MicroStrategy co-founder Michael Saylor shared his personal Bitcoin investment philosophy and MicroStrategy's Bitcoin journey with Bernstein's global digital asset senior analyst Gautam Chhugani.

Source: Michael Saylor's personal blog

Translation: Yangz, Techub News

On October 9, MicroStrategy co-founder Michael Saylor participated in a fireside chat hosted by Bernstein's global digital asset senior analyst Gautam Chhugani, sharing insights about his personal Bitcoin investment philosophy and MicroStrategy's Bitcoin journey.

Michael Saylor's Bitcoin Investment Philosophy

Gautam Chhugani: Today, we have the pleasure of inviting Michael Saylor, co-founder and executive chairman of MicroStrategy, who will introduce us to his Bitcoin investment theory and the evolution of MicroStrategy. Now, I will hand it over to Michael.

Michael Saylor: I graduated from MIT and founded MicroStrategy in 1989. The company went public on NASDAQ in 1998. I have been with this public company ever since. We built a $500 million enterprise software business with a global reach. However, by 2020, I realized the company was actually in a low-growth state, with a $500 million valuation, about 1 times revenue, and holding $500 million in cash. The question was whether to distribute dividends to shareholders or buy back stock. Should we pursue high-risk acquisitions, mergers, or transformation deals? We needed to make a change because we were stuck. Ultimately, we decided to buy Bitcoin.

We believe Bitcoin is a large technological monetary network, akin to the currency of Google or Facebook. If you could have bought Amazon, Apple, Facebook, or Google stock 10 years ago when mainstream investors were just starting to understand them, you would have seen returns of 10x, 20x, or even 30x. Similarly, if we bought Bitcoin 10 years before everyone understood it, we would achieve 10x or 20x returns, revitalizing the company. This was not a difficult decision because the alternative was the then-Federal Reserve Chairman's announcement of "no interest rate hikes for the next four years." Therefore, when we faced this issue in 2020, we boldly chose the path of adventure among the options of short pain, long pain, and risk, embarking on our Bitcoin journey. What I want to share next is the story that has unfolded since then.

Let me start with a question: what is the investor's dilemma? The so-called investor's dilemma is that almost all returns in the S&P 500 index come from 1% of companies, namely the FAANG stocks. If you are not a digital monopoly like Microsoft, Apple, or Amazon, competing in the modern world becomes increasingly difficult. The problem investors face is whether to hold 5 companies in their portfolio for returns or to hold the other 490 companies that seem to be losing money. Traditional diversified portfolios underperform compared to the Magnificent 7, and almost all alternative investments either lack liquidity or scalability. This is the dilemma faced by every family office and institutional investor, and it is essentially the subtext of daily discussions on CNBC. So, aside from investing in the Magnificent 7 and lying flat, what can we do? Could Bitcoin be the solution?

Looking at the performance of asset classes over the past 15 years, you will find that if your target interest rate is a 2% consumer inflation rate, you might be able to beat it with many different strategies (gold, preferred stocks, high-yield bonds, U.S. real estate investment trusts, etc.). But if your actual threshold interest rate is the S&P index (which is like the monetary inflation rate, reflecting the speed of monetary supply expansion), you will find that most traditional strategies underperform the monetary inflation level (averaging 13% annually). If you are heavily invested in tech stocks, you might outperform this level. But no traditional strategy performs as well as this. That is the challenge.

Now, looking at Bitcoin, it has returned 49% over the past 4 years (annualized return). It should be noted that 49% is not the highest; on the contrary, a 49% annual return is the lowest performance Bitcoin has shown in this asset class. It has not only crushed all investment products over a 4-year investment horizon but has also outperformed everything over 6, 8, 10, 12, and 14-year time frames (Bitcoin's average returns are 46% over 6 years, 78% over 8 years, 65% over 10 years, 103% over 12 years, and 168% over 14 years). Over the past 14 years, Bitcoin has been the strongest asset for 11 of those years. Moreover, Bitcoin is like the elephant in the room. Before you can buy Bitcoin, it is easily overlooked, especially when its market cap was less than $100 billion. However, Bitcoin is now a trillion-dollar asset class, growing faster than all other assets, so I believe it makes sense to pay attention to it.

Bitcoin advocates (I am one of them) believe the following:

• It is digital gold, digital capital, digital property.
• It is the perfect currency.
• It is the greatest digital transformation of the 21st century.
• It is a unique diversification tool.
• It is an ideal capital asset.
• It is a revolution in financial thinking.
• It is a paradigm shift in economics.

On the other hand, skeptics of Bitcoin argue:

• It seems too good to be true.
• It is a currency used by criminals.
• It has no real use case.
• It is extremely volatile.
• It has no physical backing.
• It will be banned by governments.
• It will be phased out.
• It will be hacked.

You can always hear these criticisms. But I want to say that everyone who supports Bitcoin initially opposes it. I opposed Bitcoin in 2013. That year, I tweeted: "Bitcoin's days are numbered. It will eventually meet the fate of online gambling." I thought that whatever it was, regulators would not allow it to survive. At that time, I didn't need to understand Bitcoin. But by 2020, I had a need, as I mentioned earlier, it was a near-death experience. So, I began to delve into Bitcoin, jumping down the rabbit hole, and concluded that Bitcoin is a moral imperative. It represents the property rights of 8 billion people on Earth, a way for 300 million companies to escape economic stagnation, and a solution to the investor's dilemma. It is the greatest technological transformation of the 21st century. I wrote on Twitter: "Bitcoin is a network of worker bees serving the goddess of wisdom, feeding on the fire of truth, growing exponentially behind the wall of cryptographic energy, becoming smarter, faster, and stronger."

