Bitcoin and Treasurys Cannot Replicate Digital Credit

It is important to note that the word “you” means “you”. scale up Many people have criticized the STRC and SATA. 

Onramps are now available. published a paper Digital Credit: Highlighting some of the issues. In most cases, the paper appeared to be AI-generated. The report’s preface contained my favorite mistake, which had nothing to do with Digital Credit. 

Onramp wrote on page 3: “Strategy has released AI-generated advertising featuring a young, attractive model in a tropical setting” 

It is worth a glance. 30-second ad They are showing that she worked “hard as an engineer”This is not a real model. It took me about 10 seconds to notice the mistake in Onramp’s introduction. 

The anecdote that I told you was just a joke. Onto my main point. 

The core argument of theirs was that Digital Credit would be more effectively replicated by using BTC in combination with U.S. Treasury Securities. Onramp is the name of this project. “the simpler trade” I can’t understand how buying digital credit is easier when there is only one ticker. “the simpler trade” This involves the dynamic re-laddering and holding of BTC on an independent venue in conjunction with maturing Treasury bonds. 

This conclusion has been proven to be incorrect. This conclusion is false. It’s easy to prove empirically. (Just compare daily return timeseries of Digital Credit instruments with a Portfolio of IBIT or SGOV). This missive, however, will provide multiple economic arguments to show that we know from the start that this claim is false. 

The first reason is Collateral 

Digital Credit’s collateral is heavily backed by bitcoin holdings of corporations. This cannot be replicated with one’s own equity because there is no committed external capital in the case of owning BTC and treasuries—it is all your own money and no one else is on the hook. Credit is not the same. Although the principal belongs to you, the assets of the issuing company are used as external capital that is committed to making sure you’re made whole. This capital is “external” It existed even before your initial investment and will continue to exist after your sale. 

A bitcoin balance sheet that is unencumbered does not constitute collateral strictly speaking, but in a more flexible way. A BTC-backed margin loan is collateralized strictly because it is for debt. Digital Credit allows the issuer to manage collateral more easily, while also giving the investor greater flexibility due to the fact that the asset is liquid and fungible. Both parties must agree on this understanding. 

This is because the existence of the collateral protects the investor. This is reflected in the BTC ratings metric. BTC Rating is a ratio that compares the Bitcoin NAV with the sum notional values of all senior credit-series. 

Portfolios of BTC or treasuries have no external capital. The fact that BTC and Treasury are not used in Digital Credit makes it difficult to reproduce the business model. 

Let me first address the treasury. These are, in fact, backed up by the Federal Government’s full faith and credits and could be classified as collateral. Others might call it infinite collateral cover. The implicit assumption is that the U.S. government will not default. Onramp says that since the government is able to print money, and because it’s constitutionally unlawful not to pay debts, the treasuries is a certain thing. 

The government can change its policy, but still default on some of the debts. This is not impossible, given the increasing influence of modern money theory which holds that sovereign debts are merely a construct limited only by inflation. MMT considers that debt is a way to reallocate society’s assets over time, in order for the current benefit of the community to be maximized. It is the ultimate destination for fiat finance, which is based upon time-based decision making and everything being relative. 

Under this logic however, it is possible to move from “delete” If the right parties were selected, the partial debt forgiveness would allow currency stability. Does the Treasury risk warrant taking it? Each person must make their own decision. STRC would still be fine if this happens (because the dollar is fine because currency stability continues to exist), but BTC and treasuries could suffer heavy losses. 

Digital Credit is a bitcoin position that has been fully collateralized and structured. Combining BTC to Treasury Securities introduces a risk. 

The real difference between Digital Credits and synthetic replicas is in the level of risk the investor takes. Remember this, as it’s an important theme. 

The second reason is correlation 

Markowitz Portfolio Theory shows that diversification is the key to financial success. Multiple uncorrelated items stacked in a stack can produce higher returns. 

Digital Credit and bitcoin are not correlated. STRC is at 0.63 correlation to BTC and 0.33 correlation to SPY and a 0.33 correlation to the S&P preferred stock index. 

