Issuing $550 Million in Debt to Buy Bitcoin, Is MicroStrategy Crazy?

Issuing $550 Million in Debt to Buy Bitcoin, Is MicroStrategy Crazy?

The most straightforward answer to this is no, it’s just more aggressive and bold than other institutions.

If MicroStrategy had issued $550 million in debt to buy bitcoin at this point two years ago, it would have been a suicidal move, and its stock price would have gone down the drain. But at this point in time, bitcoin is becoming a major trading product, so borrowing $550 million to buy bitcoin, while a very crazy move (especially since it had already spent $245 million on bitcoin and then $50 million on bitcoin), is not completely blind. It’s just a more aggressive move in response to current market trends.

In the current global scenario, more and more financial institutions are starting to offer Bitcoin-based related services. Just yesterday, DBS Bank, Singapore’s largest commercial bank, announced that it is offering trading services for a number of crypto digital currencies, including Bitcoin. UOB, Singapore’s third-largest commercial bank, is also starting to offer custody services for crypto-digital assets.

In the U.S. market, trusts issued by Grayscale Trust are trading at a premium for both bitcoin and Ethereum, never dropping the corresponding net price. Grayscale has also been consistently buying large amounts of bitcoin. PayPal has also begun offering to buy and sell transactions, including bitcoin, to its 300 million users worldwide.

The Toronto Stock Exchange in Canada is starting an Ethereum-based ETF trading service. This is a national exchange starting to offer trading services for Ethereum-based trading products.

For Bitcoin, a product traded on a global scale, the recent entry of these mainstream financial institutions provides a more solid foundation for the growth of Bitcoin trading prices.

Trading in bitcoin can be viewed in at least two dimensions, compliance vs. non-compliance, and retail customers vs. institutional customers. In the early days, the main trading force in the market was retail customers trading in a non-compliant manner, while now bitcoin trading has evolved to the point where institutional customers are starting to trade on compliant trading venues. The largest portion of the world’s assets are in the hands of institutions, so the current entry of institutional funds will definitely propel the price of bitcoin higher.

Unlike two years ago, the nature of Bitcoin’s value is no longer the focus of the market at this stage. At the Consensus conference in New York in May 2018, the conference organizers provided a forum to discuss the views expressed by Warren Buffett that Bitcoin is rat poison squared. Participants in the forum analyzed and discussed why the value of Bitcoin could not be priced in the traditional way. But now, two years later, Bitcoin has been recognized as a mainstream trading product. It is also no longer discussed in the market for what it is. This phenomenon shows that Bitcoin has been accepted by the market.

The market is more interested in whether it can be bought and sold easily, how its price will be affected, whether it has sufficient liquidity, and other specific questions about the trading product.

From this perspective, Bitcoin as a trading product is starting to resemble gold more. No one who is currently a trader of gold trading products in the secondary market is seriously considering the practical value of gold. What they are most concerned about is how the price of gold will move in the future and what factors determine whether they should hold, how they should hold or how much they should hold.

The U.S. market’s judgment on bitcoin trading products is inextricably linked to the regulatory approach. The SEC, which regulates the U.S. securities industry, has made it clear that bitcoin and Ethereum are not security-based products and therefore do not need to operate as securities products in the U.S. market.

The CFTC, which regulates the U.S. commodity futures industry, approved derivatives exchanges to offer bitcoin-based derivatives trading services back in 2017. So as it has evolved, the CME has become the largest holder of bitcoin futures.

In the U.S. banking sector, the OCC, which regulates the U.S. banking industry, made it clear this year that U.S. banks can offer services to cryptocurrency companies and can provide dollar custody services to issuers of digital stable coins. These moves by the OCC have removed compliance concerns for U.S. banks offering services in the crypto-digital finance space.

As a result, the U.S. crypto-digital financial market is more open to the exchange of fiat and crypto-digital currencies, and more U.S. dollars can be circulated into the crypto-digital currency space, including Bitcoin. The surge in the issuance of digital dollar stable coins in the U.S. market also facilitates active bitcoin trading.

All of these factors have contributed to the recent rise in bitcoin prices.

So won’t there be any risk to bitcoin after that? Will it have a significant drop? Doesn’t MicroStrategy take these factors into account? There is no way MicroStrategy is not taking these factors into account. The grey rhino factors affecting bitcoin’s price are still very obvious. A significant future shakeout is also very certain. But what is not certain for traders is how far it will fall. Will it drop to $50,000, $30,000 or $3,000? I believe MicroStrategy is so confident in bitcoin after considering all these factors that they would rather take on $550 million in debt to hold bitcoin.

Following a recent meeting of G7 finance ministers and central banks, it was shown that the G7 agreed on the need for stronger regulation of digital currencies. This is meant to include regulation of all crypto digital currencies, including Bitcoin.

For Bitcoin, this aspect of regulation has at least two implications. First, the SEC has determined that bitcoin is not a security-based product, and therefore it does not have to operate to meet the requirements of a security-based product. It would not fall under the prohibition. Second, as a trading product, it will need to meet relevant compliance requirements, including authentication and anti-money laundering, as well as related regulatory requirements.

This suggests that the G7 will develop a system and take regulatory measures to regulate the current crypto digital currency market. This will therefore definitely lead to a significant market shakeup.

However, this will further improve the market infrastructure and lay a stronger foundation for the long-term growth of the bitcoin price. Thereafter the change in bitcoin price will depend entirely on the market’s judgment and will not be affected in terms of compliance, which is good for Bitcoin in the long run.

It is due to these developments in the market that Bitcoin is becoming a traded product that is accepted by the market and there will be more money coming into this product. Even though there will be significant shocks in the future, its long-term rise is a probable event, and this is why there is such a seemingly crazy buying behavior in the market with MicroStrategy.

Article from Gu Yanxi, Founder of Liyan Consulting

Translated by Yang(Mengyan Finance)