally in line, but probably roughly >> uh it's it's worse because this is amplified and you can see that uh kind of down below the net leverage. They've got 8.2 billion in debt. And by the way, this week that you'll see that number drop by a billion and a half. They they did a deal to buy back some of their uh convertible debt. So their the leverage ratio is going to come way down over time. Eventually that will be zero. And you can see now they've got about 15 1.5 billion of preferred and it's 37% amplification. It's important to think of these preferreds not as debt because they're not debt. They never need to be paid back. This is permanent capital on their balance sheet. That's $15.5 billion. They don't have to pay back.

[00:19:20]There's no maturity date on these preferreds. They're perpetual instruments. So therefore, the the quote unquote leverage that's associated with them is really just amplification.

[00:19:28]>> Yeah. The actual leverage, the hard and I did the math on that. They Bitcoin would need to fall to 13,000 roughly for them to be underwater on the debt for them to be the the debt being higher than the assets. So Bitcoin would have to fall dramatically and even then that's not even creating a problem unless it's coming due. So that is a very important number here the M therefore everyone was interested in micro strategy in the common shares uh because the question is this M expansion that just reflects kind of the market advertise for the actual stock because that's not linked that's basically an expression how much the market cap is over the assets like the multiple of the assets kind of >> effectively you're paying 23% more for your Bitcoin than you would if you just bought Bitcoin directly. And so the question is, is that 23% premium worth it? Well, if Bitcoin per share this year increases by 37%.

[00:20:28]Then yes, because by the end of the year, you're going to be have 37% more Bitcoin and you only pay 23% more for it. So in that case, it makes sense. And so the question, the big question is ultimately, what should that MV be? And that's been one of the great debates.

[00:20:43]We've seen the MNAV for strategy trade as high as four at times and then that was >> one point we know it was as high as four and as low as 1.02 but that means we are much closer to the low lows than to the highs. So the expansion upwards is much more likely than downwards.

[00:21:02]Uh and of course everyone who's interested in that should understand this is mostly completely correlated with Bitcoin of course like the everyday move of white Christianity.

[00:21:11]>> Yeah. and then >> yeah now this is interesting because SDRC there's this thing that uh that's known as the sharp ratio and basically you can think of it as how much return do you get per unit of risk and a sharp ratio for a stock like Nvidia might be one or might be 0.9 sharp ratio for a bond might be.3 and we're seeing sharp ratios now of STRC above two which is unheard of um this is like better than hedge funds kind of return like a lot of hedge funds are known for producing alpha with very little risk. This is even better than that. So, you know, when you compare SDRC against almost any asset, depending on what metric you're looking at, you can make a a case for it. You're getting more return per unit of risk. It's paying more than bonds.

[00:21:56]And for taxable investors, you get tax deferred income. Um the the way this works is because this is a balance sheet company, they're not paying these dividends based on earnings. There is no earnings behind this, okay? It's it's a purely structured finance situation where they're taking in capital, they're buying Bitcoin and they promise to pay you a certain dividend. Therefore, that dividend has return of capital treatment to shareholders and there's no tax that's owed in that year you receive it.

[00:22:23]What basically what happens is every time they pay you a dividend, your cost basis goes down by the dividend amount.

[00:22:28]And so after in the case of STRC, after about 9 and a half years, your cost basis would be zero. And at that point, the dividends become taxable as like long-term capital gains. So, tremendous tax benefits, um, great yield and very low volatility.

[00:22:44]It's like, you know, it's it's got all these positive features associated with it.

[00:22:49]>> Hey, on this channel, we do something very important. We deeply analyze, understand, and predict capital, AGI, and politics. Not just to beat the markets and make a lot of money, even though that's important, but also to build a new society and make the future good for all of us, the pioneers. If you want to help me on this journey, you can do that by doing a very simple thing.

[00:23:13]Like and subscribe. It helps me a lot.

[00:23:17]Thank you so much for your support and let's get back to the video.

