Motley Fool Hidden Gems Investing - The Bull Case for Bitcoin

Episode Date: March 6, 2022

Motley Fool co-founder and CEO Tom Gardner interviews Michael Saylor, CEO of MicroStrategy, an enterprise software and business intelligence company. Saylor has put billions of his company’s money into Bitcoin and hundreds-of-millions of his personal wealth into the cryptocurrency. They discuss: - Bitcoin as a hedge against an increasing money supply - Environmental implications of mining cryptocurrency - The security of Bitcoin’s network Additional Resources: What Is Bitcoin? Should You Invest? - https://www.fool.com/investing/stock-market/market-sectors/financials/cryptocurrency-stocks/bitcoin/ Investing in Bitcoin ETFs - https://www.fool.com/investing/stock-market/market-sectors/financials/cryptocurrency-stocks/bitcoin-etfs/ Hosts: Tom Gardner, Chris Hill Guest: Michael Saylor Producer: Ricky Mulvey Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

When WestJet first took flight in 1996, the vibes were a bit different. People thought denim on denim was peak fashion, inline skates were everywhere, and two out of three women rocked the Rachel. While those things stayed in the 90s, one thing that hasn't is that fuzzy feeling you get when WestJet welcomes you on board. Here's to WestJetting since 96. Travel back in time with us, and actually travel with us at westjet.com slash 30 years. I think if you're looking for something that'll be around 200 years from now,

The Bitcoin protocol and the Bitcoin network has by far a much better chance than Apple, Amazon, Facebook, Google, any government, any asset, any property you can find anywhere in the world, because you really have put digital property in cyberspace for the first time in human history. It's Manhattan in cyberspace. I'm Chris Hill and that was Michael Saylor, the CEO of MicroStrategy. In general, we enjoy pretty stable purchasing power here in the United States, but recent large swings in major currencies highlight the appeal of cross-border stores of value

like gold and Bitcoin. The price of both are up since the beginning of Russia's invasion of Ukraine and the devaluing of the ruble. Saylor has put billions of his company's money into Bitcoin using these purchases in tandem with stock buybacks. He's also put hundreds of millions of his personal wealth into the cryptocurrency. Motley Fool co-founder and CEO Tom Gardner interviewed Saylor a year ago, and the conversation is still valuable today.

with the bull case for Bitcoin from a billionaire who's putting his money where his mouth is. Yeah, if you'd asked me about Bitcoin in February of 2020, I would have said, what? I don't know, it's not for me. I don't get it. If you'd asked me what I thought about business in April of 2020, I would have said, this is just the scariest thing I've ever seen in my career. Main Street shut down and Wall Street's already recovered. And the K-shaped recovery, it's just very odd. by the time we got to the second quarter what we knew was this our revenue wasn't going away our business value proposition was better than ever we were going to generate four times as much cash flow because because uh all of our marketing sales and services activities dematerialized

travel and expenses dropped by 98 and we started zooming everywhere we started uploading videos to website. So we had all this cash coming. We had a block of half a billion dollars of cash sitting there. And we got dragged into macroeconomics. And we realized that it was worthless. And the investors didn't value it. And so we had a problem. And we started looking for a solution. And I would say, Tom, the paradigm shift here is twofold. The first paradigm shift is for the first time in 30 years, people in the Western world are living in environments where the currency is weakening more than 7% a year. It's weakening at 15% to 20% a year.

That's the first paradigm shift, because that changes how you discount bonds, how you discount value stocks, how you discount commercial real estate. And you've got to think different. And the second paradigm shift is Bitcoin's the first digital monetary network in the history of the human race. We never in 5,000 years could make money work on a computer network. and it wasn't clear it was going to work when it was a billion dollars. But by the time we got to June, it was $200 billion. And you know, you guys follow digital networks, Facebook, Amazon, Apple,

Google, every good idea for the past decade has been a digital network. And when they get to 200 billion in market cap, they're pretty hard to stop. So our conclusion was this is like Facebook for money or YouTube for money. And we jumped on it today. It's a trillion dollar digital network. It's the fastest growth to a trillion dollars of any network in the history of the world. Took 12 years. Google took 22 years. Amazon took 24 years. Apple took 42 years.

