A Public Company Just Converted Their Balance Sheet Cash To Bitcoin As Their Reserve Asset

  
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To investors,

This morning it was announced that a publicly traded company, MicroStrategy Incorporated (Nasdaq: MSTR), has completed a two-prong capital allocation strategy. The first aspect is fairly traditional — a “cash tender offer for up to $250 million of MicroStrategy’s class A common stock via a modified Dutch Auction offer.”

The second aspect is where things get interesting. MicroStrategy has taken $250 million of their balance sheet capital and purchased 21,454 bitcoin. This is not a wild, speculative investment decision though. Michael Saylor, CEO of MicroStrategy, clearly articulates his belief and thought process when he said:

Our investment in Bitcoin is part of our new capital allocation strategy, which seeks to maximize long-term value for our shareholders. This investment reflects our belief that Bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash. Since its inception over a decade ago, Bitcoin has emerged as a significant addition to the global financial system, with characteristics that are useful to both individuals and institutions. MicroStrategy has recognized Bitcoin as a legitimate investment asset that can be superior to cash and accordingly has made Bitcoin the principal holding in its treasury reserve strategy.

MicroStrategy spent months deliberating to determine our capital allocation strategy. Our decision to invest in Bitcoin at this time was driven in part by a confluence of macro factors affecting the economic and business landscape that we believe is creating long-term risks for our corporate treasury program ― risks that should be addressed proactively. Those macro factors include, among other things, the economic and public health crisis precipitated by COVID-19, unprecedented government financial stimulus measures including quantitative easing adopted around the world, and global political and economic uncertainty. We believe that, together, these and other factors may well have a significant depreciating effect on the long-term real value of fiat currencies and many other conventional asset types, including many of the assets traditionally held as part of corporate treasury operations.

My initial reaction to reading Saylor’s thoughts was “Wow - MicroStrategy has a Bitcoiner CEO.” This is a perfect articulation of the argument for the decentralized, digital currency. But Saylor wasn’t done yet. He goes on to say:

“We find the global acceptance, brand recognition, ecosystem vitality, network dominance, architectural resilience, technical utility, and community ethos of Bitcoin to be persuasive evidence of its superiority as an asset class for those seeking a long-term store of value. Bitcoin is digital gold – harder, stronger, faster, and smarter than any money that has preceded it. We expect its value to accrete with advances in technology, expanding adoption, and the network effect that has fueled the rise of so many category killers in the modern era.”

So there you go. We now have a publicly traded corporation that has decided to use Bitcoin as the reserve asset on their balance sheet. They aren’t in the Bitcoin business. They have no blockchain-based products. This isn’t a cash grab by adding “blockchain” or “crypto” to their name. This is a simple analysis done by a team that is worried about protecting their shareholder value in uncertain and chaotic times in the macro economy.

MicroStrategy won’t be the only company to do this. Eventually, most companies will add Bitcoin to their treasury. They will probably start small and then ratchet up to a majority percentage at some point in the future. This trend will take awhile to get underway, but it is the natural progression in adoption.

First, we saw individuals start to convert their “balance sheet” dollars into Bitcoin. It began on the fringes and then has become more mainstream. The initial conversions were small percentages of total wealth, but now there are many people I know with majority of their wealth denominated in Bitcoin. Next, we will see corporations doing this. We obviously don’t know what has happened in the private markets, but we know that a publicly traded company just did it.

It will start with smaller market cap companies and then eventually take hold with larger corporations as well. Lastly, every central bank in the world will add Bitcoin to their reserves. This has been rumored as an option by nefarious governments such as Venezuela already, but I anticipate we will see all of them do it — large or small, good actor or bad actor.

The reasoning behind why individuals, corporations, and central banks will move to Bitcoin as the reserve asset is simple. It is sound money built for a digital world. The provable scarcity of Bitcoin will lead to a higher US dollar value as demand for the artificially capped supply sees material increases in demand. Think about this for a second — we have essentially seen $200 billion of market cap created by retail investors.

There were very few institutional investors, large corporations, or governments participating in Bitcoin’s previous rise. As those large capital pools begin to enter the game, we should see an acceleration of adoption and USD price. The macro environment has definitely accelerated the inevitable. People are looking for a way to protect their wealth or that of their shareholders. Bitcoin has always served as a great tool for that purpose.

Now the corporations, and soon the central banks, are waking up to the information that the individuals have known for years.

-Pomp


This installment of The Pomp Letter is free for everyone. I send this email to our investors daily. If you would also like to receive it every morning, join the 50,000 other investors today.


THE RUNDOWN:

Facebook Financial Formed to Pursue Company’s Payments Plans: Facebook Inc. unveiled a new group to pursue payments and commerce opportunities and put David Marcus, co-creator of its Libra cryptocurrency project, in charge of the initiative. Called F2 internally, short for Facebook Financial, the team will run all payments projects, including Facebook Pay, the company’s universal payments feature that it plans to build inside all of its apps. Read more.

Blockchain-Based Trademark App Can Boost Australian Economy, Says Minister: A member of the Australian cabinet has said a new government-backed initiative, which uses blockchain, can help grow the national economy and create new jobs. This comes as Australia's National Rugby League (NRL) announced Monday it was piloting a blockchain-based app developed by the country's patent and intellectual property office. Read more.

Bitcoin Volatility Surges Amid Flirtation With $12,000 Threshold: One of the most alluring aspects of Bitcoin to traders and speculators is back: Volatility. Price swings by the largest cryptocurrency have reached the highest level in about a year in the past few weeks as the digital asset trades around $12,000. Bitcoin crashed almost $500 in a matter of minutes this morning after reaching that level, only to begin testing that high again. Read more.

Interactive Brokers to Pay $38M in Settlement Over AML Lapses: Brokerage firm Interactive Brokers LLC agreed to pay $38 million in penalties to settle charges related to lapses in Anti-Money Laundering requirements and failure to flag suspicious transactions, according to a recent announcement by the Securities and Exchange Commission. Read more.

Coinbase Snags Lyft Engineering Executive Manish Gupta: Coinbase has hired Manish Gupta to lead its engineering team as the cryptocurrency exchange reportedly eyes going public. CEO Brian Armstrong cited need to build "new crypto-native products and services" and its pivot to a "remote-first culture" in his Monday hiring announcement. But he was coy on specific projects for Coinbase's new vice president of engineering. Read more.


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Jason Williams is a co-founder and partner at Morgan Creek Digital. He previously built and sold FastMed, an approximately $500 million healthcare business. Jason and I spend a lot of time talking every day, so it is always fun to have one of these conversations recorded and published publicly. Hope you enjoy it.

In this conversation, Jason and I discuss:

  • Bitcoin

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  • DeFi

  • The Federal Reserve

  • Maximalism

  • The core principles to build wealth

I really enjoyed this conversation with Jason. Hopefully you enjoy it too.

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