Goldstein

Why MicroStrategy Bought 21 Thousand Bitcoin And Why Other Companies Will Too

Yesterday was a landmark moment for Bitcoin and its adoption as a reserve asset, MicroStrategy, a NASDAQ-listed company, bought 21,454 Bitcoin at a total of $250 million.

After the quick takes on Twitter have been made and the dust has settled, we want to have a close look at the press release to find out what really made MicroStrategy choose Bitcoin as a reserve. From there we might just be able to deduct how impactful this fact really could be for the future of Bitcoin.

Their press release starts as follows (bold highlights by me).

TYSONS CORNER, Va.–(BUSINESS WIRE)–Aug. 11, 2020– MicroStrategy® Incorporated (Nasdaq: MSTR), the largest independent publicly-traded business intelligence company, today announced that it has purchased 21,454 bitcoins at an aggregate purchase price of $250 million, inclusive of fees and expenses. The purchase of Bitcoin cryptocurrency was made pursuant to the two-pronged capital allocation strategy previously announced by the company when it released its second quarter 2020 financial results on July 28, 2020.

The main point in this paragraph are the 21,454 Bitcoin purchased at a total of $250 million. Disregarding that fees are included, 21,454 Bitcoin at $250 million comes down to an average price of $11,652.84 per Bitcoin.

This relatively high price, given that Bitcoin only recently reached back up to $12,000 and traded as low as in the 3 thousands in March allows for two possibilities. The first is that MicroStrategy made a wholesale purchase, potentially OTC, over the last few days and did not average into the position over the past couple of months. The second option would be that they have considerable cost allocated to the purchase effort and custody of their Bitcoin, and those costs raise the average buy-in price accordingly. For now we don’t know the answer to this as they have not released how and with whom they custody or when they made their purchase. Yet, we can take a cue from their Q2/2020 results in which they announced their plan on how to invest the $250 million on 28 July 2020. Unnoticed by seemingly everyone, MicroStrategy actually mentioned that they’re considering to invest in “one or more alternative investments…such as bitcoin”. So I assume they had their minds set pretty straight on Bitcoin already at the time of the announcement and bought their share shortly after at prices over $11,000 and custody costs etc. only play a minor part in the average cost per Bitcoin.

They continue with general information referring to their Q2 results again until explaining why they invested in Bitcoin.

“Our investment in Bitcoin is part of our new capital allocation strategy, which seeks to maximize long-term value for our shareholders,” said Michael J. Saylor, CEO, MicroStrategy Incorporated. “This investment reflects our belief that Bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash. Since its inception over a decade ago, Bitcoin has emerged as a significant addition to the global financial system, with characteristics that are useful to both individuals and institutions. MicroStrategy has recognized Bitcoin as a legitimate investment asset that can be superior to cash and accordingly has made Bitcoin the principal holding in its treasury reserve strategy.”

Here MicroStrategy is saying one thing and implicitly stating another too. They’ve identified that holding cash, meaning US dollars, is a worse investment for them than buying Bitcoin. Additionally, what they’re not saying but implying is that Bitcoin is a better investment for them, not only than cash but also than "stocks, bonds, commodities such as gold". As, again, per their Q2 results they were considering investments in all these but settled on Bitcoin as the most viable option.

The second statement to note is the conscious decision to call Bitcoin “a dependable store of value”. This aligns fully with the current view of Bitcoin’s main value proposition and main driver until a broader adoption has taken place.

Mr. Saylor continued, “MicroStrategy spent months deliberating to determine our capital allocation strategy. Our decision to invest in Bitcoin at this time was driven in part by a confluence of macro factors affecting the economic and business landscape that we believe is creating long-term risks for our corporate treasury program ― risks that should be addressed proactively. Those macro factors include, among other things, the economic and public health crisis precipitated by COVID-19, unprecedented government financial stimulus measures including quantitative easing adopted around the world, and global political and economic uncertainty. We believe that, together, these and other factors may well have a significant depreciating effect on the long-term real value of fiat currencies and many other conventional asset types, including many of the assets traditionally held as part of corporate treasury operations.”

