This is the story of MicroStrategy.
We are the world's largest public holder of Bitcoin. We are an operating company and a software company with operations around the world.
In 2020, our revenue was very stable, about $500 million, and we generated about $75 million in cash flow per year. Our business is like a stable cash cow, and our customers are very loyal. However, our stock was not attractive to the capital market. So we started thinking about how to change this situation. We thought, maybe we can buy some assets with high growth potential, but it is difficult to find a high-growth business that is a digital monopoly. So we started to pay attention to Bitcoin. We think that buying Bitcoin is equivalent to buying a digital high-growth monopoly, and maybe it can help us transform.
In short, from 2020 to 2024, MicroStrategy raised approximately $7 billion in capital through equity and debt financing and purchased approximately $7.5 billion in Bitcoin. At present, the value of these Bitcoins has almost doubled. The company's market value has increased by 20 times and the enterprise value has increased by 40 times. The company now has approximately $14 billion in Bitcoin, and the existing software business is still a $500 million business that generates $75 million in cash flow per year. But overall, the story of MicroStrategy is one of digital transformation, and we have re-capitalized the company through digital capital. What's more interesting is that there are thousands of companies around the world that can also be re-capitalized in this way.
The problem we have is that low-growth stable-income businesses are being marginalized by large companies, or the large cash assets they hold are being eroded by inflation. This is something that every person, every institution, every household, every private company, every public company, and every institutional investor in the world has to think about. And that's why I think that from where we got from to where we are now, you can re-capitalize your company with digital capital, or build products and services based on it. So there is a balance sheet strategy and there is a profit and loss strategy. I'm going to focus on the balance sheet strategy today because I think it's the more powerful strategy right now.
Currently, most operating companies in the world use U.S. Treasury bonds as fiscal reserve assets. Typically, if you are an operating company with $100 million in extra funds, traditional finance recommends that you either distribute it to shareholders as dividends (but this will be double taxed) or do a stock buyback. For example, Apple announced a $100 billion stock buyback and Meta announced a $55 billion buyback. This is another way to return capital to shareholders. The third way is that you can use the $100 million to buy Treasury bonds, which may earn 5% or 5.5% interest, but this is also taxable, so you can only get about 300 basis points of return after tax.
The first problem is that dividends will face double taxation, and you will end up with no capital. The second problem is that the cost of repurchasing stocks is also not low, and you still don’t get capital. The third problem is that you put your money into government bonds. Although you have capital, the cost is very high, which is about 12% annualized capital cost. The cost of capital can be estimated by the average return of the S&P index and then calculated by adding the risk premium. Over the past 100 years, the average annual return of the S&P index has been 7%, and the current risk premium is about 5%, so the current return of the S&P is about 12%. So it can be considered that the cost of capital is about 16%. Therefore, if you use a 3% return to invest, it means that your actual return will be -9%.
So when you put $100 million into Treasury bonds, you're actually losing about $9 to $12 million in shareholder value every year. This is the first problem that every company faces, even from the big companies like Apple, Google, Meta, Microsoft to the small restaurants, the companies with $1 million in revenue a year. Everybody knows that it's irrational. So you'll never meet a billionaire who's proud of making a billion dollars investing in government bonds; they're never proud of making 3% or 4% interest on their money sitting in a bank account. They know they have to invest in real estate, equity, or other alternative assets.
Private investors understand this, but the problem is that public companies, especially public companies, are subject to certain rules, and usually they cannot invest more than 40% of their funds in securities. Usually, government bonds are considered securities, but there is an exemption for bonds that say government bonds are not securities. For example, Berkshire Hathaway has about $180 billion in Treasury bonds, or $190 billion in Treasury bonds, and they cannot invest that money directly in the S&P index.
So what are the advantages of Bitcoin? Bitcoin is a commodity, an asset. So if you have a sum of money, you can buy a treasury bond and earn 3% after tax in the traditional way, or you can invest the money in Bitcoin. The key is that you need to choose an asset that returns faster than the S&P 500 so that you can exceed the cost of capital and avoid capital losses.
