The Digital Credit Podcast Episode 2 | Grain of Salt

Timothy Kotzman (0:00)

Welcome back to The Digital Credit Podcast. I'm Tim Kotzman. Our guest today is Grain of Salt, live from New York City. Grain, good morning. How are you?

Mike Flown (0:10)

Fantastic. How are you doing, Tim?

Timothy Kotzman (0:12)

I'm very well. So tomorrow morning is the second annual Bitcoin Treasuries Conference in New York on a scale of to 100

How excited are you and what are you expecting?

Mike Flown (0:27)

I think my scale of excitement was about 100 prior to yesterday. Yesterday, I got into New York City. Obviously, I was with you and we posted that picture. I think my excitement now is about 110, 125 percent.

Timothy Kotzman (0:39)

Okay.

Let's dive into digital credit. What is digital credit?

Mike Flown (0:47)

What is digital credit? So, simplistically, a digital credit, the way that we see it implemented right now, is that a company is an issuer of their own preferred stock. That's the easiest way for them to do this. And that preferred stock is higher in the capital step, and it pays, well, as of right now, it pays either semi-monthly, quarterly, or in the case of Strive, it pays daily dividends. And what's going to happen is, obviously, the strategy has put out a proxy filing in order to take a vote to have it go to daily dividends and all their products. So that is like the overall structure of this. And what they're doing is they're saying, look, we're going to pay, whether it's 8%, 10%, 12%, 13% daily dividends or the intervals I just said, and it's based, it's built on top of Bitcoin. And that is the key part. Digital credit would not exist without Bitcoin. And what they're saying is if Bitcoin has a K or compound annual growth rate of 30%, we will pay you this rate of 8% to 13%, that difference, and that's how they put out there. That's what digital credit is.

But I want to say something, I want to say something, I want to say this is the missing piece. So I'm going to drop a couple of things in here that other people don't talk about.

I don't think that the reason why bonds built on top of Bitcoin didn't work, there's a specific reason why, is that you need to have a common stock. It's one company that has both. And what happens is the volatility is absorbed or it's reflected in the common stock. So you have MSTR, and then just for simplistic sake, you have STRC. So STRC is the stable one. It pays out 12% per year, semi-monthly. But you absorb that by having the common stock that can be the volatile addition to it. So digital credit by itself. If somebody said, I just want to do a pure play Bitcoin bond, it's not that that hasn't existed for the better part of five years, is that it didn't take off because it wasn't paired with something else. And we've seen this very clearly happen with Strive. Strive has ASST, the common stock, and it has SATA. And so what happens is those two are complementary. And so you have a company that issues both. And that was really the missing link with this.

And this whole industry, this part, the way I described it, is 20 months old. It basically started in January 2025

So I think that when people look at it, they don't realize that with digital credit, it needs to be paired by the same issuer with the common stock. And that's what makes this work.

Timothy Kotzman (3:28)

Most commentary that I hear is comprised of two buckets, retail investors and institutional investors. Can you define both of those?

And do you think that they, when they look at digital credit, they need to believe in Bitcoin and understand Bitcoin and be a fan of Bitcoin in order to buy digital credit or not necessarily?

Mike Flown (3:54)

It's not necessarily. But so digital credit could not exist without Bitcoin. But the problem right now is given the inflation, there's two different things that are going on right now. There's inflation, which is reflected in CPI and monetary debasement. The government runs a deficit, so we have to print $2 trillion a year. Those are two things that are going on. So if, if you're, if basically if money is going up 4% a year, and you're only getting paid 4% or even 5%, those bonds just don't work. So yield has to go somewhere. And if you believe that you're like, well, I have to put it somewhere that's going to make sense for me. And that's why these 8 to 10 to 12% of digital credit instruments are so, are so interesting.