Author:Michael Saylor, Compiler: Wu Shuo Blockchain

The speech further proposed that "digital credit" is not only the middle layer of Bitcoin's financialization, but may also become a bridge connecting traditional finance (TradFi) and decentralized finance (DeFi). Under this framework, Bitcoin is the "digital capital layer", digital credit is the "intermediate income layer", and stablecoins, income coins, on-chain income products, etc. are the upper "digital currency/digital income application layer". Michael Saylor believes that this model has the opportunity to reshape the huge global credit market and provide new underlying asset logic for stablecoins, DeFi income products and institutional capital allocation.

The core logic of digital credit: extracting credit income from Bitcoin capital appreciation

Michael: Today I want to talk about a very interesting topic, which is digital credit. Digital credit is built on digital capital. What we want to do is to create the best and highest-yield credit tools in the world.

How can we create the best quality and highest yield credit? You need to own the best-performing assets. Bitcoin has consistently outperformed the S&P, gold, and the Nasdaq over a long period of time. So we started thinking about whether we could separate a credit instrument from Bitcoin. The problem is that these assets are highly volatile.

One of the main obstacles to Bitcoin going global is that its volatility of around 40% is too high for most investors. Coupled with the fact that it has no cash flow itself, it is even more difficult to accept in a high-volatility environment. I know this firsthand and have put thousands of hours into this.

So, what is the core idea of digital credit? It is to use capital appreciation to support credit dividends. We extract a portion of our earnings from capital gains. For example, if you think an asset will give a 30% return, you can take an 11% yield from it; if you think real estate will give a 6% return, you can pay a 3% dividend.

It can be seen that Bitcoin is the best performing capital, so we can also pay the highest dividends. In addition, what else is needed to create asset-backed credit?

You need a lot of assets, which means a lot of equity capital. Taking our company Strategy as an example, we have approximately $68 billion in capital, corresponding to an enterprise value of $85 billion. When you have such a large amount of equity capital, the question becomes: How do you make that capital generate income? How do you use this capital? We eventually realized that Bitcoin’s real killer app was digital credit. In other words, we are not using it as collateral for loans in the traditional way.

We sell this credit product to traditional finance and traditional capital markets and provide returns to the market. For every $1 of capital, you can probably sell $0.20 of credit products per year. So, if you want to create a $20 billion credit product, you need $80 billion to $100 billion in capital first. One of our strengths is that we have access to large equity capital markets. Our stock market trade volume reaches $3 billion.

We also have a very large derivatives market. Many people don’t know that MSTR’s trading volume even exceeds that of IBIT, and our open interest size is also higher than that of IBIT. So we have equity capital market traders and derivatives traders supporting this securities system.

Structural advantages of digital credit: amplify returns, reduce volatility and defer taxes

Michael: Next, we hope to use this system to create credit. What is credit? That is, we take out part of the capital, strip it of currency risk, credit risk and duration risk, reduce volatility, and then extract returns from it.

You can imagine this process as sending a barrel of crude oil into the reactor and finally refining kerosene. Digital credit is like a currency fuel. If you hold a highly volatile capital asset, say with a volatility of 30% to 40%, it will rise and fall like a roller coaster. And what we have to do is extract the first 11% of the returns. Because what most people really want is to achieve compound interest growth in wealth more comfortably and gradually without taking huge risks on principal, rather than experiencing a sharp drawdown.

If you really process this signal and extract an 11% return, the excess energy and excess volatility will flow to the equity side. In other words, when we create credit, we actually create a digital equity that is more volatile and performs better than the original capital asset. Therefore, MSTR is an enlarged version of Bitcoin, and STRC is Bitcoin Credit. Does this model work? Let me show you the theory first.

The next picture shows the actual results. This is data from 5 to 5.75 years. You can see that since August 2020, Bitcoin is up 40% and MSTR is up 60%. Looking at where STRC is located, it's on the credit side. In other words, we are actually deploying capital assets at both ends.

There is a group of people who want leverage and high performance, and are willing to ride a roller coaster and withstand high-intensity fluctuations like a rocket; there is another group of people who just want to live a more stable life, and they are willing to give up excess returns in exchange for a more comfortable holding experience. What we do is to meet the needs of these two groups of people at the same time. So what exactly is this? Essentially, we just put together something that already existed: a public company, a publicly traded digital capital — Bitcoin, a publicly traded preferred stock, a monthly floating dividend from the preferred stock, a tax treatment for capital returns, and an actively managed ETF.

