AB updates are for informational purposes only. Do not construe any of the following as investment, financial, or other advice. You make your own decisions.
AB Research is a culmination of research & insights from the diverse capacity of the AB Team. Ultimately our focus & mission is financial freedom. This is a special edition.
If there is one thing to take away from this: When doing something unique, you need conviction.
According to Michael Saylor, there is no second best crypto asset. While AB respectfully disagrees, we can’t help but admire what Michael Saylor/MicroStrategy has pulled off over the past few years. To some, the MicroStrategy story starts with the fateful Bitcoin purchase in Summer 2020, however we’re going back to the turn of the century.
AB wasn’t actively investing during it, but the DotCom bubble must’ve been wild. For nearly two decades, MicroStrategy couldn’t dream of getting back to all time highs. Most people would’ve quit prior to 2020. Once again, study conviction to understand who Michael Saylor is. So it begs the question - what does MicroStrategy actually do?
Prior to investing in Bitcoin, MicroStrategy developed business intelligence and analytics software, similar to Tableau (purchased by Salesforce in 2019 for ~$16B). Long story short, the goal was to help companies make better business decisions using data. MicroStrategy ended FY2019 with revenues of +$450M and $34M in net profit. A good company without the resources to compete with Oracle, Salesforce, IBM, and SAP. The company had been treading water for almost two decades without much to show for it, investors certainly hadn’t gotten rich.
The direction of the company changed with a press release in August 2020. MicroStrategy allocated $250M into purchasing 21,454 Bitcoin (~11.6K per BTC). This wasn’t a big deal at the time, because almost no one (except possibly Saylor) could imagine the path that the company was about to embark on. With hindsight bias, it is easy to look back and say this was an obvious time to buy. That was not the case.
This was during Summer 2020. Riots, Uncertainty. People were arguing about 6 feet to stop the spread, not the absurd fiscal and monetary responses of the federal government. Unprecedented things happened but most persons got distracted by stimulus checks. Few people were paying attention during those dog days of summer.
By Q3 2020, it was clear that Bitcoin was the strongest asset bouncing off its lows. The world didn’t know it yet but Saylor had identified his horse.
It is clear that MicroStrategy is working on a different time horizon. The company has bought Bitcoin at $11K, $37K, $18K, all the way back up to $68K. Reporters were eager to declare the strategy dead as Bitcoin price fell post FTX. However, Saylor kept buying. Critics didn’t realize that Saylor was excited to get more Bitcoin at a cheaper cost basis. Human psychology is a powerful thing. Everyone wants the price to drop 50% [on a good asset] until it does.
An important anecdote was the clear institutional demand for bitcoin exposure. MicroStrategy found that the market was receptive to the company issuing more debt to buy Bitcoin. Much of the debt issued by MicroStrategy is in the form of senior convertible notes. This structure is important because it does not increase the interest payment expenses for MicroStrategy [e.g. forcing them to sell bitcoin] and allows the new debt holders to benefit from upside in the equity price of the stock. It could be considered similar to a call option with a floor. In his own words, Saylor doesn’t see the demand slowing anytime soon for this new asset.
I don't have any problem seeing how we could raise $100B more capital, and then $200B after that. It's a trillion-dollar asset class going to $10T, and then to $100T. The risk is very simple—it's Bitcoin. You either believe Bitcoin is something, or you believe it's nothing. If you believe that Bitcoin is an asset class, not going to zero tomorrow, then you're taking the Bitcoin risk.
Strong words. To recap the flow of capital: MicroStrategy trades at a premium to underlying Bitcoin → Issue more equity-like debt → Use cash to buy more Bitcoin → Increases value of Bitcoin → Rinse Repeat until there is no premium left.
Did Saylor actually discover the infinite money glitch? A similar trade happened with GTBC and it is now known as the “Widowmaker Trade”. Everything works until it doesn’t.
So the goal is to acquire as much Bitcoin as possible, then what? It seems obvious that they should start generating revenue on this asset. Saylor compared himself to a “digital Rockefeller” below:
If the Bitcoin network is $10T, why couldn't there be a $500B or $1T finance company that strips the risk, volatility, and performance out of crude capital? What did John D. Rockefeller do? Rockefeller took crude oil and gave you kerosene, gasoline, and diesel. How big can the business get? Pretty big. I think there’s room for a $1T company that securitizes every flavor of capital. I’m talking about the transformation of capital markets. These securities will be backed by digital capital, not physical, financial, or property-type capital. That’s our end game. We're not here to diversify.
The MicroStrategy story is far from over. The company is still in accumulation phase, and it is likely next that MicroStrategy starts to generate yield lending Bitcoin. If that rate is close to the 10 year treasury yield (~400bps), then the current bitcoin value ($17B) would generate very attractive cashflows ($680M). As Bitcoin value increases, so does the interest payments on the Bitcoin. This is another flywheel like the convertible debt discussed above. Financial engineering at its finest. This is MicroStrategy’s endgame.
The Bitcoin Bank.
Cheers,
AB updates are for informational purposes only. Do not construe any of the following as investment, financial, or other advice. You make your own decisions.