Nasdaq

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.