MicroStrategy Doubles Down
We reported last month that MicroStrategy (MSTR) allocated $250M of excess cash to purchase 21,454 bitcoins. In September, the company again made news by allocating $175M to purchase an additional 16,796 bitcoins. In the opening of this post we shared a recent tweet from MicroStrategy CEO Michael Saylor, which provides an apt but somewhat esoteric description of the one of a kind digital money. We’ll do our best to interpret.
Swarm of cyber hornets - a group of highly enthusiastic innovators and early adopters who use the digital money while building products and services on top of the financial protocol.
Serving the goddess of wisdom and feeding on the fire of truth - bitcoin is a globally decentralized immutable ledger for value transfer, i.e. sound money, one of the most important tools for a peaceful human society.
Exponentially growing ever smarter, faster, and stronger - protocols like bitcoin are all about network effects and we are somewhere between the early adopter and early majority phases of the technology adoption life cycle.
Behind a wall of encrypted energy - bitcoin uses powerful cryptography to make generating bitcoins a difficult energy intensive process, thus securing the fixed supply and scarcity of the money.
Mr. Saylor has been on a podcast tour where he goes in depth about his decision and approach to investing in bitcoin. Highlights include:
- (03:00) His undergraduate degree focused on the history of scientific revolutions and paradigm shifts.
- (13:00) Microstrategy’s lucrative portfolio of .com and other domain names, which are somewhat analogous to the fixed bandwidth of the bitcoin network and related cryptocurrencies.
- (49:00) Bitcoin is like investing in a $200B market cap tech company with potential for 900% upside with 50% downside, it simply is not going away and in fact solves a much bigger problem than any other publicly traded tech company.
- (55:00) The legalese around hard forks, soft forks, initial coin offerings, and public v. private blockchains are unnecessary hurdles for companies. Saylor’s recommendation is to start by simply treating bitcoin as digital gold, i.e. a store of value.
- (1:05:00) He lays out a high level plan for allocating corporate funds to bitcoin, 1) audition institutional exchanges and custodians, 2) do a deep dive into security and other technical aspects of using bitcoin, 3) build a capable team within your company to manage the process, and 4) if you are going to buy a lot of bitcoin you will need to buy in thousands of small transactions day and night over the course of many days in order to not significantly move the price.
- (1:10:00) Corporate bitcoin adoption is like the four minute mile, once one company does it the floodgates are open. Saylor also emphasizes that any good management team can make the shift because, in fact, these teams already solve much more complex challenges every day.
- (1:17:00) Every single class of low volatility assets, e.g. gold, real estate, power generation, is effectively producing negative real yield depending on how you measure asset inflation, i.e. somewhere between 3% to 15%. Said another way, there is no risk free asset without sound money.
Institutional Bitcoin Adoption
As we mentioned in the MicroStrategy example, it is important to create a well thought out plan when investing in bitcoin. However, the relatively deep domain expertise needed to devise and implement such plans may not be available to every company or investment fund.
Fortunately, well established bitcoin companies continue to expand their offerings of regulatory compliant, fully audited, and secure custody services for institutional and corporate investors. Last month it was announced that Kraken Financial is the first bitcoin exchange to receive a U.S. banking license to provide bitcoin custody. The bank operates under Wyoming’s Special Purpose Depository Institution (SPDI) banking charter with a mandate to provide 100% reserve custody of customer funds.
Additionally, market leading investment funds continue to pave the way toward crafting an investment thesis around bitcoin. ARK Invest, an asset management firm focused on disruptive innovation with close to $15B AUM, published a must read report titled Bitcoin: A Novel Economic Institution. The two part report (Part 1 & Part 2) provides a well thought out critique of the current financial system, an explanation of bitcoin as a necessary solution, and deep technical insights into bitcoin’s place in investment portfolios. Highlights include:
- Analysis of the current financial system relative to bitcoin, with a focus on free and open commerce, property rights, predictable monetary policy, and verifiable integrity of the financial system.
- Analysis of bitcoin’s core market opportunities including global financial settlement, protection against the seizure of assets, bitcoin as digital gold, and currency demonetization in emerging markets, while estimating bitcoin could reach a $3 trillion market cap by 2025.
