Thursday links: Overpriced debt, community-approved stables and Justin Sun

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Strategy as financing franchise

Bond investors are generally considered more sophisticated than stock market investors (theres more math involved, for one thing) — and no one has ever accused professional bond investors of being less sophisticated retail stock market investors.

But a recent paper that does the math on Strategys valuation suggests they might be.

Equity investors, it finds, are paying the right price for Strategy‘s equity — but only because bond investors are paying the wrong price for Strategy’s bonds.

This makes Strategy a “financing franchise” that can be valuable enough to justify the premium to NAV it usually trades at: “the ability to sell overpriced bonds to invest in fairly priced securities…creates an intangible asset whose value can make the market value of equity exceed the market value of the firms (tangible) assets.”

Why would bond investors continually overpay for Strategys bonds？

The authors suggest its because Michael Saylor is blinding them with science.

Strategys convertible bonds, layered preferred stock, optional conversion features and callable provisions — full of “various embedded optionalities and differing seniority levels” — are deliberately engineered to make “returns more salient while obfuscating risk.”

If so, this should reframe the debate around Strategy: Instead of asking how long it can sell shares above NAV, as investors typically do, we should be asking how long it can sell bonds above fair value.

Not forever, presumably.

“In our model, the pool of ‘dumb capital’ willing to purchase overpriced debt is not bottomless,” the authors caution.

By their calculation, an equity premium of 70-135% over NAV implies that Strategy will be able to sell overpriced bonds for about eight years.

That sounds optimistic to me — which might be why Strategys premium to NAV has fallen to about 30% now.

This is all a bit academic. Are equity holders really doing the math required to build a “continuous-time structural credit model”？

After looking at all the bewildering equations in the paper, I highly doubt it. Even bond investors will struggle to make sense of the equation they use to value Strategys “intangible asset”:

Still, it feels directionally correct: Strategys premium to NAV is falling because Michael Saylor is pushing up against the limit of how much overly complicated debt he can sell.

With an enterprise value of $108 billion, Strategy might simply have outgrown the market for such debt.

But another implication of the paper is that you cant be too small, either.

All digital asset companies are modelled on Strategy, but few, if any, are big enough to sell complex debt in the first place.

If that really is what gives Strategy its value, most DATs shouldnt trade any higher than 1x NAV.

Even I can do the math on that one.

A hyper-crypto stablecoin race

This weeks dog and pony show to select an issuer for a new Hyperliquid stablecoin looks — from a distance at least — like everything crypto is meant to be.

A DAO making a multi-billion-dollar decision: Validators — and the HYPE holders who stake with them — will determine who issues USDH, which is set to siphon as much as $5 billion away from USDC.

Profit margins being competed away: Most of the leading proposals promise to return all of their profits (the yield earned on reserves) to the Hyperliquid ecosystem.

A TradFi CEO making his pitch on X: Decentralized decisionmaking means the head of a $130 billion asset manager has to do his lobbying on social media, and not, as CEOs are surely more comfortable doing, behind closed doors.

There are sceptics: Some suspect the outcome of the vote has been predetermined in favor of Native Markets, a newly formed firm with no track record to support its proposal.

But this, too, might reflect what crypto was always meant to be.

After withdrawing his proposal for USDH, the CEO of Ethena Labs lauded the Hyperliquid communitys willingness to consider a new entrant: “No one [cares] how big you are, your background, pedigree or financial resources. It is a level playing field where emergent players can win the hearts of the community and are given a fair shot at succeeding.”

Theres a lot to be sceptical about in crypto (see above and below), but the process around USDH seems like a timely reminder of what can make it worthwhile.

Justin Sun is a character

Christopher Harland-Dunaways feature on Tron founder Justin Sun is full of colorful detail, much of which could get people in trouble: “More than one person believed that talking to me might put their lives at risk,” he writes.

One anonymous source, for example, told Harland-Dunaway that Sun was running an “insider trading team” out of Trons Beijing office.

(I‘m guessing that refers to the Tron Foundation, since the Tron blockchain presumably doesn’t have an office.)

Another source said his job at TRON was “to make sure the TRX price is at some level Justin wants.”

Sun, he claimed, instructed them to buy TRX when he knew that Tron was about to announce good news to the public.

This happened “all the time,” according to another ex-employee.

In this telling, Sun seems to almost go out of his way to invite legal trouble, without fear of the consequences: “Justins tolerance for risk is absurdly high,” another ex-employee said. “Like, absurdly high.”

For example, Sun appears to have bought the crypto exchange Poloniex with the express purpose of dismantling its KYC process: “Fake the KYC!” he screamed after being told it was slowing their efforts in China. “Fake it!”

Thereafter, he installed an automated KYC system designed to accept virtually any ID: “Didnt matter if they submitted a pic of Daffy Duck,” a Poloniex employee said.

There are shades of Sam Bankman-Fried here as well: “I think over time, he started to see all the possibilities of using [Poloniex] as more or less his personal bank,” a source said, with the implication that Sun used customer funds in much the same way SBF did.

When Sun instructed employees to collect tiny amounts of bitcoin that customers had mistakenly sent to a wallet intended only for USDT, for example, “they understood Justin Sun would take the bitcoin personally.”

The tiny amounts added up: In what was known internally as “Operation Couch Cushions,”

230 bitcoin that customers had lost in the deep recesses of Poloniexs “archaic” exchange was eventually recovered.

But hes not just about the money.

Sun is quirky enough to have disappeared “for months” without telling anyone at Tron where he was going or when hed be back.

When an employee finally reached him on the phone and asked where he was, he said “Im in the forest with this [llama].”

As Harland-Dunaway tells it, Suns story reads like a classic rise-and-fall narrative — but without the fall.