Microstrategy - Bitcoin Bear or Bull?

This is not financial advice.  Please perform your own due diligence.  These are my opinions only.

Microstrategy ("MSTR") will continue to acquire Bitcoin ("BTC") for its own corporate treasury during Bitcoin's projected peak price into 2025, if history repeats itself.  MSTR began its Bitcoin acquisition spree in Q3 of 2020, and has continued to buy Bitcoin for the duration of its rollercoaster ride since then, both up in 2021 and down in 2022, and up again in 2023.  Microstrategy's current holdings are 189,150 BTC purchased at an average price of $31,168 per Bitcoin.  They are obviously in the green.

MSTR is an operational leveraged proxy for Bitcoin, and it uses its income and balance sheet to acquire more Bitcoin either via debt or equity offerings--or cash flow.  This is normally dilutive to existing shareholders, but with careful and strategic acquisitions during favorable conditions (e.g., rising Bitcoin price, low interest rates), these periodic Bitcoin purchases are effectively accretive.

This "dollar cost averaging" strategy ran into perceived problems in 2022, when Bitcoin declined 78%  from its November 2021 peak.  Rumors were swirling that MSTR would have to liquidate if Bitcoin's price dipped below $20K, which it did on its way to a $15.5K cyclical bottom.  Michael Saylor was quick to respond that Bitcoin would have to drop below $5K before Microstrategy would have to liquidate its Bitcoin holdings.  And they certainly weren't in danger of going bankrupt.  In hindsight, Saylor was 100% correct.

As long as MSTR's core business intelligence software operating entity was generating cash flow, those flows and strategic deployment of its balance sheet could continue to fund future Bitcoin purchases.  My thoughts are that MSTR could continue these acquisitions throughout 2024 until 2025, as I believe Bitcoin's price will peak in Q3 2025 before starting another expected steep drawdown.  And in order to avoid any future speculation about MSTR's solvency or lack thereof, Saylor should refrain from any Bitcoin purchases in 2025 before the anticipated crash starting in the second half of 2025--just to be safe and ensure a big enough cushion to weather another inevitable crypto winter.

Meanwhile, if investors are bullish on Bitcoin until 2025, MSTR shares should increase proportionately even higher from its current price of $631 from a January 2023 bottom of $130.  It behaves like a leveraged play for Bitcoin, and will be superior to speculative performances of imminent spot BTC ETF's which should be approved any day now in early 2024. ETF's charge management fees up to 1% annually.  MSTR provides operational leverage, equivalent to yielding 2-3% annually.  That's a 3-4% positive spread in favor of MSTR over a spot BTC ETF..  This may explain why MSTR shares trade at a premium relative to its Bitcoin holdings.

Another bullish catalyst for MSTR is adoption of FASB fair value accounting for Bitcoin as a tangible asset instead of an intangible asset, which it currently is classified as.  This GAAP accounting rule kicks in for Bitcoin on December 15, 2024, but early adopters like MSTR can begin accounting for Bitcoin as an asset which doesn't impair its balance sheet due to "lowest value" accounting prior to the designated transition date.  Until fair value account is applied, MSTR's financial reporting shows repeated losses and balance sheet impairments.  This article explains why fair value accounting will encourage more companies to include Bitcoin into their corporate treasuries. 

https://blockworks.co/news/microstrategy-proposed-fasb-amendments

This chart shows how current accounting rules punish Microstrategy financial reporting.

Realistically, self-custodied Bitcoin is the optimal method to own Bitcoin, with Bitcoin custodied on centralized exchanges being a distant second due to potential for security breaches.  But for mainstream institutional and retail investors, a spot BTC ETF is the next best way to achieve exposure to the price of Bitcoin, even if it is not owning Bitcoin itself, the underlying asset.  In exchange for self-custody, the spot ETF provides convenience and ease of trading a security, without the hassles of managing one's own security keys, which can lead to loss of Bitcoin--if mismanaged.  The downside for ETF's includes this question: can investors trust the BlackRock's and Fidelity's of the world, and their respective custodial agents?  That is another topic better covered in another blog.

To clarify misleading nomenclature, a "security" carries downside risk of being zeroed out.  There are many high-profile examples of bankruptcies, with infamous cases being Lehman Brothers, Worldcom, Enron, FTX, etc., where shareholders are wiped out.  The list of body bags among smaller corporations is even larger.  By contrast, Bitcoin the actual asset, is a commodity, which ironically, reduces and eliminates the risk of it going to zero.  Bitcoin, like crude oil, gold, silver, silver, corn, wheat, natural gas, pork bellies, orange juice, etc. are commodities.  Their digital manifestations and futures contracts are traded at the Chicago Board Options Exchanges and the Chicago Mercantile Exchange, for instance.

The last BTC vehicle to address are the futures based BTC ETF's which are already listed.  They are the least optimal asset because they are subject to high slippage costs.

