|  | | | | Are You Ready to Take the Orange Pill? |
| Is Bitcoin real or fake? This could be the most important question any investor can ask today, whether they have Bitcoin exposure or not.
In the late 17th century, the French philosopher Blaise Pascal proposed a similarly challenging (and perhaps even more important) question. Is God real or fake?
Now known as Pascal’s Wager, his answer actually marked a critical advancement in human thought. Pascal’s approach would lay the groundwork for modern decision theory and other major developments in Western philosophy.
Pascal addressed the question by thinking through the consequences of his response. Pascal reasoned that if he chose not to believe in God, and there was in fact no God, he would perhaps have the satisfaction of being correct. But if he chose not to believe in God, and God did in fact exist, his failure to believe in God would ultimately result in eternal damnation (in addition to a missed opportunity to attain eternal bliss in Heaven).
Pascal approached this existential philosophical question as an investor might. He asked himself, what is the risk/reward? Emphasis was placed on the relevance of the statement being true or false.
Champions of Bitcoin today are framing the question of belief in Bitcoin in a similar way… and they are suggesting a similarly lopsided range of potential outcomes. If Bitcoin isn’t real, an investor potentially loses up to 100% of his investment. But if Bitcoin is real, the upside potential is truly enormous—many, many times larger than any potential investment one might make.
It’s crucial to understand that the future evolution of Bitcoin does not just affect investors in Bitcoin. The central premise of the Bitcoin upside case is that Bitcoin grows from being what is now a large asset class into a materially large asset class.
If Bitcoin were to appreciate to this extent, it would have huge implications for investors in all other asset classes. It would also likely transform the way the global economy works and disrupt many traditional business models that are based on prevailing fiat currency frameworks.
Introducing Michael Saylor
We had the opportunity to meet with Michael Saylor and many other key players in the digital currency space earlier this week at an investment conference in New York that was sponsored by H.C. Wainwright & Co. |
|  | Michael Saylor and Blaise Pascal |
| Saylor was the keynote speaker of the conference. Trish had the great honor of introducing Saylor and telling the packed audience of institutional investors about his many accomplishments and fascinating career in technology. |
|  | Presentation at H.C. Wainwright Conference (9/10/2024) |
| Michael Saylor is founder and Executive Chairman of MicroStrategy (MSTR), a software company based in Virginia. MSTR now pursues a business strategy that is built around providing investors leveraged exposure to Bitcoin.
Saylor was originally a big skeptic of Bitcoin and digital currency, a fact he openly shares. His perspective on Bitcoin has evolved dramatically. In August 2020, he made waves when MSTR became the first publicly traded company to make investing in Bitcoin a key part of its capital allocation strategy. |
| | This investment reflects our belief that Bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash. - Michael Saylor (8/2020) |
| | Since making an initial investment of approximately $250 million to purchase just over 21,000 Bitcoin, MSTR has used its cash flow as a software operating company, and more importantly its borrowing capacity, to buy much more.
MSTR has now accumulated 226,500 Bitcoin (as of July 31, 2024). Based on current trading prices, the Bitcoin stake sitting on the company’s balance sheet is worth approximately $13 billion, versus a total cost of approximately $8 billion.
Saylor owns approximately 10% of MSTR, which represents an approximately $2.4 billion stake. In 2020, he tweeted that he personally owns 17,732 Bitcoins, which he purchased at an average cost of just under $10,000 per coin, prior to MSTR beginning its Bitcoin accumulation strategy. He recently confirmed to Bloomberg that he has not sold. This implies a direct personal Bitcoin stake worth approximately $1 billion.
With immense personal exposure to Bitcoin, Saylor has become one of the digital currency’s most vocal and aggressive proponents. Everything he says about Bitcoin should therefore be taken with a grain of salt. He is clearly “talking his book.”
On the other hand, no one is forcing him to have such a massive allocation to this particular investment. If he did not actually believe what he was saying, he would probably be pursuing a more diversified personal investment strategy.
An objective look at Bitcoin
Readers of the 76report understand our commitment to independent and objective analysis. We are not advocates for any particular asset class, securities or investment strategy. Our only goal is to identify investments that we believe will perform well and share them with subscribers.
Generally speaking, objective and disinterested investment analysis is difficult to come by, since so much investment-related content is generated by parties that have some kind of vested interest. When it comes to Bitcoin, this is particularly true.
The Bitcoin hype machine is extensive. There are many business models predicated on their customers believing that Bitcoin still has enormous upside potential. Because Bitcoin is in many way untethered to the physical world, the nature of the asset lends itself to highly appealing fantasies of infinite wealth creation.
A lot of people have strong incentives to push wildly bullish narratives on Bitcoin. We do not. Our only incentive is to support narratives that will actually work.
That being said, while a heavily hyped narrative may indeed be a red flag, it does not necessarily mean it is incorrect or a scam. In fact, hype itself can become a reality. Our entire consumer economy is largely built around multi-billion dollar brands that are essentially manufactured out of thin air.
