16th December 2024 > > Strategic reserves & MSTR.

tl;dr

Sovereign strategic reserves and MicroStrategy guarantee an ongoing bid for BTC.

Market Snap

Market Wrap

Another ATH at $106.5k as the Asian markets rightly conclude that the spot BTC ETFs buyers will be back in size again today.

China’s economy is beginning to look ever more precarious. Will those in control of the yield curve let reality take over, with some painful adjustments to the banking system’s balance sheet and subsequent economic retrenchment, or do they print a load of cash to forestall that day once more? I think we know the answer to that one.

Curious Cryptos’ Commentary – BTC strategic reserve

Cynthia Lummis’ Boosting Innovation, Technology, and Competitiveness through Optimized Investment Nationwide Act of 2024 (Bitcoin Act of 2024) mandates the US to buy 1mm BTC, just shy of 5% of the total supply, over a period of five years, to be held for a minimum of twenty years, but in all likelihood in perpetuity.

It seems probable to me – and I know some of you disagree with me on this point – that this will encourage others to follow. Russia has already raised this as a distinct possibility, and China is surely not far behind. I think we can safely assume that the UK will once again let a fabulous opportunity pass by with nary a glance in its direction. It is shame that our current administration, which disagreed with the last lot on all other topics, decided that as far as cryptos go it would be as strong a denier as Sunak and Hunt, though that is not actually his real surname, but this is a family-friendly publication so I have to change it a little.

The US legislative process is probably not best described as rapid, even with one party’s control of both houses, the Presidency, and all the intermediate levers of power. I am as anxious as you are that the US gets on with its BTC buying spree. And I read that might well be the case.

There has been some discussion that Trump could use the Dollar Stabilization Act to buy BTC on day one of his second term.

If – and that is a big if – Trump has been honest with us about his vision for the US’s place in the crypto revolution, there is a material possibility that the US starts buying BTC in just five weeks’ time.

That is exciting.

Curious Cryptos’ Commentary – MicroStrategy (MSTR)

I can’t help myself. We must revisit this news that MSTR is joining the Nasdaq 100 next Monday.

Our resident techie Larry has given himself some time off from drawing squiggles on a graph to look at the fundamental basis behind MSTR. Note that this is just an opinion, one man’s point of view (and mine to be fair), and is not to be interpreted as financial advice. The CCC always remains focussed on developments that impact the adoption or otherwise of BTC and cryptos more generally. As you will soon see, this analysis of MSTR fits exactly within that framework, which is why I include it here, and for no other reason.

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First up, Larry looks at the valuation of MSTR versus BTC, a topic that is much discussed in the financial world, almost always with the conclusion that MSTR is overpriced, and to a considerable degree. I am happy to report that Larry’s contrarian nature is to the fore on this one. Let us join the conversation near the first conclusion of Larry’s analysis of MSTR:

“If you treat the accretion of BTC per share as yield (and after all, what's the difference, traditional corporate yield - profit - ends up on the balance sheet as an asset anyway), then MSTR is massively undervalued. If they have added $40bn of accretion and you valued that at 20x as you would if it was profit, then the market cap should be around $900bn.

That is nearly 10x what it is now (MSTR closed on Friday with a market cap of $98bn but will be a lot more on today’s open – Ed). And growing very quickly!

So basically, the premium to NAV is nowhere near high enough.”

That is not what the crypto deniers want to hear.

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MSTR’s BTC acquisition strategy is based upon issuing convertible bonds (CBs) to raise funds. Convertible bonds have been around a long time, but they are a niche product combining both traditional fixed income elements with potential equity upside too. Matters are complicated with zero-coupon, or near zero-coupon, interest payments which interestingly completely changes the dynamic of valuing future cash flows. Interesting to me anyway, but I suspect not to you, so we will move on.

CB buyers are focussed on equity vol, with an ongoing battle to find the arb. Michael Saylor knows that, and is very much prepared to play that game in his quest to keep buying BTC. Larry explains:

“But one thing we do know is that it will continue to be volatile and MSTR is essentially selling that volatility to the fixed income market. So, the acquisition strategy is not completely correlated to BTC price, more to its volatility.

There will continue to be demand for the CB's because where else are they getting to buy 70 vol? And he's actually pricing it as 60 vol so there's immediately 10 that is being left on the table on day one for CB buyers.”

Give them free money, which is what Michael is doing, and the buyers form a massive queue. Michael is also on a mission to explain to the world his new concept of Bitcoin Yield. Larry nails it:

“As the market starts to understand the increasing sats per share due to the accretiveness of the CB sales, they will start to reprice the stock to value that "yield". That means the NAV premium rises more, meaning the ATM equity sales are even more accretive and the flywheel keeps turning. I'm betting that eventually the accretive sats per share will be understood and priced and at that point the premium to NAV will be huge.”

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And that was the base case before the Nasdaq news, which frankly is a game-changer. Over to Larry one final time today:

“It is official that MSTR is joining Nasdaq 100.

Perpetual bid for MSTR ==> perpetual bid for BTC ==> MSTR goes up ==> more ATM and CB fund raising ==> more BTC BUYS ++> everyone tracking the QQQ has to buy more MSTR and round and round.

The rebalancing flows for MSTR over the next 12 months are going to be insane, all of which will get recycled back into BTC through ever more expensive CBs, making those expensive CBs ever more attractive.”

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The US, Russia, & China are not the only big buyers in town.