[00:23:21]>> Yeah, that's for that is like an enormous hack, the return of capital hack. So instead of paying you year like instead of paying you maybe dividends, they're paying you your capital back first, but it it's economically identical. So tax wise, of course, that's a total hack that doesn't work with bonds. I looked into that because that's not okay. Then they say it's bent on income and stuff like that.

[00:23:46]>> But for preferred, it seems to work.

[00:23:50]>> And what's amazing about it, Joe, is when they first came up with this concept, they weren't thinking about that. That was a pleasant surprise that I suppose some tax accountant, you know, told them about after the fact. Yeah, it's a it's a very because I looked into that with bonds you can't do it because then it's effectively well there's an you know you have an implied interest then even if you don't pay and you have to pay phantom tax on that phantom income so you can't just say you get a 10% bond but actually not and first you get your bond you know capital back and in the end we pay you all the interest that doesn't work with preferred probably works seemingly works >> and this tax treatment by the way in the United States has been around I think since 1910. So, it's a very wellestablished uh fact in the tax code is they're not pushing any envelopes here.

[00:24:35]>> And that's very big. So, you're getting this tax-free for the first I don't know how how does this work for the first >> It works out to about the first nine and a half years basically if you if you don't reinvest any of the dividends and don't refresh your tax basis at all. You would you would get tax deferred income for about roughly 9 and a half years >> and then you pay then you pay income tax.

[00:24:56]>> I believe you would pay capital gains tax on the dividends each month. Yes.

[00:24:59]>> Capital gains or income?

[00:25:01]>> Capital gains. It would be treated as long-term capital gains.

[00:25:03]>> Why is that dividends? I thought that's income.

[00:25:05]>> Yeah, that's my understanding. Again, we're not 9 and a half years in yet, so we don't know for sure, but that's my understanding as to how it will be treated.

[00:25:12]>> Interesting.

[00:25:12]>> Because it'll be qualified qualified dividends.

[00:25:15]>> Maybe maybe that's the better way of saying it. It qualified dividends basically end up being taxed at long-term capital gains rates in the US.

[00:25:21]>> That's a very good deal. That's crazy.

[00:25:23]By the way, I also I don't want to make this a tax thing, but I also learned what was that uh if you have no income cuz you're rich, for example, and only make capital gains at the first $60,000 or something are tax-free. Did you know that?

[00:25:43]>> Yes. If you're in the uh low income tax bracket, you you can be in a 0% capital gains bracket. Um, and in the United States this year, that is, um, if I can find that real quick. Funny how when you try to find things fast when it's, um, yeah, for married uh, filing jointly, it's uh, if you're if your uh, taxable income falls below $98,900, you're in the 0% capital gain tax bracket.

[00:26:14]>> That's crazy. For married and for single, I think it's 60 or something.

[00:26:18]>> Just under 50. 49, 450. point like let that sink in. People sometimes don't follow these things because I sound so boring. So you make no money but you have a capital stock and that capital if you do it right makes you capital gains and you can make $100,000 a year.

[00:26:36]>> Yeah.

[00:26:37]>> Gross and pay no taxes.

[00:26:39]>> That's right.

[00:26:40]>> If you're married like people don't know that. And if you do the math on tax and everything, that's actually enormous.

[00:26:45]Like how much income do you need to make to get net out 100,000? You probably need to make 200,000 or something 180 like I don't know something like that, >> right?

[00:26:54]>> Or and the [clears throat] other the other benefit here too, by the way, if you've also got STRC income, that doesn't count towards 100,000 because it's not taxable income.

[00:27:03]>> Exactly. [laughter] That's so exactly >> you can have 100,000 of capital gains and you know 200,000 of STRC income and still not pay any taxes >> but even after 9 years you're not going to pay taxes because you're under the 100,000. So >> it's you can do amazing things with a little you just need a little bit of capital. So >> uh there's also a big learning like optimizing the full stack including taxes as one of the big hacks in wealth management right to understand taxes matter a lot >> and you don't necessarily just have to pay blindly taxes because when you look at these rules there are big differences zero is much less than 45%.

[00:27:45]>> Last time I checked zero was less than 45. Yes.

