Bitcoin: Microstrategy´s Michael Saylor unchained
The thinking and the strategies behind Saylor´s bold bitcoin investing.
Michael Saylor is relatively new to the crypto sector. By his own admission he did not know much about bitcoin until February 2020. He then made the news in August 2020 when his company, Microstrategy, announced that it bought US$ 250 million of bitcoin as a treasury reserve. It was the first publicly listed company to make such an historical move. Since then he has built a 90.000 bitcoin treasury reserve worth over US$ 4 billion and no doubt this has influenced other public companies´ decisions to invest in bitcoin, such as Paypal, Tesla, Square and institutional investors such as MassMutual. In a short time he became arguably the most powerful of bitcoin advocates.
So I was curious to learn more about this new bitcoin advocate, about his thoughts on bitcoin and about his company´s investment strategy.
If one had doubts that Saylor was just selling a story and was in for a quick speculation one must rethink, cause Saylor did not only put all his money — and more of it because of the leverage — where his mouth is, but because he really thinks like a bitcoiner and he seems to have assimilated quite well Bitcoin complexities in a surprisingly short time frame.
Every bitcoiner has gone through virtually the same learning path — usually a few years long — made of initial denial, open criticism, conditional acceptance, before arriving to the full awareness in what I call the “illumination” phase, that moment of clarity in which suddenly everything falls neatly into place. So, the hat´s off to him for the remarkably short journey he has done.
He says he has got his moment of clarity only in March 2020 when markets collapsed and he watched the FED printing trillions of dollars to furiously buy securities while figuring the effects of that on his company´s US$ 500 million treasury chest and the loss of purchasing power that would follow.
This is the same mental process, charged with anxiety, which anyone who has experienced massive inflation or hyperinflation in modern times — such as the people in Argentina, Venezuela, Zimbabwe or Turkey — goes through. These are the people who come to bitcoin because of need. For them bitcoin becomes a survival tool. And they are always the fastest learners.
Saylor has been — by his own admission — also lucky, in the sense that he jumped on the bitcoin train at a time which might have marked an historical inflection point. Which is when the FED and other central banks have abandoned any pretense of fulfilling their mandates of price stability, employment and inflation control and gone fully on decoupling the risk-taking from the consequences of it. Since the financialization of western economies has grown the financial markets to the point that they represent the largest part of the whole economy, they cannot let the markets go down. They will print all it takes to sustain markets, the GDP and to keep interest rates low.
Saylor had a good mentor in Ross Stevens, CEO of NY based Stone Ridge Asset Management, one of the asset managers who pioneered bitcoin investment back in 2013 and which currently holds over US$ 6 billion in bitcoin and has additional US$ 25 billion in the pipeline from institutional investors.
Saylor was also clearly influenced by Dr Saifedean Ammous´ excellent book “The Bitcoin Standard”, on the history of money and the role of Bitcoin in a new monetary system. As a keen Austrian economics scholar myself, I found Ammous´ prospective of Bitcoin´s role in a new monetary system fascinating, which inspired my post “Bitcoin and the lost art of commercial banking”.
The first stop to learn more about Michael Saylor — I mean to truly learn more than what Twitter can tell — was Microstrategy´s conference “Bitcoin for Corporations” which they recently organized to promote bitcoin adoption among corporate CEOs. They put together a playbook for corporations to adopt bitcoin delving into accounting issues, legal issues, treasury financial issues and of course buying strategies. Very interesting stuff to go through if you are interested. All the material is available online on Microstrategy´s website including a highly interesting introductory interview with Ross Stevens in which Stevens explains to his fellow CEOs his views on Bitcoin and its future adoption.
Next was Michael Saylor´s video presentation in which he explains Microstrategy´s playbook for investing in bitcoin and how to create products to lock-in bitcoin growth potential.
Then I listened to an interview/podcast made by Saifedean Ammous with Michael Saylor.
And here Michael Saylor was unchained. What follows is a summary of what he said to Ammous on different topics (please note my general disclaimer at the bottom of this post):
Is Bitcoin a speculative asset?:
“It´s always labeled a speculation if you do not understand the science behind something. Argentinians do not buy bitcoin for speculation”.
Saylor hints here that the need for Bitcoin is caused by monetary debasement. Whether this happens in the US, Europe or Argentina the difference is only the time frame, the scale of it and the different level of awareness among the population. Therefore he does not see Bitcoin as a speculation, rather a very much needed tool to safeguard purchasing power from monetary inflation.