By combining these elements into a tool, you can create digital credit. what is it? It means double-digit returns, tax deferral, with all the advantages of equity; it also means low volatility and principal protection, with all the advantages of a credit instrument. These features are integrated into the same tool. If you don’t need the money for four years, then I would suggest you just buy Bitcoin and hold it for the long term.

But if you need the money within the next four months, such as to pay for your children's school fees, or you need working capital to pay taxes, you can't afford that risk. At this time, what you need is credit tools. Therefore, STRC is more like a short-term monetary instrument, and BTC is more like a long-term commodity; and if you are an equity investor looking to amplify returns, then you will buy common stocks.

The most unique thing here is that we find that if unrealized capital gains are used to pay the credit dividend, the dividend becomes tax deferred, which is called a return of capital. We have inadvertently created the most efficient and scalable tax-deferred fixed income generator in the world. We didn't design it this way intentionally at the beginning, we just discovered it by accident.

How is it working? STRC now has approximately $375 million in daily liquidity. We reduced volatility from 40 to 3 and have grown AUM to $8.5 billion, a 340% annual growth rate. This is a hyper-growth and most successful financial instrument this year. Why is it growing? How did it grow? Because it is driven by the crypto economy, but also by the volatility of digital assets that are traded 24/7/365 year-round.

Within 8 months, it has become the world's largest preferred stock; at the same time, it has also become the world's most liquid preferred stock. In a few months, it will become the most frequently traded preferred stock in the world. That is, we created a product that fully accelerates the entire preferred equity market. Bitcoin was down 37% at one point in the past six months. If you are a capital investor, you get no income and suffer a 37% drop; but if you are a credit investor, you get a 6.4% dividend, while the price remains close to the face value. If you're wondering why you should own it, that picture makes it clear why.

The market attraction of digital credit: high sharpness, strong liquidity and traditional financial penetration

Michael: STRC is still a new product, and you can see that it is still maturing. And in the last three months, it has been operating within a stable trading range 100% of the time.

In other words, the last three months have actually allowed this product to start operating and come alive. Its liquidity grew 7x in 5 months and continues to strengthen. Why?

Because money market funds can only give about 3.5% returns, private credit can give about 8.5%, and STRC can give retail investors 11.5% returns. If you are a U.S. tax resident, this equates to an 18% after-tax equivalent return in Miami. So how does it compare to other markets around the world?

It can be said that STRC is like the risk-free interest rate in the crypto economy. If you were to look for the free market risk-free rate of return in the crypto economy, it would be approximately 11.5%. There is almost no comparison with the Japanese yen or Swiss franc. But if you look at this chart again, you will see that there is a huge arbitrage opportunity here. If you wanted to do a carry trade, you could borrow money with a 2% euro funding cost and then invest in STRC, earning the middle spread. If you are a DeFi trader, you can even imagine looping a 2% funding cost into an 11.5% return, capturing a 9.5% spread, multiplied by 10x leverage. Generally speaking, doing 10x leverage on an asset with a volatility of 40% sounds very dangerous; but if I give you an asset with a volatility of only 2%, then even if you do 10x leverage, its overall volatility is only equivalent to the level of the S&P Index, but you can capture a 95% return.

What's happening here is very interesting. Even in New York, STRC looks like a bank product that pays 24%, so why wouldn't you want to own it? It's the same thing in San Francisco. Next, if we look at the risk-adjusted return, which is the Sharpe ratio, it is calculated by subtracting the risk-free interest rate from the return rate and dividing it by the volatility.

You can see that STRC's Sharpe ratio is the highest among all credit instruments in the world, and it is orders of magnitude ahead. The Sharpe ratio for money market instruments is even negative. STRC has a higher Sharpe ratio than any stock you can buy.

In fact, not only is it better than stocks, but it's better than other assets you can buy, like the S&P or Bitcoin, STRC's risk-adjusted performance is both stronger. In the end, if you go to a hedge fund, give them your money, and pay a "2 and 20" fee structure, STRC still outperforms all publicly disclosed hedge fund strategies. So why is it interesting? Because hedge funds lock your funds, charge management fees, draw performance shares, and let you bear various heterogeneous risks; STRC is liquid and has zero fees.

You can buy and sell at any time. Its risk structure is homogenous and transparent, and we update risk data every 15 seconds. Therefore, digital credit is actually impacting the entire credit market head-on. Because of this, it has every potential to reshape 1%, 2%, or even 10% of this $300 trillion credit market, because compared to STRC, other products almost feel like taking on risk for no reward.