[00:27:48]>> Yes. And so very interesting. So that's uh why you need to be smart and have to think about these things. And I always tell people now that we enter the age of AGI, that's what we're doing in pioneer lands to think about these things like understanding investments and return on capital and all these things and taxes is not a hobby anymore. This can save your life literally. It can make your life because you can make a lot of money if you understand this.

[00:28:15]>> Yeah. And let me let me just address something that we teased people with on the last show with Bitcoin and AI. Let's try to tie these two things together.

[00:28:23]Okay, so I'm of the belief well first of all let's talk about a problem. So we're entering in this era with AI agents, right? We're all aware now that we've got AI agents running around the internet and we can probably imagine a world where there's going to be mill billions if not trillions of these things at some point because you and I can probably deploy dozens of them easily. So, the question is, how do we constrain AI in that kind of world?

[00:28:46]Because if you have rogue AI agents, you could have them spamming you, Joe, uh you could receive a million emails a day and it would be unstoppable. You could have them making a 10,000 phone calls a day to your phone, rendering your phone useless, 10,000 texts, messages, whatever it is. AI agents could just wreak havoc on the internet if they're not controlled in some way. Okay? And so, the question is, how do we do that?

[00:29:09]Well, we've we've learned that AI agents, you know, those those those captures to to try to figure out if a computer, if you're a human or a computer, AI agents now can go to a marketplace and hire humans to tell them what the captions are, and they pay humans to tell them what the what the codes are. So, AI agents now have learned to use humans to help crack these these issues. Anything that we do from a security standpoint that involves passwords, permission codes is going to be useless in an AI agent world, okay?

[00:29:41]Because there's some guy in in India or whatever that's going to get paid to hack that for you. Okay? So, how do you do it? How do you constrain AI? Well, look at Bitcoin. Bitcoin is a system is a decentralized system. No one controls it that's controlled by energy. In order to mine Bitcoin, you have to expend a certain amount of energy to mine the Bitcoin. People talk about there's a wall of energy protecting Bitcoin. It's unhackable because it involves physical real world energy and the Bitcoin network's been long enough around long enough now that that people have tried to hack it and no one's ever been able to hack the Bitcoin network. People have hacked people's passwords to get their Bitcoin, but that's different than hacking the Bitcoin network itself. So, what it really is then, what Bitcoin really is, is a digital security technology. And if that's the case, then it can be used to control AI.

[00:30:31]in a way that passwords, permissions, and so on captures won't do because AI can't fake energy use. AI will have to expend the energy. You can't fake it.

[00:30:41]>> You can basically Yeah, you can basic I think it solves an interesting problem.

[00:30:46]Well, but there's a problem with the wolf thing, but it solves the problem that runaway ASI or some crazy thing that we don't control anymore that does crazy things. I'm not just talking about hacking. I'm talking about something really bad. The key problem is what prevents an AI to become a trillion times smarter than us. Uh if it's just unhinged, right? It can just spin off whatever it wants and we can't see it anymore and just happening. And it's probably not Bitcoin. It's more like Ethereum like some blockchain system that is basically kept in the loop would create no problem if this thing does a 10x or 100x, but it creates a problem if it does a trillionx in terms of energy use. It might use incrementally small tiny little blockchain uh energy and that so what it does not controlling it is it's creating friction that doesn't really create a problem as long as it's reasonable but it creates a problem if it's unreasonable and that's I think that's very powerful the question is yeah I mean of course you could circumvent it by just not doing it like someone has to decide that has to be the framework and forces it into that and then we know if it does it or not.

[00:31:59]>> Well, so on that front, the US military was tasked by Congress at the end of last year to find a way to use effectively Bitcoin to protect US networks, US US computer systems. And we just heard two weeks ago, Admiral Paparo, I think he's the admiral behind the US Pacific theater, who basically testified in Congress that they're now testing Bitcoin in that way.

[00:32:22]>> That's very why is it Bitcoin advisor, not Ethereum? because Bitcoin is the only one that uses the proofof work mechanism. Ethereum is proof of stake.