Bitcoin is the hardest and most salable money:
Saylor made an interesting analogy with engineering and gold when was the hardest form of money and it enabled the development of civilization. Like the hardest materials enable the strongest and tallest of constructions, the hardest money should lay the foundations for human development. Cathedrals and objects of art which took many years to complete could be built because the money that financed it did not lose value across time. Gold was the money that funded all such infrastructure in history and was the most salable form of money at the time. By the same token bitcoin is today the most salable form of money, the hardest money around. And it will enable the very same infrastructure development that gold did in the renaissance or during the gold standard from 1800 until 1914. In the future, borrowing against a hard asset such as bitcoin, will enable just that. And he mentioned as an example Jack Dorsey´s 500 bitcoin endowment trust to finance Bitcoin development in Africa. Hard money lowers time preference which is the key to investing in the future.
Bitcoin is the fastest money:
Saylor said that it is hard to conceive today what can be done with a high frequency, fast money like bitcoin. The comparison and contrast here cannot be done with fiat money because even if it is very fast, fiat money does not have finality of settlement (of course except for public enemy nr.1 the cash). So we should rather compare and contrast Bitcoin with gold because both have settlement finality. Try moving 1 billion worth of gold and 1 billion worth of bitcoin across time and space and you have the answer. The important point he makes is that high frequency money will enable a whole new different infrastructure and a totally new range of services yet unheard of. Think about flash loans: hours up to a few months.
Bitcoin energy footprint:
To summarize Saylor´s view here, one must contrast the fiat standard footprint with the Bitcoin footprint and consider both their externalities in order to get the real picture. Bitcoin´s energy footprint is totally transparent, 100% accountable and does not have substantial externalities. Its energy footprint is the mining rig. Full stop. As big as this may seem it is a tiny fraction of the energy footprint of the whole fiat system and its externalities. This system is based on a massive infrastructure which includes thousands of banks around the world, thousands of finance related service businesses, tens of millions of people employed in the sector and the huge US military machine to back stop the dollar reserve currency. Externalities include the debasement of fiat currencies and the damages that this causes to millions of lives worldwide. He made unarguably the point that if governments are debasing, conservatively, at 5% per year US$ 500 trillion of global monetary assets, that´s a US$ 25 trillion of wealth per year which is literally stolen from people worldwide. To add my personal view to that of Saylor, one must also take into account the distorted perverse incentives which a fiat system generates, such as for example the need to keep alive and profitable the huge arms/military complex which needs to sell its products and therefore increase GDP revenues by periodically leading useless wars and causing the loss of millions of lives (the list of the GDP beneficial wars in modern times is endless, starting with the Vietnam to end with the latest disastrous western interventions in Iraq, Syria, Libya and Yemen).
The store of value problem in a fiat system:
In 80 years we transitioned from the Bretton Woods system, centred on the US dollar redeemable with gold (this system was broken in 1971 by Nixon defaulting on the gold-dollar redeemability), to a system based on US Treasuries as a store of value and finally to a system based on risk assets as a store of value. Saylor sees that this last transition happened lately around 2010 when investors have been forced into risk assets by the artificial compression and manipulation of interest rates by central banks. Investors had no alternative than seeking refuge in risk assets to protect themselves from zero or negative interest rates and monetary debasement. Investors soon realized that while government bonds were not even covering half of the monetary inflation, the stock indexes were averaging 7–8% per year and therefore were tracking pretty well monetary inflation. That´s why stock indexes became the preferred store of value (remember in 2011 the Swiss Central Bank buying hand over fist stocks). This investment framework collapsed in March 2020 when monetary supply increased at 25% per year. That is why bitcoin became now a compelling investment case for corporate and institutional investors and the sole store of value in this final chapter of the fast collapsing fiat standard.
Saylor also mentions that the “progressive” and fairly new smart money considers bitcoin the primary store of value, while the “old” conservative smart money embraces the Nasdaq Tech Index as a store of value.
Looking at the year on year ROI for the main investment classes bitcoin yields + 356%, Nasdaq + 43%, Gold + 14,7%, S&P 16%, Treasuries 2%. If one factors in the monetary supply increase at 25% per year, an investor does not have any options left to beat inflation except for bitcoin and the Nasdaq.
Therefore Saylor puts bitcoin — with a current market cap of approx. US$ 1 trillion — at the core of a “monetary planet” which value is currently approx US$ 500 trillion and sees this core expanding to 10, 50 and eventually US$ 100 trillion to project the global monetary value of the planet to a quadrillion dollars.
One can argue the numbers thrown here by Saylor, but one certainly agrees with his reasoning.
What about gold´s role in Saylor´s “monetary planet”?
Well, here Saylor takes an extreme view with which I do not entirely agree and I would have expected Ammous to challenge him on that issue. But he did not, so I will try.