Everyone's Bitcoin journey goes through 5 stages. In the first hour, you start to learn about Bitcoin and become a skeptic. Then, you think of all the ways Bitcoin could go wrong. After 10 hours, you begin to conclude that it is an asset, buying low and selling high. After 100 hours, you become an investor. You start to think of Bitcoin as a global, digital, big tech monopoly network, like Google, Facebook, or Amazon. Everyone wants it, no one can stop it, but most people do not understand it. After 1000 hours, you will feel that Bitcoin is more moral than Google. It is an asset without an issuer; it is not a stock. Investing in Bitcoin is not the same as investing in Microsoft or Apple. It gifts the world property rights, integrity, freedom, and empowerment, just like electricity, steel, fire, water, and clean air, becoming a tool for economic empowerment. At this point, you become a Bitcoin maximalist, believing that Bitcoin is beneficial for the world.

If you have been exposed to Bitcoin for less than 100 hours, then welcome to the 1-hour Bitcoin investor crash course. I will help you transition from a skeptic or denier to an investor. As for becoming a maximalist, that will come later.

Understanding Bitcoin requires returning to first principles. On the MIT campus, the names of Darwin, Newton, Maxwell, Curie, Archimedes, Pythagoras, and all the great mathematicians and scientists are inscribed. These great thinkers brought us the modern world. What I want to say is that Bitcoin represents the digital transformation of energy; it is an energy revolution. Most of humanity's progress is based on energy revolutions and energy ideas. The first great revolution was fire, and the concept of fire is extracting energy from matter. This idea posits that there is actually a vast amount of energy contained in the matter around us, and we can ignite it, which distinguishes us from primates. The second energy idea is water, which is essentially extracting energy from gravitational fields. Gravity surrounds us; if you drop a drop of water vertically into a 100-foot deep place, you can harness energy to turn wheels. Steam is a breakthrough that combines water and fire; it can convert energy into power for factories, ships, or trains. It drove the industrial revolution and changed the world. Oil is liquid energy, stable at room temperature, which we can store in barrels and use to provide mechanical energy, thermal energy, light energy, electrical energy, and more. Electricity is clean energy, and of course, it permeates every aspect of our lives. Archimedes or Newton could not write articles about electricity; even if they were geniuses, they could not imagine the power of electricity. Of course, we now understand electricity, and it is clear that everything relies on electricity for transformation. Additionally, Fermi developed a controllable chain nuclear reaction, which is essentially clean zero-carbon energy.

Satoshi Nakamoto's contribution lies in the discovery of digital energy, allowing us to program on computers and transmit value across time and space. Of course, the geniuses of the 20th century would not have imagined this, just as the geniuses of the 16th century could not have envisioned electricity. But the significance is that we can now capture a billion dollars in value, preserve it in cyberspace for a thousand years, or move it back and forth around the world 60 times in a second. The most advantageous application of digital energy is the digital transformation of capital. Capital is a form of energy. As investors, we are interested in making money. Globally, the total value of assets reaches $900 trillion. People invest in many things, such as bonds ($30 trillion), real estate ($33 trillion), stocks ($11.5 trillion), currencies ($12 trillion), art ($1.8 trillion), and gold ($1.6 trillion). Bitcoin accounts for only 0.1% of global wealth ($1.3 trillion). Half of this wealth is held in assets for practical value, such as a car that can be driven, a house that can be lived in, or a building/factory that can be operated. The other half consists of long-term capital, merely a store of value. People often ask, what is the use of Bitcoin? The answer is right in front of us. It is the most profound and valuable use case in the history of humanity. It can preserve the value of long-term capital. Every government, company, and wealthy individual wants to preserve capital, which is also a topic discussed every moment on CNBC. Capital is economic energy. You can call it money, wealth, power, or value. But regardless of what it is, Bitcoin represents the transition of capital from financial and physical assets to digital assets.

If Einstein were to explain the first law of currency, then the lifespan of an asset equals the asset's value divided by the annual maintenance cost to keep the asset intact. This is very similar to the concept of "stock and flow." When considering financial assets, we retain our capital, from Argentine pesos to diversified stock funds, everything is included. However, every year there are risk factors that dilute the value of financial assets, whether it be tariffs, infringements, tolls, inflation, obsolescence, or war. All of these can harm your interests. If all your assets are in pesos and the inflation rate is 40%, then every year for every $1 million, you must inject $400,000 in capital just to maintain your wealth. Thus, financial assets are a form of short-term capital asset. This is also why you should not store all your wealth in an excessively inflated currency.

In addition to financial assets, people often chase physical assets. The wealthy look for alternative assets, sometimes a painting, sometimes land, real estate, warehouses, Ferraris, or yachts. Of course, the maintenance costs of a Ferrari or yacht are very high; if you put all your money into a Ferrari, you won't be wealthy for long. And if you buy undeveloped land, you need to pay 1.1% in property taxes. That is to say, if you purchase $100 million worth of land, and the land does not appreciate in value, you are obligated to pay $100 million in taxes over 90 years. Of course, the land will appreciate, meaning you will truly be involved in the real estate industry, needing to find tenants to rent the land and pay you enough taxes, while you will have to deal with a series of risk factors throughout the lifecycle of real estate or physical assets, including taxes, competition, recession, infringement, decay, storms, etc.

Clearly, like financial assets, physical assets are not the solution either. All physical and financial assets are temporary solutions. And Satoshi Nakamoto discovered a way to transfer value without a trusted intermediary. Every elementary school student can tell you this, but if you are an investor, what you should focus on is not the ability to transfer value without a trusted intermediary, but rather that Satoshi Nakamoto discovered a method to store value without a trusted intermediary. If you can store a billion dollars in cyberspace, you will not face all the risks of depositing money in a bank or burying it underground. The asset created by Satoshi Nakamoto carries no risks associated with currency, stocks, or bonds, nor does it carry the real risks of real estate or property. This is very important.