[00:32:30]It's a whole different mechanism. It's not nearly as secure. It might be fine for smart contracts because it makes it uh you know less expensive. It's less friction, but it's the very friction in Bitcoin that provides the security. It's like having a big vault around everything, right? It's it's hard to break that vault. It's expensive and that's what you want for security. It may not be what you want for frictionless.

[00:32:52]>> Interesting. I wouldn't trust like I mean it's a very interesting concept. I think it's very smart. Of course then the risk is can escape, right? You build this fence where the Bitcoin is implemented, but what if it just somehow gets it out and copies it a trillion times and does it outside and it gets in. So you need to like gate it and make sure it can't get out.

[00:33:11]>> That's right.

[00:33:12]>> And I think the military is a great example. You want to basically It's like it's always this question. You want AI, you want it super fast and intelligent, but you only want it 10 times smarter than you or 100 times. You want to prevent it from secretly being a trillion times smarter because then you're totally screwed. And that's a real problem. I think people don't understand how much of a real problem that is already. The military understands it because that's not what they want with their looks.

[00:33:41]>> Look, look at the problem we have today with people being tricked out of their savings, right? being scammed and for the most part that's humans behind that.

[00:33:50]Well, put that now in the hands of a super intelligent AI and it it could scam basically everybody out of everything that they've ever owned very easily.

[00:33:58]>> I think the scamming is like sure that's what people understand but when it comes to military I mean the problem is if you have infinite intelligence uh it can do things you can't even come up with.

[00:34:08]That's the problem. And you know if I have like someone who's twice as smart as me that's still manageable. was like, well, he can't like he can do much more than me, but I know he can't just randomly invent a new universe or something. Uh, but if he's a trillion times smarter, I don't know what he can do. I will never find out. So, so it's interesting. And then you create a little friction and say, okay, you do you, but I will see if you do something.

[00:34:34]There's no way around me seeing that there's massive friction and my all my power plants are empty. And the cool thing about AI then using Bitcoin to constrain it is that if AI wants to take over Bitcoin, like the 51% attack, then that's going to be something that AI is going to have to orchestrate over time.

[00:34:52]That's not something that happens overnight. So, you're buying yourself some time. Whereas, anything that's in the in the computer science realm, AI can spin up a trillion agents and suddenly you're being attacked a trillion times from a trillion different angles. You're powerless to stop that in in the in the software world. But if you're in the physical world, that's something that the military can deal with. And if AI is building out the infrastructure to attack Bitcoin, it gives you time to respond. And the easy response in the Bitcoin world is to build out more infra infrastructure of your own. The more computers that go on the Bitcoin network, the stronger it becomes. And if if an adversary adds more hash power, you do the same. If they add more, you do the same. And the act of doing that makes Bitcoin even stronger collectively and makes it harder and harder to attack, the bigger it becomes. So instead of mutually assured destruction, it's mutually assured preservation because the more investment that goes into the weapon system makes it stronger and safer for everybody else.

[00:35:48]>> The problem is you need consensus. You could of course at any point say, I don't want that. I want unined AI, right? like >> you could still have that, but I mean if if we're the United States and we're trying to protect our systems, you wrap it in a layer of Bitcoin, then that becomes impenetrable from that standpoint.

[00:36:05]>> Yeah. In a real conflict, you could say, well, in a totally separated conflict, you could say, well, we develop Chinese mega weapons and you do whatever you want to do. So then the friction might be a problem. So it's kind of a it's an interesting dilemma.

[00:36:19]>> Yeah. Well, we would be developing weapons, certainly AI weapons, to try to attack everybody else's systems, but we could protect our own with Bitcoin. And I think we're going to see more about this from the military over the coming months or a year. I believe that they're due to report to Congress by the end of this year in terms of what their plans are or what they've found out. So, my point with this whole thing is that AI and Bitcoin are, I think, tied together in ways that we may not fully appreciate yet. In Jason Lowry's book, Soft War, he talks about how when gunpowder was first invented, because it was invented by the Chinese medical community, people thought it was medicine. It wasn't until some engineers came along and started to play around with it that they discover it was good for fireworks and good for weapons. And the same thing has happened, I think, with Bitcoin. Because it's got the word coin in its name, we've instantly thought about it as money. At its fundamental core, it's not money. It's a security technology that happens to be so secure that it makes for great money.