- Analysis of bitcoin in investment portfolios, with optimal allocations ranging from 0.74% bitcoin when the portfolio is limited to 1% bitcoin, to 25.78% bitcoin when the 1% allocation is removed and bitcoin’s total addressable market is taken into consideration.
Finally, if your management team is still wondering “why the focus on bitcoin when there are so many other crypto currencies?”, we suggest giving this podcast a listen. The guests break down the bitcoin investment thesis with a focus on network effects driving bitcoin dominance, including the growing network of miners, nodes, exchanges, and financial derivatives unparalleled by any other cryptocurrency. A relevant example is continued growth of physically delivered bitcoin futures traded on the Intercontinental Exchange (ICE), which readers will recognize as a leading market for energy futures.
Energy & Money
We explained last month how energy and money are deeply connected, and that bitcoin is effectively energy backed money. Take for example Abolaji Odunjo, a Nigerian entrepreneur selling mobile phones who now pays his suppliers from China and United Arab Emirates in bitcoin. Due to Nigeria’s unstable currency, the naira, and heavy dependence on oil exports, citizens are forced to use the United States Dollar (USD) in order to trade and store value both domestically and internationally. As recent economic events led to a significant drop in the oil price, exports slowed, the naira was devalued, and the flow of USD became more scarce and expensive for Nigerians.
“Everything is oil. When the price of oil dropped, forex became scarce,” Odunjo said. “That became a very big problem.” The 30-year-old said his transactions totalled around 2 bitcoin ($20,000) a time, adding: “I don’t need anyone in the banks, I don’t need a person to use the back door to get dollars.” The shift has boosted his profits, as he no longer has to buy dollars using the Nigerian naira or shell out fees to money-transfer firms.
In other parts of the world, bitcoin mining provides a similar economic boon to local economies. Kazakhstan's new digital development minister Bagdat Mussin recently announced plans to reinforce the country's economy by expanding its bitcoin mining sector with an approximately $700M investment, following nearly $200M of previous investments in the country’s mining sector. Every day it becomes more clear to global decision makers that bitcoin mining is a massive opportunity to hedge underutilized power generation with a sound money asset, and markets with the lowest cost energy stand to be the markets with the longest term sustainable cost advantage in the industry.
Sustainable Mining Cost Advantage
Bitcoin solves the money problem using modular interruptible data centers that seek out low cost surplus energy in order to validate transactions, assemble them into <1MB blocks, and append them to the global blockchain for a reward of newly minted bitcoin and transaction fees. Money is a massive market, so bitcoin miners stand to be a massive buyer of low cost energy. Every renewable energy investor worth their salt understands we are moving toward a future with abundant zero marginal cost renewable energy, and what they are now beginning to understand is that bitcoin miners are becoming dependable energy buyers of last resort.
Knowing this, how can one capitalize on the opportunity? Start by considering the essential qualities a bitcoin mine must possess in order to operate with a sustainable cost advantage:
Low Cost Energy - Electricity is approximately 90% of operating expenses for a bitcoin mining facility, i.e. for powering SHA-256 ASICs, while mining revenue is based on the facility's portion of the global mining hashrate, thus driving miners toward ever cheaper energy in order to be cost competitive.
Capex Optimization - Much like renewable energy projects, a bitcoin data center must keep a close eye on all capital expenditures, from the SHA-256 ASICs (think solar panel cost & efficiency) to cooling system design and substation interconnection.
Regulatory Risk Minimization - Lack of retail choice, burdensome tax rates, and other regulatory constraints can significantly hamper a mining investment. Fortunately, markets like ERCOT provide abundant low cost energy under flexible energy contracts.
What does this mean for energy investors? A well planned energy portfolio, focused on the synergy between cost effective generation, battery storage, and hedging, must now consider the “energy buyer of last resort”, i.e. bitcoin miners, as a critical component. If you are looking for a guide through this process, reach out to the Satoshi Energy team at email@example.com.
Monthly Market Metrics - September 2020
At the time of writing, bitcoin is:
- 11.759 years old
- $198B market capitalization
- 31.5 million addresses holding a balance
- 143 EH/s (~10GW) of globally decentralized data centers backing the money with low cost surplus energy.
Thank you for reading.
Satoshi Energy Corp.