Bitcoin represents a revolutionary advancement in asset lifespan. No one would invest in a bad asset with a lifespan of only 1-10 years; at least, smart investors wouldn't. In the 20th century, there were many mainstream assets with lifespans of 10-100 years. Everyone would invest in these assets, but no one would tell you, "I truly believe my asset will last for hundreds of years," because that is impossible. In contrast, Bitcoin is an asset that can last over 1,000 years. You can purchase $1 billion worth of Bitcoin, host it for less than 10 basis points, and have reason to believe that in 100 years, you will still own the same proportionate share of the network, during which time Bitcoin will have appreciated significantly.

Suppose you have $100 million and then buy a building in New York. You will face various risk factors such as taxes, traffic, tenants, weather, and regulations. You hope that no one can expropriate your building rights, that no one can change the traffic routes, and that no one can shut down the subway below the building. You want it to be invisible, indestructible, immortal, transferable, programmable, divisible, interchangeable, configurable, and even musical (I mean, can I move the building at a frequency of 60 hertz, 60 times per second?). Clearly, a building cannot do this, but pure digital assets, computers, and artificial intelligence can. When the mayor walks past a building in your city and sees someone owning a $100 million building, they will only feel envy and jealousy. No one will resent you for being wealthy; perhaps you won't even pay taxes for it, because they know that this money is transferable. If they raise the tax rate to 3%, 4%, or 5% annually in the city where the building is located, the building will "transfer" to Singapore.

So, Bitcoin is not just digital capital; it is global capital. Suppose I give you $100 million to invest in any country in Africa, with the only stipulation being that you must preserve its value for 30 years. In Africa, there is nothing, no country worth investing in. Similarly, if I send you to Venezuela, Cuba, North Korea, or Argentina, you will encounter the same problem. Bitcoin is the most compelling capital preservation tool that investors from countries other than the United States have seen or will see. It is like the Manhattan of the internet; buying in at any time is a wise move. Because one day, all the wealthy people in the world will want to put their money in the greatest city in cyberspace.

Of course, Bitcoin is volatile. But volatility is a feature, not a flaw. Bitcoin is volatile because it is the most accessible, usable, and liquid capital market in the world. Investors can leverage volatility to achieve higher returns, while financiers can securitize assets. Moreover, Bitcoin addresses the issue of poor capital structure for 300 million companies. Howard Marks once said that volatility is not risk; it is a manifestation of vitality; it is merely dynamic. Many things are unstable, like one of the greatest basketball players, LeBron James, whose performance is quite unstable. Rapid changes with energy are different from risk. If you want to gain energy, you want to be the one holding the machine gun. The risk is that if everyone else has machine guns, you will be left unarmed.

As for Bitcoin's performance, everyone is actually looking for assets that are uncorrelated with the S&P index to achieve higher returns on a risk-adjusted basis. If you start from first principles, you will find that Bitcoin is an asset that does not need to face competition from rivals, nations, companies, creditors, cultures, or currency risks. As long as you spend enough time, you can ascertain this. If you wish, you can derive conclusions from first principles, physics, mathematics, philosophy, or logic. But if you don't want to go through that trouble, you can simply conduct backtesting and draw conclusions from statistical data. Fidelity's research on Bitcoin's performance shows that Bitcoin has a correlation of 19% with the S&P index, and among all asset classes available for purchase, Bitcoin has the highest Sharpe ratio. Therefore, if you want a high Sharpe ratio and low correlation, Bitcoin is your best choice. You don't even need to understand why; data is data, and that is a fact. Over the past 4 years, Bitcoin (annual return of 49%) has outperformed the S&P index (annual return of 14%) by 3 to 4 times, is 2 times that of the Magnificent 7 (annual return of 27%), 5 times that of real estate (annual growth rate of 10%), and 7 times that of gold (annual growth rate of 7%), and has completely crushed bonds (annual growth rate of -5%).

People say Bitcoin is easy to replicate. Indeed, it has been replicated 10,000 times, but each time it has failed. All mainstream coins have failed in the face of Bitcoin. Statistics show that over the past 12 months, Bitcoin's dominance has steadily risen from 50% to 58%. The second-ranked Ethereum has seen a relative decline of 36% compared to Bitcoin. The question is, will there be more attempts to replicate it? Yes. Because all the smart money in the world will explore all possibilities and then select the best. It's a bit like asking, "Can JPMorgan be replicated?" The answer is yes, but the question is whether all the wealthy people in the world would want to deposit their money there? They wouldn't; they want to deposit their money in a bank that is too big to fail, and Bitcoin is the too-big-to-fail bank in cyberspace. You wouldn't have known this in 2009, nor would you have known it in 2014. But now even Larry Fink sees Bitcoin as a global currency tool. Moreover, BlackRock is promoting this globally. Earlier this year, they launched IBIT. IBIT is the most successful ETF in Wall Street history, and of course, it is also the most successful Bitcoin ETF.

So, what supports Bitcoin? We often hear this question. Some people, after studying Bitcoin for 30 minutes, conclude that Bitcoin has no support and no utility. I want to say that Bitcoin is supported by energy. Energy is the only thing in the world that can support anything; America is supported by energy, and the U.S. Navy is supported by energy. Bitcoin is supported by 700 exahashes of computing power, or 18 gigawatts, which is more powerful than Amazon's AWS, all of Facebook's data centers, or all of Microsoft's data centers, equivalent to 18 complete nuclear reactors. A simple reverse calculation shows that over $800 billion has been deposited into the Bitcoin "bank." Of all the funds invested in cryptocurrencies, 99% are invested in Bitcoin. Since investing $250 million in Bitcoin in August 2020, MicroStrategy has invested a total of $9.9 billion. Smart money makes choices, and that is why Bitcoin wins. It has the support of 420 million cryptocurrency supporters. Additionally, it has strong political power. Bitcoin is the too-big-to-fail bank in cyberspace; it is the winner, a dominant digital network.