[00:37:14]Yeah, everybody's come at it from the wrong perspective. And to tie it back to strategy, what strategy may end up being is the largest corporate holder of Bitcoin. They already are. They own 4% now of all the Bitcoin will ever be mined already today. And that effectively may make them the largest digital security company. And when we talked about the MEAV of 1.23, well, what's the largest digital security company worth? It's probably worth more than 1.23 times their Bitcoin holdings.

[00:37:41]That's a valuable asset if that's the case.

[00:37:44]>> Yeah, it's all about well it's all about the giant bet on Bitcoin. Like if you believe in Bitcoin micro strategy or stretch or whatever is a very good thing. If you doubt it, if you think quantum whatever something is going to destroy it, then it's a problem. And do you never know? I looked into the quantum issue. I think it's not really an issue. It's kind of very well recognized. It's just a timing issue.

[00:38:04]When does a Bitcoin community decide to act on it in time? But it's very unlikely they get surprised by this.

[00:38:10]It's so obvious the thing >> it is. And I love how the fact that the quantum thing is like just focused on the risks of Bitcoin. Quantum is a threat to literally everything on the top.

[00:38:21]>> I know you forget about everything else.

[00:38:23]What about the nukes? What about >> your self-driving car? It could be driving into a wall. Like it's a risk to absolutely everything. The nuclear weapons, absolutely everything.

[00:38:31]Everything in the health care system, everything in the finance world. The quantum could destroy everything. So it's funny that the attack vector is like on Bitcoin. It doesn't make any sense. That's the least interesting thing when it comes to quantum.

[00:38:42]>> It's like a giant meteor coming to earth is like why don't buy bitcoin? The meteor is going to hit earth and then my bitcoin goes to zero just explode like well that is true.

[00:38:53]>> Um okay sir and that was very interesting. We got a good deep dive into stretch and micro strategy and got a little feel for what's coming on the AI side. Tethering I to the physical world.

[00:39:06]>> I think it's the only way.

[00:39:09]Yeah, everything becomes everything needs to be tethered to the physical world otherwise we're going to have a massive problem and we've already seen that with spam on the internet and right now we use software tools to manage that but eventually we won't be able to there'll be too much of it we're going to have to come up with a better way it's got to be physical >> but it's a voluntary voluntary constraint that's the big question if people like anthropic and x AI and China and everyone is up for that because >> well it'll be involuntary at the point that becomes a problem that they can't resolve through traditional means. At the point that our permission systems and our passwords and our captures stop working, then it becomes involuntary.

[00:39:44]Then it becomes, okay, how do we deal with this threat? Because we're inundated daily by billions of AI agents attacking us. Then it becomes involuntary.

[00:39:53]>> Probably free running untethered AI as research in space or something and everything that gets deployed through agents on Earth needs to be tethered somehow.

[00:40:02]>> Maybe it's interesting because you know a military, right, is voluntary. Uh having a navy is voluntary until you're attacked by somebody with a navy, then it's involuntary. It's exactly the same thing. It's it's referred to as the shelling point. Back in World War uh two, maybe World War I, I think the there was a there was a general in the US military that said, "Hey, we should invest in airplane technology." And the US Congress basically said, "No, the technology is unproven. It's not not worth it." I guess it's World War II.

[00:40:29]And then along comes Pearl Harbor, right? where the Japanese destroy our our fleet and it suddenly becomes an involuntary thing now to build an air force.

[00:40:38]>> Yeah.

[00:40:38]>> Right. And so you can reject these new technologies for a period of time because they're not large enough, not meaningful, not not risky enough, but at some point you become you are destroyed by the thing that you ignored. And that's >> it's actually, you know, the point in time where China and the US and all these people understand that the the real biggest threat enemy is not China or the US.

