The financial news was dominated this week with the announcement from the world’s richest man, Elon Musk’s company, Tesla, that it has bought US$1.5 billion in bitcoin. In reaction to the announcement, bitcoin surged, some 15 percent, to record highs above $43,000. In Asia trading it moved to $47,000. Bitcoin was trading in the $30-35,000 zone in the fortnight that Tesla was accumulating, so it is already up over 30 percent – $500m – on its investment. Nice work if you can get it.
This whole story began back in March 2020 with one Michael Saylor, CEO of Nasdaq-listed Microstrategy (MSTR). Saylor looked at the extraordinary money printing by the Federal Reserve in reaction to the Covid-19 crisis. He then looked at his company’s balance sheet: $500m in cash. “I have a mega, mega, mega problem,” he thought. “I have a lot of cash and I’m watching it melt away. Asset price inflation is through the roof. My costs are going up and my cash is yielding zero. If I have $500m in cash and it’s losing 10 percent, and I have $50m in operating income each year, we are running just to stand still.”
Saylor had “a fiduciary obligation” to his shareholders to do something about it. But what? He looked at his options. Buying back shares would have taken too long. He couldn’t find $500m of commercial property to buy at what he felt to be a fair price. A basket of shares wasn’t compelling to him, nor is he a fan of gold. So he spent the money on bitcoin. Then, in early December, he raised another $650m via a convertible senior note and put that entire sum into bitcoin too. In total, he spent $1.125bn buying over 70,000 bitcoins, at an average of $16,000. He has since tripled his money.
Issuing debt to buy bitcoin is a bold move, but it paid off. For 15 years, Microstrategy’s share price had traded in a range between $100 and $150. Now it is trading north of $900.
Over the course of his bitcoin epiphany, Saylor has become the most extraordinary spokesperson for the space, appearing on numerous widely shared podcasts and building a huge social media following. Plenty of CEOs have large cash piles and face the same issues as Saylor, so he has set up “Bitcoin for Corporations”, an accelerated course aiming to teach corporate managers how to do what he did, and last week held a virtual conference attended by representatives from over 1,400 different corporations, including multiple CEOs.
One of those whose interest Saylor’s cheerleading piqued was Tesla CEO, Elon Musk.“If you want to do your shareholders a $100bn favour,” said Saylor to him on Twitter, “convert the Tesla balance sheet from dollars into bitcoin. Other firms on the S&P 500 would follow your lead and in time it would grow to become a $1 trillion favour.” “Are such large transactions even possible?” Musk replied. “Yes. I would be happy to share my playbook with you offline – from one rocket scientist to another.” (Saylor graduated from MIT with a major in aeronautics and astronautics).
It seems the two rocket scientists did converse out of the public eye of Twitter. In January Tesla announced that it might hold some of its cash reserves in “certain alternative reserve assets including digital assets, gold bullion [and] gold exchange-traded funds.” Last week Musk said he thought bitcoin “was on the verge of broad acceptance”. Then this week, true to Saylor’s playbook, Tesla announced to the US SEC, “We invested an aggregate $1.5 billion in bitcoin … and may acquire and hold digital assets from time to time or long-term”.
Twitter’s Jack Dorsey, via his payments technology company Square, has already taken the plunge into bitcoin. The well established and highly respected UK fund Ruffer, which has roughly $28bn under management, allocated 2percent of its treasury into bitcoin in November 2020, doubled its money, and took half off the table. Numerous US corporations are doing and have done the same.
It is not so much that Dorsey, Saylor and Musk have paved the way and made bitcoin an acceptable place to park corporate cash. Rather, they have created an enormous FOMO (fear of missing out) effect. CEOs will look at the success of Saylor’s move and the erosion of the purchasing power of their own corporate treasuries, and feel the urge to follow. Many CEOS will come under pressure from their shareholders, who will demand it a piece of the action. Come earnings calls, it won’t so much be a case of why did you invest in bitcoin, as why didn’t you?
Elon Musk’s company, Tesla, that it has bought US$1.5 billion in bitcoin
This is opening up a scenario known as hyperbitcoinisation: the rapid rush to adopt bitcoin. Because of bitcoin’s finite supply – only 21 million will ever be created, as much as 20percent is lost and another 40percent is tightly held in cold storage and unlikely to come to market any time soon – this puts an extraordinary upward pressure on prices.
As if that wasn’t enough for the bitcoin bugs, Tesla added in its SEC filing: “We expect to begin accepting bitcoin as a form of payment for our products in the near future”. In other words, you’ll soon be able to buy Teslas with bitcoin. Does this mean every other car company will have to do the same? Almost certainly.
Paypal’s Peter Thiel is a known fan and recently made it possible for Paypal users in certain jurisdictions to buy bitcoin. Visa has partnered with 35 various bitcoin and cryptocurrency platforms in recent years, and last week announced plans to help banks roll out bitcoin and cryptocurrency buying and trading services with a Visa crypto software program, set to launch later in 2021.
It is all part of the gradual mass adoption of bitcoin. First individuals. Next corporations. Next will be governments. You may think such a suggestion is absurd, but we are already starting to see signs of it. In Ohio, you can already pay taxes in bitcoin. The City of Miami has been buying. Other jurisdictions in Florida are moving to hold bitcoin, and accept it as a means of payment. In nations where the national currencies have been weak, but energy is cheap, there have already been moves. Both the Iranian and Venezuelan governments have set up extensive bitcoin mining rigs. Ukraine’s Ministry of Energy is evaluating a bitcoin mining centre to utilize the country’s excess nuclear power.
What was once some crackpot code favoured by a few computer nerds, libertarian misfits, drug dealers and speculators is entering the mainstream.
Dominic Frisby is the author of Bitcoin: the Future of Money? (2014), available at all good bookshops with the audiobook, read by the author, on Amazon.
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