MicroStrategy CEO is hugely leveraged in Bitcoin and still banks on its appreciation.
Michael Saylor is a libertarian, businessman and bullish Bitcoin whale. Free market dynamics have influenced his view on corporate policy and investing. In addition, his concentrated stakes in cryptocurrencies may be an attempt to one-up the regulators.
Plain Say-ling
Saylor was interested in engineering at a young age, fascinated with the ability to manipulate systems to influence the efficiency of pre-existing technologies and create innovative societal impacts. Educated at MIT majoring in astro and aeronautics, he later developed his consultancy ability and quantitatively engineered systems at DuPont to predict market turning points.
MicroStrategy was founded in 1989 by Saylor, rather coincidentally with the same initials, and Sanju Bansal, a friend from MIT who initially ploughed 90-hour weeks to generate the firm's first revenues; he left in 2013. Since then the firm has developed, most notably reforming its business intelligence and data analytics workstation to become more client-friendly. The aim is to create tailored databases that are trusted, secure, and quickly accessed by users. Most recently, it has promoted zero-click hyper-intelligence business functions through its platform MicroStrategy 2021. Saylor wants himself and his clients to be in control to make rational informed decisions to emulate a perfect free-market environment.
However, MicroStrategy's success, with revenues doubling every year between 1990 to 1996, had not come without challenges. In 2000, the SEC was compensated by Saylor, Bansal and Mark Lynch, a former MicroStrategy CFO, $350,000 each in "civil penalties" and a $10mn disgorgement after an investigation found MicroStrategy's March 2000 financial results had evidence of civil accounting fraud. However, Saylor and his partners did not admit to these convictions. Settling charges without any further investigation suggests Saylor will put a price on anything, this saga created tension between him and US regulators.
Bitcoin stance
Saylor uses his neo-classical views to reason with his leveraged 100,000 Bitcoin inventory. Capital will continuously flow into stronger yielding assets, bidding up the price and reducing the rate of return to the natural rate for assets with identical risk profiles, as MPT states. Bitcoin has consistently doubled year on year. Monetary expansion is causing long-run dollar depreciation against a basket of currencies by ultra-low interest rates, repo schemes and asset purchases. Saylor's objective is to invest in assets to provide a return that exceeds inflation (growth in money supply subtract growth in money demand). In the current environment, Saylor expects inflationary pressures to sustain and rates to remain low.
Cryptocurrency markets have attracted an estimated $1tn in capital compared to $120tn invested in global bond markets. Under this model, cryptocurrencies have the potential to expand one hundredfold. The price of Bitcoin has already topped $60,000. Saylor views any price of Bitcoin since first purchasing the cryptocurrency as a good price, comparing it to purchasing Manhattan real estate in the early 1900s. Bitcoin is a technological product because it uses the blockchain and has transactional purposes with network benefits attached. Increased use of the blockchain and other cryptocurrencies will force users to understand the technology and realise Bitcoin's advantages. The digital asset is not specifically designed for any particular purpose and it is the most popular, therefore, carries the least risk. Saylor likens the asset to a firm without any employment or operational risks.
His stance stretches into a corporate strategy. Targetting capital appreciation and preservation and maintaining shareholder value Saylor believes dividends and buybacks are capital leakages, a method to pass inflation risk onto shareholders rather than internally holding cash reserves which could generate returns. Saylor sees Bitcoin as almost guaranteed to create high returns over the next decade or even the century. In response, cash reserves should be exchanged to Bitcoin, dollar-denominated future revenues are borrowed and converted to Bitcoin, when these revenues have been generated the liability can be paid. The same principle holds for assets, the debts paid off when the assets are sold (account for depreciation) and equity. All costs should be denominated in non-Bitcoin currencies, leading to inflated profits, cash flows and surging share prices. Furthermore, firms could shift sales into markets that would transact in Bitcoin.
Leveraged interest
Since MicroStrategy first invested in Bitcoin in August 2020, its stock price (and Saylor's net worth) has undergone huge strain through the cryptocurrency's asset price fluctuations. Most recently bottoming at around $29,000. To illustrate this, a synthetic control is used formed through a basket of other data analytics firms, close competitors to MicroStrategy's underlying business, that precisely emulate MicroStrategy's stock price from August 2019. Running an OLS regression, the variation in MicroStrategy's price is vastly explained by its Bitcoin investment, it is statistically significant that Bitcoin influences the stock price of MicroStrategy, this is illustrated below through the divergence of the blue and red lines.
Executing the regression model, MicroStrategy compared to the control and after the first investment of Bitcoin compared to before explains a $283 rise in its share price. Removing the control, when the price of Bitcoin changes by $1,000 MicroStrategy's price changes by approximately $13. The model's R-squared is 0.4, meaning most of the model's variation is explained by external factors, including operational risk unique to MicroStrategy and Saylor's Twitter presence. Saylor certainly has invested interest to keep the stock price buoyed.
Saylor aggressively dismisses the risks of Bitcoin. In May, China banned the use of financial institutions facilitating Bitcoin transactions for trading, clearing, and settlement. In addition, 90% of Chinese Bitcoin have closed throughout the last year. Saylor argues this is no issue as the mining is welcomed into North America including Alberta and Texas, as part of capitalism efficiency. In addition, as the US enforces capital gains taxes and AML/KYC regulation onto Bitcoin, Saylor sees this as part of the general procedure taken for all assets. Bitcoin will be regulated and not banned, when it is regulated the government has approved it as a legitimate asset, leading to greater institutional acceptance and inflows. Banning the use of Bitcoin will stifle the capabilities of the blockchain, an act against the government agenda. Even with regulation, transactional costs are near-zero, payments will be more easily facilitated with retail banks and blockchain technologies can continue to have a purpose in multiple industries including healthcare, manufacturing and real estate. It is crucial to note if the asset and consequently his company collapses, Saylor's rational emotionless side will feel the price action has been dictated by the market, he is wrong and will move on.
Overall, Saylor's biases are uninterrupted by Bitcoin's asset price oscillations. He believes that the asset price will only undergo necessary regulation and capital will continue to be attracted and appreciate the cryptocurrency. Bitcoin will always have few transaction and diversification costs and will not be internationally banned, decentralised free markets are never fully suppressed. Saylor sees this as the largest benefit, a way to remain invested in an asset that the regulators are unable to ban, unchanging his expectation of high returns.
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