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The MicroStrategy Story: Why One Company Is Going All-in on BitcoinDownloadSubscribe

The MicroStrategy Story: Why One Company Is Going All-in on Bitcoin

Bitcoin is in a phase shift from an emerging currency primarily held by retail investors to a strategic financial asset that appeals to large, institutional investors. A milestone has just been reached in that transition.

This is the story of the Bitcoin purchase that will define 2020 and open the gate to increased institutional buying in 2021 and beyond.


    What Happened?

    In the third quarter of 2020, MicroStrategy, a business intelligence company, bought $250,000,000 worth of Bitcoin. A few weeks later they announced another $175 million dollar purchase, bringing their total investment to $425 million.

    Given that MicroStrategy’s entire balance of cash reserves is $500 million, the company effectively bet about 90% of its capital on this bold allocation.

    In a public press release, the company claimed, “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.”

    The press release is worth reading in full, but the gist of it can be boiled down to a few key points:

    • The United States dollar is likely to weaken over time (inflate), thus making it not an ideal store of value
    • Bitcoin is a hedge against inflation and has historically produced higher returns than other investments
    • Bitcoin is a better store of value than gold, and BTC’s value will go up as the network effect grows

    In terms of sizing, MicroStrategy’s $425 million bought them 38,250 Bitcoin. When accounting for coins that haven’t been mined yet (only about 18.5 million Bitcoin have been mined to date) and lost coins, realistically, MicroStrategy bought something like 1/900th of all of the Bitcoin currently circulating in the world. This is tremendous.

    About 18.5 million Bitcoin have been mined so far, according to blockchain.com


    How it happened

    No company just goes out and buys nearly half a billion dollars’ worth of Bitcoin on a whim. The key factor in MicroStrategy’s decision was Michael Saylor, the company’s CEO. Although Saylor owns “just” 23.7% of the company’s shares, he controls 72% of the voting power.

    This means that Saylor was able to push the purchase through without getting board approval. This is key since Bitcoin is still far from a consensus asset. Without majority voting power, it would be hard to convince an entire group of risk-averse board members or shareholders that a company should put half of its reserves in an eleven-year-old cryptocurrency.

    While we expect that more companies will decide to allocate some of their reserves to Bitcoin, it’s reasonable to assume that these allocations will be 1 or 2% of their reserves, not 90%.


    Three Reasons Why this Purchase is Important

    Without a crystal ball, it’s impossible to say what the ultimate long term effects of MicroStrategy’s purchase will be. That being said, even without oracle powers there are already a few conclusions that we can reliably make about why this purchase is likely to be impactful.

    1. Bitcoin Gains Legitimacy

    For those deep into Bitcoin, the value proposition of a decentralized, hard money digital asset seems so evident that it’s hard to believe the world doesn’t see it. However, by and large, they don’t. Tens of millions of people have heard about Bitcoin in passing and formed some kind of vaguely negative opinion due to BTC’s being associated with,

    • Bubbles
    • Tax fraud
    • Darknet markets
    • Twitter extortion schemes
    • Complicated technology

    Once a person has made up their mind about something, even based on flimsy evidence, it often takes a lot to get them to reevaluate their judgment. A publicly-traded company putting ninety percent of its cash reserves into Bitcoin is a lot.

    By purchasing so much Bitcoin, MicroStrategy is further legitimizing the asset and opening up the possibility for other businesses to do the same thing. It’s a lot easier to be the 2nd business to buy Bitcoin and a heck of a lot easier to be the 20th business to do so. Any financial decision is easier to make if the company’s treasurer can point to dozens of other companies doing the same thing.

    2. Bitcoin Becomes Harder to Ban

    One of the concerns about Bitcoin is that governments will ban it. While that might have been relatively simple to do in 2013 or 2014, at this point the ship may have sailed. It would be difficult for a large government, i.e., the United States government, to ban an asset held on the books of a publicly-traded company. The outcry would be strong and fast.

    This is especially the case if it’s not just one company holding Bitcoin but dozens, and if the price isn’t static but going up. There is a massive difference between banning a fringe asset held by twenty thousand technologically sophisticated libertarians, and a popular asset held by dozens of large companies and hundreds of other financial institutions.  

    Companies like MicroStrategy and investors like Paul Tudor Jones have influence, they can push back against government threats to Bitcoin. The longer governments ignore crypto, and the more people and companies that adopt the asset, the more difficult it becomes to ban BTC.

    3. Bitcoin’s Price Goes Up

    There are two aspects of the MicroStrategy purchase which affect Bitcoin’s price. The first is the more obvious, the purchase itself. Anytime an investor purchases 1/900th of an asset’s entire supply at one time, it’s likely to impact price positively. The investment itself is just a short term boost. The larger boost is likely to happen in the long run.

    MicroStrategy is not a weak hand. It won’t be selling its Bitcoin if the price dips 50%. Michael Saylor has already seen the huge price crash in March, he understands how volatile Bitcoin can be and he wouldn’t have made this purchase if he was going to capitulate on a drawdown.

    So we can say with some confidence that these 38,250 BTC have been taken out of the market for the long term. That means that as Bitcoin’s price rises and new buyers enter the market, fewer Bitcoin is available for them to purchase. Fewer BTC plus more demand equals higher prices.


    The Long Term Implications

    MicroStrategy stands to profit immensely from their investment in Bitcoin. Even if we assume a conservative Bitcoin price of $50,000 in 5 years, the company will still have turned $425 million into $2 billion, while avoiding a decrease in purchasing power associated with holding dollars.

    As mentioned earlier, the most considerable long term implication is that MicroStrategy’s Bitcoin allocation “gives permission” to other companies to do the same. It normalizes the investment and sets a new precedent.

    One final thought is that because MicroStrategy is holding so much Bitcoin their stock price is going to reflect the price of Bitcoin, just as a gold miner’s stock reflects the value of their gold reserves. The implication is that people who want to invest in Bitcoin can buy MicroStrategy ($MSTR) as a proxy for Bitcoin within the confines of the existing financial system.


    Bitcoin on the Rise

    While we’ve covered a lot in this article, anyone interested in getting the full scoop on what MicroStrategy’s purchase means for Bitcoin should listen to this recent podcast. In it, Preston Pysh lays out his case for why the MicroStrategy news is even bigger than anyone thinks, and what the long term implications will be for the cryptocurrency market.

    Five years ago, Bitcoin was a fringe asset supposedly only used by tax cheats and darknet buyers. How fast the narrative can shift, as it’s now reached the point where a publicly-traded company believes it has a good reason to put half of its cash reserves into this nascent asset.

    The MicroStrategy purchase is a sign of Bitcoin’s growing legitimacy, as well as a sign of the weakness inherent in the existing financial system. Out of control central banks, weakening currencies and trillions in stimulus are all pushing investors toward hard assets that cannot be printed. For the last hundred years, that’s meant gold; for the next hundred years, that may just mean Bitcoin.

    Information provided is for informational purposes only and should not be considered financial advice. Investing in crypto assets is speculative and carries a high degree of risk; you may lose some or all of the money that is invested. Past performance is not indicative of future results.

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