Why MicroStrategy Owns Over $1 Billion in Bitcoin
Unpacking Michael Saylor’s Bitcoin bull-thesis
Who is Michael Saylor?
Michael Saylor is the CEO of MicroStrategy, which is primarily a business intelligence software company.
Over the last year, the company has spent an insane $2.7 billion to purchase over 105,000 bitcoins. They first started converting its cash reserves into bitcoin in August 2020 and has since gone all-in and even taken loans to buy more.
Despite only learning about bitcoin a year ago, Michael Saylor, the man behind this huge move, has quickly become a prominent figure in the crypto space.
Saylor has been a relentless champion for bitcoin. He has held Bitcoin for Corporation conferences, released a Bitcoin Corporate Playbook that teaches other corporations how to add bitcoin to their balance sheet, and he keeps buying the dip.
Why is this a big deal?
Last year, 2020, was the year of institutional adoption. “The institutions are coming” was once a semi-joke by early bitcoin adopters. Besides MicroStrategy, other big names like Tesla and Square have also added bitcoin to their balance sheets making it a reality.
Institutional adoption is big. This is because fundamentally, the value of bitcoin is proportional to the value accrued to it by people.
So if you’re hoping for bitcoin to hit $100k and beyond, institutions (and their money) are necessary to truly reach global adoption.
Michael Saylor has made some huge moves and contributed greatly to bitcoin adoption. Today we’ll look at what got into this man’s head to make him so bullish on bitcoin.
Cash is trash (and so is everything else)
MicroStrategy had a big problem. It had $500 million of cash in its treasury, with no good place to put it.
Saylor uses the concept of real yield to determine which how to best allocate his phat stacks of cash.
Real Yield = Nominal Yield — Inflation
Cash
When the pandemic hit, the US money printer started going brrr (officially known as quantitative easing), and the money supply increased by 26% in 2020. For comparison, money supply growth has averaged 5.8% a year from 2010–2019.
Real yield of cash in 2020 = 0 (nominal yield) — 26% (inflation) = -26%. Trash.
Bonds
To stimulate the economy, central banks lowered interest rates. Some basic economics:
Lower interest rates = Cheaper to borrow money = People are more likely to borrow money = People do shit with the money (more productivity) = Economy is stimulated
Lower interest rates also mean lower returns on bonds which are essentially loans between an investor and a corporation.
If you bought a 30-year bond in 2020, every year your money would grow 2%.
Real yield of bonds = 2% - 26%= -24%. Trash.
Assets (real estate/stocks)
As a result of the massive increase in money supply, most people expect inflation to rear its ugly head through changes in the Consumer Price Index (CPI), a measure of prices of consumer goods and services. But in a 12 month period from Jun 2021, CPI has only gone up 5.4%.
So, where is the money going?
Inflation is happening on assets instead. The valuations of companies have gone up tremendously while their economic output has remained relatively un-tremendous.
The S&P500 has appreciated 38% in the last year, these are historical numbers considering that it has averaged ~10% growth per year since inception.
But take a look at S&P returns after its been adjusted for inflation.
The green line is the normal S&P500 chart and the red line is the inflation-adjusted chart. Despite making historical highs, after being adjusted for the money supply, equities don’t look like it’s doing too hot anymore.
So, the money has gone into assets like equities and real estate, putting a nice juicy premium on them without a proportional increase in economic output. This makes them also trash.
Bitcoin is dematerialized money
We are currently in the age of dematerialization. Saylor claims that the most successful investments of the past 10 years have been a dematerialized something.
Facebook dematerialized human relationships.
Apple dematerialized mobile “networks”.
Google dematerialized information.
Amazon dematerialized retail.
Bitcoin is the dematerialization of money.
The dematerialization of things gives way to progress in the world.
One way to understand dematerialization is digitization. And digitization provides the ability to scale and innovate on top of the previous material goods.
“In order to give music to millions of people, you have to extract the music out from the CDs, records, instruments and orchestras. To give information and education to millions of people you have to suck it out of books, libraries, schools and put it on a digital platform like Youtube.
Bitcoin sucking the monetary energy out of real estate, bars of gold and silver, bonds, stocks and collectibles and dematerializing it.”
Bitcoin allows value to live on a decentralized digital network.
This allows bitcoin to:
- Retain its value through programmed monetary policy (deflating max supply of 21 million)
- Be accessible anytime, anywhere, by anyone
- Have large amounts of value can be easily transferred (impossible for gold)
- Get upgrades e.g. taproot
- Have additional use cases to be built on top of it e.g. layer 2s like lightning
Bitcoin’s network effect makes it extremely valuable
Metcalfe’s law states that the value of a network is proportional to the square of the number of users of the system.
This means that as the number of users of a network increases, its value increases exponentially.
Here’s a really good video explaining it.
Bitcoin is the first internet money in the world.
Money is the greatest social network of all.
