{"id":813536,"date":"2024-12-20T23:28:42","date_gmt":"2024-12-21T05:28:42","guid":{"rendered":"https:\/\/newsycanuse.com\/index.php\/2024\/12\/20\/microstrategys-42b-btc-buy-gives-ponzi-schemes-a-bad-name\/"},"modified":"2024-12-20T23:28:42","modified_gmt":"2024-12-21T05:28:42","slug":"microstrategys-42b-btc-buy-gives-ponzi-schemes-a-bad-name","status":"publish","type":"post","link":"https:\/\/newsycanuse.com\/index.php\/2024\/12\/20\/microstrategys-42b-btc-buy-gives-ponzi-schemes-a-bad-name\/","title":{"rendered":"MicroStrategy\u2019s $42B BTC buy gives Ponzi schemes a bad name"},"content":{"rendered":"
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  7. MicroStrategy\u2019s $42B BTC buy gives Ponzi schemes a bad name<\/li>\n<\/ol>\n<\/div>\n

    MicroStrategy<\/a> (NASDAQ:\u00a0MSTR<\/a>)\u00a0is raising $42 billion to inflate the price of the BTC<\/a> token because if founder Michael Saylor<\/a> doesn\u2019t pump these bags, who will? \u00a0<\/p>\n

    On October 30, MicroStrategy released its Q3 financial report card<\/a>, revealing a sharp decline in revenue from its (formerly) core business intelligence software business, while expenses and net losses saw significant increases. Software revenue for the three months ending September 30 fell 10.3% year-on-year, while the rising costs of that revenue resulted in a net loss of $18.5 million.<\/p>\n

    But who\u2019s kidding? MicroStrategy stopped focusing on its software business when Saylor began his campaign to acquire every BTC out there in the wild<\/a>. As of September 30, MicroStrategy held 252,220 BTC on its balance sheet, worth around $18.3 billion as of October 29, although BTC\u2019s price has tumbled since then due to uncertainty over the U.S. election outcome (which remains undetermined at the time of writing).<\/p>\n

    Saylor has been funding his BTC acquisitions with billions\u2019 worth of new equity and debt, but his latest plan is one for the ages. On October 30, MicroStrategy announced a plan<\/a> to sell up to $21 billion worth of its class A common stock. The proceeds of these sales will be used to (duh) acquire more BTC, based on MicroStrategy\u2019s new self-proclaimed identity as \u201cthe world\u2019s first and largest [BTC] Treasury Company.\u201d The initials of that identity, in case you missed it, are BTC. (Guess\u2019 Saylor Hypes Inert Tokens\u2019 was taken.)<\/p>\n

    MicroStrategy\u2019s software business has a slogan of \u2018Intelligence Everywhere,\u2019 although \u2018everywhere\u2019 evidently doesn\u2019t include Saylor\u2019s office. Turns out that the $21 billion share sale is only half of Saylor\u2019s \u201921\/21 Plan,\u2019 which will also see the company raise $21 billion worth of fixed-income securities to (duh) buy more BTC.<\/p>\n

    On October 29, the day before MicroStrategy announced this 21\/21 Suicide Pact, its share price was trading at over $258. By November 4, the price had slid below $222, mirroring the slide in BTC\u2019s fiat price, but we suspect many investors are starting to suspect that the cheese has slid off Saylor\u2019s cracker.<\/p>\n

    That impression wasn\u2019t helped by MicroStrategy CEO Phong Le revealing on the Q3 analyst call that the 21\/21 Plan is based on Douglas Adams\u2019 The Hitchhiker\u2019s Guide to the Galaxy<\/em>, in which \u201cthe answer to the ultimate question of life, the universe and everything is the number 42.\u201d<\/p>\n

    Le said MicroStrategy believes 42 is \u201ca unique number with some special characteristics. It\u2019s the sum of 21 plus 21, and we all know that 21 is a magic and magical number in the world of [BTC],\u201d given the maximum number of BTC tokens is 21 million. (Louis Farrakhan\u2019s<\/a> numerology obsession is suddenly looking a lot more rational.)<\/p>\n

    Returning to this planet, Le celebrated the fact that the proposed $21 billion \u2018at the market\u2019 (ATM) equity program is \u201cthe largest ATM in the history of capital markets.\u201d To make this magical $42 billion, MicroStrategy aims to raise $10 billion in 2025, another $14 billion in 2026, and a further $18 billion in 2027.<\/p>\n

