Should You Follow MicroStrategy & Use Debt to Buy Bitcoin?

$MSTR

MicroStrategy, the billion dollar publicly traded business intelligence software company became famous among the Bitcoin community after announcing it has adopted Bitcoin as their primary treasury reserve asset. Now it has taken its Bitcoin position one big step further.

MicroStrategy is issuing $650M of unsecured corporate debt at an interest rate of 0.75% that is not due until 2025.

This means that MicroStrategy is borrowing $650M at an incredibly low interest rate without having to post any collateral. All MicroStrategy must do for the next 5 years is pay $4.9M in interest each year, which their annual cash flows are more than enough to cover that expense.

And of course, as long as Bitcoin goes up more than 0.75% annually over the next 5 years, this will be a profitable trade for MicroStrategy. This shouldn’t be a tall order for Bitcoin either, as it is up 5,214% over the previous 5 years.

Can individuals take on debt structured like this?

Unfortunately, nobody is willing to give individuals an unsecured (you put up no collateral) loan at a 0.75% interest rate that isn’t due for another 5 years.

If you own your own private company, you may have opportunities to take on debt that most individuals do not have, but personal debt options are rather limited compared to the financial markets that billion dollar publicly traded companies have access to.

If you want to take on personal debt to buy Bitcoin, you’re likely going to have to put up some form of collateral. It is relatively easy to borrow against three things. They are real estate, stocks, and Bitcoin.

Believe it or not, if you have a mortgage on your house and you own Bitcoin, you already are a leveraged Bitcoin holder. In fact, if you have any debt (student loans, car loan, credit card, etc.) you are using leverage. You could use your Bitcoin holdings to pay off your debt, but you’d rather have exposure to Bitcoin and take on the risk (of the debt).

Let’s take a look into each of the three options you could leverage against to buy more Bitcoin.

Real Estate

Pros:

  1. You likely already own a house.
  2. It’s relatively easy to get a mortgage.
  3. 30yr Fixed Rate Mortgage currently has an interest rate of less than 3%.
  4. Real Estate can generate cash flow (tenants).
  5. Not as volatile as stocks.

Cons:

  1. You have to make a (somewhat significant) down payment.
  2. COVID uncertainty poses a risk to market prices especially in large cities.

Stocks

Pros:

  1. Easy to borrow money through a brokerage account (Etrade, Fidelity, etc.)

Cons:

  1. Higher interest rates than mortgages.
  2. Risk of a margin call because they are volatile and traded daily.

Bitcoin

Pros:

  1. If you want to buy more Bitcoin you likely already have Bitcoin.
  2. You can do it in a non rehypothecated manner (Unchained Capital).

Cons:

  1. High interest rates (nascent market).
  2. Risk of a margin call due to extreme volatility.

Fragility of Debt

All of the options require you to post collateral, and you have margin risk that the collateral you post goes under the amount of you owe. MicroStrategy is not exposed to these risks due to the nature of how corporate debt can be issued.

Taking on debt will amplify your returns. Due to potential tail risks and unexpected volatility, debt makes your portfolio fragile.

In The Investor’s Podcast with Preston Pysh and Luke Gromen, they talk about how volatile gold traded (on a month to month basis) during the Weimar hyperinflation.

If you look back to a chart of the price of gold in the Weimar Republic, the line appears to be going entirely up, but if you zoom in to see the price of gold at the end of each month, nasty quick down swings tended to occasionally follow the endless parabolic upswings.

Weimar Hyperinflation by PlanB on Twitter

Luke referenced this and mentioned that if you were using leverage to buy more gold, you were likely “wiped out four or five times”.

This is an extremely important point to understand. Debt makes your portfolio fragile, especially if you haven’t structured it correctly.

Leverage Long Bitcoin?

With that said, if you have found Bitcoin to be the world’s safest asset, and you have extra steady cash flow from your job, business, or real estate, it may make sense to use a small amount of debt to purchase Bitcoin.

As long as you have more than enough steady cash flow to cover all potential monthly payments on your debt, and the value of all your assets (bitcoin, real estate, stocks, etc.) is significantly higher than the amount you owe on your liabilities, then it might be worth considering.

Big Picture — Speculative Attack

While discussing a speculative attack entirely requires its own unique report, using debt denominated in a weak currency to purchase a stronger, more scarce currency is the definition of a speculative attack.

The US Dollar and all other fiat currencies today are debt based. Meaning more dollars can only be created by issuing new debt within the financial system. Michael Saylor and MicroStrategy just “created” an additional $650 Million USD to buy a share of Bitcoin — the only money with a truly fixed supply.

A speculative attack has the potential to start an aggressive positive feedback loop. As more companies, individuals, and even governments begin borrowing in weaker currencies to buy harder money like Bitcoin, they devalue the weak currency (by borrowing it), and increase the value of the hard currency (by buying and saving it).

As MicroStrategy does this, it begins to incentivize other corporations and individuals to do the same because the value of the dollar falls and the value of Bitcoin increases.

It is very possible that we are witnessing the early stages of a large speculative attack on all fiat currencies.

Written by Joe Burnett (@Moon__Capital), Research Analyst at Mimesis Capital.

Bitcoin denominated family office fund focus on generational wealth preservation leveraging Bitcoin tech. We invest 100% of our liquid portfolio in Bitcoin.