Bitcoin, Cheap Debt, and Speculative Attacks
On February 19th, MicroStrategy completed a $1.05 Billion Offering of Convertible Notes at 0% Coupon and used those funds to purchase an additional ~19,452 bitcoins.
This is their 2nd Convertible Notes offering where they chose to take on cheap debt to purchase more bitcoins. As February 24th, MicroStrategy holds ~90,531 bitcoins acquired for ~$2.171 billion at an average price of ~$23,985 per bitcoin in their treasury, topping all other publicly traded company’s bitcoin holdings by a wide margin.
The MicroStrategy Bitcoin Playbook Was Foreshadowed in 2014
Simply put, $MSTR is borrowing $900M at a 0% interest rate, and pouring it all into Bitcoin. All companies can follow this playbook. They borrow against their stock at near zero rates, and use those dollars purchase Bitcoin. This strategy boils down to a speculative attack against the dollar, betting on it’s continued depreciation. This hypothesis, turned real world implementation was outlined in this article written back in 2014 by Pierre Rochard.
The crux of the argument lies in the dichotomy of two forms of money:
The first, US Dollars, which are designed to slowly lose purchasing power throughout time via inflation, quantitative easing, and fiscal spending.
The second, Bitcoin, which is a money that is hard-capped, and designed to become more scarce over time.
The “speculative attack” is based on the premise that this trend will not only continue throughout time, but accelerate as the money supply continues to be diluted and purchasing power sapped away through money printing, QE, and fiscal policy. This raises the potential for a snowball effect — as more people realize the superior money, more will gravitate towards it.
A Battle of Two Monies
In economics, this is embodied in a concept called “Gresham’s Law, which posits that “Bad money drives out good.” For example, if there are two forms of commodity money in circulation, which are accepted by law as having similar face value, the more valuable commodity will gradually disappear from circulation.” When given the choice, most will opt to trade something abundant for something scarce.
In this case, the Federal Reserve is admitting to “flooding the system with dollars” as Bitcoin demand seems to be hitting new highs every other day. This dichotomy is driving people towards finding a superior store of value for long term savings. Dollars just do not cut it as a savings vehicle. They are too plentiful.
Simultaneously, alongside the money flood, Bitcoin is being soaked up like a sponge by institutions, hedge funds, and big money investors. Bitcoin offers not only an inflation hedge, but an offramp to a completely uncorrelated monetary system, with a disinflationary finite money supply. It is a superior, digital form of hard money that exists wholly outside of the traditional financial system.
MicroStrategy is the first to take advantage of the cheap debt available to large corporations, but likely will not be the last .The more companies we see allocating to Bitcoin, the more likely it becomes that others will follow as Bitcoin becomes increasingly derisked for more money managers. Many of those companies facing a melting ice cube of USD reserves will likely seek to borrow the weaker, plentiful money to stockpile that harder, scarcer money to preserve their balance sheet into the future.