Microsoft took 44 years. Those are the only firms that have ever done it. Bitcoin has done it. And so the paradigm shift is digital monetary network, a solution to everybody's problem. And COVID lockdowns, everybody's got a problem. You put those two things together, you have to think different. and that's why we did what we did. Putting your shareholders' money into a cryptocurrency may sound, among other things, unusual, but here's why Michael Saylor did it.

We're not crazy. The point is, it's the world's first digital treasury asset. There's $100 trillion worth of treasury assets that are negative yielding debt or zero yielding debt or cash. And that's like, in essence, minus 15% real yield. All the bonds are broken. All the treasury strategies are broken. This is the solution to $400 trillion worth of investors' problems. They've all got the problem. It's the solution to 7.8 billion people's problem. They're all generating salaries in cash, which is debasing at 15% a year. And it's the most disruptive technology in our lifetime. And, you know, I've been on your show. You had me talking to you about eight years ago. We're talking about Apple and Amazon. If you recall, you could probably pull

the clip. I invested $50 million in Apple and Amazon nine years ago. I made 500 million off of it. I, you know, it's a 10 bagger, not that hard. I'm not proud of it. All I did was buy these digital networks when 99% of the people didn't agree with me when they were unstoppable. And I waited. I swore to myself, if I ever saw another one, I wouldn't just do it personally. I would put my company into it. We ran into the biggest crisis of our career in 2020. I had $500 million in capital. I saw a digital network, which I think is 100 times better than Google or Facebook. It's Facebook for money. We play a game here on Motley Fool Live, and we've done it all the way back to our radio show and was on NPR and before, and the game is what happens. And we take both

sides of what happens. So here we are, we're going to play the hypothetical with you. Three years from now, Bitcoin is trading at $250,000. What happens? It probably grew slower than I expected. For some kind of, there probably some black swan event, unknown, unknown event stunted its growth and it's appreciated slower than you would expect it to, but that's probably what happened. And you're probably, I don't know if you're going to be able

to generate a scenario there on the downside. Three years from now, Bitcoin is at $4,000. What happens? It's got to be a black swan. Basically an asteroid hits it. You know, I mean, look, we can't, a rational, honest person can't discount an unknown unknown.

So I get it. Right now, I think it's a trillion dollar dominant network that's 100 times bigger than the next best thing like it. You know, it's about as likely that Bitcoin disappears as it is that Google disappears in 36 months. So some have described Bitcoin as a check or an evaluation of government spending around the world. So why would governments allow that to happen? What do you see as the risk on the regulatory side? Well, the most important thing to know is that although people call it a cryptocurrency, it's not.

It's a crypto asset. Money has two flavors. It's got the medium of exchange currency element, and it's got the store of value asset element. Bitcoin is a great store of value. Digital gold. What's the addressable market? $100 to $200 trillion. Half of all the stuff that floats around the system is store of value.

People just want to keep their money forever. The other aspect of currency is I want to buy a cup of coffee a billion times a day. People are going to do that with dollars and yuan and yen and euros and Chinese currency. They're going to do it on Apple Pay and Visa and MasterCard and Square and Ant and every other regulated payment rail. The government, as long as it functions in China, the US or Europe, is going to control the currency. And they've given it tax treatment.

When I give you a million bucks or $100,000 and you give it back to me a year later, there's no capital gain tax on it. It's not a taxable event. It makes sense to use dollars as currency. On the other hand, Bitcoin is property. It's been legitimized as property by the IRS, by the SEC, by the OCC. It's not going away. It's not going to be currency in the US.

It's not fast enough. And the tax treatment is hostile. It is going to be property. And to the extent that people buy it from regulated custodians subject to AML KYC regulations and banks like Morgan Stanley, where they're buying it now from from players like Fidelity, the government's just going to make sure that it has the same AML KYC regs and clarity that that gold or silver or stocks or bonds or any other derivative instrument would have. It's not threatening to a government if I'm swapping out my gold for Bitcoin. It's threatening to the government if you can move a billion dollars to a private wallet in sub-Saharan Africa without KYC AML. So you can expect that they'll have regs around the ladder.