Of course, Bitcoin is also the most powerful crypto network in the world, and once everyone has chosen a winner, the network effect will be unstoppable. This is not the same network effect as Snapchat or Twitter; it is a trillion-dollar network effect. If you want your assets to be permanently preserved and do not trust governments, companies, banks, or currencies, then try cryptocurrency. As for investment theory, I want to say that if you want to get rich, find something that everyone needs, that no one can stop, and that no one can understand. If nine out of ten people disagree with your viewpoint, roll their eyes, or do not understand what I just said, then it means you have the potential for tenfold or even greater returns in front of you.

We are witnessing the birth of a new asset class. We have gone through the idealistic phase, then the era of madness, and now we are in the stage of institutional and corporate adoption of this asset. We are moving towards a goal known as "point99."

Looking back at all the milestones of Bitcoin, you will find it to be a perfect concept. Satoshi Nakamoto disappeared, the IRS classified it as property, and then Bitcoin triumphed in the block size debate. In 2018, Fidelity recognized Bitcoin, and COVID-19 in 2020 added more fuel to the fire. MicroStrategy entered this space in 2021. The new government viewed Bitcoin as a digital asset and commodity in 2021 and 2022. For the first time in a hundred years, we truly have a new asset class, a new way of thinking about currency and capital, welcomed by regulators. In 2024, the Bitcoin spot ETF will be launched, allowing investors to purchase this product in a truly secured packaged form for the first time. Subsequently, the Sab 121 movement was initiated. This summer, the support for cryptocurrency from Trump and Kennedy is significant, and Morgan Stanley's approval of IBIT and FBTC for solicitation is also very important. Additionally, the mandatory fair value accounting set to be implemented in January 2025 will be another major event. All of these essentially constitute the three major elements of institutional adoption: recognition by banks, fair value accounting, and approval from regulators.

2024 will be the inaugural year of institutional adoption, and 2025 will mark the beginning of the digital gold rush. If you do not have Bitcoin yet, you have 10 years to acquire it. Once we reach January 1, 2035, only 1% of Bitcoin will be mined in the following 106 years, which is even less than what MicroStrategy currently holds. What we refer to as "point99" is the reflection point of supply shock. By January 2, 2035, 99% of Bitcoin will have been mined and sold on the open market. At current prices, this amounts to approximately $71 billion. By then, Bitcoin will become the world's first deflationary asset, the world's first perfect currency. Austrian economists cannot imagine this because they do not know how to create it, just as 15th-century philosophers could not conceptualize electricity. It was only with modern cryptography, the internet, and semiconductors that all of this became possible.

The era of institutional applications for Bitcoin has arrived. It is an asset class, not just an asset. We have already seen explosive growth, with ETFs, nations, private companies, and publicly traded companies purchasing Bitcoin. Currently, there are 40 Bitcoin spot ETPs, 12 in the U.S. and 28 outside the U.S. Additionally, there are 70 publicly traded Bitcoin-related securities and other derivatives.

Factors driving Bitcoin adoption include approvals for banking, custody, trading, and credit. The entry of BNY Mellon into Bitcoin is noteworthy. The approval for physical creation and redemption, as well as the approval for ETP trading options, are significant events. Of course, government approval of a digital asset framework is also very meaningful. The Trump campaign has promised to establish a digital asset framework if Trump is elected, but I believe that at some point in the next four years, whether it is the Democratic or Republican party, a digital asset framework will be established. Additionally, the issuance of sovereign debt, the integration with large tech companies like Apple, Microsoft, and Google, will also drive Bitcoin adoption. Naturally, the increased understanding of Bitcoin among the public will play a role as well. Meanwhile, various chaotic or black swan events will also help; every time there is a currency collapse, a government falls, or a nation-state descends into chaos, Bitcoin adoption will be propelled.

If you want to simulate the future of Bitcoin, you can use our open-source model Bitcoin 24. You can search on Google and input any assumptions about inflation, innovation, monetization, and growth. Here are my personal predictions: normally, Bitcoin's share of global assets will rise from 0.1% to 7%, with an annual growth rate of 29%. By 2045, the value of a single Bitcoin will be $13 million, with a bear market value of $3 million, and a bull market value of $49 million. In my base case assumption, the total value of global assets in 2045 will be $400 trillion, with stocks ($85 trillion), real estate ($136 trillion), and bonds ($84 trillion) still dominating, while Bitcoin ($28 trillion) will become a rapidly growing sector.

MicroStrategy's Bitcoin Journey

Our journey has transitioned from defense to opportunism to strategic investment. As I mentioned at the beginning of the article, we stepped into the "river" of Bitcoin because we chose to take risks in a critical moment. Ultimately, we raised $10 billion and acquired 252,200 Bitcoins. Over the past four years, we have acquired Bitcoin every quarter, totaling 40 purchases. You can enter "Saylor Tracker" to get dynamic information.

