The Breakdown - MicroStrategy Is Raising Another $400M to Buy BTC

Episode Date: December 9, 2020

Today on the Brief: BBVA set to offer crypto trading and custody Wells Fargo discusses bitcoin in recent investor memo Square launches Bitcoin Clean Energy Initiative with $10 million  Our main discussion: Michael Saylor is back at it.  The CEO of MicroStrategy and Giga Chad himself announced MicroStrategy would be offering $400 million in convertible bonds with the intent to purchase more bitcoin.  On this episode, NLW looks at the community’s reaction, including the comparison of MSTR stock to a BTC exchange-traded fund. He also discusses Saylor’s recent comments about censorship resistance as a reminder of the (potentially) divergent values of bitcoin retail HODLers and institutional investors.

Saylor has said over and over that the fierceness of the so-called cyber hornets protecting the Bitcoin ethos is what drew him in. If censorship resistance can be so easily compromised, why not $21 million? I think it's a reasonable question to ask, and I have no doubt that the Bitcoin community is not going to roll over and let something as integral as censorship resistance go to the wayside just for the sake of some more institutional money and banks falling in. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by crypto.com, nexo.io, and leveled. And produced and distributed by CoinDest.

What's going on, guys? It is Tuesday, December 8th, and today we are talking about micro strategy, back on it again, raising another 400 million to buy Bitcoin. Is this a de facto Bitcoin ETF? First up, however, let's do the brief. First on the brief today, BBVA is launching crypto trading. So BBVA is Spain's second largest bank. They're an extremely well-known global brand. Two people familiar with the bank's plans say they intend to begin offering crypto trading

and custody within the month. Now, this is a bank that has $840 billion in assets, so this is not a small deal. Their crypto offerings will be regulated out of Switzerland, but the initiative should be available to Europeans across the continent. Importantly, when asked, it's not just about digital assets or tokenized securities. This is about cryptocurrency specifically. Next up on the brief today, Bitcoin makes an appearance on Wells Fargo's most recent investor memo. The Wells Fargo Investment Institute released their most recent memo yesterday and includes one full page on Bitcoin.

It's a short page, so let's actually just read what they had to say. 2020 has been a wild and crazy year, so it is only fitting that the best-performing asset group in 2020 has the craziest sounding names. Cryptocurrencies. Bitcoin, the largest cryptocurrency, is up 170% this year. That's on top of the 90% gain it had in 2019. If you feel left out of the craziness, don't. Most investors have heard of cryptocurrencies, but few have ever bought or used one.

They track lots of attention, but not necessarily lots of investment money. The entire cryptocurrency market is worth roughly $560 billion, which is about one-fourth the size of the S&P technology company with the largest market capitalization. And if you feel left out of the gains, don't. The chart highlights that Bitcoin has indeed outperformed gold in the S&P 500 index over the last three years, but look at the volatility journey Bitcoin investors had to endure to get there. Up until only two months ago, three-year total returns were pretty much the same along with three assets, but volatility differed.

Cryptocurrency investing today is a bit like living in the world. the early days of the 1850s gold rush, which involve more speculating than investing. Cryptocurrencies could become investment-worthy one day, though. Over the past 12 years, they have risen from literally nothing to 560 billion in market capitalization. Fads don't typically last 12 years. There are good reasons for this, reasons that every investor should hear. As we roll into 2021, we will be discussing the digital asset space more. It's upside and downside. So, first of all, the speculation versus investment thing, it continues to be one of the silliest distinctions I've ever heard. We can ham and hawe all we want about what they mean and why they're

different, but the reality is, is that for a very long period of human history, speculation was just the name of investment. It's making a bet on a thing that might come to fruition or might not. That's what speculation is. That's what investing is. So I think it's a silly, save face kind of terminology that I would love to see just remove from our lexicon. More importantly than that, however, is the fact that although this is hardly a ringing endorsement, it's a very clear testament to the idea that this is now an asset class that is unignorable. It doesn't matter so much that Wells Fargo isn't putting a big fat buy sticker on Bitcoin. What matters is that in this investment memo, they felt like they really couldn't not discuss it. And that line, fads don't typically last 12

years. It's a hell of a line. Finally on the brief today, Squares Bitcoin Clean Energy Investment. what happened? One of the biggest remaining critiques of Bitcoin has to do with its energy footprint, and there are, of course, a lot of refutations of this, including many that are about just us as a society being able to choose what we allocate our scarce resources to. However, I think that regardless of your critique, it's likely to get louder. This drum is likely to get louder in the coming years alongside increased climate change focus. So for my money, what I'm interested in in terms of refutation is not focused on, well, we get to choose what we spend our energy on, but instead pointing to the strategies that are allowing us and creating financial incentive to go capture

