US-Listed Company Raising the Stakes With $250M Investment in Bitcoin

KEY TAKEAWAYS 

  • MicroStrategy purchased 21,454 BTC at an average price of $11,653, as part of its new cash management strategy in a period of sustained zero-interest rate
  • MicroStrategy, together with GBTC, absorbed 46,951 BTC since July 28, three-times the mining production of the same period
  • If U.S. corporations allocate 5% of their portfolios to BTC, it could generate an inflow of $200 billion into the crypto market, equivalent to the current total market cap of BTC

Listed Company Risked BTC Acquisition

Nasdaq-listed company MicroStrategy (Nasdaq: MSTR) announced on August 11 that it had acquired 21,454 Bitcoins as part of a “capital allocation strategy”. The global mobile intelligence company had hinted earlier in its Q2, 2020 results that it was looking to invest up to $250 million in one or more alternative assets, which it has now done. MicroStrategy effectively plowed $250 million in the BTC market, with an average purchase price of $11,653 per coin. Its rate of acquisition parallels that of Grayscale Bitcoin Trust (GBTC), with the latter having absorbed around 2.3% of BTC currently in circulation.

In a statement released on August 11, the company revealed its newly-found faith in Bitcoin as a superior asset class owing to its global acceptance, architectural resilience, and community ethos. The intrepid investment in cryptocurrency will prove to be “not only a hedge against inflation”, but also have a “prospect of earning a higher return” compared with traditional investment vehicles.   

MicroStrategy held cash, “cash equivalents”, and short-term investments are valued at $530.9 million. While many listed companies favor bonds and what could be considered as typically less risky investments as part of their treasury management strategies, MicroStrategy effectively raised its risk profile by allocating 47% of its cash reserve to BTC. The $250 million-investment in an extremely volatile asset is an unconventional move for a publicly traded firm. 

Riding the Next Wave

MicroStrategy has a long-standing tradition of staying on top of the formidable technological currents. As early as 2012, the company predicted the imminent proliferation of mobile-based services and has successfully ridden the “Mobile Wave” to establish its name as one of the largest business intelligence providers. Eight years later, it foresees the surge of the Digital Wave that is rapidly disrupting the status quo by dematerializing products, services, and processes. These digital disruptions, catalyzed by COVID-19, will assert broader, longer-term adoption of technology platforms and solutions. 

A New Investment Option? 

MicroStrategy’s endorsement of BTC as a viable investment vehicle is the first of its kind. In addition, it commenced a tender offer to repurchase up to $250 million in value of shares from its shareholders. The company is apparently sanguine about its new strategy despite the current economic downturn, adding that the investment decision won’t hinder its strong cash flow, citing that only $50 million is needed for operations. 

Source: MicroStrategy, Bybit Insight

It is still premature to conclude whether MicroStrategy’s move can be replicated by any asset-light companies. However, the company certainly presents a refreshing perspective on capital allocation strategies amidst constant fear of inflation precipitated by expansionary monetary policies adopted world-wide. 

Companies exploring BTC investments as a way to diversify their portfolios would be advised to hold BTC for at least one year to avoid high capital gains tax. In this case, MicroStrategy would have to hold onto the asset for over a year to be eligible for the long-term capital gains tax at 15-20%, else be subjected to paying up to 38.5% of short-term investment gains tax. 

According to Harvard Business Review, U.S. non-financial companies are sitting on just over $4 trillion in cash, up from $2.7 trillion a decade ago and $ 1.6 trillion in 2000. With vast uncertainties in the global economic outlook, there seems to be a growing lack of cash management choices for cash-rich companies. MicroStrategy may have set a precedent by deeming BTC a viable investment option. 

If U.S. companies were to allocate 5% of their portfolios to BTC, as simulated in a hypothetical model, it could potentially introduce a net inflow of $200 billion into the cryptocurrency market, which is roughly equivalent to the current total market capitalization of BTC. 

Implications for Crypto

MicroStrategy’s stock price shot up 10%, reaching a $1.3 billion market capitalization following the Bitcoin purchase announcement. Tying the company’s valuation to the price of Bitcoin increased MicroStrategy’s market value by over $100 million. Similarly, shares of Overstockthe online retail gianthave posted an astonishing rally since the launch of Overstock’s security token, TZROP, by its blockchain subsidiary, tZERO. This strategy, effectively linking the company’s valuation with the ebb and flow of the cryptocurrency market, may have buoyed its share price despite the slump of its core business. 

As much as investors cheered the move, MicroStrategy’s strategic shift to acquire BTC exposure may amount to more than just capital management strategy, and could, in turn, have larger implications for the cryptocurrency markets.   

For one, MicroStrategy’s massive purchase snapped up 0.1% of the total supply of Bitcoin, a bullish sign in the eyes of many cryptocurrency traders. Coupled with GBTC’s inflow of 16,045 BTC since July 28, these two firms alone absorbed a total of 37,499 BTC, three-times the mining production of the same period. Further endorsement from institutional investors on Bitcoin as a hedge against quantitative easing will continue to fuel Bitcoin’s long-term bull run. 

Source: Grayscale, Bybit Insight
Source: Glassnode, Bybit Insight

By including Bitcoin in its portfolio, MicroStrategy offers doses of crypto exposure to its shareholders. The company will also have the additional benefit of simplifying its treasury operations by circumventing the outdated payment rails. With MicroStrategy’s risk-taking already paying off, as reflected in the recent rally stock, more publicly listed companies may potentially follow in its footsteps. Not to mention, the access barrier to crypto markets is significantly lowered as the U.S. Federal Agency introduces a new framework that opens the door to traditional investors. 

The confluence of recent regulatory and institutional shifts will propel wider crypto adoption, which could explain BTC’s recent strong performance.