In the last few months companies that are household names (Tesla, Square) have bought Bitcoin(BTC) with their treasury capital. Another company, MicroStrategy, has made headlines by putting over 90% of their treasury assets into Bitcoin.
What may seem like a smart move for them may not translate into a good one for your company. In this post we explore the motivations behind these BTC buys and why it makes sense for them. Hint: They are not speculating, and have been quite targeted in their decision-making.
MicroStrategy was the first to really jump onto the crypto bandwagon. MicroStrategy is a Business Intelligence software company founded in 1989. Its founder, Michael Saylor, controls 72% of the voting power in the company via a multi class common stock set up. This means he has absolute control over the company and does not need board approval to do anything. This is very rare in publicly traded companies!
Here it is straight from the 10k:
“Mr. Saylor could transfer control of MicroStrategy to a third party without the approval of our Board of Directors or our other stockholders, prevent a third party from acquiring us, or limit the ability of our other stockholders to influence corporate matters.”
- source MSTR 10k
MSTR is a profitable company and has been returning capital to shareholders for the last couple of years. It’s a low growth business at less than 10% per year. They had ~$560M on their balance sheet, and used it to transform their company into a publicly traded way to buy/sell BTC.
Before they bought BTC there was not much investor interest in the core MicroStrategy business. However it was a stable and profitable business. This, along with the total control that Saylor has, allowed him the opportunity to transform the MSTR stock into one that tracks the price of BTC, and become a pseudo BTC ETF when none existed! This was brilliant on his part, as it is very difficult for institutional investors (pension funds, hedge funds etc.) to get BTC exposure without going through a lot of regulatory headache.
He achieved this transformation in multiple steps starting in August 2020.
- Inform MSTR public market investors of the intention to hold BTC instead of USD as their treasury reserve.
- Start a direct share buy back of shares of up to $250M. That gave investors who were not on board with the BTC strategy a way to exit their position. Investors had 30 days to participate.
September - October 2020
Once the buy back was complete, MicroStrategy started buying BTC with their cash reserves. They disclosed this in their Q3 earnings results on October 27, 2020.
Interestingly, there was not much movement in the stock price. It hovered around $150 a share.
November - December 2020
During this time, the price of BTC increased from $10k to $20k. It appears people started to figure out that they could get exposure to BTC by buying MSTR stock. Anyone could do it via their plain vanilla brokerage accounts. They could do it with margin, and use the same derivatives they use on stocks to manage their positions. The proverbial regulatory gloves were off!
To increase leverage and make MSTR stock even more of a BTC vehicle. MicroStrategy issued $650M in convertible bonds, with the sole intention of buying BTC with the proceeds in December.
At the end of the year they announced that they had now purchased over $1B in BTC in the last few months!
The price of both BTC & MSTR took off, and as they like to say on reddit - to the moon!
With the price of BTC continuing to rise and investor interest in using MSTR as a vehicle, MicroStrategy issued another $600M of convertible bonds to buy even more BTC.