From the company's perspective, we are simply increasing our Bitcoin holdings. We are a company that is easily misunderstood; people do not understand what we are doing. What we are doing is actually similar to a real estate development company, but we are purchasing Bitcoin instead of real estate. Imagine a real estate development company in Manhattan. They would say to you, "We want to build in Manhattan because we believe in Manhattan, and we want to buy all the land around Central Park." Then another company comes along and says, "We have the same idea, but we want to go public, we want to issue securities. Then we want to raise funds to buy Manhattan and build buildings." And if I told you that I could do the same, but because it is too unstable, I would raise $4 billion at an interest rate of 80 basis points and then invest in Manhattan real estate? If someone figured out how to create a company that could raise funds at less than 1% interest and build buildings or purchase properties in Manhattan, they would have a competitive advantage over all other developers.

MicroStrategy is the largest public holder of Bitcoin and a pioneer of this capital philosophy. While we purchase Bitcoin, we could also invest in bonds. But looking at the company's capital structure, when capital assets yield -5% per year (bonds) and +50% per year (Bitcoin), the choice becomes very clear. If you can arbitrage, you can borrow money at 1% interest and invest at 49% interest. You can achieve a 48% arbitrage profit. Over these four years, MicroStrategy's performance has outperformed all 500 companies in the S&P index and has also outperformed Bitcoin because we borrowed money at zero interest and then used that money to buy Bitcoin, or issued stock at a 60% or 100% premium in Bitcoin and then bought back Bitcoin. We are simply arbitraging between certain statutory capital markets and digital capital markets. You can see the comparison between MicroStrategy (with a return of 1455% since August 2020) and the top 10 components of the S&P 500 index.

I often tell many companies, "If you can imitate NVIDIA, then go ahead." Of course, you should do that. But even Apple, Google, and Microsoft do not think they can replicate NVIDIA's path. However, anyone can replicate our strategy; they just need to buy Bitcoin first, then issue stock at a premium in Bitcoin, and then issue bonds secured by Bitcoin. The gist is that we recover capital in a weak capital cycle and invest in something that yields three times the cost of capital, rather than something that is 10% below the cost of capital. In traditional finance, capital is toxic, with the real yield on government debt assets at -10%. Our real yield is +30% over the cost of capital, or +40%. If you can beat the S&P index with capital assets, how much capital do you want? In my view, the answer is infinite. So, we are just continuously recycling. This is why MicroStrategy's enterprise value has grown from $600 million to $45 billion in four years.

Thus, MicroStrategy has evolved into a Bitcoin securitization company. Purchasing MicroStrategy stock provides exposure to Bitcoin with 1.5 times the volatility. Additionally, there are various derivatives, such as MSTX and MSTU, which offer 3 times leverage. On top of all this, there is the options market for MSTR. This is an open contract worth $30 billion to $35 billion, which can provide 10 times or 20 times leverage. If you want greater volatility, you can layer the above products. But if you want lower volatility, you can choose to purchase our bonds. Now, we are basically creating leverage through the convertible bond market. Over time, we will explore the fixed income market and consider issuing preferred stock. To some extent, MicroStrategy is encroaching on the stock market, options market, convertible note market, and fixed income market. We are building a bridge between the securities market and the cryptocurrency market, and our operating company has flexibility and a good capital structure. Currently, we have $15 billion to $16 billion in Bitcoin and $4 billion in debt, but the debt is non-recourse, unsecured, non-covenant, and non-pledged, with an interest rate of 80 basis points. This is the most harmless capital you can buy. I dare say that if a company borrows $4 billion at an interest rate of 80 basis points (non-pledged, no covenants, no restrictions) for a term of 4 or 5 years and invests it in whatever they are doing, there is no company in the world that would not do better. This is not a complex idea. But why can we do this? Because the volatility of the relevant capital assets is 50%. We leverage it to achieve a volatility of 75 to 80. We sell this tool to the securities market, then reinvest the funds into Bitcoin, and leverage it again; this is a cyclical transaction. This is not feasible in gold, real estate, or securities investments because, from a regulatory perspective, you cannot leverage the balance sheet, and these investment products do not have sufficient volatility.

In the history of capital markets, Bitcoin is the first high-performance, high-volume commodity that can be held on a balance sheet. In this regard, it is very unique.

Q&A Session

Gautam Chhugani: Given MicroStrategy's limited operating cash flow, how scalable is the debt strategy? Additionally, from an investor's perspective, what risks does this strategy entail that could lead to the failure of the arbitrage strategy?

Michael Saylor: Regarding the first question, I believe it can scale infinitely. I think we can refinance $100 billion and then refinance $200 billion. This is a trillion-dollar asset class. As for the risks, it is essentially Bitcoin itself. You either believe Bitcoin has value or you think it is worthless. The crux of the debate is simply the comparison between the growth rate of Bitcoin and the growth rate of the S&P index.

Why is capital scalable? We just issued notes for 2028 without paying interest based on EBITDA. The operating business is not a limiting factor; we have no reason not to implement a strategy of $4 billion, $8 billion, $16 billion, $32 billion, $64 billion, or even $128 billion in debt. Some may ask, what if Bitcoin's growth and volatility are zero at some point? What if the entire asset class disappears in terms of performance and volatility? This would indeed hinder MicroStrategy's scale development. However, the current situation is 50-50; if its ARR and volatility are both 20, the strategy can still operate normally. I believe that when Bitcoin becomes a $100 trillion asset class, it will still have 8 percentage points more volatility than the S&P. Therefore, I do not see any practical limitations to the idea of scaling up. We are not bound by traditional metrics. The convertible bond market is sized at $40 billion to $50 billion, but we will grow that market. The preferred stock market is $400 billion, and we can capture 5% to 10% of that. I do not understand the reasons why we cannot do this. In short, there is a lot of capital seeking low returns, and we are providing funding for all these different markets. I believe we have no reason not to continue to grow vigorously because we have a deep liquidity pool and a robust options market. Additionally, as bond investors, we have credibility, which is unique to MicroStrategy.

