Even the most cautious investor must have been living under a rock not to have noticed the boom in Bitcoin.
For an asset that has spent most of its short, chequered life lurking in the shadows of the financial system it was perhaps fitting that the digital currency’s price broke through the $100,000 barrier in the dead of night.
The flagship cryptocurrency favoured by drug dealers and money launderers surged past the milestone just after 2.45am last Thursday.
Its huge recent advance has made some investors willing to turn a blind eye to the risks, and millions have been piling in.
But it is not just crypto itself that has been soaring. Shares in MicroStrategy, a US company that is essentially a turbo-charged bet on Bitcoin, have risen by more than 650 per cent in the past year.
That makes them one of the best performers on the US stock market – and British private investors have stampeded in, despite the considerable risks.
MicroStrategy was the most-bought share in November, according to ii – the UK’s second-biggest investment platform.
The company was founded by Michael Saylor, 59, a controversial tech entrepreneur with a colourful private life.
Bitcoin has soared by 50 per cent since Donald Trump’s election win
He is now executive chairman and holds a 10 per cent stake which, based on the current heady share price, is on paper worth more than $9billion.
But his critics harbour grave misgivings about MicroStrategy’s share-price rise, which is based on a debt-fuelled Bitcoin buying spree.
So, is buying these shares a route to get rich quick – or the road to ruin?
MicroStrategy’s business, in essence, is buying Bitcoin with borrowed money and capital raised off the back of its own vertiginous share price.
This is all going gangbusters right now, because Bitcoin itself has gone bonkers.
Traded around the clock every day of the year, Bitcoin has soared by 50 per cent since Donald Trump’s election win.
This fuelled hopes that the President-elect’s return to the White House will usher in an era of light-touch regulation – which would be great for crypto.
Trump, who once slammed Bitcoin as a ‘scam’, has nominated crypto cheerleader Paul Atkins to lead the Securities and Exchange Commission (SEC), which oversees US stock markets and protects investors. Think foxes and hen coops.
Mr Trump has declared himself a ‘crypto president’ and promised to consider creating a ‘strategic reserve’ of Bitcoins for the US government
Some in the industry, including Mike Novogratz, the billionaire boss of crypto-trading firm Galaxy Digital, believe Bitcoin and other cryptocurrencies are becoming respectable.
‘After four years of political purgatory, Bitcoin and the entire digital asset ecosystem are on the brink of entering the financial mainstream.’
Even so, Bitcoin – created in 2008 – has no intrinsic value and for years it was shunned by mainstream financial institutions. Many private investors also gave it a wide berth.
They baulked at the wild swings in Bitcoin’s price, which is notorious for its volatility, and other risks associated with crypto – including fraud and scams.
Trump’s impending return to the Oval Office has changed all that.
He has declared himself a ‘crypto president’ and promised to consider creating a ‘strategic reserve’ of Bitcoins for the US government, which could boost prices even further.
This has not gone unnoticed this side of the Atlantic.
Some seven million people – or 12 per cent of the UK adult population – now own crypto assets, according to recent figures from City watchdog the Financial Conduct Authority.
No-one could be happier about this than MicroStrategy’s Saylor, not least because few stand to make more money from a rise in Bitcoin than he does.
The tech entrepreneur once lost $6billion on paper in a day at the height of dotcom mania in 2000 after MicroStrategy had to change its accounting methods and restate two years of revenue.
Saylor and two colleagues were fined and agreed a $8.3million settlement with the SEC without admitting any wrongdoing.
Earlier this year, the billionaire Bitcoin investor and MicroStrategy agreed to pay $40million to settle a tax fraud lawsuit.
Saylor was accused of posing as a resident of lower-tax states like Florida and Virginia when his actual home, the lawsuit alleged, was a luxury penthouse in the US capital of Washington which overlooked the Potomac River where he kept a fleet of yachts.
He denied the allegations and doubled down on his claim that he lives in Florida.
‘Florida remains my home today, and I continue to dispute the allegation that I was ever a resident of the District of Columbia,’ Saylor said.
He agreed to settle the lawsuit ‘to avoid the continued burdens of the litigation on friends, family, and myself’.
A graduate of the Massachusetts Institute of Technology, since 2020 Saylor has transformed what was a struggling data-analytics firm with a share price going nowhere fast into what one banking expert calls a ‘Bitcoin-buying juggernaut’.
MicroStrategy is the largest corporate holder in the world of Bitcoins. It owns nearly 2 per cent of the digital currency in circulation.
This, quite simply, is what has fuelled the stunning rise in its shares. But anyone who has bought them, or is thinking of doing so, should be aware they carry substantial risks.
Saylor wants to outperform the cryptocurrency itself – and is already well on the way to achieving that goal.
MicroStrategy is now valued at more than $90billion. Remarkably, that is more than twice the value of all the Bitcoins it owns. How so?
