The Bitcoin Treasury "Infinite Money Glitch"

Summary

In this video, Richard delves into the rise of Bitcoin Treasuries—companies holding Bitcoin on their balance sheets, a strategy pioneered by Michael Saylor's MicroStrategy. He explains how this trend has gained traction, with companies like Tesla and Block following suit. While some investors see it as a profitable opportunity, others question the logic behind paying a premium for Bitcoin exposure. The video explores the mechanics of this strategy, including leverage, convertible notes, and Bitcoin yield, as well as the risks involved, especially as more companies adopt the model without solid financials.

Takeaways

• 😀 Bitcoin Treasuries are companies that hold Bitcoin on their balance sheets, a strategy pioneered by MicroStrategy's CEO Michael Saylor.
• 😀 MicroStrategy, once a declining business intelligence company, turned into one of the largest 100 companies in the U.S. after adopting the Bitcoin Treasury strategy in 2020, with its stock rising 2600%.
• 😀 Over 166 publicly traded companies now hold Bitcoin, collectively owning 5% of all outstanding Bitcoin, surpassing Bitcoin ETFs in purchases in recent quarters.
• 😀 Investors often buy Bitcoin Treasury stocks like MicroStrategy at a premium, paying more for the stock than the value of the Bitcoin it holds, due to confidence in the strategy and leverage benefits.
• 😀 The strategy relies on convertible notes and preferred shares to raise capital at low interest rates, amplifying returns, but introducing significant leverage risk.
• 😀 The concept of a 'Bitcoin yield' is promoted by companies like MicroStrategy, claiming increased Bitcoin per share, though this is often misleading as it involves raising more capital to buy more Bitcoin.
• 😀 Some companies treat Bitcoin as a gimmick to attract investor enthusiasm and raise capital, with a significant rise in small, loss-making companies adopting Bitcoin Treasuries.
• 😀 The strategy faces risks as more companies enter the space, creating competition for capital and pushing down the premiums on Bitcoin Treasury stocks, which may harm future returns.
• 😀 The increased adoption of Bitcoin by companies, especially with volatile Bitcoin prices, poses risks to their financial health and raises questions about their long-term sustainability.
• 😀 Despite risks, the trend of Bitcoin Treasuries is growing, and some companies are adopting it to transform their business models, even leading to new Bitcoin-focused companies and revival of Bitcoin-related SPACs.

Q & A

What is a Bitcoin Treasury, and how did it come about?

A Bitcoin Treasury is a strategy where businesses hold Bitcoin on their balance sheets. This strategy was popularized by Michael Saylor and his company MicroStrategy in 2020, which became the first publicly traded company to buy Bitcoin. The approach has since been adopted by other companies, including Tesla and GameStop.

How did MicroStrategy's stock perform after adopting the Bitcoin Treasury strategy?

MicroStrategy's stock saw a dramatic rise of approximately 2600% over five years after adopting the Bitcoin Treasury strategy, far outpacing Bitcoin itself. This performance has earned it the label of an 'infinite money glitch.'

What is the Multiple of Net Asset Value (MNAV), and how does it relate to MicroStrategy's stock price?

The Multiple of Net Asset Value (MNAV) measures the premium of a company’s stock price relative to the value of the Bitcoin it holds. For MicroStrategy, this has ranged between two and three times, meaning its stock price has been two to three times the value of the Bitcoin per share.

Why would investors buy MicroStrategy stock instead of directly purchasing Bitcoin?

Investors buy MicroStrategy stock instead of Bitcoin for reasons such as leverage, institutional access, and the ability to gain Bitcoin exposure without dealing with individual Bitcoin purchases. Additionally, MicroStrategy’s use of convertible notes and its credit amplification strategy helps to create the perceived value.

What are convertible notes, and how do they benefit MicroStrategy?

Convertible notes are hybrid securities that allow lenders to convert debt into company equity under specific conditions. For MicroStrategy, this provides an opportunity to raise funds at very low interest rates and attract investors by offering them upside exposure if the company's stock price rises.

How does the so-called 'Bitcoin yield' affect MicroStrategy's stock valuation?

MicroStrategy promotes a 'Bitcoin yield,' claiming that it has been able to increase the number of Bitcoin per share over time. This is not a magical process but a result of new funds raised through convertible securities. While the concept appeals to investors, it is also misrepresentative, as the increased Bitcoin per share is linked to growing liabilities.

What risks are associated with MicroStrategy's Bitcoin Treasury strategy?

The primary risk is the volatility of Bitcoin itself. If Bitcoin's price declines, it could force MicroStrategy to liquidate some of its holdings, which could hurt its stock price. Additionally, the company’s leverage through convertible notes and preferred shares amplifies these risks, especially if it faces difficulties meeting dividend or debt obligations.

How does the Bitcoin Treasury strategy impact smaller, loss-making companies?

Smaller, loss-making companies have increasingly adopted the Bitcoin Treasury strategy, sometimes as a gimmick to attract investor enthusiasm. Announcing Bitcoin purchases can momentarily boost their stock prices, even without any meaningful business improvements or increases in Bitcoin value.

What challenges do companies face as the number of Bitcoin Treasury companies grows?

As more companies enter the Bitcoin Treasury space, competition for investor funds increases. This could lead to higher interest rates and more concessions that may not be advantageous for current investors. For companies like MicroStrategy, this competition may also reduce its Bitcoin yield and make it harder to maintain its stock premium.

What role does institutional adoption play in the future of Bitcoin Treasuries?

Institutional adoption could play a significant role in sustaining Bitcoin Treasuries if more traditional companies and large investors recognize Bitcoin as a viable store of value. However, this also raises concerns about whether the strategy will be sustainable long-term, especially if Bitcoin's volatility limits its appeal as a mainstream corporate asset.