His Virginia-based company was barely trading at $135 at the time. Now an MSTR share is $494.33. Saylor has been lambasted as irresponsible for what’s seen as a move away from the company’s core business that could threaten shareholder investments.
In its 2020 annual report, the Nasdaq-listed firm said it did not intend to trade regularly in Bitcoin, but to hold the crypto long term. This year, the company said it plans to invest in more bitcoin.
Saylor bragged about putting MicroStrategy deep in debt to buy as many Bitcoin as possible during a debate with Frank Guistra, CEO of the Fiore Group, a private firm managing private equity investments and companies.
“Take all your money and buy Bitcoin,” Saylor later advised investors. “Then take all your time to figure out how to borrow more money and buy more Bitcoin. Then take your time to figure out what you can sell to buy more Bitcoin.” Then Saylor added that investors should mortgage their houses and businesses to buy Bitcoin.
MicroStrategy is the largest publicly traded corporate holder of Bitcoin, and some traders say Saylor, along with Tesla CEO Elon Musk, is pumping the cryptocurrency and manipulating its price to avoid going underwater and being forced to sell.
MicroStrategy has about 91,579 Bitcoin and said it paid an average of $24,450 per Bitcoin as of May 18. At a current price of $36,582.46, that equals about $3.35 billion worth of Bitcoin. As a ratio to cash, with $3 billon worth of crypto, MicroStrategy is leveraged 50X.
Here are 10 quotes about MicroStrategy debt and solvency if Saylor’s Bitcoin gamble blows up.
Most of MicroStrategy’s bitcoins were bought with funds raised in successive debt offerings, part of Saylor’s effort to shift away from what he considers a devalued U.S. currency, Washington Business Journal reported.
That’s a gamble and it leaves the company vulnerable to Bitcoin’s daily volatile swings of 5-to-10 percent, said Marc Lichtenfeld, chief income strategist at The Oxford Group.
“I think MicroStrategy is being completely irresponsible with shareholders’ capital by putting so much of their assets into a very speculative and volatile asset,” Lichtenfeld said in an interview with the Washington Business Journal. “I have never seen a company do this. This is beyond the excesses I have seen during the dot-com boom, and I think it makes them very, very vulnerable.”
MicroStrategy had abut $1.7 billion of debt and its cash on hand totaled $59.7 million as of Dec. 31, down from $456.7 million on Dec. 31, 2019. By comparison, Tesla’s $1.5 billion Bitcoin purchase represented a relatively small amount of the company’s $19.38 billion in cash and equivalents reported at the end of 2020, Washington Business Journal reported.
“You can argue that (Tesla is) essentially diversifying a bit, hedging a bit,” Lichtenfeld said. “Whereas MicroStrategy, you cannot make a diversification argument because they are all in on this particular asset. I would feel the exact same way if they went all in on physical gold or any other currency or asset.”
Because bitcoin and other digital assets are considered “indefinite-lived intangible assets” rather than currencies, even a temporary drop below what the company paid for them can force a company to write down their value, Wall Street Journal reported. MicroStrategy posted a net loss in Q3 2020 due in part to Bitcoin price fluctuations.
“If a company substitutes cash in their treasury to buy cryptocurrency, that is speculation,” said David Kotok, chief investment officer at Cumberland Advisors. “They may win, they may lose, but that’s not what their basic business is.”
Saylor could be right, Lichtenfeld said. The value of Bitcoin could continue rising, but a publicly traded company is not the right way to invest in the cryptocurrency and it’s a breach of fiduciary duty to use company resources to do it. The money raised by MicroStrategy should be going into improving MicroStrategy’s business.
“Its trading is completely distorted from the business fundamentals,” Lichtenfeld said of its stock. “It’s totally linked to Bitcoin. There is really no reason to own the stock until it starts trading back at its fundamentals.”
In 2000, Saylor’s MicroStrategy was sanctioned by the U.S. Securities and Exchange Commission and forced to pay $11 million in a settlement, accused of overstating its earnings to make a money-losing, publicly traded corporation look profitable.
