Doubling Down on Stupidity

Earlier I reported that Michael Saylor had purchased 11,000 BTC at 36,000. He hadn’t. Rather he raised cash and only recently purchased 13,000 more Bitcoin.

So his latest update:

At the current price of $32,000 as of writing this, he’s getting dangerously close to his break-even point of $26,000. Not looking good. Had he just bought a diversified large cap growth tech portfolio (such as Google, Microsoft, Amazon, Facebook, Paypal, MasterCard, Visa, Uber, Netflix, Apple, etc.) he would have had equal or better returns but with considerably less volatility.

But Mr. Saylor also has a trick up his sleeve: equity financing (selling stock) instead of debt financing. The former creates dilution but it means not having to pay anything back. This can in theory allow MSTR to buy considerable Bitcoin effectively for free. So if MSTR has a market cap of $6 billion and it sells $1 billion of new stock, the price should fall by about 16% to account for dilution, but if that $1 billion goes into Bitcoin, and the market is optimistic about Bitcoin, then the stock can still go up because that $1 billion adds to the shareholder equity, negating the dilution. This makes shorting or buying put options on MSTR is very risky due to the ability of Mr. Saylor to manipulate the balance sheet as necessary to keep MSTR stock propped up even as BTC continues to fall, either by selling stock or raising debt.

This is what happened a few weeks ago: MSTR raised $1 billion by selling stock, and shares of MSTR surged from $500 to $600 even as Bitcoin fell from $40k back to $32k.

This is a delicate balancing act on Mr. Saylor’s part that requires for Bitcoin to at least stay above $30k, so he can paint over losses with new purchases, similar to a Ponzi scheme. But Bitcoin falling below his break-even point may cause a sudden, catastrophic loss of confidence in MSTR stock as investors realize the gravity of the situation.

Mr. Saylor has a long history of shady business practices. In early 2000, at the height of the 90s tech bubble, MSTR stock fell in half after after reporting that it had ‘mistakenly’ overstated its earnings over the prior 2 years. Saylor feigned ignorance of the scheme and paid a fine to the SEC in exchange for keeping his role of CEO and admitting no wrongdoing. When you have as much money as Mr. Saylor does, you can bend the law and afford to make a lot of mistakes, but at some point math will always prevail. Using borrowed money to continuously add to a losing position never ends well.

One can also argue that MSTR’s debt-spiral downfall is analogous to the US economy being propped up by the fed and by selling debt to China, but this is different in that the US dollar has reserve currency status and that the Treasury can keep printing money to cover debt payments, whereas MSTR cannot create and spend its own currency to cover its debts. Also, America’s multinationals and wealthy pay back into the system through job creation, economic value, and taxes, but Bitcoin creates none of those things.

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