In summary, the order of preference, in terms of higher security and lower cost, are as follows:

Bitcoin in cold storage (offline, most secure)

Bitcoin on an exchange (convenient for trading, but exposed to potential security threat vectors)

MSTR shares (a security, convenient for trading, offers leveraged BTC exposure with no fees)

Spot BTC ETF (a security, convenient for trading, lower management fees than futures BTC ETF, GBTC Trust)

Futures BTC ETF (a security, convenient for trading, higher management fees and slippage)

Unlocking The Psychology Of Bitcoin's Bear Market

Important note:  a trough low occurs before a breakout to the upside.  We reached a Bitcoin secular low in November 2022, independently of when the next breakout will occur.

https://www.zerohedge.com/crypto/unlocking-psychology-bitcoins-bear-market

Comparing history of GLD to potential spot Bitcoin ETF

https://cryptoslate.com/insights/comparing-history-of-gld-to-potential-spot-bitcoin-etf/

Another day, another downgrade for America. Today it’s the banking sector

https://www.sovereignman.com/trends/another-day-another-downgrade-for-america-today-its-the-banking-sector-148019/

Report: US ETFs Signal Renewed Bitcoin Interest; BTC’s Limited 'Hot Supply' Eyes Bull Market

https://news.bitcoin.com/report-us-etfs-signal-renewed-bitcoin-interest-btcs-limited-hot-supply-eyes-bull-market/

Plan B's Bitcoin Stock to Flow Model

https://medium.com/@100trillionUSD/modeling-bitcoins-value-with-scarcity-91fa0fc03e25

Timing Bitcoin Halving

Fed Funds Rate and Equities: What's the Lag?

The Fed Funds Rate peaked at 7.03% in 2000.  The target rate was 6.5% in 2000, and was first dropped on January 3, 2001 to 6%.  It eventually bottomed at 1% on June 24, 2003.

This was the so-called tech bubble, so I'm tracking the NASDAQ.

The NASDAQ peaked at 5049 on March 10, 2000 and declined 78% to 1114 on October 9, 2002.

The Fed Funds Rate peaked at 5.41% in 2007.  The target rate was 5.25% until August 7, 2007.  The Fed dropped it to 4.75% on September 18, 2007.  It eventually bottomed at 0% on December 15, 2008.

This was the Great Financial Crisis, so I'm using the S & P 500 Index.

The S & P 500 peaked at 1565 on October 9, 2007 and declined 57% to 677 on March 9, 2009.

The takeaway message?  The Fed was late in dropping the targeted Fed Funds Rate, finally acting on January 3, 2001, a lag of 10 months after the NASDAQ peaked in March, 2000.  And the NASDAQ continued to plummet even as the FFR continued to decline.  In fact, the bottom in the NASDAQ tech bubble didn't occur until October, 2002, some 21 months after the Fed initially dropped the FFR.

With the Great Financial Crisis, the Fed acted more quickly, initially dropping the FFR in September, 2007. a month before the S & P 500 started cratering in October, 2007.  However, the Fed's aggressive easing did not prevent the S & P 500 from declining 57% to its March, 2009 bottom, thanks to the bank bailouts (TAFP, TALF, P-PIP, etc.).

In 2023, despite bank runs and another brewing financial crisis, the Fed continues to raise its targeted FFR.  When they finally do pivot and drop the FFR, it will probably be too little and too late.  Based on the two most recent cycles (and this one should be worse as debt loads and the insolvent Fed's balance sheet is more leveraged than ever), we can expect equities to face severe headwinds for the next 12 to 24 months, post-FFR finally declining (probably this summer).  The silver lining in all this is the S & P 500 peaked on December 29, 2021 at 4793, so we are off our all-time highs (currently 4109 at the time of this writing).  The key question then becomes is the bottom in?  Will bank runs be ring-fenced and contagion avoided?  And how much liquidity will be needed to prevent contagion of counterparty risks?  Monetary authorities have hinted at between $2 trillion and $18 trillion.

A side effect will be inflation as the Fed and US Treasury will provide trillions in liquidity and credit in an attempt to cushion collapsing financial markets if they do indeed collapse, with the latest vehicle dubbed the BTFP.  https://www.federalreserve.gov/monetarypolicy/bank-term-funding-program.htm

Foreign financial institutions will also be feeding at the trough in the form of currency swaps.

But don't worry, it's not "QE", so all is well.  /sarcasm

Disclaimer: The content on this site is provided as general information only and is not investment advice. Content should not be construed as a recommendation to buy or sell any specific security or financial product, or to participate in any particular investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The author(s) may or may not have a position in any security referenced herein. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Any opinions, news, research, analyses, prices, or other information contained on this site is provided as general market commentary, and does not constitute investment advice. The author will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your professional investment adviser before making any investment decisions. Perform your own due diligence.

Silvergate Short Squeeze?

February 15, 2023, 12:42 am email to business partners:

Silvergate is the most shorted stock right now

Gregory Nguyen <nguyen.greg@gmail.com>	12:42 AM (0 minutes ago)
to Keri, Edwin

Short squeeze coming.  $14.50 low yesterday, closed at $17.36.

3 Things Most People Don’t Know About Gold, Bitcoin, and Money

I first blogged about Bitcoin in 2011 and 2013.  This one penned in 2023 does a good job of covering Bitcoin from a high altitude.

https://internationalman.com/articles/3-things-most-people-dont-know-about-gold-bitcoin-and-money/

2023: FOURTH TURNING MEETS MASS FORMATION PSYCHOSIS

https://www.theburningplatform.com/2023/01/22/2023-fourth-turning-meets-mass-formation-psychosis/

DEAR NORMIE, DON’T BUY BITCOIN

https://bitcoinmagazine.com/culture/dont-buy-bitcoin-until-you-learn-more

Where Did All the Workers Go?

https://infonomena.substack.com/p/whered-all-the-workers-go

Fiat Standard

https://twitter.com/saifedean/status/1613474102672506883?s=20&t=_CGgiBDsaVvKVXhECBzleg

Pfizer's History of Fraud, Corruption, and Using Nigerian Children as 'Human Guinea Pigs'

https://kanekoa.substack.com/p/pfizers-history-of-fraud-corruption