I mean... ok. There are two things going on here. The first is that MSTR can get really cheap loans because they're essentially a profitable business that can service those loans. Although I would caution that the "But it's got a track record dating back to 1989" stuff - the only reason MSTR is in this position is because it hasn't really grown in pace with the market. They're an income stock not a growth stock, and their business analytics experience tells you nothing about their investment experience.
The second part though is - does investing in bitcoin make any sense? Well in my opinion no. MSTR has no strategic advantage in buying BTC. It's also extremely worrying that they've crossed the rubicon, they are now leveraging up to buy more. You don't just have to factor in whether this current debt looks like it's servicable. You have to question whether this company is going to continue levering up to buy bitcoin. Also, the down side risks the article mentions are like "Let's assume no downsides". Ok assuming that BTC goes down they can service the debt with other income. Fine. As long as they don't issue more debt which they likely will. Also, even if they can service the debt that doesn't change the fact they've made a bad investment of several hundred million dollars.
It also doesn't include downsides such as "Someone hacks you and all your BTC are gone" or "The US issues a new regulation changing the tax regime massively increasing your tax exposure".
The reason people are bearish on this move is because it's a guy with no busines in investing just punting everything he can onto BTC, which is fine for him to do, but it's not a particularly smart thing for him to do. I mean one obvious concern is that this company is probably trading at a significant discount vs it's assets now, so what's going to stop someone coming along and saying "Hey, $X a share, I'll liquidate the BTC and hand it back to investors" when BTC has it's next dip?
> The first is that MSTR can get really cheap loans because they're essentially a profitable business that can service those loans. Although I would caution that the "But it's got a track record dating back to 1989" stuff - the only reason MSTR is in this position is because it hasn't really grown in pace with the market. They're an income stock not a growth stock, and their business analytics experience tells you nothing about their investment experience.
I agree with most of what you said in general terms. However MSTR is doing this because they've got an eroding business that is in deep shit and the clowns in charge see the writing on the wall. They're not an income stock.
MSTR's sales and operating income the last few years:
2016: $512m sales, $107m operating income | 2017: $504m sales, $74m op income | 2018: $497m sales, $4m op income | 2019: $486m sales, -$1m op income | Last four quarters: $482m sales, $39m op income
The trend is more than written on the wall, it's graffiti'd all over that nice MSTR building in Tysons corner.
This Bitcoin move on their part is because they have no idea what to do with their actual business, they don't know how to deploy those financial resources to actually grow their real business. There can hardly be a worse sign for MSTR. Whatever their strategy has been, it has failed. Bitcoin is a hail mary. If I were large investor in this company, I'd be pushing for an investigation into their finances immediately. I wouldn't trust Michael Saylor one bit, he's a carnival barker that just barely survived the dotcom bubble, and his behavior back then was just as shady as this move is. The cloud era is likely threatening to destroy them as an independent business (at a minimum) and their options are very limited (unlike eg Oracle, they can't just get desperate and go on a big acquisition binge, they can't afford to really buy their way back in with a $2.6b market cap, given how expensive everything cloud is right now).
Re your point about hacking. They likely don’t self custody their own Bitcoin as they used Coinbase to purchase it and they have an excellent institutional custody solution with insurance and cold wallet storage:
Coinbase's insurance is limited to say the least. Namely, it only covers losses from hot storage (<2% of holdings) and it doesn't cover losses due to compromises of an individual account.
> Coinbase prioritizes the security of our customer's digital currency through a combination of online “hot storage” and offline “cold” storage. Coinbase maintains 98% or more of customer digital currency in cold storage, with the remainder in secure hot servers as necessary to serve the liquidity needs of our customers. All digital currency that Coinbase holds in its online hot storage is insured. If Coinbase were to suffer a breach of its online hot storage, the insurance policy would pay out to cover any customer funds lost as a result.
> This insurance policy does not cover any losses resulting from the compromise of your individual Coinbase account. Please note that the insurance policy covers any losses from Coinbase’s hot storage resulting from a breach of Coinbase's physical security, cyber security, or by employee theft. It is your responsibility to use a strong password and maintain control of all login credentials you use to access Coinbase.
Just a reminder that Coinbase custody is a different product to the app you install from the App Store. The faq you posted I believe refers to the latter.
If you are a large institutional investor you would likely use this and not a normal coinbase account.
