Disclaimer: Opinions expressed in this article do not constitute investment advice from Bitcoin Reserve.
This week, Microstrategy, one of the largest publicly-traded business intelligence companies in the world, placed a $250 million bet on digital gold—dubbing bitcoin its new "treasury reserve asset."
On July 28, a transcript of Microstrategy's Q2 earnings call was published; it made for dreary reading. For many, Microstrategy's lackluster performance came as no surprise. Like countless companies, the depressed macroeconomic environment ushered by COVID-19 took its toll in the first half of 2020. In Q1 alone, MicroStrategy (MSTR) witnessed 36% wiped from the value of its shares as it succumbed to the systemic crisis.
However, in a likely response to its humdrum H1 earnings and stock performance, the company declared a brand-new capital allocation strategy. The plan was to return $250 million to shareholders and invest a further $250 million in "one or more alternative investments or assets"—which included bitcoin.
The Q2 earnings call transcript read:
"MicroStrategy 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."
On August 11, the company announced that it had put its strategy into motion. In the end, it seems, rather than diversifying into bonds, gold, and other such assets, every cent of the $250 million found its way into bitcoin—21,454 BTC to be precise, equating to around 0.1% of the asset's total supply.
Less than a day after the announcement, MSTR rallied over 16%, rebounding to a 5-month high.
MicroStrategy's Bitcoin Maneuver
So why, instead of diversifying into multiple instruments, did MicroStrategy opt for bitcoin alone?
According to MicroStrategy CEO Michael J. Saylor, the substantial investment comes down to the belief that bitcoin represents both a reliable store of value and an attractive investment asset with higher appreciation potential than fiat.
"Bitcoin has emerged as a significant addition to the global financial system, with characteristics that are useful to both individuals and institutions," Saylor noted. "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."
Per Saylor, the investment didn't come on a mere whim. The firm purportedly spent months deliberating before ultimately settling on bitcoin. The tipping point finally arose when several macro risks threatened the integrity of MicroStrategy's corporate treasury program — risks that, first and foremost, include a return to quantitative easing.
Unlike bitcoin, fiat currencies can be generated at will. We've already witnessed this with the >$3 trillion printed in various quantitative easing methods and fiscal stimulus handouts in the US. By contrast, bitcoin's fixed supply and non-conformance to fickle monetary policy hold the asset in high esteem in the minds of many investors.
Far beyond a pure hedge against this kind of macro risk, however, Saylor noted that bitcoin's value could feasibly go on a tear with advances in technology, adoption, and network effect.
Will Others Follow Suit?
Intriguingly, numbered among the investors of MicroStrategy itself, are BlackRock Fund Advisors—the largest asset manager in the world with over $7.4 trillion in AUM—and The Vanguard Group—the world largest provider of mutual funds. Together, these traditional finance monoliths hold a combined 27% share in MicroStrategy. And now, whether they like it or not are similarly vested in the price of bitcoin, indirectly at least.
Both Vanguard and Blackrock have been notable "blockchain, not bitcoin" proponents. That said, so was MicroStrategy's Saylor a few years back.
Saylor tweeted in 2013:
For the record, he was wrong about online gambling as well.
Regardless, given their combined stake, it's almost inconceivable that both Vanguard and Blackrock held no prior knowledge of MicroStrategy's plan. Which indicates one thing: they likely gave their approval.
It's possible that both funds have regarded what many others—including Wall Street luminary, Paul Tudor Jones—have observed in bitcoin.
In May, Jones urged investors to allocate into bitcoin to hedge against inflation and subsequent devaluation. And that prescient call seems to be slowly coming to fruition. Right now, the US dollar is in a state of flux after falling to a two-year low last month following a reiteration of the US fed's dovish position on interest rates and inflation.
You only need to glance at the US' ever-expanding M2 money supply to see that inflation could spiral out of the Fed's control. In the first half of 2020 alone, the M2 money stock has grown by around 20%. Compare this to The Great Recession between 2008-09, where the supply grew a comparatively paltry 13%, and it's no surprise why bitcoin and gold are suddenly turning heads.
So, with companies, hedge fund managers — and even banks — jumping on the bitcoin bandwagon away from macro risk, one question remains, what's next?
Bitcoin: From Treasury Reserve Asset to Global Reserve Asset
In a previous research piece, we looked at what an aggregate 1% institutional allocation could accomplish for bitcoin's price point. At present, estimates a total of global AUM of endowments, family offices, sovereign wealth, pension and mutual funds amounts to over $104 trillion. As such, even the smallest allocation could tip bitcoin's market cap into the trillions. And that only accounts for the funds—excluding companies such as MicroStrategy.
Should this bitcoin pile-in materialize, the asset could grow beyond MicroStrategy's treasury reserve asset and fulfill what many believe to be its true calling as a global reserve asset.
Akin to many bitcoin converts and evangelists, Microstrategy's Saylor, hit upon the key hallmarks driving both bitcoin value and its narrative as a potential global reserve.
"Bitcoin is digital gold – harder, stronger, faster, and smarter than any money that has preceded it," he noted.
Soon, it'll be the fiduciary responsibility of every hedge fund, family office, endowment, mutual fund, company, to invest in bitcoin—and when that time comes, central banks will have no choice but to follow suit.