    Uh-oh, it\u2019s magic<\/strong><\/p>\n

    The hyper-concentration of BTC in the hands of a few\u2014MicroStrategy already holds 1.2% of all the BTC that will ever be\u2014may not be the brilliant strategy Saylor thinks it is and will indeed depend on \u2018magical\u2019 thinking that this \u2018number go up\u2019 will continue to go up forever.<\/p>\n

    Saylor\u2019s hyperanimated optimism regarding BTC\u2019s growth potential seems to ignore that he\u2019s largely responsible for the gains that BTC has enjoyed this year. As one confirmed \u2018gold bug\u2019 put it, Saylor is the \u2018Egg Man\u2019<\/a> who doesn\u2019t realize he\u2019s practically BTC\u2019s whole market.\u00a0<\/p>\n

    Two other factors have combined to keep BTC\u2019s price artificially high. First, block reward miners<\/a> have begun mimicking Saylor\u2019s \u2018HODL\u2019 strategy<\/a> by borrowing hundreds of millions of dollars to buy existing BTC rather than endure the cumbersome (and increasingly unprofitable<\/a>) process of actually mining new ones.<\/p>\n

    Second, the BTC spot-based exchange-traded funds<\/a> (ETF) have seen record inflows as institutional investors followed Saylor down this garden path, hoping to mirror the sixfold rise in MicroStrategy\u2019s year-to-date share price.<\/p>\n

    However, while corporations are plowing into BTC, the general public appears to have checked out long ago. The\u00a0Coinbase<\/a> (NASDAQ: COIN<\/a>) digital asset exchange\u2019s shares took a pounding last week after its Q3 report showed steep drops in retail customer trading volume<\/a> following years of peaks, valleys, rug pulls, scams, and fraud.<\/p>\n

    Retail investors no longer buy the myth that BTC is some kind of \u2018safe haven\u2019 from the geopolitical shocks that torpedo traditional financial products. BTC is now rising and falling in lockstep with far more tangible securities and commodities. And given that the overall \u2018crypto\u2019 narrative continues to be plagued by scandal and crime, retail customers see little reason to bet their life\u2019s savings on \u2018digital gold\u2019 in rigged crypto casinos, particularly when actual gold is at all-time highs.<\/p>\n

    And yet, hope springs eternal. Some observers with their own bags to pump have been claiming that since retail investors\/suckers are traditionally the last to join the party, BTC\u2019s current rally is only just beginning. Apparently, the clich\u00e9 is true: we\u2019re so early.<\/p>\n

    I\u2019ll do it again<\/strong><\/p>\n

    Bloomberg\u2019s Matt Levine offered a muted defense<\/a> of MicroStrategy\u2019s capital raising plan, noting that its shares are trading at a 300% premium to the company\u2019s net asset value, and \u201cif people want to overpay you for your stock, sell it to them.\u201d<\/p>\n

    Other, more critical observers have labeled<\/a> Saylor\u2019s BTC binge a \u2018Stock Market Amplified Ponzi scheme\u2019 in which his BTC buys bid up his company\u2019s share price. Saylor uses that inflated valuation to borrow more billions to buy more BTC, which further pumps BTC\u2019s price, which causes the company\u2019s share price to rise higher, then uses that valuation bump to borrow more cash to buy more BTC, etc.<\/p>\n

    Saylor himself referenced this strategy on the analyst call, saying, \u201cVolatility is vitality \u2026 because we have the volatility, many of the things we do are actually selling the volatility, recycling the proceeds of the volatility back into [BTC].\u201d<\/p>\n

    This may be the moment to recall the $8.6 million settlement Saylor reached with the U.S. Securities and Exchange Commission <\/a>(SEC) in December 2000. That settlement was the result of accounting fraud that disguised losses as profits and artificially inflated MicroStrategy\u2019s share price during the dot-com bubble.<\/p>\n

    Oh, and while Saylor has promoted MicroStrategy as a sort of proxy BTC buy<\/a>, MicroStrategy\u2019s financial reports contain fine print stipulating that \u201cownership of common stock does not represent an ownership interest in the [BTC] the Company holds.\u201d Caveat emptor, people.<\/p>\n

    Don\u2019t be like Mike<\/strong><\/p>\n

    Saylor told analysts that BTC \u201cis like the Facebook of money or the Google of money,\u201d ignoring the fact that BTC doesn\u2019t actually function like money. Saylor plans to amass the single largest concentration of BTC and then use that \u2018digital gold\u2019 as collateral to borrow real money to use in the real world. So perhaps BTC is more like the Fyre Festival<\/a> of money, in that it\u2019s shamelessly promoting itself as something it\u2019s most definitely not.<\/p>\n

