Ryze Recap 9/17: Why a Public Company Has 85% of Cash Reserves in Bitcoin
MicroStrategy doubles down and opens the floodgates for corporations to accumulate Bitcoin as a hedge against inflation.
Good morning Ryze readers! It’s Thursday, September 17th.
If you’re new here— Ryze Recaps is a newsletter synthesizing the biggest news Bitcoiners need to know. We’ve got one main story for you today.
MicroStrategy Doubles Down: Why A Public Company Put 85% of its Cash Reserves in Bitcoin
What if we told you that one company now owns 0.182% of all Bitcoin that will ever exist. And it's not even a Bitcoin or cryptocurrency-related company.
It's a publicly-traded business intelligence company called MicroStrategy.
Over a month ago, we told you that this NASDAQ-listed company was considering buying Bitcoin along with other alternative assets such as gold.
A few weeks ago, we told you that it bought $250 million worth of Bitcoin— no gold, no equities, no bonds, just Bitcoin.
This week, MicroStrategy revealed that it bought another $175 million worth of Bitcoin.
Over the last six weeks, it has deployed $425 million of its $500 million of cash reserves into Bitcoin as a hedge against inflation.
With insights from an Anthony Pompliano interview with MicroStrategy CEO and founder Michael Saylor, here's what went down and why it matters.
The Problem: What do you buy with $500,000,000 in cash?
MicroStrategy is a business that ended up sitting on significant reserves of cash— about half a billion dollars to be precise.
Because of macroeconomic conditions, cash is being devalued by inflation and losing purchasing power, especially when compared to other assets such as equities, real estate, precious metals, etc.
In Saylor’s words, the "problem is that I have a lot of cash and I'm watching it melt away." He continues, "outside investors don't even value the cash... they know you're a fool to sit on cash...it felt like we were running as fast as we could just to stand still."
So he knew he had to find a good way to preserve $500 million in value without holding US Dollars that lose value every day.
What would you buy— commercial real estate? "Precious" metals? A basket of stocks?
Well, Saylor contends that in today's market, it's not easy to get a fair price on $500M worth of real estate. He ruled out stocks because "the multiples don't make sense" right now. Bonds pay negative real yields. And gold is not only archaic, but too much of a hassle to physically deal with.
"What I want is something that might be cut in half but could go up by a factor of 10," Saylor says. In other words, he was looking for asymmetric risk-reward.
Thus, he began his journey down the Bitcoin rabbit hole and found value in it as an uncorrelated hedge against inflation, and as insurance against government-created money.
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Saylor contends that "the number one knock on Bitcoin is that it's just software— someone else can copy it." This is shown by the numerous Bitcoin forks that have come into existence. However, the original asset is still the most valuable and has the highest market cap, he says. Other crypto-assets may be innovative in their own right, but Bitcoin is the asset that has the most labor and capital behind it by a significant margin.
Saylor contends that people compare Bitcoin to newer assets as what MySpace was to Facebook. But MySpace at its peak was 200x smaller than Bitcoin is today. Saylor points out that there are no examples of $100B+ computer networks or technologies that have failed after being miles ahead of the nearest competition. Bitcoin is here to stay.
According to Saylor, the second main objection outsiders have is "what about the volatility?"How is an asset a store of value if it can have double-digit days up or down?
Saylor retorts that volatility is falling, and he's not wrong. Bitcoin was volatile in 2017 at the peak of retail mania. This year, we've seen a prolonged period of low-volatility consolidation.
Part of the reason for decreased volatility is the activity of institutions like MicroStrategy. Institutional money entering an asset class dampens volatility in both directions.
Saylor said, "every other non-volatile asset has a negative real yield," so he went with a more volatile asset that held a better chance of preserving value.
The Process of Acquiring 38,250 Bitcoins
Once Saylor convinced himself, he then had to convince stakeholders: board members, shareholders, and regulators.