I don’t work on custody but they may have a different insurance policy and or do things on a case by case basis:
http://custody.coinbase.com/faq
“ What storage systems does your insurance cover?
-
Coinbase’s policy covers all storage methods. This includes hot, warm and cold storage. Read more about our insurance policy here or ask the Custody team for more information.”
If you are interested in learning more here is a good article on insurance and cryptocurrency:
Huh TIL Coinbase has a product for large investors.
Regardless per that FAQ page you linked:
> We carry an annually renewed commercial crime policy that carries a $255m limit (per-incident and overall), with Coinbase Global as the named insured.
So in the event of a security breach, it's probable that losses would exceed the insured amount.
Has Michael said that micro strategy self custody publicly? If so where? Most institutional holders don’t self custody their own crypto for a variety of reasons ranging from governance (who signs off on coins going where, especially if Michael were to die), security and the ability to get the best price for a trade (read up on coinbases tagomi acquisition).
Disclaimer I work at coinbase on a team related to borrowing.
"Also, even if they can service the debt that doesn't change the fact they've made a bad investment of several hundred million dollars." -- Um, you're going to have to explain your opinion here, because it sounds like you believe their returns are not indicative of a good investment.
I'm of the opinion that making 290M+ from 475M is a good investment, I don't live near Wall Street so maybe that's not a lot of money these days?
The point is that the down side risk is that the price goes down. If that happens then it’s a bad investment - they will have lost money on it. I’m not saying it will go down, I’m saying it could go down. If it does go down their previous investments will also be down too.
> so what's going to stop someone coming along and saying "Hey, $X a share, I'll liquidate the BTC and hand it back to investors" when BTC has it's next dip?
Maybe the fact that he has 72% of the voting rights and can basically do whatever he wants.
> > so what's going to stop someone coming along and saying "Hey, $X a share, I'll liquidate the BTC and hand it back to investors" when BTC has it's next dip?
> Maybe the fact that he has 72% of the voting rights and can basically do whatever he wants.
And even if he didn't, this move is the perfect poison pill to prevent an hostile takeover: with the company massively leveraged on BTC, who'll be foolish enough to follow someone who's basically suggesting to realize the loss on the books? And while hoping this very action doesn't tank the company? It's an heroic assumption when debts remains to be serviced (ie, clear liquidity issues, that could crash stock price)
It could go to the point that not even whatever assets may remain would be enough to distribute anything at all to creditors! (ie, bankrupcy)
That IMHO is more concerning to any investor that trading at a discount vs the assets.
1980s style corporate raiding is 40 years old, so by now you must expect owner/founders to know a thing or two about poison pills!
Anyway, it's indeed a bold move, but the assets generate cash flow, and with 72% ownership, it strikes me as the RIGHT move IF the owner want to keep some liquidity handy for whatever project, without falling pray to inflation.
With 72% he can already can do what the hell he wants. He could distribute this as profit to himself but as a billionaire, does he really needs that cash RIGHT NOW? While we're expecting up to 40% inflation when the velocity of money rises back?
It's simpler to just keep the company coffer filled until a good use comes by - if only because there will be no need to bother with the TLAs like the SEC to issue bonds, and also because while parked, all that remains shielded from most taxes.
As a billionaire, it's just his form of edging, while also having a lifestyle business.
The second part though is - does investing in bitcoin make any sense? Well in my opinion no. MSTR has no strategic advantage in buying BTC. It's also extremely worrying that they've crossed the rubicon, they are now leveraging up to buy more. You don't just have to factor in whether this current debt looks like it's servicable. You have to question whether this company is going to continue levering up to buy bitcoin. Also, the down side risks the article mentions are like "Let's assume no downsides". Ok assuming that BTC goes down they can service the debt with other income. Fine. As long as they don't issue more debt which they likely will. Also, even if they can service the debt that doesn't change the fact they've made a bad investment of several hundred million dollars.
It also doesn't include downsides such as "Someone hacks you and all your BTC are gone" or "The US issues a new regulation changing the tax regime massively increasing your tax exposure".
The reason people are bearish on this move is because it's a guy with no busines in investing just punting everything he can onto BTC, which is fine for him to do, but it's not a particularly smart thing for him to do. I mean one obvious concern is that this company is probably trading at a significant discount vs it's assets now, so what's going to stop someone coming along and saying "Hey, $X a share, I'll liquidate the BTC and hand it back to investors" when BTC has it's next dip?