    Regardless, Saylor is encouraging, nay, begging <\/em>other companies to follow his lead and borrow to buy BTC. MicroStrategy\u2019s \u2018HODL\u2019 plan \u201cis easy to copy \u2026 In time, dozens of companies will realize this, then hundreds, then thousands \u2026 we\u2019re happy to share the playbook \u2026 We\u2019ll show you how to do it. Everybody can win. There are no losers on the [BTC] standard. There are only varying degrees of winners.\u201d In other words, this time, it\u2019s different.<\/a><\/p>\n

    Other entities are indeed copying Saylor, but in even crazier ways. You can now \u2018invest\u2019 in ETFs that track MicroStrategy\u2019s stock performance<\/a> but also offer leverage to maximize your returns. These pseudo-MSTR\u2019s have posted gains that dwarf those of Saylor\u2019s firm<\/a>, which will almost certainly prompt more investors to buy in and more copycat ETFs offering even greater leverage.<\/p>\n

    Incredibly, Saylor approves of this bets-on-the-bettor, telling analysts that they \u201coffer high volatility, high leverage, and they\u2019re built on a [BTC] treasury company that has a large pool of permanent capital and has an adept treasury operation.\u201d If this sounds familiar, recall these words of downstream caution<\/a> from Selena Gomez in The Big Short<\/em>. Oh yeah, this will end well. Saylor\u2019s analyst rant went well past its scheduled conclusion, which was convenient since it limited analysts to asking only two questions. One of these questions wondered whether MicroStrategy might someday adopt a different strategy if all this equity-issuing reduced Saylor\u2019s majority control of voting shares to below 50%.<\/p>\n

    Saylor claimed not to be worried if his share of the vote slid into the mid-to-low 40s range, rather boldly claiming that \u201cthere\u2019s nothing that we\u2019re going to do that [other shareholders are] not going to want us to do.\u201d And if there was any serious challenge, he could always \u201cjoin with\u201d a couple of minor shareholders to ensure \u201csubstantially, I\u2019ll have enough voting shares to ensure that the company stays on track.\u201d All aboard the crazy train.<\/p>\n

    Paranoid, batshit insane, or just criminal?<\/strong><\/p>\n

    Saylor\u2019s 21\/21\/42\/90210\/867-5309 plan helped shift attention away from the dismal performance of MicroStrategy\u2019s software business\u2014which may soon be obsolete due to AI\u2019s relentless rise\u2014but also from some recent Saylor comments that seriously irked the crypto faithful.<\/p>\n

    In a late-October interview on Markets with Madison<\/a>, Saylor slammed \u201cparanoid crypto-anarchists\u201d for expressing concern at the thought of storing one\u2019s digital assets with Wall Street institutions such as BlackRock (NASDAQ: BLK<\/a>), Fidelity (NASDAQ: FNCMX<\/a>), JPMorgan (NASDAQ: JPM<\/a>), and the like. Saylor claimed that entrusting control of your BTC to these entities was a safer bet than assigning custody to less familiar private entities or self-custody via a digital hard wallet.<\/p>\n

    Reaction was swift and harsh, with prominent figures such as Ethereum<\/a> co-founder Vitalik Buterin<\/a> calling Saylor\u2019s comments \u201cbatshit insane\u201d<\/a> for \u201cexplicitly arguing for a regulatory capture approach to protecting crypto.\u201d Stung by the backlash, Saylor tweeted<\/a> the next day that he supported \u201cself-custody for those willing & able.\u201d<\/p>\n

    But some other quotes from the same interview have yet to be walked back, including the claim that, unlike those crypto-anarchist scofflaws, BlackRock, MicroStrategy, and other publicly listed firms \u201cwill reliably file and pay their taxes.\u201d \u00a0<\/p>\n

    This quote came just five months after Saylor paid $40 million<\/a> to atone for what the District of Columbia called the largest income tax fraud recovery in D.C. history. The D.C. Attorney General noted that Saylor had \u201copenly bragged\u201d about his tax-evading tactics, encouraged his friends to do likewise, and said \u201canyone who paid taxes to the District was stupid.\u201d<\/p>\n

    We eagerly await Saylor\u2019s next settlement, which will presumably quote him saying \u2018anyone who bought into MicroStrategy\u2019s BTC plan\u2019 was equally delusional. \u00a0<\/p>\n

    Watch: Teranode is the digital backbone of Bitcoin<\/p>\n