And that's totally fine. And as they clarify those even more, it's just going to be bullish for the asset class because that's the green light for every insurance company and endowment to buy 100x more than they bought so far. Our investment advisor and analyst, the Motley Fool Bill Mann, wrote that cryptocurrencies and Bitcoin as designed violate the defining challenge of lowering the impact of power consumption. So what about the environmental aspect of Bitcoin? People don't understand that very well. First of all, 99.97% of all the power used in the world is used by other technologies, mostly 20th century technologies. And the energy intensity of those technologies is 10%.

Basically about you put in a dime and you get out a dollar worth of value added. And you can look at that everywhere. The last three basis points, 0.03% of the power in the world is used to power the Bitcoin network. And that network, that power is used to secure a trillion dollars worth of money. At a cost of capital of 20%, that's worth $200 billion a year. It's $2 billion to $3 billion in power. You're talking about energy intensity of 1%, as opposed to 10%. It's extremely efficient. And the power that's used, which is a thimbleful, is at the edge of the power grid, it's reclaimed energy, normally at like $0.02 a kilowatt hour. Every human being, an industrial application pays 11 to 13 cents a kilowatt hour to get electricity. So the only

power that's being used in the network is either green energy, stranded, recycled energy. It's plants and capital that would otherwise have to be destroyed. And Bitcoin is serving as a global monetary battery to reclaim that stranded energy or avoid the capital destruction that would ensue otherwise. Should you come across geothermal energy at the North Pole or a waterfall in sub-Saharan Africa or wind somewhere in the world that generates infinite renewable energy, you cannot monetize it in traditional networks because you've got a 500-mile radius where you can move the energy and you lose 8% to do it, and batteries lose 2% of the energy a month. what's your choice your your your strategy your mechanism is you turn that stuff on you plug it

into a bitcoin miner because bitcoin is a perfect battery and you can drop a billion dollars of energy in a bitcoin mine and hold it or in a bitcoin network and hold it for 100 years no power loss so bitcoin is probably the most environmentally friendly thing we have on this earth right it's it's literally one percent energy intensity and it's going toward point one percent energy intensity. Because once you get to $10 trillion to $20 trillion of assets on the network, you've got a value and use of $2 trillion a year against what, $4 billion in energy? We never came up with a better use of energy than store all the world's money, right? That's pretty good use. How certain are you that the supply cap is impenetrable and unchangeable?

I'm certain. Look, this is the world's most successful decentralized network. It was constructed to be outside the control of a CEO, a company, a regulator, a country. And look, you couldn't be certain of it in the first year or two years. It's pretty much the perfectly designed crypto asset network. You just got to wait 12 years and see, will it be hacked? Will it be banned? Will it be copied? And when it was one, two, three, five, $10 billion, I couldn't be sure. But that was 2012, 2013, 2011, 2015. Today, you have a trillion dollars of monetary energy in a network, highly decentralized everywhere on earth. There's nobody that can change this thing at this point. The fork wars have been fought. You could see the blood on the street

and it's all been decided. Imagine everybody on earth with a trillion dollars and you show up and you're like, I just want to steal your money or it up. It's like, good luck with that. I mean, you're going into a nest of hornets. It's just not going to happen. In fact, it's the one thing I see in the world that I have reasonable expectation that it will continue as an intact network and a protocol for hundreds or hundreds of years. I think if you're looking for something that will be around 200 years from now, the Bitcoin protocol and the Bitcoin network has by far a much better chance than Apple, Amazon, Facebook, Google, any government, any asset, any property you can find anywhere in the world. Because you really have put digital

property in cyberspace for the first time in human history. It's Manhattan in cyberspace. 100 million people live there today. A billion people will live there within five years. within 10 to 15 years i think you'll see 5 billion people it's it's really just an extraordinary thing why wouldn't you want to own one of 21 million city blocks in the manhattan of cyberspace i i i forced you into a hypothetical game about what would happen in this scenario that scenario bitcoin what do you think will actually happen what are your projections or what is your what is your overall uh perspective on let's say bitcoin anywhere five to ten years out in terms today. And I assume you fully anticipate holding your position and or adding to it here over the