This section highlights the risks associated with unmitigated government spending that many macroeconomic thinkers, Austrian economists and Bitcoiners have pointed out over the past months and shows that corporate leaders agree with the sentiment that the end of fiat currencies is a real identified risk.

In considering various asset classes for potential investment, MicroStrategy observed distinctive properties of Bitcoin that led it to believe investing in the cryptocurrency would provide not only a reasonable hedge against inflation, but also the prospect of earning a higher return than other investments. Mr. Saylor articulated the opinion, “We find the global acceptance, brand recognition, ecosystem vitality, network dominance, architectural resilience, technical utility, and community ethos of Bitcoin to be persuasive evidence of its superiority as an asset class for those seeking a long-term store of value. Bitcoin is digital gold – harder, stronger, faster, and smarter than any money that has preceded it. We expect its value to accrete with advances in technology, expanding adoption, and the network effect that has fuelled the rise of so many category killers in the modern era.”

This paragraph shows that MicroStrategy has done its homework on what makes Bitcoin valuable – a few things stand out.

They mention the architectural resilience which in my view is pointing to the network security of Bitcoin and how a higher price and rising hash rate leads to a more secure network that makes double spend financially irresponsible to attempt. This is important for companies to understand if they consider Bitcoin as an investment.

Next is the community ethos of Bitcoin. This could mean several things but I don’t think it’s our little community of Bitcoin Twitter but rather the ethos of the community to understand the value of a hard cap of 21 million Bitcoin and the shared understanding that this cap will not be removed.

Last but not least, the network effect. This is what many people outside of tech have still issues with understanding but is essential. Bitcoin was the first of its kind and has grown tremendously over time. The effort, work and time put into developing the system, the community, the hardware, the understanding is so important to Bitcoin and gives it a network effort much bigger than any other cryptocurrency. These qualities cannot be taken away and extend Bitcoin’s reach ever more. And although there are a myriad of other coins out there, money will always accrue to the best money and has been identified correctly by MicroStrategy.

So what does MicroStrategy’s move mean for the future of Bitcoin?

For one, it broke the glass ceiling of Bitcoin not being a viable reserve assett for corporations, mainly due to its fluctuating valuations.

As Andy Yee put nicely, “Paul Tudor Jones removed career risk for hedge fund managers from investing in Bitcoin. MicroStrategy removed career risk for CFOs from putting company treasury into Bitcoin”. This cannot be overstated as it sets a precedent allowing companies to realistically consider Bitcoin as an asset to invest in and profit of its appreciation. With this step taken, many companies will have to evaluate their risk profile and review whether their previous assessments of gold, cash and other assets need revisiting.

Consider for a moment how many companies there are in the world and then take note of the fact postulated by Michael Goldstein that “no more than 860 individuals or companies can have 21,454 bitcoins right now” because that is the total amount of Bitcoin in existence today. So price appreciation will be one big result of more companies dipping their toes into Bitcoin but it’ll also mean less investment into traditional assets that currently would get that investment, leading to them depreciating.

On the time perspective we have to consider the decision making processes and time needed for education. MicroStrategy seemingly has made a call end of July 2020 and invested a big amount on short notice but based on their press release they clearly had done their research on Bitcoin’s value proposition and that is something every company will need to do in their own time horizon. Entertainingly, MicroStrategy’s CEO, Michael Saylor, tweeted in 2013 that “Bitcoin days are numbered” just to seven years later consider it the best option to invest in for his company, so education takes time but CEO’s and CFO’s will get there, but surely not at the same prices as MicroStrategy did.

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To the Bitcoin class of 2020

To the Bitcoin class of 2020, on this important day, I salute you!

This week you graduated from one of the toughest learning experiences of your life – be proud of that.

