After the approval of ETFs Bitcoin (BTC) in the United States and Donald Trump proposal to create a cryptocurrency reserve, the path for large companies to adopt Bitcoin is advancing. Amazon shareholders will soon decide whether or not the company should maintain a reserve in Bitcoin – Microsoft’s did the same, and this week they decided not to.
As governments and companies evaluate the purchase of BTC, one man has become the great case study for this type of operation: Michael Saylor, founder and chairman of MicroStrategy.
In the last four years, Saylor bought so much Bitcoin that his company’s shares started to follow the movement of the cryptocurrency, becoming a – turbocharged – copy of the digital currency. Today, MicroStrategy owns more than 400,000 bitcoins, which have helped its shares jump more than 500% this year alone.
READ MORE: What are the risks for those who invest in cryptocurrencies?
“Michael Saylor realized that Bitcoin is much bigger than the business he had. And he gave himself up. Today people are embracing it and reaping the rewards. But many people still don’t believe in it”, says Alexandre Vasarhelyi, partner and CIO of the B2V Crypto management company.
Created as a software company, MicroStrategy practically gave up on its main business and today defines itself as a “Bitcoin Treasury” company.
By doing something that has never been done before, Saylor has generated great debate. If the result so far is extremely positive, having large amounts of a volatile and risky asset is also dangerous. There is no shortage of doubts, then, about the company’s sustainability.
Acquisition of Bitcoins
MicroStrategy was founded in 1989 as a software and digital solutions company for businesses – Business Intelligence (BI), in corporate jargon. Revenue was relatively high, still not enough to make the company a large caparound US$500 million per year. But the margin was enviable: 90% became profit.
As a result, over the years, Saylor’s company became a great cash generator, as it did not need to make large investments. In 2018, the company’s reserves in cash reached US$700 million. See the evolution here in the graph (later we talk about the fall, which is the central part of this story).
With so much money saved, MicroStrategy followed market tradition, leaving the values basically in the form of US Treasury bonds. In August 2020, however, Saylor found an asset that he believed to be the future of stores of value, Bitcoin. It was then that he made his first acquisition: 21,454 bitcoins, for US$250 million.
Fifteen months later, these bitcoins were worth US$1.44 billion.
MicroStrategy remained one of the largest BI companies, but the person who really generated cash was… the company’s own cash flow. Saylor then decided to take the plunge. And created a new business model.
The strategy of MicroStrategy
There was a class of investors who could not buy cryptocurrencies, but who were interested in having exposure to this new asset class. They were traditional funds, pension funds and companies that, due to internal rules or regulators, were not allowed to acquire Bitcoin, but could buy company shares or corporate debt securities.
With MicroStrategy accumulating more and more Bitcoins and its operations becoming smaller, its shares began to become fully correlated to crypto, that is, as the digital currency rose and fell, the company’s shares followed suit.
“Saylor understood that he could issue MicroStrategy debt and buy Bitcoin. And he had many interested parties and was able to offer low rates. It was basically a COE with guaranteed capital”, explains Gustavo Cunha, CEO of FinTrender.
COE is the acronym for Structured Operations Certificates: investments that combine fixed and variable income. In practice, you apply a value that will be linked to the performance of an asset, such as the dollar, gold, or a company’s shares. Anything. If the asset rises, you earn a pre-defined bonus. If you fall, you get the same amount back.
In the case of MicroStrategy, it issues a debt that works like this: whoever buys it receives, upon maturity, at least the amount invested plus the possibility of purchasing shares in the company for a lower value than the market value (via call options). If Bitcoin rises during the period, the shares will be worth more – as the company has become a huge crypto repository. That’s where the possibility of earning comes. “In other words, you have zero risk of volatility until maturity,” says Cunha. More recently, the company also began issuing new shares to finance its structure.
And the situation went further. With MicroStrategy buying unrestrainedly – and using debt to do so -, it has become increasingly leveraged in cryptocurrency, which has started to generate a multiplier effect on Bitcoin’s performance. In other words, when BTC rises or falls, MicroStrategy shares have an even greater variation than that of the cryptocurrency.
To give you an idea, the company has reached a point where almost half of its market value, US$88.8 billion, is in 423,650 Bitcoins she owns. This is the equivalent of 2,1% of the global supply of the asset.
At the current price of US$98,000 per unit, we are talking about US$41.5 billion in crypto.
“Saylor created a mechanism in which it was able to meet the demand of large investors who cannot buy Bitcoin, or do not want to suffer from the asset’s volatility. The issue is that it seems to have no limit: the more Bitcoin rises, the more it issues to buy more”, says Cunha.
What are the risks?
It’s obvious: if Bitcoin crashes, MicroStrategy sinks with it – in the same way that, if a barrel of oil falls by 95% and never rises again, Petrobras ceases to exist.
On the other hand, MicroStrategy has some sleeves. A first important piece of information is to understand that, today, the average acquisition value of all MicroStrategy bitcoins is around US$60,000 – well below the current price of the cryptocurrency. In other words, there is room for a reasonable drop before it becomes a loss.
For Cunha, in any case, the biggest risk would be regulatory. MicroStrategy is still a software company. The SEC (US CVM) or some other regulatory body may say that it simply does not have a license to offer investment products with the strategy it has been using. “But with the new government of Donald Trump, this risk decreases significantly”, assesses Cunha.
Saylor: genius or crazy?
“I have more questions than answers”, defines Cunha about the business model adopted by MicroStrategy. According to him, the cycle created by Saylor creates discomfort.
“This ‘infinite’ dynamic bothers me a lot, because it feeds back on itself and you question when it will end”, says Cunha.
In fact. MicroStrategy’s own purchases push the price of Bitcoin up. And the more Bitcoin rises, the more the company buys. An infinite cycle – but only while it lasts. If crypto falls, and it is impossible to know whether or not this will happen, the model collapses.
But Saylor remains confident. Recently, MicroStrategy announced that, between 2025 and 2027, it will issue another US$42 billion, half of which will be in debt and half in new company shares, with the amount raised financing new BTC purchases. And only time will tell whether this will be sustainable or not.
