Saylor as a Symptom

Don't hate the player, hate the game.

Love him or hate him, Michael Saylor is doing something that has everybody paying attention. If Microstrategy-mania has somehow escaped your notice, a quick TLDR; Michael Saylor is the Founder, Chairman and controlling shareholder of a publicly traded company called Microstrategy (MSTR). For the last 4+ years, he has tapped into public capital markets in increasing size and complexity to raise capital so that his company can buy and hold a massive amount of Bitcoin. (>$40 billion as of this writing.) In the process, he’s become a hero to many bitcoiners and/or financial engineers, a figure of ridicule to those who doubt bitcoin or see him as a huckster, and an entertaining topic of conversation for everyone in between.

This piece will not debate the result, but it will focus instead on the process. What appears to be happening is that Microstrategy is systematically dissecting public capital markets to understand all the complex and arcane funding mechanisms available to publicly traded companies and then finding a way to legally use those mechanisms to fund their bitcoin accumulation plan. None of this is being done in secret. To the contrary, they are publicly explaining their strategy to anyone who will listen and encouraging others to join the fun. (Links to some of these resources at the end of the piece.). What all this hullabaloo has accomplishing for me is to expose so much more of the financial engineering that happens every day in corporate finance. It leaves us with the question – if:

1. Everything MSTR is doing is legal and business as usual for many other companies in much smaller volumes, and

2. You are concerned that these tools are being used to build a pending catastrophe of some sort, then

3. What are all of these other companies using these tools for, and

4. Should these tools even exist?

The quintessential example in my mind is the use of debt in this strategy. MSTR is issuing billions of dollars of convertible debt that pays 0% interest, then using that money to buy bitcoin. MSTR publicly proclaims that they have no intention of ever selling their bitcoin, and bitcoin has no cash flows. So how do you lend large amounts of money, (even at 0% interest!!), to a company for the explicit purpose of purchasing an asset with no cash flows that they never intend to sell? The answer appears to be volatility laundering. This convertible debt is basically an option to purchase stock later at a much higher price than it currently trades at. Options have value in modern financial markets. Options on an equity that has high volatility have a lot of value. My understanding is that MSTR’s convertible bonds have been the top performing ‘bonds’ in their asset class.

Extracting this away, you have capital markets not caring about the quality of collateral on the underlying assets of debt they issue because they are creating derivative financial products on top of that debt that allow them to play ‘sophisticated’ financial trading games.

Again, MSTR is just an example here which has opened my eyes to this practice. Where else is this happening to less fanfare? Are there insolvent shoe manufacturers or solar panel installation companies taking on debt regardless of the quality of their business? The last time we had a material bout of this is featured in ‘The Big Short’. Leveraged bets were taking place on mortgage bonds at a scale multiples of the size of all existing bonds – and nobody cared about the quality of the collateral.

If you believe MSTR is pulling off a brilliant speculative attack on the U.S. Dollar by borrowing inflating money or inflating their share count to purchase a scarce and valuable asset – that’s great. You should be worried that the tools are here to be used so easily. Where else is this chicanery occurring on top of terrible collateral?

If you believe MSTR is a Rube Goldberg Ponzi, you should be worried that the tools are here to be used so easily. Where else is this chicanery occurring on top of terrible collateral?

Don’t focus on the bitcoin. Focus on the system MSTR is using. If you have assets in a bond fund, you are likely funding the purchase of bitcoin. Don’t hate the player, hate the game.

Disclosure and Resources:

*At the time of this writing I do not own any MSTR. FOMO could strike at any time, but I just buy and hold the underlying assets without all the complications.

MSTR Q3 Earnings Call describes their strategy in detail:

Resources MSTR provides to the public on why bitcoin and how to copy their strategy: Hope.com

This podcast is an interview with a bitcoiner who is a former bond fund manager that really understands the plumbing of these markets. Listening to his walk through of how this works is fascinating.