When you joined Bitcoin in the summer of 2017 most of you were green. Some thought Bitcoin was magical internet money, some hoped it would make you rich, and some of you, a very few, had at least heard of a little coin with a Shiba Inu as a logo. The barriers of entry to Bitcoin were low, and remain so for good reason, everyone is welcome. Yet the learning curve is steep, and you’re living proof of that.

After three tedious years you’re graduating from Bitcoin school a different person than than the one that entered. You’ve suffered and struggled, and are now being let out into the world to enjoy the spoils you deserve. But before we look ahead, let us take a look back at what you have achieved.

This class started at the end of a bloody civil war that ended on this day in 2017. An important victory was won for the decentralization of Bitcoin against coordinated forces with big pockets. But most of you had no awareness of that and it was simply the beginning of the the hype phase for you – Bitcoin knew only one way: up! You thought that’s just how this is, a new, digital world, untied from the burdens of the physical realm, making you rich beyond your wildest dreams – it wasn’t, it didn’t.

Advice given by parents was not heeded, you didn’t need to understand to make a profit, you’d follow the whisperers on Twitter and they’d guide your way. Yet, life doesn’t work that way. The whisperers turned out to be no better than the pied-piper of Hamelin. They told you that Bitcoin was old and slow and had too high fees. They told you of newer, faster, better networks. Ethereum and Thor would allow scripting on the blockchain, whatever that meant. Ripple would build an international remittance system, also faster and better than today’s, and the banks would love it. Every day another coin made the headlines, ICO’s left, right and center and each again better than the other. Bitcoin was legacy, ERC-20 the future. Everything on the blockchain, everything on Ethereum, everyone would be rich.

On top of that there were remnants of war in Bitcoin but you still couldn’t make sense of it. Who’s on what side? What was it even about? Why did it even matter? It’s just legacy tech, kept around for sentimental reasons. Who cares whether it’s BTC or BCH or later BSV if it’s obsolete anyway.

But then, all of sudden, as fast as it began for you, it was all over. Everyone was getting rich one moment and then everyone was getting poor, including you. This is were it ended for a lot of your fellows, the parties were over, the money was gone, the yachts were taken back by Wall Street.

It was time to reassess where it all went wrong. Luckily, you had discovered the old writings from the Satoshi Nakamoto Institute and Michael Goldstein had told you in no unclear way that everyone’s a scammer. It was a lesson to be learnt, an expensive one, but necessary. You felt duped, dumb for falling for narrative instead of substance but you sensed a lifeline. Some of you sold your Tokens for Sats, some kept around a few bags because another rally might redeem them. Not everyone made it through to today, think of your fallen friends but don’t forget why you succeeded where they failed.

Yet, the bear market of 2018 was brutal, your studies so far came at a high cost. You had to go back to making a living, like your parents did. Some of you surely got closer to your parents than ever before, living in their basement and all that.

You spent long nights reading forum posts by people way older, way smarter than you, talking about technologies you couldn’t comprehend. Cypherpunks and gold bugs, it all didn’t make sense.

Why is the old world order suddenly at stake? Why do you need to rid yourselves from the shackles of the federal reserve? Why would the government not have your best interest at heart? But on your way to work, in your old Toyota Corolla, you found support. You’d listen to Marty and Matt, guys like you that rambled over Whiskey and told you Tales from the Crypt, your personal support group, they told it like it is.

Things started to fall into place and you felt the excitement come back. Maybe there is something to this old tech after all. And then, in a two punch like you’ve only ever seen Tyson deliver, it hit you. In March ’18 a guy you’d never heard of before, Vijay Boyapati, published an article that made it all click, “The Bullish Case for Bitcoin”.

Bitcoin is like Gold!
But on the internet!
It’s Digital Gold!

That was something you could understand, Gold is worth something because it is scarce. And Bitcoin has the same characteristics but is even better because it’s more difficult to confiscate – boom!

