KEY POINTS

  • Microstrategy took months of deliberation before settling on purchasing Bitcoin
  • The firm said it expects negative real returns on U.S. dollars
  • The company is seeking maximum long-term value to its shareholders through Bitcoin

Business intelligence company MicroStrategy disclosed in an SEC filing that it has purchased 21,454 bitcoins in a “capital allocation strategy” to protect the firm against inflation.

The billion dollar publicly traded firm said the Bitcoins were bought at an aggregate price of $250 million and the purchase is pursuant to a two-pronged strategy it revealed to investors during its Q2 2020 earnings call on July 28.

While the first prong is about returning excess cash to shareholders, the second prong involves investing in alternative assets. During the earnings call, Microstrategy said it has a large amount of U.S. dollars on its balance sheet and has carried it for a while. Over time, however, the yield on these dollars has decreased but was projected to be higher in the future so the company did not address the issue for some time.

The company now foresees more fiscal stimulus from the Federal Reserve and a low-interest rate environment in the future. The firm expects a negative real return or a negative real yield on U.S. dollars.

“It would not be prudent to continue to hold a large portion of USD as our treasury strategy,” said Michael Saylor, Microstrategy’s CEO, during the earnings call. He also argued that the hope for large dollar reserves to eventually have positive yields has faded and that gold, silver, and Bitcoin are showing strength.

Saylor said it seeks maximum long-term value for the company’s shareholders through Bitcoin, which he described as the most widely-adopted cryptocurrency, a dependable store of value, and an attractive investment. He also said the benchmark crypto has the potential to appreciate more than holding cash so Bitcoin is now the company’s principal holding in its treasury reserve strategy.

The CEO also said the decision to invest in Bitcoin came after months of deliberating about the company’s capital allocation strategy. However, the confluence of macro-economic factors like the COVID-19, fiscal stimulus and global economic uncertainty led to the belief that the long-term value of fiat currencies as well as many other traditional assets will depreciate.

Bitcoin’s properties, like its global acceptance, brand recognition, network dominance, and technical utility, made it superior as the asset class can become a long-term store of value.

“We expect its value to accrete with advances in technology, expanding adoption, and network effect,” Saylor continued. 

Microstrategy’s investment into Bitcoin may potentially tie the company to the benchmark cryptocurrency’s performance. If investors equate Microstrategy’s valuation with Bitcoin’s price action, it will join online retailer Overstock, whose CEO Patrick Byrne acknowledged in 2018 his company’s stock price has a correlation with the price of Bitcoin.

Nasdaq 2013 3 The Nasdaq MarketSite is at New York's Times Square. Photo: Getty Images