I just listened to The Pomp’s Podcast where he interviewed Michael Saylor on his views on bitcoin. Michael Saylor is the CEO of MicroStrategy, a billion-dollar enterprise analytics company that is listed on the NASDAQ.
“MicroStrategy adopts bitcoin as Primary Treasure Reserve Asset”― MicroStrategy’s Investor Relations Press Release, August 11 2020
He became well known in the crypto community when MicroStrategy bought more than $400 million of bitcoin using the cash in their balance sheet. Crazy? It is the first public-listed company to make this bold move and here is why.
The conversation is brilliant, rich with insights and I have condensed the essence of the podcast into this article.
Before that, here is a preview theme of what’s to come next: “Cash is trash.”
1. MicroStrategy’s Cash Position
MicroStrategy has lots of cash in its balance sheet. The business is doing very well, there are no debts, they are doing stock buybacks and ready to seize opportunities. Then, COVID hits hard.
In Q1 2020, the pandemic shocked everyone. In Q2, everyone starts asking how this affect our products, our customers, our value proposition and for some, our survivability.
MicroStrategy realised that their software demand remains healthy. The good thing about software is you can ship them over the internet. There are no physical logistical constraints. Everything is intact and the surprising thing is their productivity went up.
Expenses went down significantly as tens of millions spent on air travel, trade shows, conferences, marketing was all gone now. But yet there is still robust demand for their products and services.
MicroStrategy’s bottom line improved as a result and the company is generating more cash than ever before.
Simultaneously, there was a major shift in macroeconomic factors, in particular, the fed’s stance on monetary policies.
Michael Saylor mentioned that he will never buy a 30-year bond that yields 2% interest. But yet bonds are a winner this year. Both equities and bonds spike, the only thing that was doing nothing is cash.
This made him think, is there a problem here?
2. What was the Problem?
Imagine a normal working lawyer who earns $500,000 a year. He saves $50,000 every year and put it in his savings account for his kids’ education. After 10 years, he has accumulated $500,000 in his bank for his 2 kids to go to Harvard.
To his dismay, he realised that education costs are going up 8% a year while his cash is yielding 0% in the bank. In other words, his cash is losing 8% of value annually and 80% over a decade. You would be crazy to work for dollars and save in cash.
Now imagine multiplying everything by a thousand. That is MicroStrategy. They are a $500 million company; they are making $50 million a year and every employee is working hard to save cash in the balance sheet.
Before 2009, there was a time when the risk-free rate is at 4-5%. MicroStrategy could easily earn $20-30 million a year from their cash in the balance sheet. Everyone was hoping interest rates would go back up to pre-08 levels. After all, that range was thought to be the norm.
However, rates did not go up. Instead, it reversed the other direction and asset inflation went through the roof. Inflation is not happening in CPI but assets. Prices of bonds, equities, properties all went up while the economy is in a wreck.
Michael Saylor describes a metaphor of what it feels like.
You have $500 million of cash in the bank yielding 2-3% and you are saving for a rainy day. Every year, the banker tells you that the interest rates went down. Then it becomes 0%. Then now every month someone comes along and take 2% of your cash pile away to burn it. By a year, about 25% of your money would disappear. So what’s wrong here?
“By this means the government may secretly and unobserved, confiscate the wealth of the people, and not one man in a million will detect the theft.”― John Maynard Keynes
The problem is you can’t hold cash. And MicroStrategy has a mega problem. They are a cash-generating business unit, they have a lot of cash and it is melting away. You would be a fool to be sitting on a huge excess pile of cash when the asset inflation is at 10%.
Shareholders are smart and they recognised it way before Michael Saylor. Investors don’t value the cash pile you have in your balance sheet. Especially if you have an excess load of them. So the company needs to do something with its $500 million cash.
3. How to Spend the Cash?
They could do stock buybacks, but there is a limit as to how fast you can buyback without spiking prices. If you do 20% of the float every day, it would take about 4 years. If your ice cream is melting 15-20% a year, you don’t have 4 years to salvage the cash.
“We just had the awful realization that we were sitting on top of a $500 million ice cube that’s melting.”― Michael Saylor
If you have $500 million of cash in your bank account, how would you spend it? Michael Saylor posed the question to Pomp.
Pomp responded, “I would buy a lot of bitcoins.”
Michael Saylor then questions again, what if you did not know about anything and you are an intelligent person. What would be your laundry list of assets to invest in?
Pomp responded that it would be inflation-hedged hard assets such as properties, gold, silver, bitcoin, assets that preserve wealth.
Commercial properties are hard because no one would sell it to you at a fair price that is not impaired. What about equities? APPL, AMZN, FB, etc.
By the way, Michael Saylor asked everyone to buy Facebook, Amazon, Apple, Twitter in 2012. You would have 10x your money if you have done it in 2012, BUT it is not a good idea this week. These assets are not going to multiply by a factor of 10 anymore, maybe at most 2-3x.
MicroStrategy has dismissed the idea of commercial properties and equities. Then now you go back to the question of Robert Kiyosaki. Bitcoin, gold or silver? Choose one.
Michael Saylor wanted an investment that has an asymmetrical payoff. That is what any intelligent investors would want, a 10x upside. He thinks that bitcoin is 1000x better than gold and silver.
4. Why bitcoin?
For an outsider, there are hundreds and thousands of cryptocurrencies to choose from. Do you own one or a list of them? There are lots of great innovations happening in the altcoins forest, DeFi, interoperability (DOT), oracles (LINK), digital identity (ICX) and thousands of other uses cases.
Imagine you are a young CEO and put 50 sales agents across 50 states. And you go to New York and there is an epiphany moment when you realised that most of the sales come from one state.