And then, in April, the second punch, stronger, without mercy, Saifedean Ammous dropped The Bitcoin Standard. It was over for you, there was no going back now, you felt converted, it was weird and beautiful at once. How can simple truths be so difficult to uncover, you wondered. But now you saw and you could not unsee.

Over the year there’d be more speakers expanding your horizon to different topics. You couldn’t watch enough of Andreas’ videos and discovered Austrian Economics and Libertarianism from Stephan Livera. You’d even read up on Mises and Rothbard but preferred Hayek, who’s a bit more accessible. On this one there’s no shame, you’ve already reached an understanding of economics far above most mainstream pundits, let alone a certain New York Times quacker.

And when you had studied enough, read enough, you started to tinker. Pierre Rochard helped you launch your first node while Rodolfo Novak made sure your few Sats were stored safely. The marvel that are OpenDimes still fascinates you to this day. But there was more to discover, it was time to meddle with a Raspberry Pi and for the first time sync the full Bitcoin blockchain. You were now able to validate your own transactions and a sense of freedom, of independence, overcame you – something changed and it felt good.

1.5 years into your journey had grown, your old friends and family didn’t recognize you anymore. They couldn’t follow your thinking and frankly, they became likely a bit worried too – people that step out of line scare others. You couldn’t understand this because you now knew something was wrong in the world and you had an idea how to fix it. You wished they’d understand but you knew they’d need to find out at their own time. Marty had taught you well, you planned to stay humble and stack Sats and help everyone who really wanted to know.

So what was next? Where could Bitcoin go from here? In March 2019 you learned what might lie ahead, when the then unknown Nym PlanB released his Bitcoin Stock-to-flow model. An eye-opener in terms of Bitcoin valuation models and a guideline as to how Bitcoin works in predictable regularity of four-year rhythms. How beautifully it mixed with what Saif taught you a year ago, was baffling, so much more to learn, ever deeper the rabbit hole goes. You loved the model, everyone loved it, but only time will prove it – or not. For the remainder of 2019 you dug in further, confident in having discovered basic truths but still in doubt whether this truth will ever come to be in a world pretty much ignorant of it.

You started to follow Bitcoin Core changes on GitHub, enjoyed seeing the constant hashrate updates on Clark Moody’s Bitcoin dashboard and marveled how a single person could’ve created a thing of beauty like the difficulty adjustment. Tuur Demeester provided further insights into the history of money and markets with “The Bitcoin Reformation” and Robert Breedlove deepened your understanding of money and time.

When 2020 rolled around you were ready, looking forward to your first halving. The halving, this incredible instrument reducing Bitcoin’s block subsidy by half every 210,000 blocks. But we all know how 2020 turned out to be and all and everyone got blindsided by the pandemic. You had to put your studies aside to care for loved ones but the halving happened nonetheless on 11th of May, 2020 – as much an event as it was a non-event, predictable yet exciting.

So now we’re here, in the midst of 2020, on the day of UASF, the day SegWit got activated and now you know what that meant. Three years after you began your studies, you are graduating and you deserve it, you made it.

It wasn’t easy and it isn’t supposed to be easy, your parents knew that, your grandparents knew that, you know that now. Don’t neglect that struggle, you have taken a long way, learned a lot, made a lot of mistakes but now you’re here and you understand what Bitcoin is. And as with Bitcoin itself, that is enough.

Take pride in what you went through and derive strength from it.

Because as much as I’d like to tell you what the future holds, and I know I promised to do so, I cannot, nor can anyone else. You know this now too, you know you shouldn’t listen to anyone blindly. You can hope to trust, but always verify. Find your own truth and walk with it. Have conviction in what you believe but be able to adapt, “strong opinions loosely held” can get you a good way. And if ever in doubt, think of the few simple truths you know for sure.

Bitcoin will be there, chugging along, tick tock, like clockwork, tick tock tick tock, block by block.
Bitcoin is open, it is for everyone to join and make of it as they wish.
And now, you, and the class of 2020, are part of Bitcoin and Bitcoin of you! You’ve earned it, revel in it – salute!

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