MicroStrategy Increases Bitcoin Holdings – What Does This Mean?

David Hamilton

@DavidtheWriter

BTCMicroStrategy

Two weeks ago saw another major development in the Bitcoin sector after the world’s largest independent publicly-traded business intelligence company, MicroStrategy, completed the purchase of 16,796 more Bitcoins. The decision follows a similar maneuver a month earlier. In total, MicroStrategy is now the proud owner of 38,250 Bitcoin.

In total, this latest round of Bitcoin investments aggregated out to $175 million, including fees and other expenses. The maneuver was part of the company’s larger strategy to sure up reserves via a pivot towards other asset classes rather than fiat currency.

The company originally expressed its desire to release its second-quarter 2020 financial results on July 28, 2020. In the statement, MicroStrategy outlined its two-step approach to repositioning its investments. In total, MicroStrategy took six months to approve its shift to Bitcoin.

MicroStrategy Part 1

The first part of the plan included a cash tender offer for up to $250 million of MicroStrategy’s class A common stock. This offer was brought to the market via a modified Dutch Auction offer. The maneuver’s goal was meant to return a portion of the company’s excess cash to shareholders.

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MicroStrategy Part 2

The second part of the strategy called for the firm to invest an additional $250 million in one or more alternative investments or assets. This strategy became a reality on August 11, 2020, when MicroStrategy announced the purchase of 21,454 Bitcoins. This original Bitcoin investment had an aggregate purchase price of $250 million.

How MicroStrategy Acquired its First Round of Bitcoins

Microstrategy employed a unique purchasing strategy to make its investments. According to executives, the company traded continuously for 74 hours. In total, the company executed 88,617 trades. This rate averages out to around 0.19 BTC every 3 seconds for a total of $39,414 BTC per minute. Interestingly, executives stated that they were prepared to make a major purchase of around $50 million if the market was to drop 1-3%.

Off-Chain Transaction

At the core of MicroStrategy’s plan was the use of off-chain transactions. Off-chain protocols such as the Lightning Network relieve congestion from the Bitcoin blockchain and provide users with more efficiency and functionality. MicroStrategy, and many others in the market, recognize off-chain protocols as the natural evolution of Bitcoin.

Round Two for Bitcoin

The third part of this strategy involved MicroStrategy purchasing an additional 16,796 Bitcoins this week. The company utilized a dollar-cost averaging strategy that saw the firm pay $11,111.11 per Bitcoin on average.

Bitcoin Reserves

The decision to go all-in on Bitcoin reflects MicroStrategy’s belief that the world’s first cryptocurrency has matured. Today, more industries, countries, and individuals recognize Bitcoin as a legitimate investment asset. Additionally, there are many reasons that this asset may outperform cash reserves over the coming years. 

Notably, Microstrategy spent months evaluating and deliberating to determine its new capital allocation strategy. Discussing the driving motivations, executives cited various social, political, and economic factors that influenced their decision. Specifically, the firm pointed to the current economic and public health crisis by the COVID-19 pandemic.

Printer Goes Brrrr

This pandemic has caused great economic strife globally. Additionally, it has spurred several unprecedented government financial stimulus measures. These measures include a large amount of quantitative easing and other measures that raise the risk of runaway inflation. In one instance, US lawmakers approved 3 trillion in pandemic aid.

Bitcoin will provide a hedge against this inflation once it begins to accelerate. The firm believes that Bitcoin will provide MicroStrategy with higher returns over the next decade. Saylor pointed to a maturing of the cryptocurrency market as a sign of what’s to come. He explained that Bitcoin had reached new global acceptance levels, brand recognition, ecosystem vitality, network dominance, architectural resilience, and technical utility. 

Digital Gold

Saylor went as far as to call Bitcoin “digital gold.” He stated that this unique financial instrument is “harder, stronger, faster, and smarter than any money that has preceded it.” In this way, you can see the factors that drove MicroStrategy to go full Bitcoin.

Impressively, Saylor was originally a Bitcoin Naysayer. In 2013, he tweeted about the cryptocurrency. He stated that “Bitcoin’s days were numbered.” However, like all savvy investors, MicroStrategy could reevaluate its position and make the right decision.

Bitcoin Matures

Analysts continue to point to numerous market indicators to suggest Bitcoin’s maturity. For example, the number of Bitcoin addresses holding at least $10 worth of cryptocurrency reached a record high of 16.6 million this year. This growth represents a major milestone because there are now more addresses with a small balance than existed at the crypto bull market’s height. Specifically, Bitcoin wallet use is up 14% from the previous peak of 14.5 million reached in January 2018.

