Bitcoin – Michael Saylor invokes bull run
In a 1.5-hour interview, Michael Saylor revealed the catalysts for the next Bitcoin bull run.
“Fair Value” Accounting
Upcoming changes in accounting standards to accommodate Bitcoin pave the way for the next bull run.
“Bitcoin will likely be accounted for as an indefinite and tangible asset until 2024. This means that companies holding Bitcoin in their treasuries will incur losses in case of a price drop, but no gains in case of an increase. It’s a one-way (downwards) ratchet effect on their balance sheets. BTC is currently valued at the lowest price without ever being able to record its current price on the balance sheet,” stated Mr. Saylor.
In other words, companies can only improve their balance sheets when they sell BTC. This is problematic since the ultimate goal is to use Bitcoin as collateral for borrowing rather than selling it. The accounting change allowing gains to be recorded on the balance sheet is excellent news.
Traditionally, the most liquid and least risky financial asset favored by treasury managers is the local currency. However, holding cash leads to wealth erosion due to inflation. The higher the inflation, the more multinational corporations are incentivized to get rid of cash and buy back their shares.
The problem is that in case of unforeseen events (e.g., an economic downturn due to Covid), a lack of cash reserves can result in bankruptcy.
Multinational corporations also invest some of their treasury in sovereign debt. It is considered low-risk since governments, especially the United States, are unlikely to default.
The Problem of Sovereign Debt
There are risks associated with the duration of the debt and potential interest rate variations. For instance, Turkey has a policy rate of 25%, while Argentina’s is 118%.
The value of long-term government debt securities depends on interest rates. Securities purchased just before a significant rate hike can plummet in value. If a company is forced to sell these securities before maturity for any reason, it incurs a massive loss. The Silicon Valley Bank (SVB) has experienced this
Here’s proof: The value of US government 30-year bonds (offering a 1.25% yield) has dropped by 50%.
Moreover, although sovereign debt is considered “safe” and more liquid than other assets, it doesn’t generate significant returns. A company holding a substantial amount of sovereign debt yielding 5% will only receive 3.5% after taxes.
Considering that if the money supply increases by 7% per year (the average over the past 100 years), cash reserves need to yield at least 7% annually, all else being equal.
Given the low yields of cash and sovereign debt, Mr. Saylor notes that multinational corporations traditionally resort to two other strategies (aside from share buybacks):
- Paying dividends: Shareholders will face the same issue,
- Acquisitions: Purchasing assets for better returns.
Not a Good Idea, according to the CEO of Microstrategy:
“In my experience, in 30 years of running a listed company, all my competitors have disappeared because of bad buyouts. They overpaid for companies that weren’t worth much, because they were desperate to buy something to support the value of their shares.”
Bitcoin: the new treasury strategy
For Mr. Saylor, Bitcoin is an asset that will appreciate much faster than inflation due to the limit of 21 million coins.
“Starting in 2024, CFOs and CEOs will have the option to buy Bitcoin instead of buying Treasury bonds. It will be possible to hold a liquid and fungible ‘commodity’ in treasury that will likely yield 14% per year in the long run. This is even after the next bull run, during which Bitcoin will appreciate faster than 14% per year. In ten or twenty years, if the money supply continues to grow by 7% per year, Bitcoin will still appreciate by 14% per year.”
“Placing treasury in Bitcoin is not the same as placing it in soybeans, silver, gold, oil, or natural gas, which are real commodities. More can be produced if their prices triple. Gold miners will produce more gold, farmers more soybeans. Commodities are not scarce. The same goes for the stocks of multinational corporations. Any S&P500 company can issue more shares. This is not the case with Bitcoin.”
“What comes closest to Bitcoin would be a piece of land in Miami Beach. Prices have multiplied by 1000 in the last century. The reason being that no amount of money, technology, or expertise can create more square meters of beachfront in Miami Beach. Unfortunately, Miami Beach square meters are not a suitable asset for corporate treasuries. I can’t trade them every day in the market. […] Quite the opposite of Bitcoin, which is a liquid and fungible digital rarity that can be easily added to your treasury.”
Where will bitcoin adoption come from in the next five years?
According to Mr. Saylor, Bitcoin adoption will come from various sources:
- Establishment of exchanges in every country.
- Peer-to-peer exchanges for goods and services using Bitcoin.
- Integration of Bitcoin by companies, investment funds, and sovereign wealth funds.
- Banks embracing Bitcoin.
- Spot Bitcoin ETFs.
Saylor believes that the ETF will be the “most significant bullish catalyst,” and that “those who can already buy Bitcoin on an exchange can consider themselves fortunate”:
“You can purchase one Bitcoin for $26,000 instead of $1,000,000. We are on the verge of witnessing Wall Street investing a significant amount of money in Bitcoin. Soon, most people will invest in Bitcoin by buying a share of an ETF from Fidelity or BlackRock.”
“In the long run, even banks will offer Bitcoin investment options. Others will hold the ETF because they believe it’s slightly easier. And there will always be maximalists who hold their own seed.”
In conclusion, Mr. Saylor believes that “Bitcoin will not replace fiat currency as a currency, nor short-term sovereign debt as the least risky asset.”
“If you are the Norwegian sovereign wealth fund, and you are comfortable with a hundred billion dollars in S&P500 stocks, you could allocate half of that to Bitcoin. And you could very well convince yourself that it’s diversification aimed at reducing risks. Bitcoin plays this emerging role as a diversifier.”
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Bitcoin, geopolitical, economic and energy journalist.
The views, thoughts, and opinions expressed in this article belong solely to the author, and should not be taken as investment advice. Do your own research before taking any investment decisions.