The man behind Michael Saylor, MicroStrategy CFO Phong Le talks about Bitcoin investment strategy

Background: Cryptocurrency has become one of the most widely used applications of blockchain distributed ledger technology. In August last year, MicroStrategy, a business intelligence software producer, began to enter the cryptocurrency field, and its corporate finance department bought $250 million of Bitcoin as its main reserve asset. In the interview, President and CFO Phong Le will talk about the advantages and logic behind his holding of Bitcoin, as well as his own thoughts on Bitcoin and accounting business, operating reports, board of directors and investor relations.

Q: In a low-interest environment, treasurers are always looking for more efficient use of cash. Can you talk about MicroStrategy's rationale for buying Bitcoin?

Phong Le (hereinafter referred to as Le): Due to the epidemic, many governments are increasing their money supply through quantitative easing. This means that things in the form of fiat currency, such as the US dollar, are depreciating at a rate of 15% to 20% per year. The traditional way to invest is to invest in treasury bonds, but it is not a wise choice to keep money completely in fiat currency because it can be "devalued" at any time in a form that the government is happy with. Therefore, it is wise to find a diversified investment method.

Conventional thinking is that excess cash should be returned to shareholders, and there is nothing wrong with a company using its profits and balance sheet to increase shareholder income. But I believe that the first use of excess cash flow should be to reinvest it in the business, which is the best option for shareholders, employees and customers. Our business is highly profitable and growing, and we have invested an appropriate amount of cash in it. Returning cash to shareholders does not necessarily generate additional benefits for customers or employees, although it will generate a good return to shareholders in the short term.

When we were thinking about where to go with our $550 million in cash flow, we looked at everything from corporate bonds to stocks and commodities like silver and gold, and ultimately we decided that Bitcoin was the best solution, as long as we could tolerate short-term volatility in exchange for potential long-term asymmetric returns. Over the past six to eight months, we have proven that Bitcoin's volatility is reasonable in the short term, and as we see more corporate treasurers seeking positive views on what to do with excess cash, I think it's something everyone should consider.

Given our public company structure and our business that consistently generates significant cash flow, we are able to do something unique that most of our shareholders cannot do on their own: use our excess cash to purchase cryptocurrency. If we return the money to our shareholders, most of which are large institutions and banks, they cannot use it to purchase Bitcoin due to the rules and regulations they need to follow. But we do give shareholders the opportunity to sell their shares back to the company if they disagree with our Bitcoin acquisition plans. Those who do not sell have the opportunity to continue to invest in MicroStrategy, and by doing so, we believe we can provide shareholders with more incremental value.

Q: With so many cryptocurrency options out there, what makes Bitcoin stand out?

Le: Bitcoin is digital gold, which makes it even better than gold. You can move Bitcoin across regions and jurisdictions at the speed of light without the friction loss of moving fiat currency or gold. In terms of other cryptocurrencies, Bitcoin is dominant in terms of global acceptance and recognition; after more than a decade of development, it has proven to be the market leader and the one with the most institutional adoption at the moment. And from a purely technical perspective, Bitcoin is the foundation for other cryptocurrencies.

Q: How did you convince the board, shareholders and other stakeholders to invest in Bitcoin?

Le: The first thing I would recommend to anyone considering buying Bitcoin is a lot of research. There is a lot of information available through mainstream channels, and of course it includes both positive and negative information about Bitcoin, and you should consider both sides. Everyone has some kind of opinion about Bitcoin, but they are not all based on facts. When we planned the discussion with the board, we first allocated a few hours of videos and reading content. With this, we were able to have a better basis for discussion relative to our other investment options. We also brought in lawyers, bankers, and other advisors to seek their opinions and discuss the pros and cons of institutional acquisition of cryptocurrency, which is different from retail investment.

Once we were done with the discussion and the board was happy with the progress, we began to think long and hard about what our investor relations strategy should look like, and we came up with a multi-step plan. In our second quarter earnings report last year, we said that we had over $500 million in additional cash, that we intended to return up to $250 million to our shareholders, and seek to invest another $250 million in one or more alternative assets, which could include digital assets like Bitcoin. We put an open tender for $250 million, and if any shareholder didn’t like the current investment strategy, we could repurchase the shares at a 15% premium. We even made an offer to buy back all the shares, but in the end, we only bought $60 million of shares from shareholders who wanted to sell. Since the remaining shareholders thought the current investment strategy was promising, we put all of the remaining $190 million of available funds into the investment strategy.

Our reserve policy is very simple. As long as we hold cash flows in excess of our working capital needs, which is about $50 million, they are allocated to Bitcoin investments. We hold Bitcoin as our primary reserve asset, just as many other companies hold the U.S. dollar as their primary reserve asset. In our most recent 10-K, we clarified that we have two corporate strategies in place for our business operations: growing our enterprise analytics software business, and acquiring and holding Bitcoin. You hear a lot about the idea of ​​using cryptocurrency as a medium of exchange, but that's only a small part of the market. We don't use it for transactions; we use it as a store of value.

Q: In terms of accounting and reporting, how does MicroStrategy handle its acquisition and holdings of Bitcoin?

Le: In accounting, if you were to buy and hold your own Bitcoin, it would be accounted for as an intangible asset. Another option to hold your own Bitcoin is to invest in a fund, in which case fund accounting allows you to price it at market price. We are working with other like-minded institutions and companies to research more appropriate accounting for Bitcoin.

Q: Aside from Bitcoin’s use as a store of value, are you implementing Bitcoin in any active operational financial functions?

Le: We have an interesting debate about how to use Bitcoin in our business. The underlying yield of Bitcoin is quite high. If you expect the value of Bitcoin to grow by 100% every year, as it has done over the past 10 years, then any investment in our operations must cross that 100% yield target. But even with a very conservative estimate, say Bitcoin will go up 20% per year, the return on investment required for our business is still high. Imagine if we could achieve a 20% return by investing $100 million back into our business? It is possible, but we have to think carefully and plan for the long term. We plan to build one or two teams to look at how we can make money from blockchain, the distributed ledger technology behind Bitcoin, or the analytics technology around Bitcoin. And I can confirm that integrating blockchain into the finance department will not generate a 20% return, let alone a 100% return, so the best way to operate at this time is to continue our Bitcoin acquisition strategy. We will certainly consider opportunities to apply blockchain to finance, as long as our customers or employees want it, then we will consider doing it.

Q: What risk management process do you use for the Bitcoin you hold?

Le: In terms of control, people are concerned about how Bitcoin is kept. Some people ask me if I walk around with the password to our digital wallet hanging around my neck. Obviously, I don't. We use investment-grade and industrial-grade custody arrangements to store our digital wallets, and we treat it like a bank account. No one can transfer money in or out of our bank account or our custody account on their own. To do anything with our custody account, you need to go through a multi-level approval process similar to the control of a bank account. So we have a thorough custody plan and we have procedures in place to do that.