Insight
June 21, 2024
Since adopting bitcoin as a primary treasury reserve asset nearly 4 years ago, MicroStrategy’s stock has been one of the best performing stocks in US markets. Its 1,089% cumulative return since August 10, 2020, the day before announcing its first bitcoin purchase, is bested by only 19 other securities in the FT Wilshire 5000 Index, which is designed to capture 100% of the investable stock universe in the US. Although MSTR’s stock performance falls slightly behind the AI favorite NVDA, which boasts a 1,114% increase during the same period, it notably outshines major market indices like the S&P 500 (SPY) and Nasdaq 100 (QQQ), as well as bitcoin itself.
Even since the introduction of spot ETFs in the US, which eliminated the necessity for a public company primarily valued for its bitcoin holdings, MicroStrategy has continued to outperform (although optically it appears to be higher beta version of bitcoin itself).
The secret behind MSTR’s stock performance has undoubtedly been its bitcoin acquisition (treasury reserve) strategy, as the core software business revenue is largely unchanged since 2020. Since adopting bitcoin as its primary treasury reserve asset, the company has issued $4.4B in debt and acquired 226,331 bitcoins currently valued at approximately $14.7B, making MSTR one of the single largest holders of bitcoin.
Considering the remarkable success of MSTR’s approach, why haven't more public companies embraced bitcoin ownership, even partially? While various factors could be influencing this decision, a few key points spring to mind.
Firstly, the issue of governance plays a significant role. MicroStrategy stands out due to its distinctive leadership structure, with Chairman, founder, and controlling shareholder Michael Saylor spearheading the bitcoin initiative. This structure is not common in most public companies, possibly making it challenging for management to navigate the volatile nature of bitcoin ownership.
Secondly, the landscape of bitcoin ownership for public companies has undergone significant changes that may not have reached widespread awareness. Beginning next year, bitcoin will be accounted for under fair value accounting rather than as an intangible and tested for impairment. This change may make it more favorable for more companies to hold bitcoin.
Finally, one potential factor could be linked to the essence of treasury operations itself. Treasury management primarily revolves around managing assets and liabilities – such as funding working capital, handling foreign exchange risks, and capital allocation decisions. In the case of most companies, bitcoin exposure or related liabilities do not require management. Hence, the decision to purchase bitcoin would likely be perceived as an investment choice, akin to acquiring SPY, rather than a treasury-focused risk mitigation strategy.
That isn’t to say that bitcoin ownership can’t create shareholder value, as demonstrated so starkly in the case of MicroStrategy. Perhaps if management teams think about bitcoin ownership in that context, driving returns to shareholders, rather than as a treasury function, more companies will choose to invest in bitcoin.
Earlier this week, Tether, the company behind the $113B Tether (USDT) series of stablecoin(s), announced a new stablecoin, Alloy (aUSDt). The difference between this stablecoin and USDT is that, instead of it being backed by dollars held in bank accounts, which has been the subject of much handwringing over the years, this one is backed by another Tether-issued asset, Tether Gold (XAUt). XAUt is designed to be backed one-for-one by physical gold.
Alloy appears to be the first in what Tether is calling “Tethered Assets”, digital assets designed to replicate a reference asset, in this case the USD. A quick glance at the docs indicates it works similarly to Maker, which allows users to deposit one asset (originally ETH in the case of Maker) and withdraw (borrow or mint) a stablecoin (DAI in the case of Maker) backed by those assets. Should the collateral's value dip below a specified threshold, specialized entities have the ability to settle the debt position by returning the borrowed asset in exchange for underlying collateral at a favorable rate (105% in the case of Alloy). Positions are deliberately overcollateralized to ensure that the LTV (loan to value) never surpasses 75%.
While on-chain collateralized stablecoins have shown some success in the past, they have not reached the same level of popularity as off-chain collateralized stablecoins, like USDT. One obstacle that could hinder the wider acceptance of products like aUSDt is the lack of transparency. For instance, when it comes to Tether Gold's collateral, the identity of its custodian, a crucial aspect of asset-backed digital currencies, is not openly disclosed. From the available information, it appears that the gold is stored in Switzerland, but this is all we can surmise. This stands in stark contrast to the comprehensive details provided to investors in the SPDR Gold Trust (GLD), where its custodians and their governing agreements are outlined in detail in its regulatory filings.
Digital assets are commonly promoted as open databases constructed on open-source code, which undoubtedly offers advantages. However, this should not be a replacement for the transparency and disclosures provided to traditional market investors. If anything, it should complement and enhance information provided to investors, not detract from it.
As bitcoin continues its soggy trading, investors are looking for reasons to explain this behavior. While we delved into some of those items last week, there seems to be a need to debunk some false beliefs and clarify uncertainties that may be affecting market sentiment. A quick list of some of these is:
We acknowledge the desire to rationalize the current market trends, however, it is important to note that these factors are not at play right now.
Bitcoin slid 2.3% this week as the rangebound trading we outlined last week continues. The prevailing sentiment in the industry seems rather bleak, however. While Bitcoin is only 14% below its all-time high set in March (with ETH down 15%), other major coins have seen more significant drops. Solana has decreased by 38% from its peak, Cardano by 54%, and Avalanche by 59%. The majority of memecoins, which have been a prominent trend this cycle and the reason for dour sentiment, are now more than 60% below their peak values.
In an objectively bearish signal, bitcoin fell this week even as MicroStrategy was in the market acquiring the bulk of its recently announced $786M bitcoin purchase. This comes in conjunction with the completion of its convert offering, which was completed on Tuesday. Had MicroStrategy not been in the market, bitcoin might have fallen even further.
ETF flows have taken a sharp turn towards the negative side, with outflows averaging $150M to $160M per day over the past week. Among the specific funds, the Fidelity Wise Origin Bitcoin Trust (FBTC) has been consistently experiencing outflows, averaging around $80M per day. Considering the significant ownership of FBTC by hedge funds and the narrowing of the futures basis, we think these outflows are likely associated with the closing of futures basis arbitrage trades.
Lastly, we urge investors to take note of the calendar. Historically, bitcoin has shown lackluster price performance during the summer season. The average monthly returns peak in March and gradually decrease each month until they start to pick up again in October. The impact of seasonality may also be a significant factor affecting price.
Regulation and Taxation:
SEC's Head of Crypto Asset and Cyber Unit Departs After Nearly Nine Years - The Block
Crypto Trading Firm Cumberland Acquires New York's BitLicense - CoinDesk
SEC Closes Ethereum 2.0 Investigation, Will Not Pursue Ethereum Enforcement Action - Consensys
Investing:
Bitwise Discloses $2.5 Million Seed Investment in Latest Amended Filing for Its Spot Ethereum ETF - The Block
Hashdex Proposes New ETF That Would Own Both Spot Ethereum and Bitcoin - The Block
Companies:
CleanSpark Announces Acquisition of Five New Bitcoin Mining Facilities in Georgia, Adding 60 MW of Infrastructure - CleanSpark
MicroStrategy Completes $800 Million Offering of 2.25% Convertible Senior Notes Due 2032 - MicroStrategy
June 28 - CME expiry
July 11 - June CPI release
July 25 - Bitcoin 2024 Conference
July 31 - FOMC interest rate decision
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