"I assigned them all homework," he says with a smirk, and thus the stakeholders read and watched the litany of content that exists about Bitcoin's potential, from The Bitcoin Standard to Pomp's podcasts.
Once they were "converted," they went about convincing anybody else who needed to be onboard. The CFO dealt with the accountants, the general counsel dealt with regulators and attorneys, and so on.
It's worth noting that BlackRock and Vanguard are two of the largest shareholders of MicroStrategy, owning a total of 26.99% of the company, and likely had to give some sort of approval before the company went ahead with the purchase.
After deliberation, MicroStrategy decided to initially purchase $250 million worth of Bitcoin, equating to 21,454 Bitcoin.
With the remaining $250M, they then bought back $60M of their own stock.
This week, Saylor announced that they purchased another $175M worth of Bitcoin, bringing his total to 38,250 Bitcoin worth over $425,000,000.
These transactions were facilitated by institutional-grade custodians and liquidity providers, who are building out the infrastructure for corporations such as MicroStrategy, as well as financial institutions such as hedge funds and family offices, to gain exposure to Bitcoin.
Saylor states that he was "in the market for every minute" for several days, presumably using advanced trade execution services to ensure that this massive purchase of Bitcoin didn't move markets. In fact, he claims that MicroStrategy's purchase dampened volatility in Bitcoin markets instead of causing price swings.
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Why this matters:
This global macro environment, brought about by the pandemic and governments’ responses to it, has fundamentally changed the way we think about things that we may have previously been uncomfortable with. As Saylor says, "things that were inconceivable last year are now...you look and think okay well now that's happening."
Saylor makes this point about video conferencing and remote work, which conservative employers were staunchly against before the pandemic. Now, those viewpoints have had to adapt.
He draws the same parallel to investing and assets. In this new environment, the things that were considered to be safe investments (cash, treasury bills) aren't as safe now and lose significant value over time. Alternative assets such as Bitcoin are no longer inconceivable investments, they're sound, long-term investments that hedge against inflation. The shift in the global macro environment has led to a paradigm shift in the way these assets are perceived.
Moreover, MicroStrategy has decreased the risk that public companies and their CEOs face by buying Bitcoin with their balance sheet.
I think of this as the "four-minute mile. People told themselves they couldn't do it. One person does it. Then the next year dozens of people do it," Saylor said.
This argument becomes compelling when considering that there are 3500 publicly traded companies with a total of $5 Trillion in their treasuries and "it's all melting." They have a fiduciary duty to preserve the value of their companies, and holding cash isn't going to achieve this.
Previously, it was inconceivable for a public company to hold Bitcoin as a reserve asset. Now that Saylor and MicroStrategy have done it, it’s not as outlandish.
Saylor says that while it was prudent and conservative to hold cash when asset inflation was 6%, this is no longer the case when asset inflation reaches 20-30%. He predicts that a slew of corporations, both public and private, will begin to hold a portion of their reserves in Bitcoin within the next 6-12 months.
While it's unlikely that every company converts 85% of their balance sheet to Bitcoin, it's reasonable to expect at least some companies to convert some of their cash reserves to Bitcoin. When this new demand enters the market, prices will inevitably rise.
At the time of writing, MicroStrategy's stock is up 30% since its first Bitcoin purchase in August. We'll be watching closely to see who follows in its footsteps.
That's all for today! We hope you enjoyed this and will be back this weekend for another Ryze Recap discussing the following, and more:
Bitcoin tests $11k as the Federal Reserve targets inflation above 2% in the near term and commits to aggressive quantitative easing until 2023
Kraken, one of the oldest crypto exchanges, received a Wyoming bank charter to become the first crypto bank, on the heels of an OCC announcement earlier this year allowing chartered banks to be custodians of crypto-assets
Jim Cramer, the guy who's always yelling at you on CNBC, was recently converted from a gold bug to a Bitcoiner and is buying Bitcoin to secure his legacy for his children. Our take is that this is a peek into how to get older generations to see the value in Bitcoin.
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