MicroStrategy CEO: Dollar, gold shortcomings led company to put 90% of balance sheet into bitcoin

Nasdaq-listed Microstrategy isn't a bitcoin company, per se. But its CEO is arguably a bitcoin CEO.

Michael Saylor and MicroStrategy recently made headlines in the crypto and financial media for purchasing a total of $425 million worth of bitcoin with the company's treasury balance. The move makes MicroStrategy the first publicly-traded company to hold bitcoin on its balance sheet.

The Block spoke with Saylor earlier this week to understand his firm's bitcoin bet. Saylor said, compared to gold and the U.S. dollar, bitcoin is a superior asset for a treasury given it is not deflationary by design.

“Gold is defective in the 21st century,” he said of bullion. "It boils down to a very simple principle. It's going to debase between 2% and 4% a year, certainly over the next hundred years." As for the dollar, Saylor said, the problem is monetary policy expansion and inflation — which comes at the cost of purchasing power.

In what might be considered a testament to the depth of the company's bitcoin bet, Saylor revealed in the interview that 90% of MicroStrategy's treasury balance is in the form of bitcoin.

Below are some highlights from Saylor's conversation with The Block. 

From “bitcoin days are numbered” in 2013 to bitcoin maximalist in 2020? 

I was wrong in 2013 and I paid the price of being wrong.

You would have had to take a lot more risk in 2013 to buy $425 million worth of bitcoins. And we know what the risks are in 2020 hindsight. Right? You have to live through the forks and you would have had to live through the religious wars of whether transaction speed or transaction capacity is more important than a store of value. And then how do you feel about scalability and you would have had to live through the regulatory uncertainty. What will be the tax treatment of bitcoin, what will be the monetary treatment, can you use it, and of course, there's still some uncertainty there.

The longer something's been around, the longer it's likely to be around. Time is the ultimate volatility engine to stress a system. So I would say I thought about bitcoin with 0.1% of my energy in 2013 and I didn't have a compelling need for it at the time. And so it was easy to dismiss it based upon all of the risks I could imagine.

Bitcoin has done extraordinarily well and matured as an asset class. And that’s the maturation of miners, exchanges, developers, analysis, customers, custodians, and crypto banks. All of these things make, of course, make bitcoin far, far, far less uncertain today than it was in 2013.

I would even say that the maturation of the asset class between 2017 and 2020 is extraordinary. So I think that bitcoin is the perfect solution for a treasurer or a treasury as a store of value. And I think that anybody that has the ability to buy bitcoin in 2020 at the same price they could have bought it in 2017 has the good fortune of those three years of development.

I believe in bitcoin. I think it's just one of the most extraordinary achievements in the history of the world. The best money ever created. It can become 100x larger than it is today.

On the 90% allocation to bitcoin 

If you define the balance sheet as cash and cash equivalents and liquid assets that we convert into cash in a matter of days, then I would say we've invested something around 90% of the balance sheet [in bitcoin].

I think that there's a very clear model in my mind and most people haven't written about it. I don't know if they have articulated it. If you run a company on the gold standard, then the way you would operate, let's say you have a $500 million business. I'm going to give you a simple model. Business is $500 million and it generates $50 million in cash flow a year. And let’s say you have $550 million in your treasury. This is a hypothetical business, which is similar to ours.

But I'm just making it straightforward so it's a simple thing to explain for analogy.

So I have a business that generates $500 million in revenue and $50 million in cash flow and I have $550 million dollars in liquid assets. If I adopt the gold standard, I would ask myself the question, how much do I need for operating cash and the cash accounts. About $50 million. I’d put that into fiat currency. Now that fiat currency is in a mixture of dollars, euros, yen, won, Argentine pesos, South African rand, UAE dinar, etc. lots of different currencies, Singaporean dollars, Aussie and Canadian. And I need to have those fiat balances in every one of those countries because I have subsidiaries and I have employees and counterparties and landlords and my customers are probably paying me in that fiat currency. So those are my operating accounts. And you can figure out how much working capital I’d need. And I can't pay my employees in gold, nor can I pay my landlords in gold, nor would I want to.

So I would take all my excess treasury and I would go buy gold. I'd probably buy gold bars. I'd put it in a bank vault somewhere and it would sit there. That's the gold standard. And you would have about 90% of your tangible assets on your balance sheet in gold and 10% in working capital, which is fiat.

And then every year you would generate more revenue, sweep more cash. As you have excess cash, you sweep it into gold. And you would do this because maybe fiat currency is inflating. The money supply is inflating at 7% a year. And the gold monetary supply is inflating at 2% a year. So theoretically, if every country inflates fiat at 7% a year, which Saifedean [Ammous] in his book, The Bitcoin Standard, points out that that's been the case for the last decade. But I happen to know doing business and like I do business in Argentina, I remember in Argentina we had $1 million in cash 10 years ago. The government forced us to convert it to pesos. And then the next day they devalued the peso 10 to one. And I had 100,000 worth of pesos in 24 hours. But before they forced us to convert it into pesos, they made it illegal to leave the country with it. So I'm doing business in Argentina. I'm doing business in the peso, I'm attempting to sweep it into dollars, but ultimately a bank and the government can direct the bank to what they want. That's a challenge for us. So if we could sweep it into gold, then the government has to seize the gold and devalue it.

So back to this idea. You know, you're running a company. Are you on the dollar standard? Are you on the gold standard or are you on the bitcoin standard?

If you operate a company on the dollar standard. By the way, you're a global multinational. I can't do business in dollars in Europe, I have to do business in euros. So as a practical matter, if I operate on the dollar standard, I sweep $500 million into the U.S. dollar, but the money supply is expanding by 7% a year, which means asset inflation is 7% a year, which means the cost of capital. If you wish your capital to maintain its purchasing power of 7%, that means that if my yield, my nominal yield is not 7%, I'm losing purchasing power.

