How and why is MicroStrategy’s unique approach to holding Bitcoin paying off?

• Former CEO Michael Saylor was pivotal to MicroStrategy’s Bitcoin strategy
• The spot Bitcoin ETFs will likely help MSTR stock prices, instead of hurting it

The business intelligence software vendor MicroStrategy [MSTR] added to its vast Bitcoin [BTC] holdings on the 27th of December. The company is carving a bold new future for itself, one that is not the norm for companies to take.

co-founder Michael Saylor was instrumental in the company going down this road. Critics were brutal though, especially after the Bitcoin slump in 2022.

The king coin did not initiate a recovery until the latter half of 2023. At the time of writing, however, its price stood at nearly $44k and MicroStrategy sits on billions of dollars in profit on its BTC holdings.

What’s more, as promised, it bought 14,620 more BTC for close to $615.7 million. The company is the largest corporate holder of BTC, with a total of 189,150 bitcoins.

MicroStrategy has acquired an additional 14,620 BTC for ~$615.7 million at an average price of $42,110 per #bitcoin. As of 12/26/23, @MicroStrategy now hodls 189,150 $BTC acquired for ~$5.9 billion at an average price of $31,168 per bitcoin. $MSTR https://t.co/PKfYY59sTW

— Michael Saylor⚡️ (@saylor) December 27, 2023

This amounts to ~1% of the total circulating supply. This has raised concerns among some in the crypto-community that MicroStrategy and Saylor might wield enormous power in the future.

Each of Saylor’s transactions could move the market, but is this a valid concern?

Introducing the Bitcoin maximalist Michael Saylor

Michael Saylor, the executive chairman, co-founder, and former CEO of MicroStrategy, is a big part of the reason. He had been CEO of the company since it was founded in 1989 and stepped down from the role in 2022.

This came after the tumbling prices of Bitcoin put a large dent in the company’s balance sheet.

Despite those losses, Saylor has been adamant that Bitcoin is a great long-term hold. This is because he believes that companies will struggle hard, and ultimately fail, to beat the slow but giant monster that is inflation.

Saylor talked about how he “developed a more nuanced appreciation of inflation.” This came in the Stephan Livera podcast back in September 2020.

He argued that the Consumer Price Index, or CPI, is an arbitrary measure of inflation where they cherry-pick a basket of goods whose costs don’t go up much and call that inflation.

But, this basket doesn’t cover all goods and services. He talked about other baskets of goods and services, such as education and medicine, rising at 6-8% or more.

Another basket containing equities, debt, prime property, and scarce art rises by 8% to 24% a year. Saylor termed it a “horrifically painful category”. He also noted that the S$P 500 index had similar returns in the past 10 years.

When we look at the index’s performance and average it out, we realize that he is not wrong.  He argues that this is why the conventional idea of referring to inflation based just on the CPI numbers misses crucial nuances.

In the end, a person’s life savings aren’t safe in the bank anymore because they bleed so much to inflation. They are forced to study the markets to find more attractive assets to hold that yield greater returns.

“That’s what our monetary policy has done to the rank and file,” Saylor said. His appearance on the Lex Fridman podcast in 2022 also shed much light on his thinking.

There, he talked about how the year is “pretty catalytic for digital assets in general, and Bitcoin in particular.” The persistent inflation in the US is a big shock, and everyone, including business companies, is in a constant battle to stave off inflation.

Saylor decided to take action after concluding that their corporate cash was degrading at a rate of over 10% a year.

After a lot of effort, research, and intense talks, Saylor convinced the company that buying Bitcoin was the prudent thing to do with their corporate treasury.

The Bitcoin gains of the past six months vindicate Saylor’s convictions

The stock MicroStrategy Incorporated [MSTR] has gained 350% since the 3rd of January 2023. A huge part of these gains was due to the addition of BTC to the balance books. As a software vendor, the company has done decently well in its business.

The Q3 2023 financial highlights of the company showed that total revenue was up 3.3% compared to Q3 2022. However, the company was at a net loss for the third quarter of 2023. This amounted to $143.4 mln.

Impairment losses for the company’s digital assets amounted to $33.6 mln for the quarter.

Yet, investors realize that MSTR is one of the ways to gain exposure to BTC simply because of how much the company holds. Directly owning BTC on exchanges could see some funds lost in commissions. Storing it offline also involves network costs. Then there’s the cost of security. Owning BTC through funds such as the Grayscale Bitcoin Trust also leaks some gains made to management fees.

Bitcoin as a reserve treasury asset

Due to these disadvantages, it is easier for an investor to pile into the MSTR stock than to look to own Bitcoin directly. MicroStrategy’s BTC buys have leveraged debt.

Adam Cochran on X (formerly Twitter) provided a comprehensive dive into this aspect.

The BTC holdings of 189,150 BTC at a market rate of $43,200 puts their holdings at $8.171 bln. According to the earlier statement, this acquisition cost ~$5.9 bln. This leaves the company sitting on a $2 billion+ profit.

The market capitalization of the company is at $8.63 billion at press time. This meant that more than 80% of the company’s value was due to its BTC holdings. This is not the norm.

Saylor has employed their cash piles and accrued debt to go down this path with great conviction, and so far the effort has yielded positive results.

Similarly, MSTR gains value as BTC rises, but its investors do not directly own BTC. In recent months, various ETF applications have been submitted to the SEC. The deadline for the ruling on these applications is the 10th of January.

BlackRock, one of the world’s largest asset management firms, is expecting its BTC ETF approval on the 10th of January. The company has more than $9 trillion in assets under management (AUM).

The chances of an ETF rejection are dropping, according to Bloomberg ETF analyst Eric Balchunas.

Experts speculate that the final approval for spot Bitcoin ETFs might come on or before the 10th of January. This is the date for the U.S. Securities and Exchange Commission to rule on an ETF proposal by ARK Invest and 21Shares.

In turn, this could reduce the allure of MSTR stock in the eyes of investors looking for indirect Bitcoin exposure. However, Michael Saylor disagrees with this idea.

During an interview with Bloomberg TV, Saylor said,

“The ETFs are unlevered, and they charge a fee. We provide you leverage, but we don’t charge a fee. We offer a high-performance vehicle for people that are Bitcoin long investors.”

The ETF approvals could open a floodgate, and investors everywhere might look to allocate a small part of their portfolios to Bitcoin.

Once again, while the majority agree that this is great news for the crypto industry, its short-term and long-term effects on the price remain unknown.

The short-term Bitcoin price action points to volatility

Source: BTC/USDT on TradingView

The past month saw BTC trade within a range (purple) that extended from $43.4k to $40.6k. Above the $43k-$45k resistance zone, $47.2k and $52k are levels that prices could reach soon.

If another breakout past the $45k region occurs, a retest of the current range highs would provide a buying opportunity.

Read Bitcoin’s [BTC] Price Prediction 2024-25

The volatility seen a week ago when BTC dropped from $45.k8 to $40.8k in a day could repeat itself after the BTC ETF news unfurls. The chances of a rejection and a steep drop in prices were low, but investors should be prepared for the possibility.

On the bright side, approval would mean long-term investors can continue to buy Bitcoin without too much regard for the resistance levels of the past two years. In Saylor’s words, a 10X from here for the entire industry is feasible.