energy that might otherwise be lost. Marty Bent from Great American Mining has been on the show talking about exactly that. Square adds some clout to the argument today that Bitcoin can be a force for better, cleaner energy when it announced its plans to be net zero carbon for operations by 2030. As part of that, they launched a Clean Energy Investment Initiative to help make the Bitcoin supply chain greener. Here's what the press release said. Bitcoin is a unique part of Square's footprint as the company purchases the cryptocurrency on behalf of Cash App customers. The new Bitcoin Clean Energy Investment Initiative will support companies working on green energy technologies within Bitcoin mining and aims to accelerate its transition to clean power rather than only

removing the carbon for the Bitcoin that Square processes. The company intends, the company intends, to reinvest any of its gains from the investment back into the initiative and is exploring the possibility of opening this initiative up for participation by a consortium of like-minded companies in order to amplify the impact. Said Square co-founder and CEO Jack Dorsey, quote, We believe that cryptocurrency will eventually be powered completely by clean power, eliminating its carbon footprint and driving adoption of renewables globally. Published estimates indicate Bitcoin already consumes a significant amount of clean energy,

and we hope that Square's investment initiative will accelerate this conversion to renewable energy. As part of this effort, Square has dedicated 10 million to this initiative, and I think this is a hugely significant step. It addresses one of the biggest sources of FUD. It's just the right thing to do, and I think it creates a platform for other companies to get involved in similar activity as well. This episode is brought to you by crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the Crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the Crypto.com metal card, which pays you up to 8% cashback instantly on all purchases. Reserve

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to give our listeners a free month of premium service. So when you sign up, use the promo code CoinDesk or just visit level.com slash coin desk. That's LVL.com slash coin desk. to get started today. Let's shift to our main discussion. Michael Saylor, the absolute madman, is at it again. Before we dive into this investment,

I also want to go back to a conversation, a discussion a couple weeks ago, between Andrew Edstrom and Preston Pish on the Swan Bitcoin Signal. Let's listen to Andy talk about how, based on micro-stratage's clean balance sheet, they could actually leverage some of this low-cost money to maybe buy even more Bitcoin.

When I look at the business, I say, you know, let's call 30 to 50 million of cash flow. This business could easily support some debt, right? I don't see any reason why he couldn't go into the high-yield bond market, raise a couple hundred million in bonds, do eight to 10-year maturity, right? So you're not, you know, facing basically a repayment risk in the next few years, push it out a number of years. I'd be shocked if you can't raise money. You know, that would be a four-times leverage roughly if you're saying cash flow is EBITDA. That's an approximation. But a four-time's a numbered company. could easily service, you know, 5% coupon debt, you know, that would be 200 million and 5%.

It'd be 10 million bucks on interest expense. He's got 50 million or 30 to 50 million to play around with. He could come over the top, do a $200 million bond deal potentially and buy another $200 million of Bitcoin, right? I mean, this is not impossible. I'm not saying he will do it. What I'm saying is the business could support more debt if he wanted to. Yeah, big time.

That conversation would prove prophetic. as yesterday on Monday at 5.05 p.m. Michael Saylor tweeted a link to Micro Strategies investor relations page with this headline. Micro Strategy announces proposed private offering of 400 million of convertible senior notes. The first part of that page is a whole lot of details, the interest, the maturation, the convertibility, etc. And then there was this sweet little line. Micro Strategy intends to invest the net proceeds from the sale of the notes in Bitcoin in accordance with its Treasury Reserve policy, pending the identification of working capital needs and other general corporate purposes. Of course, this went off like a bomb.

Joe Mack tweets, if Micro Strategy succeeds, it may open the floodgates for other publicly traded companies to do the same. Dilution proof points out that, quote, Micro Strategy is essentially doing a speculative attack here, doing exactly what Pierre Rochard described here. in July 2014. He then links to a piece by Pierre-Richard where the main thrust is the idea of borrowing money in a fiat to put it into Bitcoin. Tihini's, the little Schwarma restaurant out of Canada, says how to make our 100% allocation feel short with a link to the piece from Micro Strategy. Of course,

they're referring to the fact that all of a sudden Micro Strategy is going to have more than a 100% allocation to Bitcoin because they're going out to sell more to it. Ellie Frost actually wrote through some of the mechanics of this type of convertible bond. So she writes, okay, Bitcoiners, here's a quick 101 on convertible bonds from a former evil banker. A convert bond starts as a bond and then converts to equity. Pay lower interest to investors because it can be equity later. It's cheap now, especially now, but you'll pay later with equity dilution. Usually there's bad credit or expected high growth. So why do investors like it? Protection. The stock goes down. You'll still have the value of your bond. If the stock goes up, then you convert, but most converts are callable, aka they'll force

a conversion if the price is greater than the price of the bond. Basically, it is downside protection with a profit cap versus owning straight equity. Tesla is famous for this. The street thought Elon was absolutely nuts for insisting on raising convert after convert as he believed in his growth. They've recently STFU for the same reason. Turning to micro strategy, they have essentially no debt, no RCF or term loan. Their biggest liability are leases. They've consistently made stock repurchases, 530 million in fiscal year 19, and already approved 800 million to repurchase by April 2023. They're prepped for dilution. TLDR, rates are super low and a convert fits MSTR's debt profile. But this is a massive bet on Bitcoin and aligns the company's future

