MicroStrategy: Betting the Farm on Bitcoin

In November 2023, the software company MicroStrategy made a big gamble: it bought more than 16,000 bitcoin, spending nearly $600 million.

Then it threw them onto the pile of bitcoin it had been stockpiling, for a total of 175,000 bitcoin worth over $5 billion. This puts them on the Top 10 list of bitcoin holders, along with Binance, the U.S. government, and Satoshi Nakamoto.

MicroStrategy makes about $500 million in annual revenues, which makes you wonder why they need $5 billion in bitcoin. As MicroStrategy CEO Michael Saylor told Time, “My mission right now is to fix the balance sheets of the world.”

In Saylor’s view, “cash is trash,” so keeping his company assets in rapidly-inflating U.S. dollars is like holding a “melting ice cube.” Bitcoin, on the other hand, is “digital gold”: a lasting store of value.

While this has made Saylor a hero in the eyes of the bitcoin faithful, our view is different. By betting everything on bitcoin, Saylor has taken on unnecessary risk: he has bet the farm on bitcoin.

What Does MicroStrategy Do?

Since all the MicroStrategy news headlines are about bitcoin, it can be hard to remember that it’s actually a business.

MicroStrategy creates business intelligence software that helps businesses analyze and visualize large amounts of complex data. Competitor products would be Tableau, Microsoft Power BI, or Qlik.

The company has continuously innovated on its products, making it easier to develop applications that tie into your data, providing extensive support for mobile users, and adding advanced AI capabilities.

MicroStrategy’s revenues have gradually declined over the past decade, though fortunes have improved somewhat over the past few years:

Meanwhile, MicroStrategy’s stock ($MSTR) has increased by over 200% since Saylor started stockpiling bitcoin in 2020. In fact, the stock has increased even faster than the price of bitcoin, making it an attractive option for investors who can’t invest in bitcoin directly.

On the other hand, MicroStrategy’s huge bitcoin stash makes the stock extremely volatile, as if you were buying bitcoin directly. Note its correlation with the price of BTC:

Saylor’s fixation on bitcoin has thrown the economics of the company out of whack: in our view, when you buy $MSTR stock, you’re not buying the business, you’re buying bitcoin.

Which begs the question: why not just buy bitcoin directly?

Learning from History

Saylor is like a modern-day Scrooge McDuck, rolling around in his giant pile of bitcoin.

There’s nothing wrong with saving cash for a rainy day, even a lot of it. Alphabet, Microsoft, and Facebook hold billions in cash and marketable securities, which gives them options when they need to acquire a competitor, or move quickly into a new market.

But the historical performance of hoarding behavior is mixed, at best. For example:

Apple Hoarding Gold: Steve Jobs believed that gold was the ultimate hedge against inflation. (Sound familiar?) So for much of the 1970s and 1980s, Apple kept a huge gold reserve. The company sold off most of its gold in the 1990s, and was later criticized for not investing that money back into the business.

Coca-Cola Hoarding Sugar: For much of the 20th century, Coca-Cola kept a strategic sugar supply, in order to protect its supply chain from sugar shortages and unexpected price increases. The practice continued until the late 2000s, until sugar markets became more stable and globalized.

Iran Hoarding Oil: A good example of resource stockpiling on a national scale. Oil is one of Iran’s most valuable assets, so the country keeps enormous oil reserves, which allows it economic and political leverage. But it brings the threat of fluctuating oil prices and international sanctions.

De Beers Hoarding Diamonds: When the company held a monopoly on diamonds, they kept a stockpile of the precious gems, to manipulate prices and keep their market dominance. Thankfully, better regulations and smarter consumers have since forced De Beers to diversify their holdings.

Sometimes hoarding works, for a while. However, our view is that resources are usually better spent in growing the business, especially in the fast-moving technology industry. Long-term, Scrooge McDuck would probably be better off investing in his nephew’s new ideas.

The Risk of Betting the Business on Bitcoin

In our investing approach, we recognize that bitcoin is risky: it’s a roller-coaster. That’s why we hedge that risk by investing primarily in common stocks and bonds, with just a portion of our portfolio allocated to bitcoin:

You’ve got to wonder why Saylor doesn’t do the same. Why not hedge the risk of bitcoin with other investments – even gold?

By putting everything into bitcoin, he’s literally doing the thing we constantly warn you about. We don’t bet the farm on bitcoin.

Only in Saylor’s case, he’s betting the business on bitcoin.

True, it’s unlikely that bitcoin will go to zero. True, it’s possible that his bitcoin investment could 10x.

And then what? Buy more bitcoin?

Lots of Risk, Uncertain Reward

Ultimately, the purpose of a business is to generate new value for the world. If MicroStrategy is buying bitcoin without reinvesting it, investors should ask what the business really does. Is it a bitcoin holding company with a little software business on the side?

If so, where is the value in that?

Make no mistake: we’re bitcoin believers. More importantly, we’re believers in a new financial system. Here, MicroStrategy has enormous potential: it could use its considerable expertise to develop new financial software products or services that bring the world into the crypto age.

But sitting on top of a $5 billion bitcoin stash subjects the company to wild market uncertainty. It puts MicroStrategy on the bitcoin roller coaster. Lots of risk, with uncertain reward.

For investors who want to invest in bitcoin, our solution is simple: invest in bitcoin. Not MicroStrategy.

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