It is worth considering as well just how successful Bitcoin has been so far. If it is indeed a scam, it has gone quite far over the last 15 years.
Just under 20 million Bitcoins have been mined since the system was created in 2009. At current prices around $57,000 per Bitcoin, this puts the total value of all Bitcoins at more than $1.1 trillion. A company that was valued this highly would be one of the ten most valuable companies in the world. |
| | Short Primer on Bitcoin
Created in 2009 by an anonymous person (or group of people) under the pseudonym Satoshi Nakamoto, Bitcoin is a decentralized digital currency. It is based on a peer-to-peer network that eliminates the need for intermediaries like governments and banks. The key to this system is blockchain technology, which creates a “distributed ledger” that records transactions across a network of computers.
Bitcoin relies on a process called “mining” in which powerful computers solve complex mathematical problems in order to validate transactions and add new blocks to the chain. This is done to ensure transparency and security, a function that would otherwise need to be performed by intermediaries.
To incentivize the costly mining activity needed to make the system work, which not only requires advanced computing capability but is highly energy intensive, miners are rewarded with new Bitcoins. The current supply of Bitcoins is just under 20 million, but the total supply is capped at 21 million. Every four years, the reward for mining is cut in half (a process known as halving), and eventually miners will only be rewarded with transaction fees.
Bitcoin can be stored in digital wallets. Each Bitcoin has a key that permits the use of the Bitcoin in a transaction. Technologically savvy individuals can transact with Bitcoins directly by using this key, which functions like a password or secret code. Alternatively, Bitcoin can be owned through custodians like Coinbase (COIN), who protect the key. Funds and other legal entities that own Bitcoin, such as recently approved Bitcoin ETFs, often rely on such custodians.
Because of the extreme complexity of the mathematical problems used in Bitcoin mining, Bitcoin is said to have never been hacked (although security breaches can occur at the custodian layer or higher).
By market value, Bitcoin represents more than half the cryptocurrency market and is about four times larger than Ethereum, which sits in second place. |
| | Saylor’s narrative
Notwithstanding his unbridled enthusiasm and vested interest, Michael Saylor may be the most credible and articulate proponent of Bitcoin that we have encountered. His ideas deserve serious attention.
Born in Lincoln, Nebraska in 1965, Michael Saylor was the son of an Air Force chief master sergeant who spent his early childhood at military bases around the world before the family settled in Ohio. He attended M.I.T. on a full Air Force ROTC scholarship, where he studied aeronautical and astronautical engineering and the history of science.
Saylor is not your typical “crypto bro.” He founded MSTR in 1989 after spending several years developing advanced software systems for DuPont. He has dozens of patents to his name.
While we encourage readers interested in his perspective to watch his full presentation along with other ones that are available on his website (conveniently called michael.com), we will take this opportunity to summarize and assess the key concepts that he put forward earlier this week.
(1) What actually is Bitcoin?
A good portion of Saylor’s presentation revolves around establishing a mental model for Bitcoin beyond the technical definition. Saylor describes Bitcoin as the “transformation of our capital from financial & physical assets to digital assets.” He views the development of Bitcoin as a “paradigm shift” and a “fundamental technology shift.”
In essence, Saylor views Bitcoin as the implementation of a new and superior technology that represents a major advancement in money, perhaps not dissimilar to the leap from beads to paper currency. He describes Bitcoin as “the first perfect money” as it solves many problems with traditional approaches to transferring and storing economic value.
(2) What problems does Bitcoin solve?
Saylor believes Bitcoin has succeeded and will continue to succeed because it preserves value, or what he calls “economic energy,” in a way that no physical asset can. As a purely digital asset, Bitcoin is not subject to the forces of depreciation and risk that erode the value of other assets, from physical deterioration to taxation to political risk.
As Saylor puts it, “digital capital is like all the benefits of holding something tangible with none of the detriments.”
(3) Why will Bitcoin prevail over digital competitors?
While the idea of a decentralized digital currency may represent a valuable technological advancement, why should Bitcoin be the one that prevails? Here, Saylor points to the relatively poor performance of other digital currencies over time.
He also equates Bitcoin to the “digital monopolies” that characterize mega cap technology stocks. The idea is that network effects will only permit one truly dominant platform when it comes to digital money, similar to what we have witnessed in other areas.
(4) How high can Bitcoin go?
Saylor outlines various scenarios that he believes are plausible as far as how much Bitcoin can appreciate in the years ahead as it outpaces fiat money creation and establishes itself as a global monetary standard.