with it. If Bitcoin continues to pump, the stock price will go up and they'll are set. If not, don't ask Sailor for an ex-pice gift. He's got other shit to pay off. Still, easily the most common comment theme was about ETF comparisons. The Blocks Frank Shapiro says Micro Strategy literally becoming the Bitcoin ETF the SEC won't allow. Willie Wu says Micro Strategy stock is about to mimic a leveraged-long instrument on BTC. 2x-long Bitcoin ETF masterfully played. Tom Shaughnessy, in credible a Bitcoin ETF for traditional investors. To Sharjane, Saylor is going to single-handedly force the SEC to list a Bitcoin ETF feels like a Bitcoin ETF is imminent now. The idea here is that

people want an ETF so that we can allow people to get exposure to Bitcoin through traditional investment instruments like retirement accounts. Right now, you can't have your Roth IRA buy into Bitcoin directly. This is part of why Grayscale has been such a huge for in the space, their grayscale Bitcoin trust, is because many of those types of traditional instruments can interact with grayscale. This effectively allows the MSTR stock to play some type of similar role, although of course it's less correlated than GBT, for example. One of the big questions is, will this be allowed? Hasu writes, genuinely begs the question, though, if the SEC will tolerate this kind of regulatory arbitrage, or if they will step in at some point. That remains to be seen,

I do want to point out that this isn't the only discussion of micro-strategy we've had lately. Elaine O spoke with Michael Saylor for the Bitcoin Times, and the lead quote is this. Stop talking about regulatory arbitrage. Censorship resistance, privacy, and tax evasion are bad ideas. We hate that. What? Obviously, this got a lot of commentary as well. Hodlenot says,

It's cool that micro-strategy accumulates a lot of Bitcoin, but Michael Saylor can be damn sure Bitcoin won't start bending the knee. Mr. Hoddle said, as of right now, I've been on the sidelines just watching mostly. Bitcoin doesn't work without censorship resistance. If you don't like censorship resistance, then you should probably sell all your Bitcoin back to the market, or just deal with it. Alex B says Michael Saylor claims, quote, institutional investors don't like regulatory arbitrage or censorship resistance. I wonder what Argentinian institutional investors are thinking right now. And he tweeted a link to a new wealth tax that is designed to seize assets from Argentina's wealthy in the face of COVID-19.

crises. But what about Elaine's further take? So she writes, The conversation began with a huge letdown. I had asked Michael Saylor what could motivate greater institutional investment in Bitcoin. After all, if Bitcoin is going to the moon, we're going to need a lot of deep pockets to climb on board. Quote, people with billions of dollars don't want to invest in crypto networks that support anarchists, Saylor explained. And then I want to fast forward to the end of her piece, which kind of has this open-ended question to it. It's a catch-22. If Bitcoin is to become a sovereign money, it needs the spread to every corner of the earth. In order to spread to every corner of the earth, it can't storm

out of the gates screaming about crypto-anarchy. Square and PayPal integrations don't need to be the endgame, but they'll help us get there. This doesn't mean that developers shouldn't continue to improve privacy and censorship resistance. It just needn't feature in an investor prospectus. After all, wealth managers don't go off about the military's nuclear arsenal when considering a purchase of treasury bonds. It's a testament to Bitcoin's technological success that unforgeable costliness and network resilience are now taken for granted. Any sufficiently advanced technology is indistinguishable from magic, as they say. What about the cypherpunk manifesto, the one where we arise and cast off our barbed wire fences? For the diehard crypto-anarchists, institutional money may seem

anathema. It's not necessarily a bad thing, according to Saylor. Quote, if Bitcoin goes up by a factor of 10, these early hodlers are all going to be insanely rich. They can use their monetary energy to invent stuff and make the world a better place. Maybe it's a fact of life that anything cool and subversive is eventually co-opted by corporate interests, from punk rock to cypherpunk. There's a never-ending search for the next disruptive thing. We can either complain and rail against the inevitable, or shut up and take their money. From my perspective, this is the battle line. More institutional money is going to drive the price up like wild, and frankly, Sailor has opened up almost an entirely new category of treasuries to this space. MSTR's de facto ETF could also give people a type of exposure who

couldn't otherwise get it. But there's also a pretty good chance that your values for Bitcoin don't comport to the values of this new set of market entrance. So what do you do? Fight for your values. Sailor has said over and over and over that the fierceness of the so-called cyber hornets protecting the Bitcoin ethos is what drew him in. If censorship resistance can be so easily compromised, why not 21 million? I think it's a reasonable question to ask, and I have no doubt that the Bitcoin community is not going to roll over and let something as integral as censorship resistance go to the wayside just for the sake of some more institutional money and banks falling in. What do you think, guys? Let me know on Twitter. Let me know in the comments. As always, I appreciate

you listening. I also appreciate all your ratings and reviews. They're making a huge difference. Please get out there and share a review if you have it. And until tomorrow, be safe and take care of each other. Peace.