[00:41:04]It's the agents. And I think the end point is probably already here because they're not dummies. And these agents will become more and more intelligent.

[00:41:11]They will be more and more they will have willpower and all these things. I think this year probably because that's the first thing you want to code into.

[00:41:18]You can even tell your thing already to do stuff and figure it out on their own.

[00:41:22]And once you give it the power to spit out all these other agents, it gets out of control basically immediately. So if you are a military planner and say, "Oh, design the perfect drone swarm." You don't want this thing to go out and figure out what it actually want is bad.

[00:41:37]And you want to tether it somehow. And I say you're not allowed to spin up a trillion agents and figure out who you are. It's bad. So I want to basically constrain you. So you literally cannot do that.

[00:41:47]>> Yeah. And we we may have that conscience in the US or the West in general. Some of our adversaries may not have that conscience and just may be desiring to unleash weapons on us that don't have any kind of constraints on them.

[00:42:01]>> Yeah. Well, I think I think honestly that especially the Chinese, but also the Russians, they they understand that because they are saying they will be the first target.

[00:42:09]>> That's right.

[00:42:10]>> Themselves. They're not dumb. like they might have bad like different ethical standards but no one has the ethical standards like yeah kill me like no they they want to preserve themselves too and I think >> yeah I think in that regard we need to be more worried about perhaps like North Korea or other like non-nation state terrorist organizations where >> yes terrorists are much more dangerous because they want maximum damage I think China the first thing they ask is this thing going to threaten my power if you're shiing thing you got to check with your military is this going to is this thing going kick me out.

[00:42:43]>> That's Hey.

[00:42:44]>> Yeah, that's right.

[00:42:47]>> Yeah. Very interesting. We will see. I mean, these things are evolving now at lightning speed. So, this is important.

[00:42:54]There's also the whole Ethereum debate where people say, and that's pretty obvious to me that you need you need blockchain contracting for these agents because how are they going to do business? Like, you are unlocking a whole new thing once you allow that once you connect these two. So it's bullish for Bitcoin and for Ethereum for both.

[00:43:12]>> Yeah. The only thing that I worry about and I'm not an expert on this, but from what I understand is Ethereum from a security standpoint doesn't have near the security of Bitcoin and how it's structured with the proof of work. That proof of stake can be something that can be gained. And so the question is then that's fine. You get the benefits of the Ethereum network, less energy cost and all that. That's fantastic. But maybe you pay the price from a security standpoint. And I think that's all to be worked out still. But certainly that's an issue and Bitcoin clearly can handle the volume of activity that would need to be handled on on Bitcoin in order for all this to work. So there has to be some different layers in this and maybe ultimately Ethereum is somehow sort of sitting on Bitcoin in some way using Bitcoin as security in order for Ethereum to work or you look at Solana from a transaction standpoint. There's there's lots of things there that need to be figured out, but ultimately we're going to have more activity on the internet from AI than humans. And therefore, the security issues are different and then the payment needs are very different as well. And we're going to have to solve all that stuff at the same time.

[00:44:14]>> And the interesting thing is again when you put this on timeline, some people think, oh sir, whatever that's 2040. I think that point could be this year.

[00:44:22]>> Could be >> like look at what's happening.

[00:44:25]Look at Nvidia rolling with Alpha Enterprise. this would happen much.

[00:44:28]People don't understand when you look at and dropping for example and dropping could be the largest company on the planet next year.

[00:44:36]>> Mhm.

[00:44:36]>> So it's like the the exponentials are crazy on all metrics. Yes. So it's going to be pretty wild. That's why you have to watch Sarin Basher.

[00:44:45]>> Yes. No, you're excellent thinker on these topics as well and it's it's fun to discuss it with you.

[00:44:50]>> Yeah, that was fun. Thank you so much SERN. more to come. But for now, thank you so much for enlightening us on strategy and Bitcoin and Stretch.

[00:44:58]>> Appreciate it, Joe. Thank you.

[00:44:59]>> Thank you.