Therefore, one of the most attractive Bitcoin strategies today is to re-capitalize your company by moving cash flows into Bitcoin, or by financing the purchase of Bitcoin. Look at the MicroStrategy example: When we started buying Bitcoin, the stock trading volume was $2 million per day, and volatility was low. But as we bought Bitcoin, the stock trading volume increased significantly, and now we are trading about $2 billion per day in stock, and volatility has increased significantly. This volatility allows us to issue convertible bonds because the options on these bonds become very valuable.
We recently raised $1.4 billion in convertible bonds in less than eight days at an average interest rate of just 0.7%. If you were a normal company, the cost of raising capital would be around 8% to 10%, and you might need to provide security and other conditions, but we were able to raise capital at close to zero cost.
Why is this the case? The reason is primarily because of the extremely high liquidity and volatility of our stock. Normal financial wisdom is that I want to create a company with predictable revenue and cash flow by stripping out the volatility in the P&L. This is common practice for companies like Microsoft, which have very stable revenue through long-term agreements with corporate customers. But if there is no volatility in the P&L, then the option has no value. By adding volatility to the balance sheet, such as the price volatility of Bitcoin, we can greatly increase the value of the option.
Bitcoin's volatility has brought us huge capital benefits. For example, between 8 p.m. yesterday and this morning, the price of Bitcoin rose by $1,400, resulting in an increase in value for MicroStrategy shareholders of approximately $350 million, equivalent to five to six years of operating income. If the price of Bitcoin falls tomorrow, it will be the result of no income for five or even six years, but this volatility makes our company interesting and attracts a large number of market participants.
If you embrace the Bitcoin standard, you can accumulate capital quickly and massively in this way and inject that capital into financial instruments such as stock options and convertible bonds, thereby creating value for shareholders.
Actually, until January 2024, the accounting standard for Bitcoin was "indefinite intangible assets," which means that if you do what I just described, you can only adjust the value of Bitcoin downward, not upward, which will have an adverse impact on your income statement and balance sheet. So, traditional CFOs are reluctant to accept this strategy when faced with this "indefinite intangible asset" accounting standard. But it wasn't until the first quarter of 2024 that you could adopt fair value accounting. And fair value accounting now allows you to separate investment gains and losses on the balance sheet from operating gains and losses on the income statement. So the regulatory adoption of Bitcoin by the accounting community is a very important change. The second thing that happened this year was that the U.S. Securities and Exchange Commission (SEC) approved 11 spot Bitcoin ETFs. When the SEC approved them, they sent a signal to the market that Bitcoin is a commodity, an institutional-grade asset, and they will allow billions, even tens of billions, and possibly trillions of dollars of capital to flow into the Bitcoin ecosystem, and now Bitcoin has become an institutional-grade asset that a publicly traded company can hold.
You know, the adoption of ETFs is a good thing for us. There are about 22 spot ETFs in the world right now, and there are more derivative ETFs for trading options and so on. But we counted 22 ETFs in the world, where you can buy these securities, and they will use those funds to buy spot Bitcoin ETFs and hold them. These ETFs are one-to-one, non-leveraged investment vehicles, and they are SEC 40 companies, which are investment trusts. What this means is that if you give them $1 million, they can buy $1 million of Bitcoin. If the price of Bitcoin goes down, the value of the Bitcoin you will own will be reduced by half, and if the price of Bitcoin goes up, the value of the Bitcoin you will own will be doubled. They charge a small fee. MicroStrategy is a different company. MicroStrategy is an operating company, and Tesla, Block, and all the Bitcoin miners are operating companies. What is special about operating companies is that they can raise permanent capital through equity issuance and registration procedures, which can be used to invest and assume risk capital, and they can also issue fixed income instruments and convertible debt instruments. So operating companies can issue other types of securities, not just simple ETF certificates or ETF shares.
