Bitcoin as anti-theft technology

J.P. Szafranski, BridgeTower Media Newswires

Inflation is “a thief in the night.” So said William McChesney Martin, the longest-serving chairperson of the Federal Reserve Open Market Committee. The Fed faces a dual mandate from Congress to pursue price stability and full employment via monetary policy. This duality presents a tenuous situation, as the requisite monetary policy for price stability (i.e. low inflation) is typically detrimental to full employment.

In the wake of governmental response to the COVID-19 pandemic in 2020, specifically the historically aggressive approach taken by the Fed to flood the financial system with newly created dollars, MicroStrategy Inc. founder and CEO Michael Saylor, his management team and the board of directors decided they had what might be described as a high-class problem.

Over recent years, MicroStrategy, an IT firm offering business intelligence software, built up a cash war chest of over $500 million, orders of magnitude more than the company needed to fund operations. In Saylor’s view, the company’s cash pile amounted to a melting ice cube and the Fed’s unprecedented recent money printing just ratcheted up the ambient temperature.

How could the company best preserve value for its shareholders? Management did not see any feasible acquisition targets that might exceed its cost of capital. One option for a company with excess capital laying around is to simply return it to shareholders via dividends or share repurchases. MicroStrategy did just that last August when it announced a $250 million tender offer for its shares at $140 per share. It turned out that existing shareholders mostly preferred to not part with their shares, as only around $60 million worth of stock was ultimately sold back to MicroStrategy.

They also did something novel. That same month, the company bought $425 million in bitcoin. Saylor describes bitcoin as an ideal “treasury reserve asset.” Unlike dollars and other fiat currencies that can be printed at will and thus de-valued, the supply of bitcoin will be hard-capped at 21 million permanently. As a decentralized digital network, it lacks a central authority aside from its publicly available software code.

While historical bitcoin price fluctuations have been wildly volatile, the value of the network has grown remarkably as adoption increases, throughout its bullish and bearish price cycles. It’s a powerful testament to the network effect in action.

Bitcoin has gained traction as a store of value (one of three traditional definitions of money). It’s like gold in that sense as a potential tool to ward off the inflation thief. Digital gold is a popular description for bitcoin.

Michael Saylor and others have pointed out some compelling advantages for bitcoin versus gold. It is easily portable and can be transferred at a de minimis cost. When handled correctly, it cannot be confiscated. When the price of gold surges, gold miners rush to increase supply (and thus harm pricing). New supply of bitcoin is fixed, regardless of price. Maybe most importantly, bitcoin is a living, dynamic network with software developers working on innovative applications to work on top of bitcoin’s blockchain. Innovation drives more adoption, conceivably making the network more valuable for everyone.

Other public companies like Square and Tesla have recently announced significant bitcoin purchases. Meanwhile, Saylor and MicroStrategy have continued buying up more bitcoin. As the company’s largest shareholder, he is uniquely positioned to lead it down an unconventional path. Saylor’s approach might best be described as “go big or go home.”

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J.P. Szafranski is CEO of Meliora Capital in Tulsa (www.melcapital.com).