next five to 10 years. My view is Bitcoin is the apex property of the human race, which means that it's the last thing you will sell. If you had a block of Manhattan, you would hold it a long time because you thought Manhattan is always going to be valuable, but Bitcoin is better than Manhattan. And so it's the ultimate long duration asset, or in other words, an institutional grade treasury reserve asset, you ought to buy it and hold it. And if you ever need cash, just borrow against it. The volatility of Bitcoin is well known. In the past six months, the price of one Bitcoin has surged above $67,000 and fallen to about $35,000. But here's why Michael Saylor is not worried about that volatility for the long term. I'm not terribly concerned with the volatility.

I think there'll be accelerations and pullbacks, but the institutions are collaring it on both sides. The capital is not consumer leveraged capital, day traders. The capital right now is insurance companies, big public companies. We're coming in to buy it forever. Ask me what, I'm going to sell it. Never. I'm not going to sell it ever. And so the narrative has rotated long-term institutional deep pockets, and the asset class has matured. And of course, the law of large numbers say a trillion-dollar entity has more inertia to it than a $100 billion entity. And what do I expect to happen? I expect it will grow aggressively toward gold, and it will flip gold, and then it will demonetize gold and subsume gold. And probably it'll be first

$10 trillion, and gold is $10 trillion. Then it'll be $20 trillion, and gold will be $5 trillion or for. And gold will eventually become an ornamental metal. Bitcoin is going to suck the monetary energy off of negative yielding bonds. Tom, I ran a survey on my Twitter. I got 65,000 responses two days ago. I asked people, where did the money come from used to buy Bitcoin? 49% is stocks. 20% is gold. 10% is bonds. 19% is property. Basically, stocks are going to be negative yielding if your value stocks because they can't keep up with the rate of monetary expansion. Everybody knows bonds are destroyed. Ray Dalio just told the world they're all negative yielding. By the way, he thinks they're negative yielding versus CPI. The real point is they're negative yielding versus the

cost of capital or the rate of the monetary supply expansion, which is like 15% to 25% a year. They're screaming value destroyers. So I think that Bitcoin goes to $10 trillion, and it goes as fast as it can. And then it grows 50, 60% a year toward a hundred trillion. And it slows down from 200 to 150 to 100 to 80 to 60 to 40. You saw Google and Amazon growing at 20% a year off of large numbers consistently for the past five years. I think when it gets that big, it'll be growing 20% a year. And eventually it'll subsume the total addressable market for treasury assets, and then it will be growing at an organic rate, 5%, 6%, 7%, a fair cost of capital. Sadly, we only have two minutes left because I'm thoroughly enjoying this. Thank

you so much for sharing your perspective here with all of our fools. Let's talk real quickly, rapid fire, about other cryptocurrencies and NFTs. So other cryptocurrencies, do any of them interest you? Dogecoin, anything else out there, or it's all Bitcoin all the time for you? Bitcoin is the world's best treasury asset. It's like 100x bigger than the next thing. The risk is 1,000 times less than the next thing. The addressable market is 100 times bigger than it is right now. It's its own thing. Everything else in the crypto universe is venture capital. If you have a venture capital portfolio, if you have the wherewithal to invest in crypto ventures and you want to study it, well, in my opinion, they have 100x less addressable market and they're

a hundred times more complicated. But if you want to do that and you have the capital to do it, have at it. If what you want to do is just buy a bar of digital gold and wait, I mean, Bitcoin is better gold than gold on a big tech network, right? It's just, you just buy a bunch and you wait. And it's- Is there any reason to operate micro strategy given that? I mean, given the potential for, I remember Pat Riley, the coach of Los Angeles Lakers saying at one point that the players gathered and said, why are we spending so much time practicing? like it's wearing us down and he realized maybe they're right let's only he set up a structure i believe where if they won they could define how much practice they wanted to do the next day and