New Bitcoin Adoption Cycle

These statistics have analysts stating that Bitcoin has entered a new adoption cycle. Keenly, Bitcoin adoption has gone up by 27% since the major market corrections in March. A combination of factors has driven this adoption. Today, the market has more faith in blockchain technology. Additionally, there are more cost-efficient ways to move Bitcoin globally.

A growing crowd of researchers predicting Bitcoin will challenge its all-time high in the coming months. This growth will spur new investments due to FOMO. At the same time, central governments around the world are attempting to launch their own blockchain-based currencies. These Central Bank Digital Currencies (CBDCs) help introduce digital currencies to the public. This year saw China take the lead in this race with its Digital Yen pilot program.

World’s Top Crypto

Discussing the decision in a recent interview, Michael J. Saylor, the CEO of MicroStrategy Incorporated, stated that “Bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset.” He went on to compare potential future ROIs of cash investments versus Bitcoin. Saylor explained that Bitcoin shows more long-term appreciation potential than holding cash. 

SEC Notification

Microstrategy followed a protocol of full transparency during the investment strategy. Specifically, the company notified the SEC of its decision. The report explained that Microstrategy intends to utilize two forms of reserve assets moving forward. Specifically, the first types of assets listed were cash, cash equivalents, and short-term investments.

The second type of investment was obviously Bitcoin. The report states that Microstrategy will utilize Bitcoin as its primary treasury reserve asset on an ongoing basis. Executives also included a statement that explained that the market conditions and anticipated business needs for cash assets, including future potential share repurchase activity, would guide the investment moving forward. 

The filing states that Microstrategy may increase its Bitcoin holdings from the original $250 million purchase. This statement proved to be prophetic as the firm spent another $175 million this week on Bitcoin. It’s yet to be seen if the firm will continue with this strategy and make another major crypto investment.

Future of Bitcoin

MicroStrategy just showed the world that Bitcoin could scale effectively as a store of value. The firm conducted 78,338 off-chain transactions during its first rounds of trading. Amazingly, the firm then condensed these transactions down to just 18 on-chain transactions.

Market Implications

Saylor pointed out that on-chain transactions for major investors may become a thing of the past. He echoed the belief of other well-known Bitcoinist that on-chain transactions will be a rarity for major investors in the future. Specifically, he said, “99.98% of all transactions will be off-chain, and assets-at-risk will be in cold storage 99.92% of the time.“

Bullish Moves

Microstrategy’s maneuver is seen by many as signs of what’s to come. For years, there has been talked of institutional investment funds pouring into Bitcoin. This latest news falls in line with this belief. It strengthens Bitcoin’s support as a reserve currency, and it provides other firms with more confidence to enter the market.

Saylor pointed out that 3,500 publicly traded firms could enter the Bitcoin market in the future. He estimates that just a 1% conversion rate would push Bitcoin to a record $2 trillion market cap. You can expect to see other major investment firms join the crypto movement as fiat currencies become more unstable.

MicroStrategy SOV

The news places MicroStrategy in a close second behind the global digital currency asset manager Grayscale in terms of large Bitcoin reserve purchase. This year saw Grayscale’s Bitcoin trust increase in value by over $1.1 billion from over 125,000 BTC to 387,000 BTC. MicroStrategy’s purchase had many in the market, stating a Bitcoin buying race had begun.

MicroStrategy (Nasdaq: MSTR)

Microstrategy is the largest independent publicly-traded business intelligence company. The company provides modern analytics on an open, comprehensive enterprise platform. Currently, the company has some of the most exclusive clientele globally, including multiple Fortune Global 500. Consequently, Microstrategy is an industry leader.

Microstrategy was one of the first companies in the enterprise business intelligence software sector. The company now possesses more than 30-years of experience anticipating technology trends. Their latest maneuver demonstrates that the economy’s digital transformation has sped up due to new unprecedented threats such as Covid-19. 

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Microstrategy continually proves its commitment to its shareholders. The company is prepared to make the changes necessary to continue to keep the firm growing and profitable. For now, Microstrategy is leading the investment community by example. You can expect to see this firm and its shareholders celebrate some hefty ROIs as Bitcoin continues to experience record adoption globally.