So, how will it affect the entire ecosystem? Now market interest is exploding rapidly. Retail investors are interested, corporates are interested, institutional investors are buying, crypto-native companies are building on it, and innovators in traditional finance are building products around it. First, STRC can be distributed through all retail brokerage channels. It trades on Nasdaq, you can buy it on Schwab, Robinhood. Vanguard isn’t willing to let you buy Bitcoin, but they are willing to let you buy STRC. So, we reach all traditional, conservative investors with this product.

STRC has 80% of its holders from the retail end as soon as it is listed, and has an extremely large retail investor base. Just like the crypto market was initially driven by retail, STRC is a retail-driven product that is spreading rapidly. People will recommend it to friends, family, parents because it sounds really attractive.

I mean, who doesn't want to retire with 11% a year and not have to pay taxes on it right away? Why not? Companies are now beginning to incorporate it into their corporate treasury allocations. It now offers 11% tax-deferred benefit, compared to 3% taxable benefit, or just 2% after-tax. In its first eight months, it has become the second-largest product in the credit index after BlackRock and VanEck.

Its scale continues to grow, and it has been embedded in various fixed income funds. A lot of ETF developers are building products around it as well, so you'll see it in public funds soon. But what I want to talk about next is the most interesting part of the whole sharing, because I think the real appeal of digital credit is that it is a springboard to digital currency and digital income, and this is the direction that everyone here should focus on, because this is your business. We have transformed digital capital, which was too volatile and yieldless, into a credit instrument with a volatility of about 3% and a yield of 11%, and the basis for this is the stable support of billions of dollars, $60 billion worth of equity capital to be precise.

Digital credit moves towards digital currency and digital income: from credit instruments to third-layer financial construction

Michael: Now, here comes the third level opportunity, which is to create digital currency or digital income. What does this mean? This means that currency should be a tool with zero volatility, daily liquidity, and income; while digital income may not have zero volatility, or it may be an income product in a certain liquid state.

How to create it? You can issue a token, a private equity fund, a public equity fund; you can offer it through a bank, you can offer it through a crypto exchange. You can design the volatility between 0 and 10, and the return rate between 5% and 25%, or even higher; you can also arrange its liquidity and complete the conversion of currency forms.

Many people can do this. You can do it as a bank, you can do it as a Wall Street institution, or more interestingly, you can do it as a cryptopreneur, a startup, or any innovator. If we give you a credit instrument with a volatility of 3% and a return of 11%, you can further downgrade it and make it a currency instrument with zero volatility and a return of 5%, or a product with a return of 6%, 8%, or 9%; you can also increase the leverage by 3 to 4 times and make it a tool with a return of 25%. If you wanted it to have daily liquidity, it might be an 8% volatility product with a 25% yield.

But if you are willing to lock it up for a month, then it can probably be turned into an instrument with zero volatility, a one-month lock-in period, and a 25% yield. Who would need this product? Stablecoin market. The market is now about $350 billion, and almost all are desperately hungry for yield. The question is, how do you actually add returns to this market?

Crypto-native returns are inherently endogenous. It expands when market activity explodes and contracts when market activity contracts. At the same time, there are also exogenous returns, and digital credit here competes with U.S. Treasury bonds. The problem with endogenous returns is that they are reflexive, so in a bull market you can get good returns, but in a bear market those returns get compressed. Relatively speaking, the advantage of U.S. Treasury bonds is that their returns come from outside sources.

But the thing is, if your cost of funds is 3% and the asset itself only pays 3%, your net return is zero. In this way, even if you add 10 times leverage, zero times ten is still zero, which is essentially nothing. What you really want to do is add leverage with a cost of capital of 3.5% and allocate assets with an income of 11.5%, so that you can obtain a net interest spread of 800 basis points.

If you magnify this spread to 5x leverage, you can actually create an instrument with a 40% return. And that’s exactly what STRC stands for. It is an external source of power and the financial fuel for DeFi and digital assets, just like kerosene. As for how you use it, that's your creative space.

Moreover, we now have equity capital as support. For every $1 of STRC, there is approximately close to $5 of capital backing it, so it is actually highly over-collateralized.

Digital credit as a bridge: connecting Bitcoin, traditional finance and DeFi application layer

Michael: So, we actually provide you with an equity buffer, and our company's job is to continue to maintain STRC's trading price at around 100. To do this, we will raise billions of dollars in equity capital, purchase billions of dollars in cash assets, increase dividends, and dynamically adjust our ATM issuance mechanism. This is what we are doing. What happens next depends on what you do and what everyone else involved does. What we provide is a transparent, institutional-grade, highly liquid income tool. You only need to visit our website to see the data we update every 15 seconds and know exactly how much capital we have.