In his worst case scenario, Saylor sees Bitcoin evolving from a mere 0.1% of total global asset value to 2%. This implies a 50-fold appreciation in the value of Bitcoin over the next 20 years, with Bitcoin reaching $3 million. His base case, Bitcoin at $13 million in 2045, involves a 200-fold increase as Bitcoin becomes 7% of all global assets. |
|  | While this sort of performance forecast may seem extreme, when represented graphically in the context of all global assets, it looks more realistic. |
|  | Bitcoin at $1 trillion (today) |
|  | Bitcoin at $280 trillion (2045) |
| Political acceptance
A key theme that permeated Saylor’s presentation, which also made the largest impression on us, was the extent to which Bitcoin has achieved political, legal and institutional support.
As Saylor emphasizes, the value of Bitcoin is its lack of a physical reality. What is Bitcoin ultimately? It is simply a robust system with digital tokens that are extremely difficult if not impossible to hack. Bitcoins don’t have the defects of real world assets because there is in fact nothing to them beyond the key itself.
All that being said, what is the U.S. dollar? It is also “backed by nothing,” so to speak. But it has value because it is integrated within the prevailing political system. Dollars have value because they are a form of money that allows us to participate in the U.S. economy.
Bitcoin has made tremendous strides forward embedding itself in the United States and around the world as a legitimate monetary instrument. The SEC has approved Bitcoin ETFs. Whereas there was historically a lot of concern that Bitcoin would be outlawed, as time passes it has only achieved deeper acceptance.
The more valuable Bitcoin becomes, the more influence Bitcoin has over our political system. We were struck in this regard by a top comment on X, where Saylor posted his presentation, by Peter Schiff, an investor with whom Saylor has publicly sparred.
Schiff is a Bitcoin skeptic, to say the least. Saylor’s presentation contained a video clip of Larry Fink of Blackrock now saying many positive things about Bitcoin. (Blackrock is now highly involved in Bitcoin ETFs and other products.) Schiff writes: “Larry Fink only changed his mind because his firm makes money off of people who buy it and trade it…. It’s not the first time Wall Street sacrificed customers to make a buck.”
Ironically, Schiff is proving Saylor’s point. The more that powerful groups and people become aligned with Bitcoin’s success, the more integrated Bitcoin becomes within our system, almost like a second fiat currency.
Along these lines, an illuminating point Saylor made in his presentation is that Bitcoin’s connection to the United States is the source of its appeal worldwide. As Saylor put it: “Nobody wants to own anything that isn’t tied into the most secure, most powerful network in the world.”
Bitcoin is now providing the world easy and secure technological access to a form of money that is increasingly backed by the U.S. political system and integrated within the U.S. economy.
Recent political developments in the United States have been quite positive for Bitcoin as the Trump campaign and many elements within the rapidly evolving Republican Party eagerly embrace Bitcoin. Part of this stems from distrust of the Federal Reserve. Part of this stems from the influence of the tech industry and venture capital.
The afternoon prior to Saylor’s keynote address, Trish hosted a fireside chat at the same conference with former Presidential candidate Vivek Ramaswamy. Vivek represents a new breed of American politician, along with J.D. Vance, RFK, Jr., and now Donald Trump, who are pushing for greater acceptance and implementation of Bitcoin across our economy. |
|  | Vivek with Trish at H.C. Wainwright Conference |
| …Bitcoin in particular is an alternative to that game that the Federal Reserve is able to play from on high like God printing man money from heaven, like Manna from heaven. It’s a fixed supply, there’s no new issuance, and it’s something that everybody is able to hold in a decentralized, anonymous manner. - Vivek Ramaswamy (12/13/2023) |
| | In the tech sector, there is a concept of the “fly wheel,” a virtuous cycle where growth begets more growth. We would propose that the more Bitcoin becomes entrenched within our financial system, the more influence it gains over our political system, the more entrenched it becomes within our financial system.
What would Pascal do?
There is clearly a fair degree of unsubstantiated speculation embedded in Saylor’s forecasts, given the extremely positive outcomes associated with investing in Bitcoin. If he is right, or even somewhat right, a rational investor attributing any credence to his comments should feel an urge to buy at least some Bitcoin.
There is both an offensive and defensive component to investing in Bitcoin in the event Saylor is right. If Bitcoin were to emerge as a meaningful component of global assets, it would essentially dilute the value of other assets.
Wall Street traders, known for their fondness of colorful language, have a commonly used phrase… “schmuck insurance.” It refers to buying a little bit of something, even if you don’t totally agree with it, to soften the blow just in case you are wrong.
If Blaise Pascal were to become reincarnated as an investor in the 21st century, he may well feel the need to invest in Bitcoin as a form of schmuck insurance. Just in case Michael Saylor is even partially right.
There are many options available to investors seeking exposure to Bitcoin and potentially other forms of digital currency, like Ethereum (which may be more interesting than Michael Saylor is willing to acknowledge, because it represents a technology with different use cases).
Our own views on the subject are evolving as we learn more and gain a better understanding of the investment opportunity set. We intend to continue to discuss the profound changes taking place in the economy as a result of cryptocurrencies in parallel with rapid developments in AI. |
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