This week witnessed a very important piece of news for Bitcoin. MicroStrategy, a billion dollar publicly traded firm, has announced that it purchased 21,454 bitcoins, worth around $250m, to hold as a cash asset on its balance sheet. This makes it the first publicly traded company to hold bitcoin in its cash balance, and the first company to hold bitcoin as cash inspite of having no operational or business reason for holding bitcoin. This is not a bitcoin exchange or mining company whose business revolves around bitcoin and for whom holding bitcoin is necessary. This is a strategy and consulting firm whose work doesn’t have to have any connection to Bitcoin. They chose to hold it purely as a monetary asset.
This purchase constitutes a recognition of Bitcoin’s real value proposition, and is congruent with the analysis I mentioned in The Bitcoin Standard, where I argue bitcoin’s payment network is extremely limited in its capacity, and can better be understood as a settlement network for a hard cash asset rather than a consumer payment network. MicroStrategy is not buying bitcoin in order to use it as a payment network. Nor is it wasting its resources on the futile quest to use “blockchain technology” applications that do not involve bitcoin, as many corporations have done over the past few years, with exactly zero return. It is buying Bitcoin to hold it on its balance sheet because it has recognized that it can help it alleviate the problems of holding US dollar cash reserves over the coming period.
The case for Bitcoin is pretty simple: it’s a superior form of money to central bank money, because it is much harder to produce and inflate. Bitcoin is superior to gold because it is much cheaper to move and verify. The morbid fascination with needing to find more use cases and applications of the “underlying technology behind bitcoin” and the misguided attempt to recreate a better bitcoin have been a monumental waste of time. People would be far better off just focusing on understanding the implications of a cash that is superior to both gold and central bank money.
In their announcement, MicroStrategy explain in particular why they chose Bitcoin:
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. 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.
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.
In their recent earnings call of the second quarter, held two weeks ago, MicroStrategy CEO Michael Saylor outlines the background to the decision:
With our commitment to generating long-term operating income and free cash flow, we will also take a more opportunistic approach to our balance sheet. We believe we can manage our day-to-day business with approximately $50 million of operating cash. This leaves approximately $500 million of excess cash, cash equivalents, and short-term investments which will be more active in managing. To date, we’ve been utilizing our cash to generate shareholder value through share repurchases, including $11.1 million in the second quarter.
Overall, we’ve returned more than $245 million to shareholders through the repurchase of 1.8 million shares since the fourth quarter of 2018. Our capital allocation strategy going forward is to return a portion of this excess capital to our shareholders and invest a portion in assets with higher return profiles in cash. Accordingly, today, we are announcing a capital allocation strategy under which we plan to return up to $250 million to our shareholders over the next 12 months. In addition, we will seek to invest up to another $250 million over the next 12 months in one or more alternative investments or assets which may include stocks, bonds, commodities such as gold, digital assets such as Bitcoin, or other asset types.
The thought process behind choosing bitcoin is explained later in the letter:
We have a large amount of USD on our balance sheet and we have carried that for a while. Over time, the yield on our dollar values has decreased and at points, we had an expectation that we would get higher real yields, and therefore, there was no real urgency to address this issue. But as of today, we’re expecting negative real returns or a negative real yields on U.S. dollars, and that’s an expectation that has materially changed over the course of the last three months. We expect, on a macroeconomic basis, more monetary stimulus. From the Fed, we expect more fiscal stimulus. From politicians, both in the U.S. and Europe, and perhaps, everywhere else in the world, and we expect a low-interest rate environment for quite some time. As Jerome Powell said, we’re not thinking about raising interest rates and we’re not even thinking about thinking about raising interest rates. And not being the case, if you’re — if you have large dollar values and you’re hoping for any kind of return on them, that’s faded. Gold, silver, and bitcoin are showing strength.
The dollar, the DXY index is weakening. Faith and fiat currency across the market is fading and we’ve seen that in rallies in most asset classes during Q2. Accordingly, it wouldn’t be prudent to continue to hold a large portion of USD as our treasury strategy, and that’s prompted us to rethink this. Our strategy is to return a portion of our capital to the shareholders via buybacks and invest another portion of our capital into assets other than dollars that will yield a positive real rate of return, that will result in us reducing the number of shares outstanding and that should be accretive to all shareholders.
The traditional way in which companies have prepared for the expected depreciation of their cash balances is to hold shares and investments instead of cash balances. But MicroStrategy illustrates they are keenly aware of the advantages of holding cash over investment assets, which are likely to be highly correlated with market conditions, and thus offer little safety against market downturns. They still want to hold cash, they just want a better form of cash, and that is what led them to consider alternatives to the dollar.
Having said that, we need to maintain a healthy capital base. It’s the equivalent of our endowment as an institution and we need that capital base in order to assure our investors, our employees, our customers, and our partners that we’re going to be around through good times and bad times. So while it’s potentially dilutive for us to carry that capital in dollars, that doesn’t mean that we don’t need the capital. Hence, if we look at assets, gold, silver, bitcoin, and equities have all been accreting as the dollar has been weakening.
It makes sense to shift our treasury assets into some investments that can’t be inflated away or are less likely to be inflated away. There is just about nobody we can find in the market today that isn’t expecting some form of inflation to come. So, as we pursue alternative investment strategies for our treasury assets, we expect that we will have more volatility, at least as measured in U.S. dollar terms looking forward.
But with the consensus of the market that fiat currencies are going to continue to debase, now is the time for us to address this issue and make a change in our policy. We’re going to work to execute this two-pronged investment strategy over the next year, taking into account market conditions and the opportunities as they arise.