Bitcoin is now a reserve asset of a publicly-traded company called MicroStrategy. When I saw this announcement from the company, my first thought was “only in 2020, right?”
Who would have that the digital asset would come this far in its short timespan of a life?
Remember that bitcoin came out in 2010 and has been around for a decade now. But look at what it has accomplished thus far. From a coin tossed around in seedy dark corners of the world wide web and adopted by those on forums to be a conversation starter at Davos and your local COVID-19 protocol followed wedding.
It seems as if it is a massive deal as it gives bitcoin even more credibility in the digital era. Let’s find out more Microstrategy, its legitimacy, and why it made the bitcoin move.
What is MicroStrategy?
MicroStrategy® Incorporated (Nasdaq: MSTR), serves as one of the more substantial business intelligence companies in the world today. For those wondering, the firm did not come about in 2017 and go “long” on the blockchain like a few other companies in hot water. No, this company came about in 1989, and still exists today building enterprise software platforms.
The entity aims to make businesses smarter by enabling them with robust software applications and professional servies that improve their operations. Their goal is to increase business value by tapping into processes and systems that unlock more potential.
That’s fine, but what is their rationale for buying bitcoin and how much bitcoin did MicroStrategy buy?
The MicroStrategy Bitcoin Purchase
21,454 bitcoin at a total price of at a minimum of $250 million altogethe, that’s how much bitcoin MicroStrategy purchased fairly recently. Why would this public company that seems to be doing well financially have purchased such a significant portion of bitcoin?
The primary reason might be that they believe the asset will go up in value over the rest of the year. Further, it is part of its general capital allocation strategy to divest capital to different opportunistic investments.
It states:“our investment in Bitcoin is part of our new capital allocation strategy, which seeks to maximize long-term value for our shareholders,” said Michael J. Saylor, CEO, MicroStrategy Incorporated.
The chief executive officer thinks that bitcoin is a stable and reliable asset to hold over the long-term.
“This investment reflects our belief that Bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash. Since its inception over a decade ago, Bitcoin has emerged as a significant addition to the global financial system, with characteristics that are useful to both individuals and institutions.
Of course, depending on what side of the fence you are on, this is a great investment or a horrible investment. It seems as if it is a great trade to me. Bitcoin and its uncorrelated nature are necessary when governments across the world are debasing currencies and increasing the chances of wealth confiscation through taxes.
MicroStrategy has recognized Bitcoin as a legitimate investment asset that can be superior to cash and accordingly has made Bitcoin the principal holding in its treasury reserve strategy.”
The company didn’t make this decision lightly. Of course, not, you’re going to allocate $250 million dollars to bitcoin and not deliberate its merit?! They, like others who are thinking about Gold, and other assets of the same nature see a complex macro-economic backdrop exacerbated by COVID-19.
Mr. Saylor continued, “MicroStrategy spent months deliberating to determine our capital allocation strategy. Our decision to invest in Bitcoin at this time was driven in part by a confluence of macro factors affecting the economic and business landscape that we believe is creating long-term risks for our corporate treasury program ― risks that should be addressed proactively.
The leader of MicroStrategy goes on to state what these macro factors and why the matter to his firm in the context of the bitcoin purchase.
“Those macro factors include, among other things, the economic and public health crisis precipitated by COVID-19, unprecedented government financial stimulus measures including quantitative easing adopted around the world, and global political and economic uncertainty.”
Indeed, many financial managers see a dreary outlook for traditional assets over the next decade. Stocks seem overpriced, bonds will underperform from a yield standpoint, and treasuries provide safety with little return. Further, liabilities and future promises (that still remain underfunded) pose further risks to countries like the United States.
We believe that, together, these and other factors may well have a significant depreciating effect on the long-term real value of fiat currencies and many other conventional asset types, including many of the assets traditionally held as part of corporate treasury operations.”
In the end, the company chose to go with bitcoin because it serves as a differentiated asset that could defend against future issues that seem on the horizon.
In considering various asset classes for potential investment, MicroStrategy observed distinctive properties of Bitcoin that led it to believe investing in the cryptocurrency would provide not only a reasonable hedge against inflation, but also the prospect of earning a higher return than other investments.
But why bitcoin, specifically?
Mr. Saylor notes, “we find the global acceptance, brand recognition, ecosystem vitality, network dominance, architectural resilience, technical utility, and community ethos of Bitcoin to be persuasive evidence of its superiority as an asset class for those seeking a long-term store of value. Bitcoin is digital gold – harder, stronger, faster, and smarter than any money that has preceded it. We expect its value to accrete with advances in technology, expanding adoption, and the network effect that has fueled the rise of so many category killers in the modern era.”
The reason why it seems more relevant is because it is coming from MicroStrategy, a company that has been around for over three decades, that’s an accomplishment and is easier said than done.