This week’s issue is going to be slightly different — an excerpt from a recent issue of Insider Weekly that is guaranteed to ruffle the feathers and trigger a flood of hate mail in our inboxes, so consider yourself warned…
We’re going to take a closer look at bitcoin, specifically one of its most ardent disciples, Michael Saylor and his firm MicroStrategy.
You may have heard Saylor on any media channel that’ll take him professing his undying love for bitcoin. He loves it so much that he’s leveraging his company (MicroStrategy) assets to buy more and more. That’s all well and good, and his shareholders can make up their mind if they want to be onboard a super levered cult train or not.
Now, MicroStrategy doesn’t make any money. There are no “net profits” here. Insider ownership, otherwise known as skin in the game, is a whopping 0.03% — what we like to call a “heads I win, tails you lose” gig. That is from the founders perspective. There also is no P/E ratio because you need an “E” to get a ratio. Return on equity is butt clenching -26.8%. This is a cash hemorrhaging, super-levered bitcoin ETF using shareholder money. Nice!
Still, the market cap is over $5bn so what the hell do we know…
Now, don’t get us wrong… We’ve been big proponents of bitcoin, and we love the sound money aspect of it. But as an investor you have to have to take emotion out of the game and certainly that’s not what we’re seeing when looking at MicroStrategy.
What we find fascinating is that Saylor’s firm just announced a $400m senior secured bond offering… so they can go buy more bitcoin. Why on God’s green earth would any investor buy this? That’s what we want to know.
You buy the bond, and you get zero upside of bitcoin and are stuck with the yield. You’d pay for decent yield, provided the underlying is secure but — and this is where we think this entire thing takes a bit of a mind warp — the underlying is increasingly bitcoin itself. Whaaat? In fact, it is a diluted exposure to bitcoin because there is the “cash losing” part that is the actual business. Again, why would you buy that?
The underlying on any bond issuance really should be low volatility. Bitcoin’s standard deviation is what? -150% or something like that. It fairly regularly gets cut in half or loses 80%. We know this. So now imagine you’re long up to your eyeballs and have borrowed money (a helluva lot of it) to be even longer (go big or go home) and you get a drawdown.
Problem here is that the business is a tech business. In other words, if we’re correct on our growth vs value thesis (value stocks outperforming growth over the next couple of years), then the tech side of things may not do so well on a go-forward basis. “Boo hoo,” you may say, “They’ll have bitcoin.”
Sure, maybe. But remember those drawdowns. You want to know what happens to you if you’re running a tech company in a tech wreck and you’re simultaneously levered to the hilt with a massive bitcoin position and you get one of those “standard deviations”. Well, your actual cash flows are drying up while your asset base is imploding.
That’d be the case if your business was profitable. This one isn’t. In any event, you’ve still gotta make payroll, and so you dig into those “savings” of yours (in BTC), only to find they’re imploding against a net short USD position (your bonds issued). So you become a forced seller into a collapsing market. So again, who the hell would buy these bonds? Makes no sense. But hey, in a mania things don’t need to make sense, so we just get to sit and enjoy the show. Maybe they’ll hire Russian hookers or porn stars to go on Youtube and shill it. Could work. Stranger things have happened. Keep in mind… if tech keeps going up and BTC keeps going up, all will be well.
But we’re boring, old probability guys, so we’re going to go out on a limb here and say that within the next decade Michael Saylor is going to see his arse. Now, we’ve no beef with him at all and wish him well. But the way he’s structured his firm is to set it up to become its own financial wrecking ball should anything go just a little bit wrong. We certainly wouldn’t allow a dude like this near our money because he clearly doesn’t understand risk management. He’s probably a hoot to go to Vegas with, though.