Bitcoin has had a phenomenal year. But its rich returns are paltry compared with those of MicroStrategy, a company dedicated to a risky business: buying Bitcoin with money provided by you and other shareholders.
By “you,” I’m not speaking loosely. There’s a good chance that MicroStrategy, which trades like Bitcoin’s wilder cousin, is hiding in your retirement account.
I own the stock indirectly, as a holder of Vanguard index funds through my workplace retirement plan. And it is a holding in all manner of diversified stock funds that include small and midsize publicly traded companies, run by Vanguard, Fidelity, BlackRock, Morgan Stanley or, really, just about any large asset manager.
As far as MicroStrategy’s stock performance goes, there’s little to complain about — with one glaring exception, 2022. That was a catastrophic year for nearly everyone and everything associated with cryptocurrency because of the fraud and bankruptcy at the FTX exchange, run by Sam Bankman-Fried.
MicroStrategy’s investors lost more than 74 percent in 2022. It’s hard to bounce back from losses like that. Yet MicroStrategy has. Over all, it has turned in an otherworldly performance, with a 3,000 percent gain, since Aug. 10, 2020. That was when the company shifted its core strategy from being a so-so provider of business software to a supercharged financial engine powered by debt, stock sales and Bitcoin.
Is MicroStrategy risky? Is the sky blue? You can’t get colossal returns like these without taking on outsize risks — exposing investors to hazards that they may never have dreamed of taking in their retirement accounts. The company didn’t comment for this column. But in its annual report, MicroStrategy reveals these hazards frankly, in a voluminous section packed with useful details. We’ll come back to that.
But, oh, those stock returns. The company proudly trumpeted them with its last earnings report on Oct. 30. They are real, but hard to believe.
Sky High
So I checked them on Bloomberg, updated them and have found that they were as remarkable as they first appeared. Here are some comparisons with MicroStrategy’s 3,014.8 percent total return, from its strategy change on Aug. 10, 2020, through Thursday:
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Nvidia, whose semiconductors and servers are building blocks for artificial intelligence: 1,204 percent.
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Bitcoin, which reached $100,000 on Wednesday: 735.6 percent.
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The S&P 500 stock index: 93.1 percent.
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Gold, 29.8 percent.
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Coinbase, an online cryptocurrency platform: –4.8 percent.
The Nvidia story will be familiar to anyone following the stock market. It sells all the equipment it can make to other tech companies, and reaps enormous profits. Nvidia’s stock performance may not be sustainable at this pace, but it is based on solid earnings.
MicroStrategy is something else. Its software business lost money in the latest quarter, and that operation’s growth prospects are minimal, Gautam Chhugani, an analyst with AB Bernstein, said in a report to clients. Instead, MicroStrategy’s amazing stock returns are based only on Bitcoin, debt and market frenzy. The company says it is using “intelligent leverage” — borrowed money — to amass a “strategic Treasury reserve” of Bitcoin.
What’s leverage? Say you buy a stock for $10 but borrow $5 to pay for it. You have put down only $5. If the stock rises 50 percent to $15, you have gained $5, or 100 percent (not counting the interest you owe). So far so good. But there’s a dark side. Now suppose the stock falls to $5. It declined 50 percent, but you have been wiped out.
Michael J. Saylor, MicroStrategy’s executive chairman, says its stock will keep rising as long as Bitcoin does, but at a much faster pace. That’s because of the borrowed money and the horde of traders who have jumped on the MicroStrategy bandwagon, driving up the price of its shares.
The strategy has been working, so the company is going in deeper. In October, for the purpose of buying yet more Bitcoin, it announced a plan to issue new stock shares and bonds, in the form of convertible debt, amassing a cryptocurrency war chest of $42 billion. Why $42 billion? Well, as the company pointed out when it issued its earnings report, 42 is a special number. It is the mysterious and much studied answer to “the Ultimate Question of Life, the Universe and Everything,” according to the whimsical sci-fi book “The Hitchhiker’s Guide to the Galaxy.”
I’m not joking, and I’m not sure whether the company is.
Risky Business
Cryptocurrency may not be your thing. It’s not mine.
Basically, I agree with the perspective of Charles Schwab, the financial services company, which says: “We suggest that clients who are interested in cryptocurrency approach them as speculative investments and consider their goals as well as the risks involved. For those who already have a diversified portfolio and a long-term investment plan, we see cryptocurrency as being used primarily for trading purposes outside the traditional portfolio.”
That’s fine. Bets on basketball and lottery tickets belong outside the traditional portfolio, too, though they can be fun and are popular.
The problem is that through companies like MicroStrategy, as well as Coinbase, crypto has already entered nearly every traditional portfolio.
I wouldn’t buy Bitcoin directly. But the MicroStrategy example tells us that Bitcoin is already creeping into the retirement savings of ordinary people. Pretending that it’s not there doesn’t help.
It’s worth knowing about MicroStrategy even if you don’t care about cryptocurrency.
In the annual report it filed in February with the Securities and Exchange Commission, MicroStrategy enumerated some of the risks facing investors.
Inescapably, the central issue is Bitcoin itself. MicroStrategy acknowledges that plenty of skeptics question whether Bitcoin has any fundamental value, aside from the willingness of traders to buy it. Should the cryptocurrency’s appeal wane for any reason — as it did in 2022 — investors in MicroStrategy will be hurt. Add to that the various ways the company is borrowing on its future to fund more Bitcoin purchases and you have a lengthy series of substantive legal and financial risks.
The company pointed out in its earnings presentation that MicroStrategy was more volatile than any stock in the S&P 500. Mr. Saylor has found a bright side. The frequent ups and downs of its shares create opportunities for quick trading, not only in MicroStrategy but also in options and leveraged exchange-traded funds based on the company’s stock.
With some complications, you can buy funds that try to return double or even triple the daily return of MicroStrategy shares. Then you are multiplying the risk of trading Bitcoin several times over, starting with MicroStrategy itself and then piling on leverage. In a single day, you can experience the thrill of a rocket launch or the agony of a crash, and maybe both.
President-elect Donald J. Trump, people chosen for top posts in his administration and newly elected members of Congress are embracing cryptocurrencies. Mr. Trump and his sons stand to gain as much as $22 million from a cryptocurrency they have promoted through World Liberty Financial, a company that received a cash infusion from Justin Sun. He is the crypto entrepreneur who in October bought a piece of conceptual art containing a banana taped to a wall for $6.2 million.
The prices of Bitcoin and other cryptocurrencies have been rising along with the political fortunes of Mr. Trump, and it’s hardly a stretch to believe that regulation of virtual currencies will be lighter in the next administration.
That may mean more windfalls for crypto entrepreneurs — and for investors who, unwittingly or not, hold stocks like MicroStrategy in their accounts.
As part of diversified portfolios, MicroStrategy has been easy to overlook. Yet with a total stock market value exceeding $90 billion, it has surpassed Target, CVS and General Motors, and it has been growing at superspeed. Celebrate, if you like, but should Bitcoin falter again, MicroStrategy would spread the pain to many thousands of people.
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