The Bitcoin Evangelist Who Recommended That You Mortgage Your House To Buy More Bitcoin… When It Was $56,000
June 12, 2023
Our hypothetical SEC employee started their journey on June 1. The more research they did, the more questions emerged. There is still much to consider, so their research continues…
It’s Monday morning again. A long week is ahead of you and you want it to be as productive as possible for your first assignment. Which direction should you take your research?
You review your notes. You started with Buffett/Munger, Damodaran and Dimon. All of them are well-respected, for good reasons. They all agreed that Bitcoin, and crypto in general:
Does not generate any cash flows;
Since it doesn’t have any cash flows; it doesn’t have any intrinsic value;
Since it doesn’t have an intrinsic value, it can’t be valued; and
Since it can’t be valued, one can’t invest in it.
You've looked at it from every angle and you can’t find any rational explanation why any of that is not true. All of these strike you as financial truths.
Then, you looked at Bill Miller, Kevin O’Leary and Goldman Sachs. These are all well-respected as well. That said, you realized this unfortunate fact:
They all agreed with Buffett/Munger, Damodaran and Dimon, until Bitcoin came along.
Then, their tune changed. The investment universe expanded to any profit-making opportunity. The fund manager whose investment strategy was buying shares that are trading at a substantial discount to their assessment of intrinsic value ended with a portfolio containing half of its value in a token that has no intrinsic value. The shark who didn’t understand why anybody would want non-dividend paying stocks (even a more conservative version of investing that focuses on current yield and not even earning power) ended up with 20% crypto/blockchain in his portfolio. The bank that denounced Bitcoin as “not an asset class” declared, one year later, that it is now an asset class.
Why is the change of heart happening? “They didn’t really receive any new information,” you remind yourself, “they are just following the adoption story.” You wonder: Who are the people that are banging the drums to get crypto adopted, Bitcoin in particular?
Framing the question that way, you come up with your first subject of the week: Michael Saylor, Executive Chairman of MicroStrategy (MSTR), a publicly traded business intelligence firm that he founded in 1989.
You have been hearing Michael Saylor's name mentioned a lot lately because he is one of the loudest Bitcoin evangelists. When he was CEO of Microstrategy, he decided to turn his publicly traded company into a holding vehicle for Bitcoin.
In the video below, he got this question from the interviewer:
Michael, when you are doing something, there is only 24 hours of the day, that means you are probably giving up not doing something else. What stays and what goes? How do you prioritize?
This is how he answered.
Every dollar that is not invested in Bitcoin is dilutive to your opportunity… So the single most accretive way to use money or time is to invest in Bitcoin…
Once you know how it all ends, the only use of time is, ‘How do I buy more Bitcoin?’ Take all your money. Buy Bitcoin. Then take all your time, figure out how to borrow more money to buy more Bitcoin, then take all your time and figure out what you can sell to buy Bitcoin. And if you absolutely love the thing, that you don’t want to sell it, go mortgage your house and buy Bitcoin with it.
You can’t believe it. The guy is literally advising people to mortgage their house and buy Bitcoin. You check the day of the interview - March 10, 2021. Then you check historical crypto prices. On that day, Bitcoin closed at just a hair above $56,000.
“It’s not even half that now,” you shout. You clench your fist. You wonder, how many people have followed his advice and are regretting it? Equally important, you wonder what the SEC is doing to protect these people? “Are alerts like this really effective?” you ask yourself. “Or, do we need to rethink this whole process?”
Those whispers again... First, Charlie Munger: “A speculative medium that has no intrinsic value.”
Then, Aswath Damodaran: “You don't invest in Bitcoin, you trade it.”
You feel like you are getting close. You still have research to do, and your draft is not due for another couple of weeks. That said, you feel like you are honing in on the most fundamental issue: definitions. You begin to realize that true investor protection must start with answering the question: What is investing?
You wonder what Saylor’s views are on the lack of cash flows. A few clicks, and you come across this video:
Bitcoin is not valued on cash flows. It’s digital scarcity.
Right. If it is not valued on cash flows, it cannot be valued, period. Digital scarcity, in and of itself cannot be valued. Scarcity, to the extent it translates into cash flows somehow, can be part of an investment thesis and those cash flows can be valued. Otherwise, scarcity is helpful in the sense that it might make someone a willing buyer at a higher price, but it cannot be valued.
You recall the difference between having value and being valued, and you realize the best characterization of Saylor is a speculator, whose business model, whether it is by design or not, depends on people not fully appreciating this crucial nuance.
