Dialogue Michael Saylor: The cost of holding strategy has no substantial meaning, Bitcoin's utility is high, so its volatility is large

Source: Natalie Brunell Podcast

Organizer: Felix, PANews

Major Drawdowns and Low Points Are Inevitable for Any Tech Investment

Natalie Brunell: It's great to see you. You are one of the few Bitcoin bulls, and I think there are many bulls out there, they are just waiting for the right opportunity. With Bitcoin's price currently down and market sentiment quite pessimistic, critics argue that the theory behind Bitcoin is collapsing. What are your thoughts on this?

Michael Saylor: It has only been a little over 4 months (137 days) since the last historical peak, with a drawdown of about 45%. In reality, there is no successful tech investment case that doesn't experience a 45% drop and a low point. Major tech companies have been the most dazzling success stories. But in all these cases, you can find examples of traditional markets underestimating them. Take Apple, for example; between 2012 and 2013, Apple’s stock also plummeted by 45%, and its P/E (price-to-earnings ratio) fell to 10, with the market viewing it as a weak cash cow with no technology and no future. It took Apple a full 7 years (2013-2020) to recover to a P/E of 30. Similarly, Amazon was also heavily underestimated by traditional investors for a decade.

The current pessimism in the traditional market towards Bitcoin is akin to the underestimation of Apple and Amazon back in the day. Bitcoin has actually gained global consensus; entities like the U.S. government cabinet, the Federal Reserve, Middle Eastern sovereign wealth funds, and BlackRock are all telling you that Bitcoin is global digital capital.

Why Has Bitcoin Failed to Reach the Predicted $126,000 High?

Natalie Brunell: For those who are disappointed with the bull market and feel that we haven't broken through the $126,000 mark, what do you have to say? What do you think is the reason we haven't reached the price targets that many expected?

Michael Saylor: I believe the market is continuously evolving. The entire ecosystem is maturing, and the derivatives market is transitioning from offshore to onshore and becoming increasingly sophisticated. As the U.S. regulatory market for derivatives grows, Bitcoin's volatility and upside potential will decrease, thereby suppressing its upward potential. At the same time, the downside potential will also be reduced. What could have seen an 80% drop and 80% volatility may now only see a 40% or 50% drop and 50% volatility. Therefore, as the market matures, Bitcoin's volatility in both upward and downward movements is being suppressed.

Meanwhile, the banking sector's acceptance of Bitcoin is steadily progressing, but it is much slower than what those who struggle to focus would expect. Banks need four to five years, or even six years, to accept this entirely new asset class. Yet people expect Bitcoin to gain recognition within four months.

If banks take four years to start accepting Bitcoin, issuing credit, recognizing, processing, trading, and custodial services, that implies a peak Bitcoin value of $2 trillion, of which perhaps $1.8 trillion is held by retail or offshore investors who cannot obtain low-interest loans from traditional banks (like JPMorgan) by collateralizing Apple stock. This forces people to turn to shadow banking or crypto exchanges, leading them to face extremely high interest rates or the risk of re-hypothecation—where your Bitcoin is collateralized, lent out, and shorted multiple times. This underdeveloped credit system and re-hypothecation mechanism create immense selling pressure, suppressing Bitcoin's price.

Expectations for Long-Term Returns and Views on Volatility

Natalie Brunell: You always say that volatility is where the vitality lies. So, what are your expectations for the next 10 to 15 years?

Michael Saylor: Looking ahead 21 years, Bitcoin's ARR (annualized rate of return) is expected to be around 29%, accompanied by waves of rises and drawdowns. Many panic sell due to news like the Middle East situation over the weekend, but this also means Bitcoin is the only asset that trades 24/7 globally. Bitcoin has the highest volatility because it has the broadest use cases. Bitcoin represents the global capital market; some people use this asset to do things you can't do, can do but won't do, or don't want to do, and that’s what causes the volatility. It also creates a gravitational or magnetic field that attracts all the energy in the world, including financial energy, political energy, digital energy, etc., all drawn into this space because of Bitcoin's utility. If you are a long-term investor with a four-year investment horizon, short-term wild fluctuations are irrelevant; you just need to let those crazy traders who love to leverage 50 times over the weekend provide liquidity.