Gautam Chhugani: So far, Bitcoin has followed a four-year cycle with a certain degree of predictability. Whether it will continue to follow these cycles remains to be seen. In a bear market lasting 2-3 years, if the capital markets cool down, how will MicroStrategy generate cash to pay interest and repay debt?

Michael Saylor: We can generate cash by continuously refinancing existing assets. A few weeks ago, we raised $1.1 billion in equity and used it to purchase Bitcoin. But we did not need to do that. Later, we raised $1 billion through convertible notes. We refinanced a $500 million note, took on debt, and then used the remaining funds to buy Bitcoin. This $500 million in cash can cover the company's interest for the next 12 years. So the key is that we are a bank. We raise funds through investors' regular deposits and then invest in Bitcoin. Many investors want a 7% interest rate. We can launch fixed investment tools with a 7% interest rate, and then we invest at a 50% interest rate. When would this not work? If Bitcoin's yield is forever below 7%, then it would not work. This means our equity would be diluted. If we sell a fixed investment tool that yields higher than Bitcoin, it would dilute equity. However, this situation would only occur if Bitcoin's yield had to be zero forever, and its volatility also had to be zero. Currently, interest expenses are minimal. If we finance $10 billion, plus some coupon, the balance sheet would have $30 billion to $40 billion in assets. If our leverage is too high, we can simply turn around and sell billions of dollars in equity to deleverage. We are not doing something overnight; we are gradually deleveraging back and forth. Currently, the company's leverage is actually 20-25%. If Bitcoin rises to $100,000, the leverage will drop below 20%. The issue is not leverage but deleveraging. So, we will deleverage at a rate of 50% per year. A 50% net asset return on $16 billion means there will be $8 billion in equity in the next 12 months. Therefore, Bitcoin growth, common stock issuance, and debt conversion are all part of deleveraging. We just issued 2025 notes, creating a lot of equity appreciation. Just like our 2027 notes, when our bonds convert into currency, it will also deleverage. Thus, we have a series of incentives to continuously deleverage by establishing permanent Bitcoin capital. MicroStrategy holds $16 billion in Bitcoin, while BlackRock has $22 billion in overnight deposits. You should understand the difference between having $16 billion in permanent capital and having $22 billion in capital that can be withdrawn tomorrow.

We are building a massive digital capital base that we can leverage to support our stocks, options, derivatives, and all the fixed income tools we issue. The company can always choose to refinance and deleverage to get rid of tools we do not like. Ultimately, at any time, there are opportunities in the capital markets; the question is whether the fixed income market, convertible market, preferred stock market, or equity market provides cheap capital. We will take advantage of all these opportunities, perhaps sequentially at the same time, and then convert these opportunities into Bitcoin investments. So far this year, MicroStrategy has raised nearly $5 billion.

Gautam Chhugani: Investors often ask what MicroStrategy's ultimate goal is. MicroStrategy calls itself a Bitcoin bank and currently holds 1.3% of Bitcoin globally. Assuming MicroStrategy eventually holds 2-3% of Bitcoin and the price of Bitcoin rises to $1 million, then the valuation of the Bitcoin held by your company would reach $400 billion to $500 billion, and there would be a premium. At that point, will Bitcoin still be the core business of the company, consistent with the positioning of a Bitcoin development company? Or will we see MicroStrategy shift towards purchasing other diversified assets?

Michael Saylor: Bitcoin is the most valuable asset in the world. Our ultimate goal is to become the leading Bitcoin bank or commercial bank, or you can also call it a Bitcoin financial company. If we ultimately have $20 billion in convertible equity, $20 billion in preferred stock, $10 billion in debt, and $50 billion in some debt instruments and structured tools, we will have Bitcoin worth $100 billion to $150 billion, with a trading premium of 50%. As volatility and asset net value ratios increase, we can build a company with a 100% premium on Bitcoin valued at $150 billion, meaning a market cap of $300 billion to $400 billion, with the largest options market and the largest stock market. Then we can start encroaching on the fixed income market. We will continue to buy more Bitcoin. Bitcoin will rise to millions of dollars, and then we will become a trillion-dollar company. The biggest risk is deleveraging. Now there is a corporate bond market emerging, with these corporate bonds being highly secure, collateralized, and yielding up to 5%. So, will there be a market for $400 billion in preferred stock? Will there be a market for private credit and junk bonds? Perhaps you can achieve one-third of Bitcoin's yield by taking on significant credit risk and counterparty risk, but MicroStrategy's approach is simpler. We are not trying to lend money to individuals and companies and then earn the spread. We sell securities to investors, guarantee performance, and then "lend" the money to the Bitcoin network. If Bitcoin has a market cap of $10 trillion, why can't there be a financial company worth $500 billion or $1 trillion that separates risk, volatility, and performance from the original capital? What did John D. Rockefeller do? He took crude oil and gave you kerosene, gasoline, and diesel. I believe there is room to establish a trillion-dollar company that can securitize various capital. This is a transformation of the capital markets, where all these securities are supported by digital capital rather than physical capital, financial capital, or property capital. This is our ultimate goal. We are not here to diversify investments. The entire value of MSTR lies in providing 1.5 times the risk exposure of Bitcoin. We are playing with asset securitization, and our philosophy is that many people in the world would prefer a 10% asset return with 10% volatility rather than a 50% asset return with 50% volatility. So we give them 10%, while we take the remaining 40%, and our stockholders will receive a 40% return, while fixed income holders may receive 10%. This is all about adjusting the capital structure of the balance sheet to avoid being over-leveraged or under-leveraged. We do this quarter by quarter, step by step.

Gautam Chhugani: Do you consider yourself a pioneer or incubator of the Bitcoin capital market?