The short answer is leverage, or the art of ramping up returns by buying assets with borrowed money. The catch is that risks are also amplified, but Bitcoin groupies don’t want to hear about that.
Saylor plans to raise $42billion in the next three years to buy even more Bitcoin to add to his stash.
He is planning to do this by borrowing money and issuing even more MicroStrategy shares. The scale of financial engineering involved can only be described as epic.
It works like this. MicroStrategy issues new shares at current high values to investors. At the same time, it issues bonds – which are basically IOUs – to hedge funds and other market operators.
One twist is that it pays zero interest on these bonds – which after a period can be exchanged for MicroStrategy shares – so it is costing the company nothing to borrow the cash.
The hedgies and others buying the bonds and lending money to Saylor for free are in essence making a bet that MicroStrategy shares will go up enough to compensate them for missing out on interest payments.
As for the company, it uses the money it has raised by selling its shares and bonds to buy more Bitcoin. This sends the price of Bitcoin up, which in turn lifts MicroStrategy’s share price even further.
That then means MicroStrategy can sell more of its own shares and bonds off this higher price to buy even more Bitcoins.
And so the rinse-and-repeat cycle continues. The catch, of course, is that a fall in the value of Bitcoin could bring the whole merry-go-round to a crashing halt.
Buying Bitcoin directly usually involves using offshore exchanges such as Coinbase and Binance, which are not authorised in the UK, so savers have no protection under the Financial Services Compensation Scheme safety net.
The Financial Conduct Authority puts it bluntly. ‘If you buy crypto, be prepared to lose all your money,’ says Matthew Long, its director of payments and digital assets.
Individuals can buy shares in MicroStrategy easily through an investment platform, but the risks are if anything even higher because the company’s strategy of buying Bitcoin with borrowed money juices its gains but also deepens any losses.
A bet on its shares could go badly wrong if the extraordinary rally in Bitcoin and other digital currencies goes into reverse – so don’t invest any cash you cannot afford to lose.
This is exactly what happened in 2022 when Sam Bankman-Fried’s crypto exchange FTX collapsed, dragging the price of Bitcoin below $16,000 and plunging MicroStrategy into hefty losses.
Bankman-Fried was sentenced to a 25-year stint in jail earlier this year for defrauding customers of his bankrupt exchange and is currently behind bars.
Experts warn the latest hike in MicroStrategy’s share price is just another speculative bubble that is bound to burst again.
‘It’s symptomatic of a market that has become obsessed with believing in get-rich-quick schemes,’ said David Trainer of research firm New Constructs.
‘If you like Bitcoin, go buy Bitcoin. But don’t invest in a company that’s losing money and also buying Bitcoin, because then you’ve sort of doubled your risk,’ he told the Wall Street Journal.
Of course Saylor, the true Bitcoin believer, is having none of that.
‘I think it’s [Bitcoin’s] going to surge through the roof to 180 (thousand dollars) and crash to 140 and people will be freaking out about it again,’ he predicted on US broadcast channel CNBC last week.
His argument is that because there is a ceiling on the number of Bitcoin that can ever be produced, demand will exceed supply and the price will inevitably rise over time – albeit with fluctuations.
Like gold, Bitcoin’s perceived value comes from its limited availability.
Bitcoin’s computer algorithm sets a fixed limit of 21million coins, most of which have already been ‘mined’ or digitally created.
‘It is the only commodity invented in the history of the human race that is absolutely capped so that means you can expect it to keep going up,’ Saylor declared.
Scarcity is Bitcoin’s secret sauce, advocates such as Saylor insist.
But scarcity alone is not a source of value.
Saylor says Bitcoin’s volatility also helps boost gains, comparing its huge gyrations with fire.
‘Some people run away from the fire but Henry Ford put the fire into a carriage via an engine and created an entire (car) industry and gave humanity wings,’ the Bitcoin evangelist told a bemused CNBC presenter.
Even those of us who choose not to jump on the Bitcoin bandwagon can no longer ignore crypto.
In the past, its gyrations were dramatic but its penetration remained relatively small so the broader financial system was not compromised.
But it has now reached a scale where its fortunes could affect the mainstream financial system and, by extension, real economies and individuals – even those of us who have studiously steered clear.
The value of all Bitcoins in circulation is $2trillion – more than the combined worth of all but the biggest companies in the FTSE-100 index.
Investment heavyweights BlackRock and Fidelity now offer Bitcoin exchange-traded funds in the US, though not yet in the UK. Saylor points out that 120 public companies now hold crypto.
All of which means that if Bitcoin collapses again, the global financial system will be no longer immune.
It would also drag MicroStrategy down with it. The fact it survived a previous Bitcoin meltdown might not necessarily mean it can do the same again.
‘It could be a giant house of cards that will crush many shareholders when it crashes,’ says Trainer.
‘It has become a game of musical chairs – you play until the music stops and you just hope you can get out before the crash.’
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