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18 September 2020

MicroStrategy's Bitcoin Investment Thesis

Amidst all of the DeFi volatility, drama and excitement, Bitcoin has started to seem rather boring. Its price is more or less flat to where it was a year ago and you can’t even farm Yams with it.

While some have started to view Bitcoin as a useless digital rock, someone did find an interesting use case for it. This week, more details surfaced around how MicroStrategy CEO Michael Saylor convinced the board of a publicly traded company to allocate nearly all of the company’s $500M cash position to bitcoin.

Michael Saylor

Saylor graduated from MIT in 1987 and founded Microstrategy at the age of 24. MicroStrategy is a “Business Intelligence” company, which basically creates software that allows companies to use their own data to drive decision making.

Interesting side note - Saylor, like any good 90’s internet entrepreneur, also bought a bunch of internet domains and was the guy who ultimately sold Voice.com to Block.One (EOS) for $30M.

MicroStrategy’s’ $500M Problem

To most people, having $500 million in cash doesn’t sound like a problem. Up until recently, it wasn’t for large corporations either. There was a time before the ‘08 financial crisis when the risk free rate of return on cash was 5% a year. This means a company could sit on $500M, earn $25M a year for doing nothing, and have cash on hand for a rainy day.

Fast forward to today, when the risk free rate of return has plummeted to 0.69% due to loose fiscal policies (money printer go BRRRR) alongside inflating asset prices, and it’s a different story. In Saylor’s own words, “we just had the awful realization that we were sitting on top of a $500 million ice cube that’s melting.”

Cash is Trash

So what’s a corporation to do with a $500M melting ice cube? It turns out it’s not that easy to unload half a billion dollars in a short amount of time.

You could buy back half a billion of your own company’s shares. For a company like MSTR, Saylor estimated that would take 4 years. Time MiscroStrategy didn’t have.

You could buy real estate. However, commercial real estate prices have collapsed post COVID while property owners still believe their assets are worth what they were in January. In other words, good luck getting a fair market price.

You could buy blue chip equities. Amazon, Apple, Google, Facebook. However, your risk is symmetric. They can each fall 50% just as easily as they can go up 50%.

That left Saylor with silver, gold, Bitcoin, and other alternative assets. A move the company announced it was exploring on a July earnings call.

A Bold Purchase

Saylor ultimately wanted something that could either get cut in half, or go up by a factor of 10. An investment akin to what buying Amazon or Apple in 2012 was. In other words, asymmetric risk.

As a student of technological history, Saylor observed that the winning strategy over the last ten years has been to find some kind of “digitally dominant network” that dematerializes something fundamental to society. Apple dematerialized mobile communications. Amazon dematerialized commerce. Google dematerialized the process of gathering information.

Something Saylor noted was common to all recent 10X opportunities is buying when they’ve achieved $100B+ marketcaps and are ten times the size of their next biggest competitor. As Bitcoin is the dominant digital network dematerializing money that’s 10x the size of any cryptocurrency competing to be a store-of-value (not counting ETH here), it fit the bill.

Making the purchase

With the thesis in place, the next thing Saylor had to do was get everyone at MicroStrategy to sign-off on the unorthodox decision. To do this, he simply made everyone go down the same Bitcoin rabbithole that most people in the industry have gone down.

He made everyone at the company watch Andreas Antonopoulous videos, read The Bitcoin Standard, watch Eric Vorhees debate Peter Schiff and listen to Pomp and NLW podcasts. With no strong detractors, MicroStrategy turned to execution. They first put $250M to work purchasing 21,454 BTC in August and another $175M (16,796 BTC) in September for a total $425M and 38,250 BTC.

What’s fascinating is that MicroStrategy was able to open such a large position without really moving the market or anyone even taking notice. This speaks to just how liquid of an asset BTC has become. To acquire the September tranche of BTC, Saylor disclosed that they traded continuously for 74 hours, executing 88,617 trades of .19 BTC every 3 seconds.

One for the history books

Skeptics noted that shares of MSTR have been on the downtrend since 2013, which is the real reason behind MicroStrategy’s bold move. Regardless, the move has interesting implications for the company’s shareholders. As TBI observed, MicroStrategy is now both a software company and with ⅓ of its marketcap in Bitcoin, a pseudo Bitcoin ETF. At the time of writing, MSTR is up 20% on the week.

Only time will tell if history looks back on this move as a brilliant strategic decision or a massive corporate blunder. In the short term, it scores a massive win for Bitcoin’s digital gold investment thesis.

Billionaire hedge fund manager Paul Tudor Jones is in. A publicly traded corporation has made Bitcoin it’s primary treasury asset. As CFOs and fund managers around the world undoubtedly take notice, one has to wonder, who’s next?

PS - I based a lot of this article on Pomp’s interview with Michael Saylor, which I recommend giving a listen.

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