got down to like 10 minute practices and the theory of lakers when they won those championships was less work more reward and isn't bitcoin potentially set up for you to get tremendous reward without much effort so why have the operating business at all okay well first of all we've got two strategies one is we run enterprise software and we make money and we love it and we've been in the business for 30 years and our customers need us and we're good at it it just happens that we're not growing 200 a year right but there's no shame by are you going to disband your family and none of those sports teams make money but like so why even like own a sports team the answer is because you love it and it's beautiful thing and if it's not no sports team

grows 200% a year either, Tom, right? So if here's the real existential issue, right? If we get rid of everything on the human, on earth, that isn't growing 200% or a hundred percent a year, it isn't growing faster than Google and Facebook. There's not much left in the world, right? So I, we have two strategies. One is we're going to buy and hold Bitcoin and that's a 200% digital asset network growing and we love it. And we made a lot of money. We made $3 billion doing that in the past six months, but that gives us the ability to do the other thing we love, which is create great enterprise software and, and to continue to sell that and grow that. And just because the two businesses don't grow at the same rate, doesn't mean we don't love them both. And there are a lot

of synergies to actually having an operating company that's taught that, that has a P and L strategy tied into a balance sheet strategy. So we're going to keep doing them both. We're happy about it. By the way, it's a lot easier to do the enterprise software company when the stock is moving up and when every customer in the world knows who we are. It's helped our marketing. It's helped our customer relations. It's helped our employee relations. It's helped our recruiting. And so they're very synergistic. Well, I want to thank all of our members out there for feeding questions in. They've helped to frame the questions I've asked Michael here. Thank you so much for that, members, fools. Michael, just one last rapid fire question answer from you. Let's simulate

somebody who's 62 years old. They've got a $500,000 portfolio to invest. And what percentage of that portfolio would you put in Bitcoin versus equities versus any other alternatives that they might be considering as they're heading toward retirement? So they're looking at like, I'm not going to have maybe income after age 65, and I've got a half million to a million dollar portfolio. what percentage would you put in Bitcoin? Tom, I think the single most important thing you can do is estimate the annual rate of money supply expansion every year for the next eight years. And if you think of that's 15% going to 10, going to five, going to two, going to zero, then you're going to be more, you're going to stick toward a traditional portfolio.

But if you think that money supply expansion is going to be 15% consistent, then you got to go to scarce assets. Bottom line is I don't think bonds or real estate work as a store of value and in a monetary inflation environment, because they're both one of them's a coupon and the other one's pegged to CPI or capped at CPI. I think that, um, that value stocks are, you know, you've, you've basically got to invest in an index of, of equities that are going to grow, or you got to invest in scarce assets. And, uh, if the, if the growth rate of the money supply is 15%, you better find a portfolio of equity that's going to grow 15% or better if you're going to store value in it. Otherwise, I would invest in trophy assets, buy your house on the beach that

you want to live in the rest of your life, because that'll always be valuable to you with leverage. I think you buy scarce digital, probably like Bitcoin. You buy things that are absolutely... Buy something that a rich person is going to want to buy from you in a decade. Ask yourself that question. I'm not buying your New York municipal bonds yielding 2% in a decade, right? And you're going to get a negative 15% real yield. So I would think in terms of that,

trophies, equities, and then scarce assets. And obviously I'm biased. I think Bitcoin is the best property in the world. Figure out what your risk tolerance is for it, buy that much of it, and then diversify the rest across other things you know and you're comfortable with.

michael saylor thank you so much for the 30 plus minutes hopefully we'll get you back on molly pool live you're definitely somebody who's doing what we strongly believe in the molly pool and that is getting skin in the game behind your beliefs having conviction and and and and trying to teach the world so thank you so much for the half hour and the best of luck with you uh with micro strategy and beyond thanks tom i've got the domain hope.com i put all my bitcoin information on it. So Bitcoin is hope. If you want more information, try that. Otherwise, thank you for your time. I appreciate it. Love it. Hope.com. Thank you, Michael. That's all for today, but coming up tomorrow, we'll talk about how to build an investment thesis

through the lens of a popular language learning app. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow. Thank you.