“The fact that Michael Saylor, the cofounder, CEO, and primary shareholder, is making reckless decisions with the company funds — be they good or bad — isn’t likely illegal…” wrote Cas Piancey in a Medium post titled “MicroStrategy Before Bitcoin.”
In its Feb. 12 annual report filed with the SEC, MicroStrategy acknowledged that Bitcoin can be risky, volatile, subject to regulatory scrutiny and potential security issues, and is little understood.
“We have only recently adopted this bitcoin acquisition strategy and are continually examining the risks and rewards of such a strategy,” the company wrote in the annual report. “This strategy has not been tested over time or under various market conditions. Some investors and other market participants may disagree with this strategy or actions we undertake to implement it. If bitcoin prices fall or our bitcoin acquisition strategy otherwise proves unsuccessful, it would adversely impact the market price of our class A common stock.”
David Stockman, former director of the Office of Management and Budget under President Ronald Reagan, tweeted about Bitcoin and tulip mania.
“Speculators haven’t gone this berserk since Tulip bulb mania. Michael Saylor just borrowed $400m to buy more bitcoin because:“I see bitcoin as the most secure, most reliable, most certain thing in the entire economic universe.”MSTR market cap was $12.2B, now $4.6B, going to $0.0B.”
“Okay Boomer,” Repeal the 20th Century @PevaBruehound replied.
Gold broker and crypto bear Peter Schiff tweeted, “I don’t think @michael_saylor is familiar with Murphy’s Law. What if #Bitcoin crashes below $20K? Will #MicroStrategy sell stock at depressed prices to shore up its balance sheet? Will it sell Bitcoin to raise cash? If MicroStrategy goes bankrupt will creditors HODL its Bitcoin?”
Kenny Ligthart responded, “F*ck sake you are annoying. What if aliens visit us and tell us there is tons of gold on Mars? Why can’t you just value the fact that bitcoin is the first ever sovereign currency actual in favor of the regular guy instead of the dollar that favors only banks and governments?”
Michael Kao, a Los Angeles-based investment analyst, tweeted @UrbanKaoboy that there was “no bigger poster-child for crypto-hubris” than Saylor, whom he called “the Lord of Cyber Hornets”. Kao questioned Saylor’s decision to issue convertible bonds to buy Bitcoins and hold them to perpetuity. The decision “to HODL BTC” has “created extremely destabilizing influences in the MSTR capital structure,” Kao tweeted. Kao added that the “negative gamma-like” effect between MicroStrategy’s shares and Bitcoin could leave Saylor’s investment strategy in the digital asset exposed to insolvency. This could force him to dump Bitcoins.
“Except as a steward of publicly traded company along with a board of directors charged with the same fiduciary duties to shareholders/creditors, the decision to HODL a 100%+ vol asset might be wrested out of his hands at the most inopportune moment,” Kao said.
“By issuing so much debt and embedding ‘short puts’ into his capital structure and simultaneously jacking up his Asset volatility, it also increases probability of that put getting exercised – euphemism for ‘default/bankruptcy’,” Kao tweeted.
MicroStrategy’s move, made public on June 7 to borrow $400 million to buy more Bitcoin while also writing down the value of its existing holdings, is the first-ever junk bond sale used for financing purchases of Bitcoin, Bloomberg reported.
“The $400 million in debt isn’t being used to fund an acquisition or growth. It’s being used to speculate on a volatile asset,” Lichtenfeld said. “Does MicroStrategy even have a business anymore or is it simply a proxy for Bitcoin — with borrowed money?”
Image credit: pialhovik
Listen to GHOGH with Jamarlin Martin | Episode 74: Jamarlin Martin Jamarlin returns for a new season of the GHOGH podcast to discuss Bitcoin, bubbles, and Biden. He talks about the risk factors for Bitcoin as an investment asset including origin risk, speculative market structure, regulatory, and environment. Are broader financial markets in a massive speculative bubble?