Unarguably, Saylor sees bitcoin as a superior store of value to gold for more or less the same reasons that I have also highlighted in my post “Oops! Ray Dalio missed the biggest of all paradigm shifts: crypto” . But he goes to the extreme of arguing that bitcoin will completely destroy gold. He seems to overlook the fact that gold is STILL the reserve asset of the main central banks worldwide. If he envisages, as I do, a monetary system in which fiat currencies will coexist with bitcoin — which main use will be as a store of value, the hard salable money which constitutes the foundational layer of a new economic infrastructure — how could then fiat currencies survive the current level of debasement if central banks do not intervene to backstop their currencies with the only real asset they own?
In my opinion a possible scenario is a new Bretton Woods, in which the main central banks which hold the largest gold reserves (US, Germany, Italy, France, Russia and China) will coordinate to backstop the falling fiat currencies with their gold reserves and will bid up the gold price x times until it balances their liabilities. Therefore we might see a two tiered system in which we have the main fiat currencies, somehow fractionally backed up by gold reserves in order to restore confidence among the population, while all those who do not hold relevant gold reserves will rather adopt bitcoin as the main reserve asset.
The fact mentioned by Saylor, that only one store of value is needed and that while bitcoin is better and more functional than gold it will achieve market supremacy and destroy gold, is conceptually correct but fails to consider what I have mentioned above. Which is that gold still is THE reserve asset for the financial elites and central banks. In a longer time frame — because of the technological superiority of Bitcoin — the demise of gold as a store of value envisaged by Saylor is a possible scenario, but this is far too early to foresee and it will depend on many factors among which how bitcoin behaves in the future and its adoption curve.
Is bitcoin volatile? any worries?:
March 2020 was for Saylor an inflection point. All that has happened to bitcoin before that inflection point, Saylor thinks will be irrelevant in the future. The inflection point has been the sudden awareness by a group of institutional and corporate investors of the impact of monetary debasement on their treasuries, which suddenly made bitcoin a compelling store of value for all. He is convinced that the new flow of institutional money into bitcoin will prove wrong all the previous models used to forecast price fluctuations (including my beloved indicator, Plan B so far extremely accurate and reliable stock to flow model). But undoubtedly his reasoning has merit and if March 2020 will really prove to be the inflection point which then triggered the investments of Microstrategy, Square, Paypal, Marathon, MassMutual and Tesla, this will mean that any other large institutional investor or quoted corporation entering bitcoin will add fuel to the fire and propel bitcoin to levels which no one could have dreamed of only 1 year ago. My own August 2020 prediction of US$ 248.000 bitcoin looks today quite conservative. Maybe we will have to re-calibrate the old models based on a completely new set of assumptions. Bitcoin´s past history might after all be little relevant in the future.
If Saylor is right, March 2020 has marked the first page of a whole new chapter in bitcoin´s adoption book. For the adoption to scale to the levels foreseen by Saylor though, I am convinced that we will have to see a consolidation of bitcoin´s market cap around US$ 1 trillion for quite some time in order to attract the interest of really large institutional investors. While the likes of Saylor, Ross Stevens, Mike Novogratz and Musk have written the first historical page of this new chapter, the likes of Apple and Blackrock will have to drive the next adoption phase.
Hopefully this phase will also attract a new breed of bright, progressive and forward thinking central bankers and politicians from emerging economies. These countries have an historical opportunity and a first mover advantage to be at the centre of a new economic infrastructure built upon Bitcoin. Ideally this should promote a new renaissance based on hard salable money to foster real free trade and cooperation, solidarity, liberty, sustainable economic development and widespread shared wealth to replace the current status of rampant wealth inequality, financial repression, coercion and unsustainable economic development. All this is the result of misaligned incentives, corrupted vested interests and enormous privileges which have been generated by the adoption of the fake fiat money standard as the weak foundation of our economic and societal infrastructure. And one cannot build a solid house on weak foundations, only a house of cards.
This system is breathing its last. Satoshi gave us the hardest of the monetary tools to use and to build upon, it is now on us to build something better with it.
© www.bianconiandrea.com — 2021
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General Disclaimer: All the above content is my own summary of an interview/podcast made by Saifedean Ammous with Michael Saylor. Unless Saylor´s words are directly quoted in the above post, the post content then represents my own interpretation of the podcast interview. Sometimes I have expanded on Saylor´s concepts to explain them better, clarify them and make them more comprehensible using my own words. I apologize if I have misinterpreted his words. Therefore, despite having made my best efforts to report as truthfully as possible the content of the podcast, I encourage the readers to listen to the original podcast and not to rely solely on my summary. I do not know Michael Saylor nor have I received any type of economical compensation for writing this article. If you appreciate my free and independent work donate crypto to https://www.bianconiandrea.com
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© www.bianconiandrea.com — 2021