MicroStrategy CEO Michael Saylor made a wild bet—to invest heavily in Bitcoin—and it is paying off.
March 2020: the pandemic is single handedly interrupting the flow of our economies, and halting business activity altogether. Michael Saylor, MicroStrategy’s (MSTR) CEO, believes his business lacks a certain gusto despite solid fundamentals, and revenues of $500 million. The extra cash is however not dry powder for M&A activity or more R&D, but rather, an opportunity to invest and better manage working capital. The problem is that markets are down and returns on equities are uncertain. So, Saylor does the only sensible thing in the eye of an increasingly aggressive central bank that prints money and promises inflation, he dives headfirst into cryptocurrencies. With market volatility plunging prices to recessionary levels and the future of cash looking increasingly dubious, Saylor decides to make the bold move to convert his cash to bitcoin.
April 2020: Michael Saylor is on the quarterly earnings call discussing MicroStrategy’s performance. He presents analysts with his reinvestment strategy, a traditional equity tactic and a new alternative investment portfolio where bitcoin takes a certain front seat position. A couple of days later, MicroStrategy’s treasurer buys 21,454 bitcoins representing a sum of $250 million, for an average bitcoin price of $11,000. This is the beginning of the firm’s long honeymoon period with cryptocurrencies.
PayPal and Square suddenly allow customers to use bitcoin on their platforms and many more firms begin following MicroStrategy’s bitcoin move. Saylor’s conviction only bolsters further. He then decides to issue convertible debt in order to finance another round of bitcoin and is bullish enough to buy more during the January 2021 25% correction period.
Today, MicroStrategy holds 71,079 bitcoins at an average price of $16,109 for an aggregate sum of $2.6 billion representing 40% of MicroStrategy’s market capitalization. Since Saylor’s earliest purchase, the value of Bitcoin has soared 400%, an exponential growth that is not tied to any operational results, at least not in the traditional sense of the term. Because of MicroStrategy’s decision, the firm has now become a ‘’proxy’’ stock on the value of bitcoin. Many institutional and retail investors have a positive outlook with regards to cryptocurrencies, but many are risk averse, or do not have the capital on hand. Therefore, they turn to buying proxy stocks like MSTR and Morgan Stanley (MS) is an example. MS now owns 10% of MicroStrategy.
Graphic : MicroStrategy stock performance over the past 12 months
This success story has made envious more than one organization. Today, a copious number of groups have made the allocation over to bitcoin in order to join the movement. Some public companies are going even further as to change their business structure to emulate that of MicroStrategy’s. They see a benefit in pooling the bitcoin investment and working together and Saylor supports this movement. In fact, the CEO organizes open conferences to discuss his bitcoin strategy with others. During seminars, Saylor explains in detail how to proceed with bitcoin allocations case by case. This engenders a sort of Nash equilibrium whereby more firms buying into the strategy would increase the price of Bitcoin, and thus the value of their stock.
It is fair to say that after the success seen by Saylor, an increasing amount of companies could see it fit to transfer over their liquidity to more bitcoin. Cathie Wood, Ark Invest’s portfolio manager, has calculated that if S&P 500 companies invested on average 1% of their liquidity in Bitcoin, that the price of Bitcoin would grow to $50,000. Grow this 1% to 10% and see the price of Bitcoin soar to $400,000. Imagine what the price could be if companies outside the S&P 500 started buying too. Soon, we will know more about such a phenomenon as more investors get lured into the vision. As an example, we recently saw Elon Musk’s Tesla invest $1.5 billion in Bitcoin, raising the price of Bitcoin back to previous levels and generating a lot of buzz around the future of Bitcoin. Bitcoin is currently pricing at $46,500. Afterall, if Elon Musk builds rockets for Mars, how bad could bitcoin really be?
Graphic : Hypothetical Bitcoin price levels based off S&P500 companies balance sheet cash allocations (Source: Ark Invest)