Why Are Retail Investors Not Participating in This Bull Market?

Natalie Brunell: Bitcoin is still primarily held by individuals. But I just had Lynn Alden on, and she said that retail investors did not really participate in the last bull market. What do you think is the reason for this? What can bring ordinary retail investors into the best savings technology?

Michael Saylor: I believe early retail investors have already entered the market. Those retail investors who are passionate and invested in digital capital, especially Bitcoin, have had ten years to buy in. If you were looking for a non-sovereign store of value digital asset at some point between 2010 and 2015, you would have found Bitcoin in a continuous wave and bought as much as possible.

The next batch of retail investors does not want an asset with a 40% annualized return but with huge volatility risks; they want an asset with a 10% or 0% annualized return that allows for tax deferral. That’s why I’ve been working on this for the past year. Can we reduce the volatility of an asset like Bitcoin, which has a volatility of 45%, by 80% to 90%? Then provide retail investors with four to five times the over-collateralization, creating double-digit yields, and do this in a way that allows for capital return. This way, you can enjoy tax deferral or deferred tax treatment. You can gain the returns and performance of stocks, along with the principal protection of credit or bonds, and receive fixed yields with monthly cash dividends.

If you want to reinvest, just reinvest the dividends into the principal, and it becomes a continuously growing, tax-deferred asset with an annual yield of 11%. When you need funds to pay for your child's tuition or taxes, you can simply withdraw or sell. To achieve this, you cannot endure the volatility and drawdowns of stocks. You cannot endure the volatility and drawdowns of Bitcoin. You need some kind of credit tool, a provider willing to offer over-collateralization. And you need to actively manage this credit tool to maintain price stability. So, in my view, STRC or digital credit is our way to attract the next batch of retail investors into this space.

Is Quantum Computing a Survival Threat to Bitcoin?

Natalie Brunell: I want to talk about a very important topic: quantum computing. There’s a saying in the crypto market: "Don’t trust blindly, verify." But many people lack sufficient expertise to verify whether quantum computing truly poses a survival threat. You recently released a strategy regarding quantum computing and future developments aimed at ensuring Bitcoin can withstand quantum attacks. Can you explain why you believe the risks of quantum computing have not been priced into the market?

Michael Saylor: The general consensus in the cybersecurity field is that the threat of quantum computing is at least 10 years away, and whether it will actually become a threat is still uncertain. If the quantum threat does materialize, then the global banking system, the global internet, consumer devices, all crypto networks, the Bitcoin network, all digital systems, AI networks, and all the networks we rely on today (whether government, financial, consumer, or defense-related) will need to upgrade their operating software. All stakeholders, whether Google, Microsoft, Apple, Coinbase, BlackRock, Strategy, or the U.S. government, Russian government, EU government, JPMorgan, or Morgan Stanley, will face the same issue.

All of our digital systems would be at risk if there is indeed a credible quantum threat. When it happens, it is expected that some software or hardware, or both, will respond accordingly. The crypto community is actually the most mature community in the cybersecurity field. I believe the crypto security community will be the first to perceive this threat and respond. We have announced a Bitcoin security plan, and Coinbase clearly has its own security plan. In fact, I invested a significant amount of money early on into the Bitcoin core development team, which was actually used for Bitcoin security projects, such as MIT's Bitcoin security project. So, I think we Bitcoin holders or users, as well as industry insiders, understand that cybersecurity is crucial. However, I do not believe quantum computing is the biggest security threat Bitcoin faces today, nor has it ever been.

People joke that this issue has been discussed every two years for the past 15 years. In reality, I think there are many factors that could pose a security threat, at least hundreds. For example, are there bandwidth issues? Are there national-level attack vectors? Is its functionality sufficient? Is there too much functionality? Is the development speed too fast? Is the development speed not fast enough? Is the level of decentralization sufficient, etc.? These debates will continue, and quantum technology is just one of them.