For example, what MicroStrategy has done is we have borrowed $3 billion through convertible debt, and the combined cost of these convertible debts is about 50 basis points. So, we pay about $15 million a year to access $3 billion of capital, and that capital is invested in Bitcoin, which is growing at 40% per year. We can take the risk of borrowing 50 basis points and invest it in Bitcoin, which is growing at 40% per year, and then capture the difference as our shareholder return. If you think of an ETF as a container ship or a freighter, their cargo is very large and they sail slowly, but they can carry a lot of money. You can invest $100 billion into an ETF tomorrow and basically get this low-cost, peer-to-peer exposure to Bitcoin. If you try to buy $100 billion of MicroStrategy shares tomorrow, the company's capital structure is not that large, so there will be a premium, and you can't buy the shares at net asset value. But this inefficiency, this premium, we are able to generate liquidity opportunities for shareholders. Because if you drive our premium, we can issue convertible debt at a price above the premium, and then we can recycle or arbitrage that money back into Bitcoin.
MicroStrategy is securitizing Bitcoin. ETFs just make it possible to invest one-to-one at scale. They benefit from our activity because we are locking up Bitcoin. There may be $15 billion of Bitcoin that is directly locked up. But there are also a lot of people who short MicroStrategy stock to buy Bitcoin. For example, you short $1 billion of MicroStrategy stock and then buy $1 billion of Bitcoin to get arbitrage gains. You are helping Bitcoin, you are helping the spot ETF, and you are also increasing demand for Bitcoin. We don't mind because you are actually creating more liquidity and trading volume, which benefits us in the long run. So it's a mutually beneficial ecosystem.
Bitcoin can be thought of as a city in cyberspace, it is a city that is 276 blocks wide, 276 blocks high, and 276 blocks deep. There will never be more than 21 million Bitcoins. The cube root of 21 million is 276, which is close to that number. We have bought 214,400 of these blocks. It is like buying land in Manhattan, if you know that it is the commercial center of the world, all the capitalists want to live there or move capital through there, and you can never create more land, then you might want to buy it. The New York deal for Manhattan has been a good deal for the past 300 years. We can think of ourselves as a real estate development company in cyberspace, we call ourselves the Bitcoin Development Company. We will keep acquiring more Bitcoin. The main way we create shareholder value is to issue securities at a premium and then use it to buy Bitcoin. This is a bad idea in other commodities, but not in Bitcoin because Bitcoin is capped and is the world's first truly scarce asset.
Money is economic energy. If you have $1 billion in wealth and want to store it for 100 years, you have to decide what asset to convert it into. For high-frequency use of money, such as buying coffee or paying bills every day, you need to use monetary assets, such as RMB, US dollars or euros. But for low-frequency use of long-term savings, you will not store 30 years of funds in RMB or US dollars, but buy real estate, sports teams, stocks or works of art. The assets for long-term savings are capital assets, and the short-term high-frequency use is monetary assets.
MicroStrategy wants to find the most ideal capital asset. We considered buying real estate, art, Apple stock or the S&P index, but ultimately we think cryptocurrency property is the most ideal. If I can create a city in cyberspace, but the land in this city will never increase, there will be no property taxes and mayor, it will be more valuable than the physical Manhattan because it can attract people from all over the world, not just a certain area. Crypto property has more advantages than physical property.
Likewise, crypto gold is better than physical gold because if God said there could only be 21 million gold coins and it could be seamlessly transferred, programmable, and securely kept, that would be a better gold. But God didn't do that, so we created crypto gold to achieve these functions.
So crypto assets and crypto gold seem to be more valuable investments than physical assets and physical gold. The next question is, among the many cryptocurrencies, which one is the best?
To answer this question, we need to consider its morality, technology and economy. Bitcoin was created through the "holy birth" of Satoshi Nakamoto and is truly public property, not controlled by any company or criminal. It has the most powerful computer network in the world, the most electricity input, the most node holders and the most investors. All the "smart money" chooses Bitcoin, while the "dumb money" gambles. If you want to save for your family, company or country in the long term, you should not invest your money in casinos, but choose Bitcoin, the best crypto asset in terms of economy, technology and morality.