So sweeping $500 million into US Treasuries yielding 2% while the nominal cost capital of 7% means that you have a net 5% loss, which is $25 million a year loss in purchasing power. So the problem with being on the dollar standard in a normal year is you make $50 million in cash flow and you lose $25 million in purchasing power.

You're only getting half of the benefit of your work. That's why you would go from the dollar standard to typically, there are two solutions. One is you go from the dollar standard to the gold standard, you know, assuming that gold worked. The second is, I guess you invested in some kind of market basket of high growth equities that are growing their cash flows faster than the expansion of the monetary supply. That's why it makes sense to buy Apple, Amazon, Facebook, Google, because when they're growing 20% a year and the monetary supply is growing 7% a year, you can stay ahead of the natural asset inflation rate and then stay ahead of your cost of capital. That's why those trades make sense. So I could do that or I could simply start buying my own stock back. And most companies, I think when they think about it, they decide that they're going to sweep all their excess cash and they're either going to dividend it out. Which, by the way, is a challenge because their stock supply doesn't become more scarce. Right? So you're not going to drive the stock price up. You're going to dividend up or buy the stock back. And that could sort of work. But the problem with that is you're de-capitalizing the company.

And saving it on the dollar standard means that you're getting a 2% yield or 1% nominal yield on a 7% monetary expansion. You're losing 5% of your money every year. You've got a negative real yield of 5%. If you've got 2% nominal interest in a good year for the last decade. But this is not a good year. This is a year where you probably got a negative real yield of 20% and if the Fed policy gets looser as it is, you have every reasonable prospect of asset inflation running at 10% a year for the next three years, which means the cost of capital is 10%.

So if you're running a company on the dollar standard, the issue is how loose or tight is the monetary supply or policy for the dollar.

If you are running the company on the gold standard, you know, there's a built-in monetary policy. Gold is going to debase by between 2% and 4% a year. Two percent is the best case. If miners invest more and if the price of gold goes up, the miners will build more mining rigs. Capital will flow into the mining industry. Smart people will invent the equipment of fracking for mining.

So fiat and dollar standards are challenging ones. If you have loose money, a gold standard is a bit better. But gold is defective in the 21st century. It boils down to a very simple principle. It's going to debase between 2%-4% a year, certainly over the next hundred years. And if the price of gold ever goes up a lot. If there is large hyperinflation and people crowd into gold, then people may very well invent the equivalent of fracking for gold and find a way to produce a lot of it. And that's and then it's not going to track the inflation rate, and it is not going to be a perfect hedge against inflation. And if you look at the chart, it hasn't been. Gold is not keeping up with the Federal Reserve or the central bank balance sheet. It's lagging and it's lagging because of the problem with all commodities.

Now, if we go to bitcoin, the beauty of bitcoin is when the price goes up, miners make more money. The only way to mine it is to buy [ASIC] mining rigs. That's a very special purpose thing. And if you spend billions of dollars buying those rigs and the price goes down, you're going to keep running those rigs. You're not going to because they're not really good for anything else. But you can't generate any more bitcoin. All you can do is make the networks more secure. You can just make the network safer. You're giving me trust and security. You're not debasing the baseline asset. And that's what makes bitcoin so extraordinary. It's a zero impedance hardest money in the history of man because it's virtual gold as opposed to anything tangible now.

Is 90% too much?

Well, if I could find something that I thought was going to not debase, then maybe I could diversify, but, you know, if I'm diversifying, if I'm splitting the balance sheet between gold and bitcoin, then I'm losing potentially 4% or more on the gold every year. And I could lose a lot more than that if I put it into a market basket of equities. We could have a decade where equities don't track inflation. And that's not working. So what else can I actually diversify the treasury in that isn't going to be a negative real yield and I can't find anything. There isn't any obvious thing that isn't riskier. So the only choices you have in the treasury are you buy back your own stock or you buy a tangible, hard asset. We did a very, very rigorous, thorough search of every asset under the sun. And after we went through commercial real estate, corporate bonds, sovereign bonds, municipal bonds, equities, equity, basket portfolios, every derivative, precious metal, every type of crypto, we concluded that bitcoin was the best treasury asset we could possibly find. Everything else is dilutive.

What is needed for other companies to dive in

If someone is going to put hundreds of millions of dollars into bitcoin, the number one attribute one can pursue is trust. And the number two attribute is security. If I give you $100 million of my money and you are a banker, I want 100% trust. If I hear that you go out on Saturday nights and get drunk and gamble. You're not going to be my banker. If I think that there is one out of a hundred thousand chances that someone's going to leave the door to the bank open, I'm not putting my money in the bank. So I have to trust that you're not going to take the money. I have to trust that I'm not going to lose the money. The [bitcoin] network cannot fail. So the trust [and security] is robustness.

There are a lot of people with treasuries, high net worth individuals, private corporations, public corporations, institutions, trust funds, insurance companies, investment funds, hedge funds and governments, state, local and municipal, federal governments and agencies. Everybody's got a treasury. So once you appreciate the idea that this is a perfect monetary system that will store financial energy without any friction, without bleeding it over time or space. That's kind of your big aha moment. You stop. And then everything else just kind of follows every other conclusion that if that helps.

In 2020, the [coronavirus] pandemic accelerated. A transformation in the entire society and Western civilization. It changed the behavior of a billion people or more. And it changed the behavior the way they view their P&L [profit and loss statements] and their operations. And it also changed the way they view their balance sheets. And it happened over a matter of weeks. And I think that's why it's reasonable and it makes total sense for a corporate treasury to invest in this [bitcoin] today.