Down the Bitcoin Rabbit Hole
Chapter 6: Some Thoughts
It’s Friday so we are going to come back to the bitcoin theme to take us into the weekend. I want to touch on three things:
Another company is adding bitcoin
MicroStrategy is selling a convert to add to its bitcoin holdings
The current technical structure is not the most compelling
Starting with the fist point, the Wall Street Journal is reporting that Massachusetts Mutual Life Insurance Co. bought $100 million of bitcoin for its general investment account, the latest sign of mainstream acceptance for the upstart digital currency. That sounds like a lot of money, and it is but these things are always looked at on a relative basis. On September 30th (my birthday), the general investment account at Mass Mutual totaled ~$235 billion. But we have made the case that increased demand is likely bullish for bitcoin so this is noteworthy. It’s also worth noting that insurance companies are generally methodical when making big changes relating to asset allocation. In my mind, without having been in the room, there must have been a fair amount of thought put in to making this decisions. The article goes on to say that MassMutual purchased the bitcoin through a New York-based fund management company called NYDIG, which has about $2.3 billion of bitcoin and other cryptocurrencies under management. MassMutual also acquired a $5 million minority equity stake in NYDIG, which was formerly known as New York Digital Investment Group. So not only is Mass Mutual buying bitcoin, but they are taking a stake in a digital investment company?
According to Darwin's Origin of Species, it is not the most intellectual of the species that survives; it is not the strongest that survives; but the species that survives is the one that is able best to adapt and adjust to the changing environment in which it finds itself. Mass Mutual was founded in the 1851, they have been around for a long time. Companies that last a long time are the ones that are best at adapting to change. Here is what they had to say about the recent transactions: the bitcoin investment was based on a broad strategy to take advantage of new opportunities while remaining diversified, “giving us measured yet meaningful exposure to a growing economic aspect of our increasingly digital world.” Adapt or Die!
Moving on to point number two. MicroStrategy. The company that converted 95% of the cash on its balance sheet to bitcoin and set the crypto world on fire in the process continues to make news. Michael Saylor, the CEO who can only be described as a total bitcoin evangelist now, is not shy about “talking his book” any chance he gets. On December 9th, it was reported that MicroStrategy is offering $550 million in convertible notes and will use the net proceeds to buy bitcoin. Here is the presser. And here is the line that has the bitcoin community excited: MicroStrategy 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.
Great, more demand, which should ultimately be bullish for bitcoin. Saylor is going to go down in history as one of the most forward-thinking business executives of all time or a Harvard case study in straying too far from your expertise. You see, insurance companies such as Mass Mutual make investments all the time. When we pay our premiums that cash doesn’t just sit in the bank. it gets put to work in the market in hopes of earning a positive return. It’s a great model and the reason Warren Buffet loves insurance companies. MicroStrategy is not an insurance company, they are software company. It’s not a knock. I love software companies. Software is eating the world.
That got me thinking, why is Saylor doing what he is doing? I know the reasons that he gave and agree. The purchasing power of fiat currency is being burned at the stake. It won’t be long before we go to get a loaf of bread and it costs a lot more than it does today. I can see taking a portion of the cash that you generate and holding it in a hard asset such as bitcoin. But 95% of your cash? Issuing a convert to add to your bitcoin holdings (which are not core to your business)? My thought is something may be up. So I launched Koyfin (a great product) and I pulled up some fundamental data on MicroStrategy (MSTR). Here is the top of the income statement (these numbers are believed to be accurate):
In an environment where “software is eating the world” MicroStrategy stopped growing their revenue in 2014 and have seen year over year declines ever since (the red numbers at the bottom). And quite honestly, the absolute revenue number is not all that impressive; they have been in business since 1989, and only logged $486 million in sales in 2019. Now, I know they went through a restructuring in the 2014 / 2015 time frame but we are now five years on and sales are still declining.
Have a look at the long-term chart and see if you can spot then they started to pivot to being a bitcoin story. The stock went virtually nowhere for nearly a decade in the green box. Then, the pivot!
So, while I am happy that Mr. Saylor has chosen to adopt bitcoin, it is interesting considering the revenue growth…or lack there of. I always find it interesting when a company makes such a drastic change. Maybe the stalled growth story at MicroStrategy played a role. Make of it what you will. I have heard that some people own MSTR as a way to have “bitcoin exposure.” That makes no sense to me, but to each their own.
Finally, there is the bitcoin chart itself. It seems that all of this new demand that we have discussed over the past few weeks has been met with a wave of sellers in the near-term. Bitcoin has been unable to break through those 2017 highs. On the downside, there isn’t much support until ~$14,000. As I have said, I am a believer and I am not trading this. I buy a set amount every two weeks. If it wants to go to $14,000, I hope it is there on one of the days that I am in the market.
That’s it for this week. Thank you all for taking time out of your day for reading my thoughts. Please remember to hit the share button. Have a Great Weekend!