What if you invest $500 million in Ethereum or some yoyo coin, then someone decides to do a soft fork or hard fork or if there are any code changes to it. That would be extremely unnerving and you don’t want to go through that experience from a risk perspective.
The easiest way to go beyond that is to choose a Proof-of-Work, secure, immutable network that is designed to be a store of value. That is bitcoin.
Bitcoin has survived through the test of more than a decade and more importantly, bitcoin continues to be defended even after a hard fork. That is what gives Michael Saylor the confidence to invest millions into bitcoins.
5. How did MicroStrategy Adopt Bitcoin?
The ironic part is Michael Saylor made a tweet in 2013 comparing bitcoin to online gambling. He apparently forgot his own tweet and did not follow bitcoin all through the 2017 or any of the fireworks.
Michael Saylor showed up in 2020 with a clean slate to learn about crypto and bitcoin from scratch. He started reading “The bitcoin Standard” and watching videos from Andreas Antonopoulos, Pomp, Parker Lewis, Max Keiser and etc.
To get the approval of all stakeholders in MicroStrategy, Michael Saylor assigned them homework.
Everyone was required to listen to bitcoin podcasts, read up on papers, watch Erik Voorhees vs Peter Schiff debate on fiat, Max Keiser vs Peter Schiff debate on bitcoin vs gold. Everyone fell into this relatable rabbit hole in the crypto community. There are arrays of discussions, conversations, consultations, deliberations before MicroStrategy moves ahead with its bitcoin strategy.
6. How did MicroStrategy Buy Bitcoins?
MicroStrategy first purchase is $250 million. They announced again another round of $175 million making it to a total of $425 million investment into bitcoins. That is about 85% of their $500 million spare cash pile in its balance sheet.
So how did MicroStrategy bought so much bitcoins? They definitely didn’t put a $425 million market order on Coinbase as that will spike prices up.
Though Michael Saylor didn’t give exact details as to the OTC process due to security reasons, he does give an idea of how one should go about doing it if they were in his position.
First, you have to go to international-grade exchanges, then you have to search for international-grade custodians, then settle all security and technology risk issues. Then think about a team and build a relationship with them.
And if you have to buy hundreds of millions worth of bitcoins, it has to be done through hundreds and thousands of small transactions every single day. It can’t be done overnight and you got to be extremely patient. Don’t chase the markets, let the market come to you.
7. Reactions of Other CEOs
Next, Pomp asked if there are other CEOs in the industry that reacted to MicroStrategy’s bold move into crypto. Michael replied that this is a year where every CEO are busy with their own stuff because of digital disruption and the pandemic. No one has time to look at what others are doing.
Everyone has a lot of their assumptions shaken this year. About how markets will behave, about regulations, businesses, financials, remote working, monetary policies and etc.
Just like how rates are not going back to the norm, we should now rethink our assumptions of cash positions. Do we still stick to the traditional approach of investing in T-bills, short-term bonds and save for a rainy day? Or has the market dynamics changed permanently?
Nevertheless, there are a few CEO that reached out to Michael Saylor about his thoughts on it and why MicroStrategy bought bitcoins. People are now starting to be more open-minded and starting to think about what is in it for them.
MicroStrategy could be the first company that broke open the dam inviting other companies to follow suit. Their announcement on August has paved a path for other companies that have the same characteristics to consider bitcoin as a cash allocation strategy.
There are trillions of cash from listed companies combined and there is a fiduciary duty to conserve cash. It used to be acceptable to be conservative and hold cash.
But that is in the past where rates are 4-5%, not now when asset inflation is has gone from 6% to 30% and rates are at 0%. This should be CEO, CFO-led and Michael Saylor has proven the world that it is possible. It is up to individual companies on whether they decide to move.
8. Volatility of bitcoin as an Investment
What about the volatility of bitcoin? Does it not scare you, asked Pomp?
Michael Saylor made the first observation that institutions are coming in with millions to help dampen the volatility in bitcoin. He is in the market every single minute to buy in when prices are depressed. That is how he acquired $425 millions worth of bitcoins efficiently. How many institutions does it take to stabilise prices? GrayScale is also actively buying bitcoins.
The second observation is that crypto operates 24/7 from Monday to Sunday including all holidays. This is a remarkable operation success as compared to traditional financial markets. You could easily liquidate millions on a Saturday afternoon in crypto within an hour but try doing that for millions worth of gold bars on Saturday at 9 am.
The third point is you got to live with volatility in this new environment. Every non-volatile asset, like cash, is negative-yielding that loses its value by the day. You are not going to make it by the decade. It’s like the saying investing is risky, but not investing is even riskier.
9. Final Thoughts
Pomp’s concluded by saying bitcoin is just a $200 billion market cap today. If it were to ever reach gold’s market cap of $8 trillion, that is about a 40x from today. Bitcoin is an asset that is superior to gold in every other way and MicroStrategy has made a smart decision to hedge against inflation.
In closing, he asked if Michael Saylor has any last question for him.
Michael Saylor requested Pomp to convince Jack Dorsey in investing his billions of cash equivalents from both Square and Twitter combined into bitcoins.
Despite Jack Dorsey being a bitcoin bull (Cash App accepting bitcoin, Square submitting crypto patents and Twitter adding bitcoin logo etc.), he has not yet invested the company’s cash reserves into bitcoins. Though Jack Dorsey has personally bought bitcoins massively.
Pomp’s guess is Jack Dorsey is probably being restricted by upper management and regulatory issues.
MicroStrategy’s stock price has surged by more than 30% since its first public announcement to buy bitcoin on Aug 11. Canada-based Middle Eastern restaurant chain Tahini has also made similar moves after MicroStrategy. Imagine what would happen to the price of bitcoin if MicroStrategy started a trend?