This year, MicroStrategy bought over $700 million in Bitcoin. That’s on top of more than $6 billion acquired in prior years.
Not bad for a company that’s barely profitable and loses money in most quarters.
Its most recent earnings presentation laid out a plan to buy another $42 billion in Bitcoin.
Doesn’t that sound absurd? It makes hardly any money. Where will it find enough to buy $42 billion worth of Bitcoin?
It won’t. It doesn’t need to. It’s not spending its own money. It’s spending its investors’ money.
An asset with no intrinsic value
More precisely, it plans to sell $21 billion in stock and raise $21 billion through debt offerings.
This is the same approach it took to get the $7 billion in Bitcoin it already has. Investors, not Microstrategy, paid for that Bitcoin.
You might say that’s pretty shady. A corporation is dumping stock on speculators and gaming the financial system for cheap credit.
Guess what?
That’s how the system works.
Bonds are crowdsourced loans. Often, it’s easier to get money from Boomers and their financial planners than banks.
What about equity?
It’s free money for corporations, literally conjured out of thin air and priced at the market’s opinion of the company’s worth. Stocks do only three things:
- Give corporations a cheap source of funding for business activities and executive compensation.
- Give corporate executives an easy way to manipulate the public’s perception of the company’s value with buybacks to artificially raise stock prices and dividends/splits to reward shareholders.
- Give shareholders a way to game the tax system. They pay less on capital gains than income and protect their profits in tax-advantaged savings accounts.
You buy bonds because your financial advisor says they’re a safe way to beat the returns you get on a savings account. You buy stocks because you think you can sell them to somebody else in the future for more than you paid for them.
Flipping the script
MicroStrategy is a break-even business at best, but it figured out a secret:
People think equity has value, but it doesn’t.
MicroStrategy trades that equity for bitcoin. Its, er, strategy, depends on selling equity for Bitcoin and waiting for its price to go up.
When Microstrategy puts those Bitcoins into its treasury, they count it as an asset on the balance sheet. When Bitcoin’s price goes up, Microstrategy’s balance sheet grows. The business becomes more valuable.
As a result, its stock looks more attractive. Speculators can justify buying its bonds and inflated shares.
Can’t lose
As long as Bitcoin’s price goes up, MicroStrategy doesn’t need profits, revenue, cash flow, or anything else to boost its share price.
It can run its business into the ground. Its assets will make the balance sheet look good.
The best part of that plan?
People will still buy shares of MSTR stock because of the book value!
Is it sustainable?
In theory, MicroStrategy never has to sell its Bitcoins. It can borrow against its treasury, sell more shares, or take out more debt.
In reality, MicroStrategy will have to sell or trade its Bitcoins at some point.
Eventually, people will realize they don’t need to buy MicroStrategy stock to get exposure to Bitcoin. They’ll switch to Coinbase stock or the Bitcoin ETFs to gamble on Bitcoin’s price.
Once that happens, Microstrategy will lose a vital source of funding and won’t have enough profits to make up for it. Banks and bond buyers will stop giving it money. It will have to sell some Bitcoins or go out of business.
If it goes out of business, creditors or trustees will sell the bitcoin as part of the bankruptcy process.
Even if all goes swimmingly, shareholders may force Microstrategy’s CEO, Michael Saylor, to sell some Bitcoins and invest the profits into the business.
A man, a plan, a scam, macsanal Panama
Yes, the stock market is a massive subsidy for corporations and corporate officers.
But it’s a scam that the US government has incentivized people to buy into with retirement funds and private savings. It kicks back income in the form of dividends and buybacks.
Those businesses do have a value, even stock prices never reflect that value, only what somebody’s willing to pay for the chance to sell their shares at a higher price in the future.
The question is, will Bitcoin’s price go up long enough to justify Michael Saylor’s strategy?
And, if it does, what will that say about the “intrinsic value” of the rest of the stock market?
Mark Helfman publishes the Crypto is Easy newsletter. He is also the author of three books and a top Bitcoin writer on Medium and Hacker Noon. Learn more about him in his bio and connect with him on Tealfeed.
