Microstrategy’s bitcoin strategy

Microstrategy and its CEO Michael Saylor made big waves in the last year when they converted a large portion of its corporate treasury from cash to bitcoin. This move was applauded by Bitcoin-maximalists and crypto-fans but criticized by Bitcoin-skeptics and traditionalists alike. In the meantime, bitcoin has rallied over $50,000 and earned celebrity endorsements from Elon Musk and others. Eight months after Microstrategy’s initial purchase, it is a good time to look back and examine what they did and whether it was successful. — Author: Felix Hosse

What did Microstrategy do?

Michael Saylor, Microstrategy’s CEO, began his bitcoin journey around 2013, but not in the way one would expect from one of bitcoin’s most prominent proponents of recent years. In a tweet in December 2013, Saylor predicted that bitcoin will go the way that online gambling went. Online gambling, especially in the USA, has since returned to obscurity and has to be considered a failure. However, looking at the current impressive price development of bitcoin and having done more research on Blockchain technology, Saylor seems to have changed his mind.

In August 2020, Microstrategy announced that it made an initial purchase of $250 million worth of bitcoin. At an approximated price of $9,800 per bitcoin, this amounts to around 25,500 bitcoin. The total investment has increased since then and reached around 91,000 bitcoins in the beginning of March 2021. These purchases were special in multiple ways:

  1. Microstrategy was the first company to move the majority of its cash into bitcoin as a reserve asset.
  2. Microstrategy doubled down on its initial investment by raising additional funds through convertible bonds to acquire more bitcoin.
  3. Microstrategy conducted the purchases publicly and openly disclosed its motives behind the transactions.

Why did Microstrategy purchase bitcoin?

Following the purchases, the value of Microstrategy’s bitcoin holdings drastically appreciated in value. Based on this success alone, one might be quick to assume that bitcoin is a classic, yet highly lucrative, investment. However, Microstrategy sees it differently. Saylor views bitcoin mainly as a vehicle to store value and to hedge against the inflationary pressures stemming from the current central bank policies. In interviews, he frequently states that the present situation necessitates holding companies’ funds in assets other than fiat currency to protect it against estimated inflation rates of 10–15%.

His analysis appears to be correct. Since the financial crisis of 2008, central banks have been steadily increasing their balance sheets and have been putting more money into circulation. However, those increases seem almost minor when compared to the recent wave of money printing around the world. Governments’ reactions to the Corona crisis have been to prevent companies from being harmed by the virus restrictions by keeping them afloat with cheap money and stimulating short-term consumption. Around 20% of every dollar in existence was created in 2020 alone with foreseeable effects on the value of the USD. Other currencies have been devalued to a similar degree. Switching from a bad currency to a better one emerges as a plausible idea for any economic actor in times like these.

Microstrategy understood this new macro-economic reality. As Michael Saylor pointed out, they would not have decided to move into bitcoin this aggressively had there been a “normal” monetary policy. Currently, profit goals and everything connected to them are at risk and companies have to find strategies to satisfy shareholders. Based on its unique features scarcity, high liquidity, and censorship resistance, bitcoin was the logical choice that could serve as an alternative reserve asset. Thus, bitcoin appears to be suitable as a store of value for small and large global companies alike.

Which companies can profit as well?

Saylor has been one of the most outspoken proponents of corporate use of bitcoin in the last year. He has given talks, held online seminars, and organized conferences to enable companies to make use of bitcoin. To him, businesses should consider accepting bitcoin as payment and most importantly hold it as a reserve asset in their treasuries. This approach has become increasingly popular among American high-tech enterprises. In February 2021, Tesla, whose CEO Elon Musk had previously been a Bitcoin skeptic, announced that it purchased around $1.5 billion of bitcoin and plans to accept it as payment for its vehicles in the future. Consequently, Elon Musk became more vocal in his support of bitcoin, which raised the public’s interest in cryptocurrency even more.

When comparing Bitcoin to a fiat money system, Bitcoin can be seen as a decentralized money network rather than a centralized money system enforced through government power. Hence, it is also subject to network effects and gains value once more members join the network i.e. holding or transacting in Bitcoin. Therefore, there is a natural incentive to join the network early and promote its adoption over time. The American tech-companies appear to be the pioneers in this field, but institutional investors and large corporations are expected to join over time. Microstrategy can be seen as the first publicly listed enterprise which invested in bitcoin and thus, created a blueprint for others to follow.

While it makes a lot of sense for companies to familiarize themselves with Bitcoin, there is still a vast amount of knowledge that needs to be acquired before making an investment. This includes a thorough understanding of the macroeconomic factors influencing bitcoin and the different ways of purchasing it, and the intricacies of owning bitcoin when it comes to accounting and taxation issues. 21Treasury is a German-based enterprise that helps companies explore bitcoin and helps take your company to the next level of bitcoin competence. If you are interested in exploring this great opportunity, contact us under the details below.

References:

https://www.bloomberg.com/news/articles/2021-03-01/microstrategy-raises-bitcoin-holdings-to-more-than-4-billion

https://fred.stlouisfed.org/series/M2

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