Michael Saylor: I believe that before we appeared, the convertible notes, preferred stock, and stock markets were unhealthy, and we have repaired these markets. Companies of our size, or those twice our size, have $3 million in open contracts in the options market daily, and stock trading may have $3 million or $10 million. This is unhealthy. What did we do? We turned $3 million in daily stock trading into $3 billion in daily stock trading. The most important point is that digital capital is superior to analog capital because there are counterparty risks in areas like real estate and finance. Additionally, there is another important point. When a small real estate investment trust raises $500 million in the fixed income market to invest in real estate in Chicago, it faces a five-year capital cycle, and the credit is heterogeneous; they cannot do the same transaction again next week. They must find a different $1 billion real estate in New York or a different $1 billion real estate in Chicago. All credit is complex, and capital cycles are long. However, in the convertible note market, when selling $800 million in bonds to buy Bitcoin, the credit is homogeneous, and the capital cycle is one week. A week later, we have already invested the money, generating huge returns for our shareholders. We made $500 million in arbitrage in five days. When you invest in MSTR, stockholders will react, and the stock will rise. In the last week of the first quarter, we issued another bond. Our capital cycle is not six years; it is six days. The focus of credit analysis is not on how the company will handle the funds just raised through convertible stock. Everyone is clear about what we are going to do, when we are going to do it, and how we are going to do it. Therefore, we have created a very special company. It has ultra-fast capital cycles and ultra-homogeneous credit, giving everyone what they want.

MicroStrategy is an innovator, creating digital capital assets (securities that can be issued as permanent equity capital by a bank) that mitigate credit risk. We essentially provide people with a transparent capital base to create all these different tools. Ultimately, the funds we raise all flow into Bitcoin. Everyone says this sounds like monopolizing the silver market. But that's not the case, because the stock-to-flow ratio of silver is 2, and silver is not scarce. It is a mistake to treat silver or any commodity other than Bitcoin as a capital asset because you can infinitely create silver with capital, technology, and human knowledge. Bitcoin is the only scarce commodity in the capital markets, which provides leverage for this trade. You don't have to worry about gold or silver miners dumping large amounts of silver, or a country selling off large amounts of Bitcoin in the market, thereby disrupting long-term trading. I think this is the best choice. But if you spend a hundred hours, you will realize that we have thought this through. This is not silver; it is Bitcoin.

Gautam Chhugani: How do you view the MSTR premium? Additionally, new Bitcoin investment tools are emerging, such as Bitcoin ETF options. Do you think there will be companies that compete with you?

Michael Saylor: First of all, the theory of premium is that if we can generate Bitcoin returns, then for those Bitcoin maximalists and people wanting to invest in Bitcoin, it’s like generating Bitcoin dividends. If there is a tool that can give you a 5% dividend yield every year, while another tool can only give you 0% dividend yield, both backed by Bitcoin, you might prefer the former over the latter. MicroStrategy's Bitcoin yield this year is close to 18%, achieved through leveraging cash flow, equity, and debt. I think the premium is misunderstood. People think we have a premium because they see us as the only way to buy Bitcoin. But the fact is, we are the only Bitcoin refinery, the only company that can truly create bonds backed by Bitcoin. Imagine if you were the only bank that could issue bonds, or the only real estate company in New York that could issue public securities to the market; how would that be?

As for so-called competitors, I actually see them more as collaborators. If Apple or Google bought $50 billion worth of Bitcoin, even more than we did, they would push the price of Bitcoin higher. The question is, what proportion of Bitcoin would be in the capital structure of these companies? MicroStrategy started as a small company worth only $600 million and has now grown into a $40 billion enterprise, with 98% of its capital structure in Bitcoin. This is something that large companies like Oracle, Microsoft, or Apple cannot do because they need to build their capital on other good businesses. At the same time, they cannot leverage diverse tools to securitize assets like we do. Smaller companies, such as those valued between $1 billion and $2 billion in the Russell 2000 index, could double their market cap by buying Bitcoin, but only 50% to 80% of their capital structure would be Bitcoin. As for other small companies, even if their capital structure is 100% Bitcoin, they will not have the liquidity and capital position we have in the options market. Yes, companies should mimic us in acquiring Bitcoin, but this will not threaten our position or the MSTR premium. MicroStrategy has made a strategic decision to securitize Bitcoin as an asset class, and its survival will depend on Bitcoin.

Gautam Chhugani: As you mentioned the concept of a "Bitcoin bank," investors often envision MicroStrategy generating income by lending out Bitcoin. Will MicroStrategy do this? If so, what would be the catalyst? How much income can be generated from lending Bitcoin, and who would be willing to borrow Bitcoin?

Michael Saylor: Currently, we do not plan to lend out our Bitcoin. Instead, we think a better approach is to borrow $10 billion from those eager to lend, giving them an extra 100 basis points in yield, and then invest in Bitcoin to achieve a 30% to 50% return. At some point, when institutions like JPMorgan and Bank of America start to custody Bitcoin and use it as collateral, they may issue loans against Bitcoin. For example, if you have a $10 billion portfolio with $1 billion in Apple stock, $1 billion in Microsoft stock, and $1 billion in Bitcoin, I think they would be willing to issue loans based on that. Now, if you want to short MicroStrategy, those large companies would charge a 50 basis point short fee, and the yield in that market is very low. Since we can obtain a 42% spread by paying an 8% fee with no risk, why would I want a risk spread of 100 to 400 basis points? Once you overcome and learn to manage volatility, who would be willing to pay you 22% interest even if Bitcoin only grows 22% per year over the next decade in a bear market?

Gautam Chhugani: What limitations does MicroStrategy face when purchasing Bitcoin? Are there leverage limits or specific thresholds?

