Pingu's Snowball ❄️ 🇬🇧

Gross vs. Net Metrics Thoughts We need to start with two definitions. Ex ante economic value: PRESENT economic value of a contractual claim, given the possible future outcomes, their probabilities, timing, and risks. Ex post: What does the contractual waterfall actually distribute once a specified event like a liquidation occurs? A liquidation preference on a perpetual preferred equity establishes a contractual priority ex ante, but it specifies a settlement entitlement that applies ex post, so by definition it is conditional on the relevant event and available assets. The mistake I see being made often is treating that contingent settlement amount as though it necessarily equals the claim's present economic value in a going concern. I've made the same mistake. A perpetual preferred with a $100 liquidation preference has its present value defined by its dividends, redemption provisions, investor protections, probability of liquidation. Ex ante economic value and an eventual ex post payout can coincide numerically, but they are not conceptually identical, and there is no accounting identity that guarantees their equality. If CEBE subtracts a hypothetical future liquidation settlement amount and then declares the remainder to be what common shareholders economically own today, it then crosses from describing a contractual settlement convention into making an ex ante economic assertion, but the event (liquidation) hasn't occurred yet. That assertion requires a valuation argument. Common shareholders are continuously exposed to changes in the economic value of their residual claim on a going concern. That value incorporates the possible consequences of liquidation, but it is not determined solely by a hypothetical liquidation waterfall. The possibility of that event, and the contractual rights that become enforceable under it, influence the economic value of the securities today. Ex ante. Ex post. The former necessarily considers the possibility of the latter. The latter does not independently determine the former. Today's market valuation of an equity is observable, while intrinsic economic value remains an estimate. And an actual liquidation may become highly probable, making the waterfall increasingly relevant to present prices. Therefore, subtracting full liquidation preferences from mark-to-market Bitcoin assets can establish a liquidation-preference-adjusted residual, but it cannot independently establish what common shareholders economically own in a going concern. You can make a mathematical counterexample to the universal proposition that liquidation-preference-adjusted backing establishes the ex ante economic value belonging to common shareholders. Consider two hypothetical companies with identical assets, identical common share counts, and perpetual preferred securities carrying identical $100 liquidation preferences. The only difference is their dividend obligations. Preferred A pays $8 annually. Preferred B pays $12 annually. Assume a constant 5% required return, no liquidation or redemption, and sufficient cash flows to fund both securities indefinitely. The present economic values of the preferred claims are: Preferred A: $8 / 0.05 = $160. Preferred B: $12 / 0.05 = $240. Suppose each company has $350 of assets, comprising $100 of Bitcoin and $250 of cash earning 5%, with the Bitcoin ultimately distributable to common shareholders. The cash interest fully funds either preferred dividend. Under these assumptions, the respective economic values attributable to common shareholders are $190 and $110. Yet a metric deducting the identical $100 liquidation preference from identical $350 asset balances reports the same $250 residual for both companies. Identical liquidation preferences. Identical assets. Identical liquidation-adjusted residuals. Different economic values belonging to common shareholders. That is a mathematical counterexample to the proposition that liquidation-preference-adjusted backing, by itself, identifies the ex ante economic value of common equity. And the distinction extends to Bitcoin price exposure. Suppose a company issues perpetual preferred at par and purchases Bitcoin with the proceeds. At issuance, the additional Bitcoin assets are exactly offset by the additional liquidation preference. CEBE can remain unchanged. But the company now holds more Bitcoin against a fixed-dollar senior deduction. If the Bitcoin price subsequently rises, the additional Bitcoin appreciates while that contractual deduction remains fixed. The dollar sensitivity of the calculated residual to Bitcoin's price has increased, even though CEBE was unchanged at issuance. This is not necessarily a prediction of the common stock's market beta. Actual common equity sensitivity depends on the economic behavior of the senior claims and the enterprise. But it demonstrates that an unchanged net coverage snapshot does not establish unchanged Bitcoin price exposure. An important qualification is that CEBE doesn't mathematically assert that ex ante and ex post economic values are identical. But when CEBE is presented as what common shareholders economically "own" today, it implicitly treats a contingent liquidation entitlement as though its full settlement amount is the appropriate deduction from present economic value. The ex post waterfall is one possible outcome incorporated into ex ante valuation. It is not a substitute for ex ante valuation. I like CEBE. I think it's a useful tool for comparing liquidation-preference-adjusted Bitcoin backing across companies, and net metrics have an important place alongside gross metrics. My criticism is specifically about using these measurements to describe what common shareholders economically "own" or are "exposed to" in a going concern. Those claims require accounting for the present economic value of the contractual rights throughout the capital structure. Ex ante economic value incorporates the possibility of ex post liquidation. The liquidation waterfall alone cannot establish that present value. That distinction matters when interpreting what these metrics actually measure.