We file with the SEC every Monday morning. You can see when we've raised additional capital, and you can calculate the Sharpe ratio yourself and see the price and eventual stability range. We even made our credit model public. You can actually estimate the credit risk of these instruments directly here, and again this set of data is updated every 15 seconds.

You can enter your various expected parameters such as Bitcoin's future trend and volatility and make your own calculations. So what does this ultimately mean? This means that capital will definitely flow to places with better returns. Therefore, DeFi will be better than traditional finance; and digital returns supported by STRC will be better than those DeFi returns that rely on endogenous sources. We have transparency and you can see it all because we are a public company. So who is pushing this now? The answer is that there is an explosion of innovation happening across the DeFi economy. You can see projects like APEX, Hermetica, Kraken, Ondo, Pendle, Roxom, Saturn, Strata, etc., all doing very interesting things.

They are advancing much faster than traditional financial innovators. There are certainly many innovators in traditional finance, but in my experience, DeFi innovators are about 10 times faster and in many ways more mature.

In just 8 weeks, we went from zero to $270 million in DeFi. STRC's sales in March were $1.2 billion to $1.5 billion, and by April they had reached $3.2 billion. You can see that the whole system is exploding rapidly. Why am I so excited? Because I believe that digital credit is the bridge between Bitcoin and the crypto world, and between traditional finance and DeFi. It solves many problems in the crypto space and DeFi space, while also mobilizing all of our asset capabilities in traditional finance. So now you can see that Bitcoin is the digital capital layer, STRC is the digital credit layer, and on top of that, you can continue to build the third layer.

When you further put these tokens into various applications, you can create a lot of very interesting things. So in our view, STRC is essentially a platform for creating applications. Digital currency and digital income are two of these applications, and many people are already building them. I believe that stablecoins are essentially zero-volatility, zero-yield instruments. They are good as a medium of exchange, but not a good store of value. You don’t really want to lock up a piece of unprofitable collateral for an entire year to use in prediction markets, DeFi protocols, or futures trading.

Earning coins are different. They can have zero volatility, 8% returns, or 7% or 9% returns. You can build this type of product in dollars, euros, yen. But wouldn’t you want a yield coin that looks like a stablecoin and keeps paying you yield, but is also backed by Bitcoin? And that's exactly what we've done. STRC is creating revenue coins. Now you've seen APEX do this.

You've seen Saturn doing this too. There has been a clear explosion of enthusiasm in the market around the tokenization of such products. But there’s still plenty of space waiting to be built. For example, who is going to build a yield coin denominated in Japanese Yen or Swiss Francs that yields 8%? Or who's going to build a yield coin that yields 24%, whether it's a 5% or 10% volatility design, or it pays out 24% by staking for 90 days.

These things can actually be done, and the idea itself is not complicated. What is really needed is to first have a mountain of equity to support the establishment of the credit layer; then you need equity investors from MSTR to support this system, and credit investors to support the credit product itself. Once this middle layer is established, there are almost no boundaries. You can create a variety of excellent digital currencies and digital income tools in various currency systems; then deploy them on different chains and give them any functions you want.

The focus of our company is to build STRC into an instrument with a management scale of hundreds of billions of dollars and an average daily liquidity of billions of dollars, and further reduce its volatility to below 2, or even enter the range of 1, close to the level of money market instruments. Doing this is enough for us. What we provide you next is an underlying capability: you can build hundreds of digital currencies and digital income applications based on it, and connect them to various excellent encryption and DeFi scenarios.

And you get to keep 200 to 300 basis points of the proceeds. For example, you can provide 8% of returns to the outside world, keep 350 basis points for yourself, and get 11% of the returns at the bottom, which is a very valuable product solution in itself. Instead of earning only 15 basis points on an ETF product, why not go for a proprietary product that you create yourself and earn 150 basis points, or even 250 basis points? It will be easier to sell and more worth doing.

This will be more beneficial to you. I believe that these people here are the key force in bringing digital credit to the world and every corner of the entire ecosystem. I also think that this represents the convergence of Bitcoin interests, crypto industry interests, DeFi interests, and traditional financial interests. It should propel the entire digital asset industry toward the next 10x, or even 100x, development stage. I’m really excited to be working with you all on this so far, and I’m looking forward to more of what’s to come.

Thank you all for your time today.