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Bitcoin Episode 3 – the Potential for a Perfect Storm

February 29, 2024

I have concertinaed the chart to highlight the strong uptrend and the latest breakout. This price looks set to climb higher, maybe much higher – $250,000, why not?

HODL – a Simple Strategy for Bitcoin

A simple rule is to hold Bitcoin while the averages are rising. An even simpler rule is HODL (hold on for dear life) which is what the Winklevoss twins say is their strategy for Bitcoin. The Winklevoss twins say Bitcoin should be valued like gold. There is around $10T of gold in the world, which implies an eventual price for Bitcoin of $500,000 a coin. Sounds crazy; well who ever thought the price would top $60,000 when it was priced in cents?

Strategy – Buy Microstrategy (MRST)

The CEO, now executive chairman, and founder of Microstrategy is Michael Saylor. He is a very clever man. In 2020 he decided that fiat currencies (dollars, pounds, euros etc.) were doomed and that Bitcoin would become the world’s ultimate asset. He did this even though his company had a software business generating sales and profits and with considerable potential in a world of AI.

He began buying Bitcoin. He bought aggressively with company cash, new equity funding and debt funding. The result is that at the last count, Microstrategy held 193,000 Bitcoins, worth around $12bn in a company with a market value of around $16bn. As a result of this staggeringly bold strategy, MRST is the largest corporate holder of Bitcoin in the world.

CEO, Phong Lo, explains how it all works.

As a Bitcoin development company, we’re focused on generating value for our stockholders by using various capital markets and technology levers. As an operating company, we can make use of intelligent leverage. Since our adoption of our Bitcoin strategy, we’ve used three primary mechanisms to acquire more Bitcoin.

One, cash flow from software operations. Since August 2020, we’ve invested $726m of total cash on our balance sheet in Bitcoin. Two, equity issuances. We have issued $3.1bn in equity in a manner that we believe to be accretive to existing shareholders to acquire Bitcoin.

And three, debt financing. We’ve obtained $2.2bn in corporate debt proceeds through the issuance of both senior secured notes and convertible notes that we use to purchase Bitcoin. The blended cost of our debt is fixed at 1.6pc annually. We believe each of these techniques and our unique positioning as the world’s first Bitcoin development company have enabled us to generate tremendous value for our shareholders.

Phong Lo, CEO, Microstrategy, Q4 2023, 6 February 2024

This strategy of borrowing to buy Bitcoin means that MRST should outperform Bitcoin.

While the overall market benefited from the increase in Bitcoin price as well, we believe our intelligent use of leverage and excess cash to acquire more Bitcoin, as well as our equity capital market strategy, contributed $2.4bn of incremental value for our balance sheet, demonstrating our track record, generating value for shareholders. This slide shows an illustrative example of how responsible and intelligent leverage can be used to boost returns when Bitcoin prices are increasing. The baseline returns of any long Bitcoin strategy benefit from spot Bitcoin price appreciation. Bitcoin ETPs also benefit from this, offset, of course, by the management fees that are charged for those products.

Leverage provides us the opportunity to generate high returns if the price increases. In this illustration, assuming Bitcoin price reaches $250,000, keeping Bitcoin count constant, spot Bitcoin without leverage would return approximately 480pc. Adding leverage to acquire more Bitcoin would return between 660pc to 740pc, depending on the amount of leverage, further boosting returns compared to simply holding spot. If the market value of our Bitcoin increases, we believe this will create more opportunities to manage our leverage targets.

Andrew Kang, CFO, Microstrategy, Q4 2023, 6 February 2024

Microstrategy Already One of the World’s Best Performing Stocks

This strategy is already delivering great results according to the chairman, Michael Saylor.

Since August 2020 when we adopted our Bitcoin strategy, our stock has outperformed Bitcoin, as well as every major asset class, along with every major big tech stock, as well as every major enterprise software stock.

