Ecoinometrics - Should you follow MicroStrategy on Bitcoin?

What makes sense for MicroStrategy might not make sense for you.

Water is wet. The sky is blue. And MicroStrategy buys Bitcoin. 

These are like the laws of nature.

But while I usually recommend you buy Bitcoin too, you might not want to follow the exact same playbook as MicroStrategy. Let’s see what this playbook is.

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Should you follow MicroStrategy on Bitcoin?

What's MicroStrategy’s Strategy?

MicroStrategy is a relatively old company. Started in 1989 by Michael Saylor. IPOed in 1998. For the most part (at the exception of the dotcom bubble I guess) the stock hadn’t been doing much. Until the summer of 2020.

In August 2020  Michael Saylor announced that MicroStrategy started buying Bitcoin to put on its balance sheet. And they haven’t stopped since then.

Now it is true that MicroStrategy was not the first public company to do that. Bitcoin miners or various financial holding companies have been buying Bitcoin before Michael Saylor. But MicroStrategy is to my knowledge the first public company whose main business does not revolve around crypto or finance to buy Bitcoin as a treasury asset.

As we’ll see below the funny thing is that in 2023 MicroStrategy has essentially become a Bitcoin holding company. But whatever the plan was it didn’t start like that.

At the beginning the strategy looked pretty safe:

• MicroStrategy runs a software / business intelligence company and generates free cash flow.

• They take that free cash flow and instead of buying Treasury bills with it they buy Bitcoin.

• Repeat as long as you have cash coming in.

That’s basically called dollar cost averaging at the scale of a NASDAQ listed company. 

Up to this point everything is fine.

Now over time this strategy has evolved a bit. Buying Bitcoin served MSTR stock price so well that MicroStrategy decided to go into a leverage play. 

They raised debt ($2.4bn at a low rate and $0.5bn at a much higher rate) to buy more Bitcoins. And after that they took some debt ($0.2bn at something like 4%) collateralized by their coins to buy even more BTC . Which means that at this point about 50% of the coins they own were bought with cash, the other half was bought with debt.

Is it wise? I don’t think so. 

My general philosophy is that to make it in the business of investing the most important thing is to survive long enough to see your positions bear fruits.