It is also true, as with everything else in life, that there can be a positive correlation during high-stress times. Digital Credit is a good way to diversify your portfolio, because it has a lower correlation. 

By contrast, it’s easy to prove that bitcoin and treasuries can’t do this. It’s just a watered down position of bitcoin: bitcoin leveraged between 0-1. In this case, a 20% BTC position and an 80% treasury is really only 0.2x-leveraged BTC. A portfolio with BTC already in it would not benefit from a 0.2x-levered BTC because there is a 1.0 correlation between BTC and 0.2x-levered BTC. This has a 0.20 beta, but it also has a 1.0% correlation. 

Digital Credit is able to generate a lower correlation precisely due to its capital structure. Investors who only hold BTC or treasuries are not able to take advantage of the company’s many options. These options produce idiosyncratic elements that are not correlated to BTC and thus independent.

These idiosyncratic risks are different from those that Digital Credit investors accept. 

Reason #3: Tax 

Onramp made the worst mistake. In the cases of STRC or SATA, Return of capital is tax-beneficial. Onramp claims that this is not a tax benefit, because there are no earnings for the company. The capital is therefore a return of the principal. This is similar in economic terms to their laddered Treasury model. This is the case in many cases, but not for Digital Credit. 

Understand that the ROC’s tax rules for negative taxable profits and earnings were designed on the basis that firms would earn money through fiat-denominated funds rather than by taking advantage of debasement in the fiat to build up appreciating asset. 

Please take a minute to consider the reasons why a dividend from a business without profits would reduce cost basis. What is the reason for this fair rule? 

Answer: A company which does not have any income, but makes a distribution, is actually liquidating its own assets. Therefore the cost basis of equity investors must be adjusted to reflect this partial liquidity. The entity shrinks as ROC distributions are made, since the distributions were literally part of it. This can be seen in covered-call ETFs, which suffer from a brutal NAV eroding while they pay out ROC payments. 

Again, the whole concept is built on the assumption of companies making money only by investing in cash flows. In fact, if there was a business that made money from investing in assets with a high appreciation rate, it would be able to take advantage of this ROC tax by appearing as if it were partially liquidating but in actuality growing. 

You can see that Strategy has done exactly this. As it distributes more ROC, its enterprise value increases. The opposite is what would be expected if you were to think from the beginning, and what we actually observe in other ROC situations. The difference is even more apparent when BTC rallies. 

Digital Credit is unique in this regard. This is because it has ROC. We can think of ROC as an accounting method of treating principal erosion without reflecting the real economic impact of this erosion in a drop in share prices. It is a structure arbitrage that was made possible because of an oversight in tax law (i.e. C-Corps don’t make money from holding assets with appreciation). Digital Credit is the only company that can do this. BTC or Treasury cannot replicate it. 

If the tax rules change, Digital Credit could lose its benefits. If this happens, Digital Credit will likely be re-priced. Digital Credit is exposed to a higher risk than BTC or Treasury portfolios. 

The Fourth Reason: Value Investing 

Value investing involves buying assets that are undervalued. Undervalued assets occur when the market fails to accurately assess risk. If the risks associated with corporate structures are not correctly priced, the Digital Credit Investor may earn higher premiums than is warranted. It could also explain why Digital Credit instruments have yields in the double digits. 

A potential bargain can be a great benefit. Treasury bonds can be an excellent bargain. BTC, too, is undoubtedly a bargain. It is undeniable, however, that neither Bitcoin nor Digital Credit can express the bargain offered by a capital structure misunderstood. 

You can also read our conclusion.

Investors are entitled to think that Digital Credit is not worth the risk. This is not the purpose of this article. Its goal was to show that Digital Credit has at least four benefits which a BTC or Treasury portfolio can’t match. 

This claim is incorrect because a Portfolio does not accurately replicate Digital Credit’s economics.

Digital Credit benefits are derived from the different risks that come with the capital structure unique to a Bitcoin Treasury company. The economic facts show that Digital Credit is not replicable without the same capital structure.