Michael Saylor: We currently hold more than 1% of Bitcoin, and our holdings may grow exponentially. The asymptotic limit is about one million Bitcoins. I do not think we will stop increasing our holdings, but I believe it will become more challenging as the price grows exponentially. We aim to increase our holdings from 1% to 2%. As for leverage, it depends on the type. If the term is over four years and the cost is very low, like 80 basis points for convertible bonds, then a leverage ratio of 20% to 40% is acceptable. But for tools with a one-year term or an 8% interest rate, I would not want to use 40% leverage. Given the current structure of convertible bonds, which are non-recourse, unsecured, and unencumbered, and are essentially free, a leverage ratio of 20% to 40% would be more appropriate. When considering other tools like preferred stock, our strategy will depend on market conditions. If leverage drops below 20%, we are likely to increase leverage for the maximum benefit of equity holders. If our leverage exceeds 40%, we may adopt different tools, such as non-interest-bearing perpetual preferred stock. However, given the rapid appreciation of Bitcoin, we may not reach the 40% threshold anytime soon. If we get to that point, it would mean our stock and Bitcoin are both performing well.

Gautam Chhugani: If other companies adopt MicroStrategy's Bitcoin purchasing strategy, the demand for Bitcoin will rise, and the price of Bitcoin will increase, which may benefit MicroStrategy for being early movers. But does this create a prisoner's dilemma that prevents others from participating?

Michael Saylor: There are 50,000 companies using Treasury bonds as capital assets. When using Treasury bonds, the after-tax yield is about 3%, while the cost of capital is 12% to 13%. This means you are losing 10% of capital every year on Treasury bonds. All these companies have toxic capital with low volatility, and their capital structures are fundamentally unhealthy. But if they invest in Bitcoin, the top 10 companies will make a fortune, the next 100 companies will also do well, and the next 1,000 companies will grow healthily and faster than others. I think this is inevitable. If I give you a choice, assuming Bitcoin becomes a $100 trillion asset class, if you compare it to the S&P index, its returns could be 600 to 800 basis points higher than the S&P. If Bitcoin's yield is 20%, then the S&P's yield is 12%, the cost of capital is 12%, and the after-tax Treasury yield drops to about 2% or 1.5%, you will face two choices: a yield of +8% or -10% on your capital structure. Companies using Treasury bonds create toxic capital, leading to negative working capital. In contrast, companies adopting Bitcoin use healthy capital; they do not need to distribute cash flow as dividends or buy back stock. Instead, their stock will rise, ultimately holding billions in assets.

Buying Bitcoin will ultimately become the fundamental strategy for all other companies. The revolution in corporate finance revolves around a simple idea: volatility is not a defect but a feature. Business schools often teach to strip volatility from the balance sheet and income statement. You can strip volatility from the income statement, but you cannot strip it from the balance sheet. Companies should respond to balance sheet volatility with a stable income statement and then raise funds, rather than giving up their capital. I understand why companies previously did not build balance sheets around capital assets because they could not. But now, they can completely build balance sheets with digital assets, and we are still in the early stages. In the future, people will recognize the necessity of digital capital on the balance sheet, just as they treat electricity. If I want to harm someone, I would provide them with harmful water or food. Similarly, if I provide a company with harmful capital, I am poisoning that company. This is why many companies go bankrupt within a decade or so. Why is the average lifespan of a company only 10-15 years? And why do Yale and Harvard have longer lifespans? The answer lies in one having positive working capital and the other having negative working capital. Once this idea takes root, I believe there will be a progressive movement that accelerates over time.

Gautam Chhugani: What are your thoughts on different companies' Bitcoin strategies, such as Block/Square, which offers Bitcoin on its platform and uses part of its gross profit to buy Bitcoin?

Michael Saylor: My view is that if you have $5 billion in bonds on your balance sheet and you earn $500 million from Bitcoin each year, then investing in those bonds actually results in a loss of $500 million each year. Every company in the cryptocurrency ecosystem, including all Bitcoin miners and exchanges (like Coinbase and Block), should treat Bitcoin as a treasury reserve asset, as the shareholder value destroyed on the balance sheet is actually equal to the shareholder value created on the income statement. Once this is recognized, companies can increase their asset value by 10% or 20% each year to gain unlimited capital. Companies suffer losses because their balance sheet investments are in depreciating toxic assets. If the balance sheet is stable, the borrowing cost is 10%, but if the balance sheet is volatile, the borrowing cost could be only 1%. I believe every company should do this, but cryptocurrency companies should take the lead in adopting this idea. I will continue to advocate for this idea and speak at board meetings to persuade board members to adopt the Bitcoin standard. We are gradually gaining support from some companies, like Semler Scientific and Marathon, and hope that over time, more Bitcoin miners and exchanges will join in.

Gautam Chhugani: Why can't governments ban Bitcoin? For example, governments could declare owning or trading Bitcoin illegal and impose heavy penalties. Many people see this as a survival risk; what do you think?

Michael Saylor: Most of the Bitcoin network's hash power is outside the United States, and no single country can control most of the network. Even if China accounts for about 50-55% of the hash power and declares Bitcoin mining illegal, it has not stopped the development of the Bitcoin network. Governments cannot stop Bitcoin, just as they cannot stop the spread of language. You cannot stop people from using decimal mathematics or the metric system because these are protocols that spread globally. Secondly, governments do not want to stop Bitcoin. While they may feel threatened by Bitcoin's use as a currency, they are not threatened by Bitcoin as a capital asset or store of value. In the U.S., China, Russia, and the EU, property rights exist, and governments have not criminalized property. As long as there are places in the world that allow property rights, the digital property network will not be banned.

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