I've heard that there are 10,000 different cryptocurrencies, and they all claim to be better than Bitcoin, and everyone thinks they're the next Bitcoin, and they're the better choice. The question is, which one is the best? To find out the best, you have to answer a series of questions, like, which is the most ethical? Which is the most technological? Which is the most economic? Well, the most ethical question comes in: Did a criminal group create this cryptocurrency, which is not good; did a company create this cryptocurrency, which is slightly better, but still not good; or did the people create this cryptocurrency? Is it the people's, is it public property, or is it corporate? Or is it criminal or counterfeit?
What makes Bitcoin special is its "flawless birth." Satoshi created the network, created the way it works, gave it to the world, and then he left. A very simple idea is that if someone creates something, gives it to the world, never benefits from it, and leaves, that is the definition of public property. So Bitcoin became public property through Satoshi's actions.
Satoshi mined a million bitcoins, but they have never moved and they never will. The point is, he gave this to the world as a gift, it's not mine, it's yours. There's no company behind Bitcoin, it's public property. Whereas every other cryptocurrency has a company or criminals behind it, especially the top 100 cryptocurrencies, they all have companies behind them, you can see them, like the Ethereum Foundation, Consensus, I can list, Solana, if there is a CEO, if they can be subpoenaed, that's corporate coins, they have a lot of coins, they have pre-mines, they have ICOs. They are actually like securities because they are not listed, they may be unregistered securities. So corporate coins cannot operate as global currencies because there are companies behind them. And the coins that are launched by criminals, like Terra Luna or FTT tokens, the people who created them are now in prison. So, isn't this idea just stupid? It doesn't make sense to entrust your life savings to a criminal coin or corporate coin. So, Bitcoin represents the largest public property in the world.
So, how do you know it's the greatest? First of all, not only because Satoshi Nakamoto released Bitcoin through flawless birth, the second reason you know it's the greatest is that it has the most powerful computer network in the world behind it. Bitcoin mining equipment has invested about $20 billion to $40 billion, and these devices are custom silicon chips ASIC, which produce about 600x hashes per second. This is more computing power than all the data centers of Amazon, Microsoft or Google combined. So, it is the most powerful computer network in the world, protecting your property.
Third, it has the most power resources behind it. It is a very decentralized digital energy network.
Fourth, it has hundreds of thousands of node holders who run Bitcoin nodes around the world that independently validate the network and track every transaction. So it's the most decentralized network. Next, it has over 200 million holders who collectively have invested about $700 billion or more of real capital. Remember the MicroStrategy story? We put $7.5 billion into the Bitcoin network to get a 1% share. If you actually look at the 200-week simple moving average, or all the trading patterns, or look at the size of MicroStrategy, you'll find that about $700 billion of real money is invested in Bitcoin. So what is the largest amount of money invested in the second-best cryptocurrency? Not even 1%. I repeat, not even 1%. So all the smart money in the world is looking at Bitcoin for the world's greatest crypto property, or the world's greatest digital capital network.
All the smart money went to Bitcoin. You know, what does the dumb money do? The dumb money goes to gamble. If you're drunk or just having fun on the weekend, fine, you can do it. But if you're really thinking about investing for your family, 30 years from now, to preserve the value of your company, your country, your family, your institution, you're not going to take your money to Las Vegas or Macau to gamble. Right? When I say there's no second best option, Bitcoin has the most economically sound protocol, it's the least susceptible to corruption, devaluation, inflation. It has the most technically sound protocol, it hasn't been hacked yet. It's the least susceptible to hacking, and why is that important? Because if it's not ethical, the regulators will designate it as an unregistered security or a criminal enterprise and shut it down. And that's what's happening now.
Why are there 22 physical Bitcoin ETFs? Because regulators believe Bitcoin is an ethical good, the best good. Why are there no other ETFs? Because they won't allow you to package corporate property or criminal property as institutional securities. I mean, their job is to protect investors, so you can't let that happen. If you really want to pick winners, when you invest in digital devices, you better pick Apple; when you invest in digital information or digital search, you better pick Google; when you invest in digital relationships, you better pick Meta; when you invest in corporate digital processes, you better pick Microsoft. Because there is only one digital winner in each field, and the others are crushed into dust, and Bitcoin is digital capital, it is the winner of the network. Now you can see that there is really no second best choice.