Bitcoin is maybe the greatest social network also.— Winklevoss Twins
Once a network is large enough, it becomes extremely hard to unseed. Just think of Twitter, Instagram, or Facebook. Once all your friends are on one platform, it’s extremely hard to get everyone to switch to a new one.
Bitcoin now has around 80,000 nodes and has hit highs of over 1 million active daily addresses.
Diversification doesn’t make sense all the time
If I knew everything else is going to zero, why would I diversify?
Every stock is a currency derivative. Every stock is based on expected cash flows, denominated in fiat currencies. The same goes for bonds, derivatives, real estate, and cash itself.
Therefore, a portfolio of stocks, bonds, and ETFs is not really diversified since they all correlate to the same currency.
If the dollar is collapsing, and everything else is derivated from the dollar, what other option is there?
Saylor thinks bitcoin is the answer, and there’s no reason to not go all in.
Volatility is a 2nd/3rd order concern
Saylor provides 4 reasons why volatility isn’t a good reason to avoid bitcoin:
- All other assets have a negative real yield
- The 24/7 trading of crypto markets makes it more liquid than equities (stocks), real estate, and precious metals
- Institutions and other big players entering the market are damping the volatility with automated bots buying every minute to not move the market
- “If there’s blood on your collar, dry cleaning is the least of your concerns”
I find this to be a good way to think about it:
Option A: Go for “stable returns” and hold the S&P500 Index fund, get 7–10% non-inflation-adjusted on average with price risk
Option B: Buy bitcoin, the only asset that has held its value against inflation, risk 50–90% drops with the possibility of getting multiple Xs on your capital
What about Ether (ETH) and other tokens?
“Ethereum is a dematerialised operating system competing against broad technologies like iOS, Windows, and Android. And the applications built on top of it are competing with the financial companies and banks.
Saylor thinks the biggest risk factors for $ETH are its competition and regulatory clarity.
Competition
More competition equals more risk:
- A decentralized exchange (DEX) is not only competing with centralized crypto exchanges like Binance and Coinbase but also with the NASDAQ and NYSE.
- All applications also need to be optimized for functionality and performance in order to beat out their competition
- It’s hard to imagine that decentralized applications and operating systems will compete favorably against big tech, and eventually replace the traditional financial system
- Bitcoin has less competition. As a digital store of value, bitcoin just needs to be durable and maintain its integrity
- Even amongst the decentralized apps and platforms, there are no clear winners to bet on
Regulatory clarity
Regulatory risk is probably the biggest risk to crypto.
“What they’re (regulators) saying is, we’re not regulating spot market ETH and spot market BTC, because there is a general consensus that ETH 1.0 and bitcoin are property, and that has not been overturned.”
Bitcoin and ether tokens are safe since regulatory positions on them are clear.
Saylor thinks that bitcoin has the least regulatory risk out of all cryptos. It has a simple ethos, function, and mechanics. Even if platforms and applications get built on top of Bitcoin, the risks will accrue to the respective layers.
“However there isn’t consensus about the definition of a security token versus a commodity token. If application tokens are regarded as securities, regulators will start shutting protocols with these tokens down.”
We are already beginning to see this come into effect. Binance, the world’s largest centralized exchange, is facing serious regulatory heat in Europe and Malaysia.
Even Uniswap, a fully decentralized exchange (DEX), has been delisting synthetic tokens and tokenized stocks (e.g. $TSLA in a token form trading on crypto protocols) under new regulations. Read more about the intricacies of the issue here.
Moreover, DEXs currently don’t comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations. That’s the point of decentralization — to bypass censorship and central control.
However, this poses a huge risk since the very point of regulation is to enforce KYC and AML for tax purposes and limiting criminal activity. This makes the future landscape for all decentralized applications extremely uncertain.
Here’s some food for thought:
Are decentralized applications going to throw away their life’s work to stand up to regulation? Even if they do, how will their accessibility and functionality be limited? What will it do to their network effects?
Final Thoughts
I liked studying Saylor because he’s like many of us — he wasn’t here since the beginning, nor any of the other halving cycles in ’13 and ’17. He discovered bitcoin just last year and went all-in.
Michael Saylor is a big picture guy. He reasons from first principles to find the best long-term investment that can minimally maintain the value of his assets, and at best achieve crazy capital appreciation.
He sees bitcoin as a scarce, valuable piece of digital property that is the only rational store of value in today’s c̶o̶n̶s̶t̶a̶n̶t̶ ̶m̶o̶n̶e̶y̶ ̶p̶r̶i̶n̶t̶i̶n̶g̶ macroeconomic landscape. And he’s not concerned about short-term price movements.
However, Saylor is not a bitc0in g0d. He’s a smart man with conviction shown through his actions. Learning where his conviction comes from will serve as fodder for our own. Take what he says with a pinch of salt, have your own opinions, DYOR, and take responsibility for your own actions (or inaction).
Only time will tell whether Saylor’s big bet will pay off.
This was an aggregate from three interviews with Michael Saylor:
