The Genius of Michael Saylor (Why Bitcoin will be blowing up)

If you ask any Bitcoin expert they’ll tell you that Michael Saylor is either an idiot or a genius, but almost everyone agrees that he’s an extreme risk taker. His company Microstrategy is the largest institutional buyer of Bitcoin, and not only are they not slowing down their buying, but they’re pushing the petal to the metal and buying more furiously than ever.

This week, Microstrategy completed a $500 million convertible 5-year note offering that was priced at 6.125% and oversubscribed by more than 4x! The money from that note is earmarked to buy more Bitcoin. One the same day this money became available, the company followed up with an SEC filing to begin selling a newly issued $1 Billion of stock, which is essentially earmarked to, you guessed it, buy even more Bitcoin.

So what’s going on here? Is Michael Saylor a gambler, a fanatic, an idiot or a genius? If we do a deep analysis of his action, the answer becomes very clear: he has found a way to invest that cannot fail unless the rules of the game are changed. It’s a guaranteed winning play, and understanding what’s actually happening can allow anyone to play along and win their share of the wealth he’s begun to generate.

To explain his new investment strategy, we should first understand how stock buybacks really work. Not the way they work in a technical sense, but how they work to pump stock prices and make people rich. This is important because in a sense, this is what Michael is doing, only he’s found a way to guarantee the outcome.

Let’s imagine a company that has an after tax profit of $1 million per year, and the stock is trading at $10 per share. For the sake of argument, let’s also imagine that this company can borrow funds at close to zero percent interest (thanks to the Fed’s generosity). The company could reinvest its earnings in an effort to grow its business and have a long term benefit, but with interest rates near zero, it has a far easier and more lucrative option:

The company uses its $1 million to buy back its own shares. This decreases the number of shares outstanding without changing the earnings, so the stock value will go up — let’s say it rises to $12. With this new share price, and solid earnings, the company can essentially use its stock as collateral (just as traders can borrow against their stock positions to buy on margin). With the “collateralized” loan at zero cost, the proceeds are then used to buy more stock, raising the price to $14. Since the stock has increased in value, there is now extra room on the “collateral” account against which the company has borrowed, so they can now borrow more money. This new money can be used to buy stock raising it to $16 dollars…

Creating a virtuous cycle that fuels massive stock market bubbles…

But this system has a few potential points of failure, and if it fails, the company implodes (and gets bailed out by the Fed, thanks again!).

If a shock event takes place and the company is forced to come up with cash, the cycle can quickly reverse itself. The company may be forced to issue stock and drive the price down, which could trigger capital calls and collapse the entire house of cards. If interest rates rise and the company needs to refinance their loans, the system can also collapse.

What Michael Saylor has done through Microstrategy is totally eliminate the potential points of failure while keeping the virtuous cycle intact. Here’s how he’s done it:

Knowing that Bitcoin is a permanently finite asset, he’s started this round with a massive wallet with enormous value. Lenders line up with unlimited offers of cash in exchange for a 6.125% interest rate that is secured by billions of dollars worth of Bitcoin. They feel (correctly) that they can’t lose, since their loan is fully secured many times over.

With $500 million in hand, Michael buys Bitcoin. Does the price matter to him? Yes, but not in the way it would matter to us. For Michael, if he buys and the market moves up, his wallet grows by far more in value than he would ever save by trying to buy as cheaply as possible! So he buys and drives the price higher.

Since a higher value for Bitcoin raises the assets of Microstrategy, the stock price of the company rises.

And here’s the genius! Instead of borrowing against the stock to buy more stock, they sell more stock to buy more Bitcoin. The sale of stock dilutes existing shareholders, but since the proceeds are immediately used to increase their Bitcoin holdings, just like an ETF, the net result is that the stock value is unchanged against the value of Bitcoin before he starts buying with that new cash. But spending a billion dollars buying Bitcoin in the open market will absolutely increase the price of Bitcoin, and this higher value of Bitcoin increases the value of their stock!

This is only guaranteed because of the finite nature of Bitcoin. No matter how much the price rises, new miners can’t add to the amount, they can only compete for the same rewards. This is different from any other asset, and its why the laws of supply and demand don’t choke the Microstrategy system out. The market can’t correct to the new price by increasing the supply.

So Bitcoin goes up in value, and as it rises, the amount that was used to secure the Bond offering now is worth much more than necessary for collateral, so there’s room for another bond offering that will again be oversubscribed… And there it begins again, the virtuous cycle of: Sell bonds, buy Bitcoin and raise the value, sell stock at the higher price, use the cash to buy Bitcoin and raise the value, sell more Bonds and repeat forever.

So what happens if the price of Bitcoin goes down you ask? Absolutely nothing!

The bonds are always secured with much more Bitcoin than is necessary, so there’s never a capital call on the bonds. There is no risk that more stock will need to be sold to cover a crisis, because stock is never used to secure loans. If the price of Bitcoin drops, Microstrategy’s stock will indeed drop along with it, but if that happens they simply sell more stock at the lower price to buy more Bitcoin at the lower price and they still win! They dollar cost average their buys down and that adds even more value to the company. This buying on dips also has the added benefit of stopping price drops from becoming crashes.

For figuring this out, Michael Saylor definitely deserves to be respected. He is, in fact, a genius.

And from his genius, a new method for running a hybrid ETF/Public company that can perpetually increase the value of Bitcoin has come to life!

Trade accordingly!

(This is not investment advice, and I am not a financial advisor, nor am I in any way qualified to give you investment advice. You should do your own research and talk to a qualified professional before risking any money in investments).