Michael Saylor, executive chairman, Microstrategy, Q4 2023, 6 February 2024

The shares were around $125 in August 2020 against around $1,000 presently, a rise of eight times v around 50pc for the Nasdaq 100 and around 100pc for Microsoft. Even Nvidia, up six-fold over the same period, has not done as well.

Michael Saylor is incredibly bullish on Bitcoin, both for his company and himself since he is a Bitcoin billionaire. Who needs diversification?

if you look at Bitcoin as a digital gold, as gold, it can be 10 times what it is. And as property, it could be 100 times what it is. And we don’t need to address any of the traditional currency criticisms or medium of exchange criticisms. In fact, one could say simply as a store of value, there’s no reason why Bitcoin can’t continue to outperform and can’t become 100 times what it is.

And these ETPs that have been released are doing a tremendous job of scaling Bitcoin as a store of value because they’re putting it within the grasp. You can buy $100 worth of it or millions or tens of millions or 100s of millions in accounts with one-one hundredth of the friction, perhaps one thousandth of the friction that traditional investors faced just a few years ago when they had to go set up a crypto account on a crypto exchange, and then they had to figure out who their Bitcoin custodian was going to be or whether they were going to do self-custody, and there are large classes of investors and institutional investors that either can’t or won’t do that. So we’re living through a very exciting period.

Michael Saylor, executive chairman, Microstrategy, Q4 2023, 6 February 2024

The company plans to continue with its strategy which is working so well.

We expect to continue to be able to reinvest cash into Bitcoin acquisitions. And when we do this, this is, we believe, very accretive to our shareholders. And the last point that I would want to make is we’re very fortunate to be able to leverage the capital markets. There are no companies that have, to the extent that we have, been able to leverage the capital markets to acquire Bitcoin.

We have acquired Bitcoin with senior secured debt issuance. We’ve acquired Bitcoin with convertible debt issuance. We have acquired Bitcoin with equity issuance, and those are just three ways we’ve done it in the past. And as we look forward, we’re going to consider all possible capital market opportunities.

Michael Saylor, executive chairman, Microstrategy, Q4 2023, 6 February 2024

The company is superbly placed to do well.

The nice thing about our situation right now is that we have all these options, and we believe we’re structured very well to take advantage of opportunities as they present themselves in the Bitcoin era of institutional adoption that we see over the coming 15 years.

It won’t be like the first 15 years, but we believe it will be a healthy growth period, presenting many opportunities for corporations, such as ours, as more and more institutional investors and retail investors become aware of Bitcoin and as regulatory clarity spreads everywhere in the world. 

Michael Saylor, executive chairman, Microstrategy, Q4 2023, 6 February 2024

Piling Leverage on Leverage

Now, for you crazies out there, we can pump up this strategy even more. Bitcoin is a wild but oh-so-exciting investment. Microstrategy ups the ante by using its corporate structure and capital markets to keep buying more Bitcoin.

Now Kamikaze Man can add the final ingredient by buying MRST in a spread betting account with say three times leverage. This is such a wildly exciting strategy I get an adrenaline rush just thinking about it. You don’t have to bet the ranch; just put some cash in your spread betting account and place your bets, faites vos jeux, as they say in Monte Carlo.

Beats betting on horses into a cocked hat, especially given the way the charts are looking. Both Bitcoin and Microstrategy have fabulous, high-potential charts. The timing for such a bet looks perfect!

Share & Crypto Recommendations

Bitcoin BTCUSD. Buy @ $62,672

Microstrategy. MSTR. Buy @ $1002

Note: Bitcoin trades 24 hours a day, seven days a week and is quite a thin market. It can rise or drop several thousand dollars in a heartbeat so you need to be chilled with this one. Think Marlon Brando in The Wild Ones – what you rebelling against; what you got! It’s going to be a bumpy ride but that is what we thrill seekers want. If you can sleep at night you are probably underinvested.

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