The Microstrategy Bitcoin Deal Is Much Bigger Than You Think
By: Jason Deane
Tags: Economics, Finance, Cryptocurrency, Bitcoin, Investing

The Microstrategy Bitcoin Deal Is Much Bigger Than You Think

Behind the numbers lies an even bigger story

That’s A LOT of Bitcoin. Image by Eivind Pedersen from Pixabay

We had barely stopped talking about the fact that a Nasdaq-listed company had just spent quarter of a billion dollars converting its “spare” cash to bitcoin last month (I covered it myself in this article), when Microstrategy’s CEO, Michael Saylor, casually slips into conversation that he’s done it again.

This time, his company has purchased another $175 million worth of bitcoin, bringing the total on the balance sheet to 38,250. It was just a month ago that the first investment was made and, at first, I couldn’t help thinking that he is attempting the world’s largest Dollar Cost Averaging purchase.

As before, Saylor’s words were eloquent and beautifully written, perfectly encapsulating his thinking in a handcrafted metaphor:

“We just had the awful realization that we were sitting on top of a $500 million ice cube that’s melting”

However, he went even further this time. Whereas most people, myself included, had assumed this was a hedge against almost certain inflation and a desire to protect those funds, he was actually thinking much bigger:

“This is not a speculation, nor is it a hedge. This was a deliberate corporate strategy to adopt a bitcoin standard.”

This thinking is a whole step change in the corporate world, and while only one other company has publicly announced they are buying bitcoin at this point — Tahini’s restaurant chain based in Canada — Microstrategy’s reasoning is utterly unique.

The market reacted positively to the news back in August, with Microstrategy’s share price jumping from $123 to $137 within 48 hours. This time around, the effect has been similar, with another price jump of over 9% to $155 within 24 hours of the transaction.

But that’s just a summary with the top line numbers. It gets far, far more interesting when you dig beneath the surface, so let’s take a look at the hidden story.

Behind the numbers

Microstrategy’s 38,350 bitcoin represents 0.18% of the entire world’s supply, and not just for now, for always.

Just as importantly, Saylor has made it clear that he intends for this investment to outlast his tenure, stating:

“I want something that I could put $425 million into for 100 years”

We can deduce, therefore, his commitment of moving to a “Bitcoin Standard” is a real one, and his bitcoin will not be back on the market anytime soon. That leaves only 99.82% available for everyone else.

But of course, that’s not actually the case. Block.one reportedly holds around 140,000 bitcoin (approximately 0.66%) and Grayscale also holds somewhere around 400,000 (approximately 1.9%) with, allegedly, plans to continue buying up to 3.5% of total stock, or 735,000 total bitcoin.

Once complete, that would take 913,250 bitcoin, or 4.34% of the total supply, out of circulation for a very long time, if not permanently — between only three organisations.

Even those numbers are not correct. Although bitcoin’s total supply is capped is 21,000,000 coins mathematically and theoretically speaking, it is actually far less in practice because of time and loss.

Right now, at the time of writing, bitcoin’s circulating supply is actually 18,490,581, not 21,000,000. It will take another 120 years for those units of bitcoin to become available as the exponential effect of incremental halvings take hold.

However, they almost certainly will exist at some point, unlike the estimated 4 million coins that have been lost or locked permanently as I covered in detail in this article.

Adding all these numbers together, the true number of bitcoin in circulation is probably only around 14,490,000. This means those percentages actually look more like this:

Microstrategy: 0.26% Block.One: 0.97% Grayscale (when complete): 5.07%

Of course, there are many other organizations and individuals who own large numbers of the “orange coin” as well, which further restricts the bitcoin that is freely available.

The Winklevoss twins, for example, are often cited as owning another 1% of the entire supply (more like 1.44%, when adjusted for the above) and there are many other big names who collectively probably hold another few percent between them.

The bottom line is that there is far less opportunity for other companies to be able to do this than people think.

Doing a ‘Microstrategy’

I find it hard to believe that there are not other companies looking to do the exact same thing now that the precedent has been set.

Saylor mentioned that his company had had to deal with a significant amount “of legal, custodial and security issues that stood in the way of publicly traded companies getting into crypto” before the purchase could be made. Presumably therefore, there is a lag, although privately owned companies would not have the same hurdles to deal with.

And this is where it gets interesting. Mathematically speaking, only around another 376 companies could ever match Microstrategy’s move in terms of absolute numbers.

This number is calculated by taking the currently available bitcoin and dividing it by the 38,500 bitcoin that Microstrategy have managed to secure.

Of course, this is a best-case scenario in terms of availability, and it doesn’t take into account the effect of price moves in terms of supply and demand, but let’s just go with it for now for simplicity’s sake and to make the point.

According to theglobaleconomy.com, there were roughly 4,400 publicly listed companies on U.S. stock exchanges in 2018, a number, incidentally, that has dropped considerably since then.

That means only 8.5% of those companies could hope to match that level of bitcoin reserve, assuming they had the capital. And some of them do.

But of course this is only U.S. companies and, since Bitcoin is truly global, we have to take account of the global picture as well.

Theglobalecomomy.com also puts the global average of publicly listed companies in stock exchanges across 70 developed countries at 597, meaning there are a total of 41,790 companies included in their numbers for analysis.

Now, should only 0.8% of those companies try and match Mircostrategy’s move, there would not be enough bitcoin to do it. Bitcoin is scarce, as in really scarce.

But even that isn’t the whole picture.

The “small print” in the analysis of the publicly listed companies above makes the following clarification in its definitions or inclusion:

Investment funds, unit trusts, and companies whose only business goal is to hold shares of other listed companies, such as holding companies and investment companies, regardless of their legal status, are excluded. A company with several classes of shares is counted once. Only companies admitted to listing on the exchange are included.

All of these companies are therefore excluded for statistical reasons, but they are not excluded from being able to purchase Bitcoin. And, since this same exemption has been applied across the globe, the real number of publicly listed companies that could try and do the same increases by many tens of thousands.

Given that these publicly listed companies have just seen Microstrategy’s shares rocket on the news, it seems likely their incentive to join the party has just increased as much as that share price.

And, for buyers who want to invest in Bitcoin but are unable to do so because of regulatory limitations, or simply because they don’t know how, they can now do it directly by purchasing the shares of the companies concerned.

There’s nothing to stop pension funds, for example, getting round any red tape over cryptocurrency purchases by buying Microstrategy stock directly.

And if that’s not enough to think about, when you add in private companies with strong cash reserves, the number of qualifying organisations globally must run well into the hundreds of thousands.

Even half a percent of these companies trying to duplicate the move will completely drain the available supply of Bitcoin.

With not just financial incentives but clear PR benefits as well, the temptation for the CEO of any large cash-rich organisation to follow Microstrategy’s lead and claim early adopter advantage must, surely, be high.

So who will make the first move now that the floodgates have been opened?

I have a feeling we won’t have to wait long to find out.