The reason we are discussing quantum computing now is that none of the other risks have materialized over the past decade. Various "Bitcoin doomsday theories" over the past 15 years—such as block size disputes (insufficient bandwidth), energy consumption boiling the oceans, banning mining, etc.—have all failed to destroy Bitcoin and have been resolved by the free market. Ultimately, this alarmist rhetoric is amplified economically and politically because it benefits politicians, entrepreneurs, and those who crave money or power.

What Is the Strongest Argument Against Bitcoin Currently?

Natalie Brunell: I have an interesting question for you. What do you think is the most compelling argument against Bitcoin at the moment?

Michael Saylor: The most reasonable reason people reject Bitcoin right now is simply that it hasn't been around long enough. Bitcoin has only existed for 17 years. Just like how most people still wouldn't dare to fly 17 years after the invention of the airplane. A disruptive technology takes decades to go from invention to becoming a consumer product used by everyone.
Is the cost of Strategy's Bitcoin holdings important?

Natalie Brunell: I'm a bit curious; you seem completely unconcerned about cost. Many people are trying to find the bottom price, studying technical charts, but you seem indifferent. Can you explain that? Especially for those who think the price might drop, why not buy in at a lower cost?

Michael Saylor: You can think of us as using a dollar-cost averaging method; the key is: we are using equity and not buying on loan.
When we buy Bitcoin, if we raise funds by selling stock (equity) to buy in, then whether we buy at $100,000 or $200,000, we are essentially just making a permanent, risk-free asset swap. We are exchanging equity for Bitcoin.
When should you swap equity for Bitcoin? As long as this action is value-adding. If Bitcoin's price rises by 10% while our stock price rises by 25%, then swapping equity for Bitcoin is profitable.

So, if after buying, Bitcoin subsequently drops by 20%, would you regret it? Of course not. Because without doing so, you wouldn't have those Bitcoins at all. Moreover, when Bitcoin drops by 10% and your equity value drops by 20%, you have actually reduced the risk of equity by swapping into Bitcoin. If you support stocks with a stable asset, the risk of the stock will decrease, especially when you are swapping at a premium.

So, the core issue is not the price but whether this swap is profitable for shareholders.

If you are swapping Bitcoin for common stock, then the future trajectory of Bitcoin is not that important because this operation does not involve ongoing liabilities; you do not need to repay anything over the next thousand years.

Of course, if you are using digital credit (like preferred stock) to swap for Bitcoin, the calculations become a bit more complicated. For example, if I pay a 10% dividend on preferred stock while Bitcoin's return over the next hundred years is only 5%, then this swap will dilute ordinary shareholders over that hundred years.

If you are swapping for Bitcoin through debt, such as a 10-year bond with a 5% cost, then you need Bitcoin's price to rise more than 5% over 10 years to avoid dilution.

If you are buying through margin loans, for example, if you only have $100 million in collateral but leverage it 10 times to buy $1 billion worth of Bitcoin, the risk is extremely high. Because the term of such a loan might only be a minute. If Bitcoin drops by 10%, you will be liquidated, losing $100 million.

So the real difference lies in the term. If you borrowed a minute's flash loan to buy, the purchase price relative to the current price is extremely important. If you borrowed money for ten years, the importance manifests ten years later. If you borrowed permanent money (like through equity, which never needs to be repaid), then the importance of price becomes blurred.

What most retail investors do not understand is that the only credit they can obtain is margin credit, which is a minute's credit. If you make a wrong judgment, you will be liquidated over the weekend. Whereas the credit we use, even if we are wrong for 30 years, does not matter.

I can say this: if we pay 10% interest while Bitcoin only returns 8%, even if we are wrong for 30 years, due to some second, third, or even fourth-order dynamic factors, this could still be a good business for ordinary stock. But the fact is, if we have a 10 to 30-year time window to prove ourselves right, then our average purchase price has no substantial impact.