The MicroStrategy Playbook: Pure Financial Genius
With major financial institutions such as BlackRock and Fidelity now offering Bitcoin products to retail and institutional investors, it’s clear that Wall Street is no longer treating the digital asset as a niche market. In 2024, the Bitcoin ETFs emerged as a mainstream investment option, bringing in over $30 billion since their launch in January. However another option is available to investors who wish to gain exposure to Bitcoin in a traditional setting.
MicroStrategy, MSTR on the Nasdaq uses Bitcoin as a primary reserve asset. This means the company is managing its capital allocation beyond the tools traditionally used by corporate treasuries.
Treasury managers are facing difficult choices in the current traditional financial markets. Unprecedented monetary interventions by central bankers around the world have pushed treasury instruments into negative real rates territory. Nominal rates do not offset inflation. Therefore, corporate treasurers are faced with two uninteresting options to manage their capital account. One, they can sit on cash or cash equivalents and will lose purchasing power or two, they invest in securities such as stocks and bonds at a heightened risk and valuations level. They now have access to a third option. The opportunity cost of holding a scarce asset that pays no yield is eliminated when there is no yield in traditional treasury management tools.
Bitcoin can act both as a hedge against the erosion of the purchasing power and carries a superior appreciation potential compared to other instruments. While its unique characteristics are not fully appreciated by most corporate treasurers, MicroStrategy’s move has already influenced other treasurers and money managers facing similar issues. At the time of writing, almost 2% of the entire Bitcoin supply is currently being held by public companies.
However MicroStrategy didn’t stop there. Michael Saylor, the executive chairman and co-founder of MicroStrategy, had another financial strategy in mind. After taking a colossal position in Bitcoin, MicroStrategy decided to issue debt at a very low rate to purchase more bitcoin. As the price of bitcoin increases over time, so does the market cap of MSTR. The rise in market cap also increases MicroStrategy’s weight in market indices. In turn, the higher valuation then allows MSTR to issue equity to purchase yes, you guessed it, more bitcoin. Rinse and repeat. MSTR currently holds over 226,000 bitcoin representing nearly $7 billion in paper profit. In time, the management of MicroStrategy will be seen as visionaries and trailblazers.
Investors who value Bitcoin more than cash or short-term money market instruments, will appreciate this proactive treasury management strategy and the potential it offers for long term shareholder’s value maximization.
To fully appreciate the use of Bitcoin by a corporate treasury as its principal reserve asset requires a special skill set. It is a two for one: an investment in the largest independent publicly-traded business intelligence company and in Bitcoin. Traditional money managers may be able to value the company’s traditional operations but they may struggle to understand the Bitcoin angle. There are still today very few traditional financial analysts with the necessary background to fully appreciate the value of Bitcoin and to evaluate service providers, such as the custodian, the company has retained.
As opposed to mining companies, MicroStrategy is not a natural seller of Bitcoin. It is rather a net long holder. As opposed to a closed ended investment fund investing in Bitcoin, which typically trades at a premium to NAV on the secondary market, MicroStrategy offers two for the price of one: an equity and a Bitcoin play. Both the volatility in the equity and Bitcoin markets will create buying opportunities. Interesting times ahead.